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Kuroda Urged to Open Lending Spigot After GDP Miss: Japan Credit

Japan’s biggest lenders are urging the central bank to extend a low-interest loan program as soon as today, as a report showed the economy grew at half the forecast pace in the fourth quarter.

The 5.5-trillion yen ($54 billion) facility established in 2010 provides banks with funds at an interest rate of 0.1 percent. Funding costs for the nation’s lenders averaged 0.97 percent in the six months ended September, according to the latest data by the Japanese Bankers Association. The three-month euro-yen Tokyo interbank offered rate, the price at which banks in the country’s capital are willing to lend to each other, held at about 0.22 percent in the past four months.

Takeshi Kunibe, who chairs the lobby for Japan’s largest banks, said last week that the BOJ’s loan program is an “effective tool” for securing an economic recovery and called on the central bank to keep it alive after its expiry in March. Disappointing growth data and a sales tax increase due in April are adding to pressure on Governor Haruhiko Kuroda to safeguard the rebound as his board concludes a two-day meeting today.

“It’s good timing to expand the facility,” said Tetsuya Inoue, a former BOJ official who is now chief researcher for financial technology and markets at Nomura Research Institute Ltd. in Tokyo. “This is not a powerful panacea to boost all lending, but it can give a supportive push to companies that are thinking about forward-looking activities. For banks, the 0.1 percent interest rate is low enough to be beneficial.”

Growth Slows

Japan’s gross domestic product grew at less than half the forecast pace in the fourth quarter, expanding an annualized 1 percent from the previous quarter, the Cabinet Office said yesterday in Tokyo. That’s less than 1.1 percent in the previous three-month period and short of the median projection for 2.8 percent in a Bloomberg News survey of economists where the lowest estimate was 1.1 percent.

The BOJ is likely to expand the lending program by about 1 trillion yen, people familiar with the central bank’s discussions said in December. The facility may also be extended by at least one year, according to the people, who asked not to be named because the plan was private.

“The BOJ’s lending program is a very useful and meaningful tool to secure the Japanese economy’s growth and allow banks to provide funds with companies aggressively,” JBA’s Kunibe said at a press conference on Feb. 13. “We’d like the BOJ to extend the facility. We will continue to use it from now on,” said Kunibe, who is also president at the lending unit of Sumitomo Mitsui Financial Group Inc., Japan’s second-biggest bank by market value.

Portfolio Rebalancing

Japanese banks, which used their swelling deposits to hoard government bonds in recent years, are now shifting assets away from the securities as lending picks up and the central bank buys the assets to spark inflation. Lenders’ stockpiles of sovereign debt fell 17 percent to 138.9 trillion yen in November from 166.6 trillion yen in March.

“There are signs that a certain degree of portfolio rebalancing is taking place,” Kunibe said.

Even so, banks have growing stockpiles of cash that they aren’t deploying for loans. Financial institutions’ reserves at the central bank almost tripled over the past year to 116 trillion yen on Feb. 14, BOJ data show.

That casts doubt on the merits of extending the loan program, according to Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute Co. in Tokyo.

Ample Funds

“I doubt if there is much need from banks to use this facility or if it can help the BOJ to achieve what it wants,” Minami said in a telephone interview. “They already have ample funds in hand that they aren’t using.”

The BOJ is trying to boost lending with its monetary easing, Kuroda said in a speech on Dec. 25. Total bank lending rose 2.5 percent in January, after climbing the most since May 2009 the previous month, BOJ data show. Even so, deposits exceeded loans by 186.2 trillion yen, close to a record 189.1 trillion yen in June, indicating that financial institutions could lend more.

The benchmark 10-year yield was at 0.605 percent, after falling to 0.59 percent yesterday, the lowest since Nov. 11. The yen traded at 102.12 against the dollar as of 9:20 a.m. in Tokyo today.

Prime Minister Shinzo Abe’s economic stimulus policies backed by the BOJ’s about 7 trillion yen in monthly bond buying are facing headwinds from the two-step doubling of the 5 percent sales tax in April this year and October 2015. Japan’s first boost in the levy since 1997 will plunge the economy into the deepest contraction in three years, with economists predicting a 3.9 percent decline next quarter.

Three Arrows

Abe’s so-called three arrows of economic strategy, consisting of fiscal spending, monetary easing and growth initiatives, helped drive an 18 percent plunge in the yen versus the greenback last year, the most since 1979, and pushed inflation half-way to the BOJ’s 2 percent target.

The loan facility is nearing its ceiling, with about 4 trillion yen dispersed so far, according to the BOJ. Banks use the funds to lend to industries from environmental technology to tourism and disaster prevention that are seen by the BOJ as having growth potential.

“The program encompasses developing sectors such as health care, energy and research and development,” Nomura’s Inoue said. “It can be justified as part of the Abenomics growth strategy.”

To contact the reporters on this story: Monami Yui in Tokyo at myui1@bloomberg.net; Shingo Kawamoto in Tokyo at skawamoto2@bloomberg.net

To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net; Chitra Somayaji at csomayaji@bloomberg.net

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