Japan Banks Urge Abe to Release ‘Third Arrow’ to Spark Lending

Japan’s new bank lobby chief urged Prime Minister Shinzo Abe to follow through on his pledge of sparking private investment through deregulation, a stimulus element the group says is key to boosting anemic loan demand.

“Domestic lending is turning around, but it isn’t strong just yet,” said Takeshi Kunibe, who replaced Yasuhiro Sato today as chairman of the Japanese Bankers Association. “We hope Abe’s policies will bolster business confidence and encourage companies to increase capital spending.”

Abe has spurred a stock market rally and reversed the yen’s strength since winning elections in December on the promise of bold monetary easing, flexible fiscal policy and the “third arrow” of deregulation. Japan’s quarterly Tankan survey today showed the steepest gain in large-manufacturer confidence since September 2011 on expectations of more central bank stimulus.

“Japan’s recovery for the medium to long term requires structural and regulatory reforms,” said Kunibe, 59, who is also president of Sumitomo Mitsui Financial Group Inc.’s banking unit. “We strongly expect Abe to shoot his third arrow.”

The Tankan rose to minus 8 in March from minus 12 in December, the Bank of Japan said today. The median estimate of 24 economists surveyed by Bloomberg News was for minus 7. A negative figure means pessimists still outnumber optimists.

Overseas Growth

To offset muted corporate borrowing and loan profitability caused by 15 years of deflation and sluggish growth at home, Japan’s banks are looking for demand in overseas markets.

Domestic loans by the country’s city banks including Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui and Mizuho Financial Group Inc. rose 1.1 percent in February from a year earlier to 198 trillion yen ($2.1 trillion), according to central bank data.

Lending overseas is likely to increase during the fiscal year started today, Kunibe said.

Mitsubishi UFJ, Japan’s largest lender by market value, had 21.9 trillion yen of loans outstanding overseas as of Dec. 31, a 20 percent jump from a year earlier, company data show. Lending abroad at Sumitomo Mitsui and Mizuho grew 15 percent and 6.3 percent, respectively.

“Where you can expect growth to come from is still outside Japan,” said Kunibe.

In his effort boost domestic growth and international competitiveness through deregulation, Abe last month agreed to join talks on an American-led regional trade pact that may help domestic auto and electronics makers compete with rivals in South Korea, which already has a free trade deal with the U.S.

‘Decisive Easing’

New BOJ Governor Haruhiko Kuroda said last month he aims to achieve 2 percent inflation through measures including lowering the entire yield curve through “decisive monetary easing.” He’s slated to hold his first policy meeting on April 3-4.

Asset purchases by the Bank of Japan are likely to push down yields on short-term government notes, boosting returns for lenders from bond holdings, said Kunibe. Japanese banks increased JGB holdings by 1.1 percent to 164 trillion yen in February from a month earlier, close to the record 171 trillion yen held in March 2012, central bank data show.

“For the medium term, the government must show a path toward sound public finances to avoid a jump in yields,” said Kunibe. “If it fails to raise sales tax as planned, for example, such a risk may grow.”

Japan’s benchmark 10-year yield rose half a basis point, or 0.01 percentage point, to 0.565 percent today, while the five-year rate stood at 0.135 percent.

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