Japan bank lending falls as fund demand weak

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Outstanding loans held by Japanese banks fell 1.5 percent in January from a year earlier as companies facing spare output capacity and a murky economic outlook hesitated to borrow for capital investment.

The Bank of Japan, under pressure from the government to do more to fight deflation, decided on Dec 1 to offer banks more short-term funds, but the cash is not spreading through the economy as corporate fund demand remains weak.

"The drop (in bank lending) is mostly a reaction to the sharp gain last year. But it also shows that fund demand is weak even though banks are easing their lending attitude. Big companies are now able to raise funds in capital markets too, relying less on bank loans," said Junko Nishioka, chief economist at RBS Securities.

The 1.5 percent fall in lending followed a 1.0 percent drop in the previous month and was the largest fall since September 2005, BOJ data showed on Monday.

"Demand for funds from Japanese companies is still low, reflecting low interest in increasing capital expenditure," said Yoshiki Shinke, a senior economist at Dai-ichi Life Research Institute.

Separate data showed Japan's current account surplus rose 452.8 percent in December from a year earlier, supported by a recovery in exports.

The balance of payments slipped to a rare deficit in January last year as the financial crisis battered exports and cut gains on overseas investments. It has been in the black since then.

"US gross domestic product is looking very strong, and emerging markets are also doing well, so Japan's exports are likely to remain strong for a while. The risk of a double-dip recession in Japan is very small," said Dai-ichi Life's Shinke.

The world's second-biggest economy has been growing since the second quarter of last year on the back of exports, particularly to China, thanks to stimulus steps taken around the world.

But a recovery in exports has not spilled over to domestic demand, as many firms are saddled with excess capacity and are refraining from capital spending, while consumers have tightened their belts amid falling wages, fuelling concerns about deflation.

Deflation, where both investment and consumption are likely to be put off due to expectations of lower prices later, has bedevilled Japan off and on for years, despite interest rates being virtually at zero and massive public spending.

The central bank, which has kept rates near zero and introduced several emergency funding schemes to help the economy recover from its worst slump since World War Two, has been bombarded for weeks by government calls for it to do more.

Analysts say the pressure for more BOJ action reflects government fears that falling prices and a strong yen could push Japan back into recession as it faces an upper upper house election this summer. The government, which came to power in September, also finds its policy options limited with national debt nearing 200 percent of GDP.

The ongoing economic recovery is expected to slow early this year as the effects fade from stimulus measures worldwide to shake off the effects of the financial crisis, although few economists expect another recession in the near term.