BOJ Fails to Spur Loan Demand, Banks Say

By Atsuko Fukase

TOKYO—The Bank of Japan earlier this month took the unorthodox step of providing funds to the country's financial institutions in a bid to kick-start perennially sluggish lending. But the effort hasn't been a hit: Many banks say they don't expect a dramatic improvement in loan demand.

The central bank has made up to three trillion yen ($35 billion) available to commercial banks at a rock-bottom 0.1% interest rate. In return, the banks are required to make new low-interest loans to companies in growth sectors the central bank has designated, such as environment-related businesses and nursing care. Although banks are eager to lend and some companies have tried to draw on the program, many others remain reluctant to tap banks for funds, remaining cautious about borrowing because of concerns over the economic downturn and a strong yen.

The central bank's move was considered a last resort designed to spur lending, which has been declining year on year for nine consecutive months. The bank was also facing pressure from the government to take action to help bring the economy out of deflation.

The central bank hoped the low-cost funds would act as a catalyst to stimulate economic growth. The one-year Tokyo Interbank Offered Rate, or Tibor, a benchmark for financial institutions' borrowing rates, stands at around 0.5%, compared with the 0.1% offered by the Bank of Japan.

But banks themselves remain skeptical. "Loans with the 0.1% rate are surely attractive but the rate itself wouldn't help boost corporate loan demand," said an official at a regional bank. The yen's recent strength is damping companies' willingness to make capital investments. Unless the economy recovers, companies won't spend cash or ask for loans for capital investment, analysts and lenders say.

There is also a concern about a possible increase in bad loans. The BOJ won't take credit risk, so if the economy worsens and loans default, that may weigh on banks' credit costs, said Nana Otsuki , an analyst at UBS Securities.

Still, some banks have been working on specific projects eligible for the loans. Sumitomo Mitsui Banking Corp. has set up funds in the areas of environment-related businesses and medical care, as well as targeting companies that plan to expand or start operations in China. Using the central-bank facility, Sumitomo Mitsui has provided loans to companies such as Toyobo /zigman2/quotes/205340851/delayed JP:3101 +0.10% Co., for its project to expand a facility to manufacture materials for seawater desalination, and Ohta Oil Mill Co., for a recycling-related business.

Sumitomo Mitsui, the core banking unit of Sumitomo Mitsui Financial Group Inc., said it has received more than 700 loan requests. Regional banks are also trying to tap business clients using the program, which the central bank announced in June.

The Bank of Kyoto /zigman2/quotes/206678655/delayed JP:8369 +0.32% Ltd. in July outlined a loan program targeting local companies in sectors such as tourism, the environment and energy. The bank has received more than 70 loan requests from several industries, including a ryokan, or Japanese style-hotel, a spokesman said.

Bank of Nagoya /zigman2/quotes/206335934/delayed JP:8522 +0.79% Ltd. started a 20 billion yen program to provide loans to companies that expand their businesses in Asia, and to those that are involved in businesses linked to the environment, energy, or medical or nursing care.

But whether the effort will push lending back into positive territory is unclear. The central bank's plan may serve as a catalyst, prompting firms to ask for loans, but it isn't likely to lead to a full-fledged recovery in lending, Masayuki Oku , chairman of the Japanese Bankers Association, said at a news conference.

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