Japan's Bank Lending Slows as Companies Shun Debt (Update5)

Japan's lending growth slowed for a
third month as cash-rich companies ignored the lowest borrowing
costs among major economies and used their own funds to invest.

Loans excluding trusts rose 1 percent in April from a year
earlier, the Bank of Japan said in Tokyo today, slowing from 1.1
percent in March. Lending adjusted for currency fluctuations, bad
loan write-offs and securitizations climbed 1.9 percent.

Lending has risen less than 2 percent in each of the past nine
months as companies including Toyota Motor Corp. and Canon Inc.
shun the use of debt for expansion, instead using money generated
by the longest stretch of profit growth in 36 years. Borrowing is
unlikely to accelerate in coming months, said Takuji Aida.

``Companies have ample cash and that reduces their need to
borrow from banks,'' said Aida, chief economist at Barclays Capital
in Tokyo. ``The extra liquidity is more a reflection of strong
business activity.''

The yen traded at 120.21 per dollar at 5:11 p.m. in Tokyo
compared with 120.17 before the report was published. Bank lending
including trusts climbed 1 percent in April, the same pace as the
previous month, the central bank said.

Japan's banks began to increase lending in February 2006,
having disposed of bad debts accumulated after the bubble economy
burst 16 years ago. Growth in borrowing has slowed since peaking at
2.2 percent last July, the same month the Bank of Japan ended its
five-year policy of keeping interest rates near zero percent.

BOJ's Fukui

Loans excluding trusts were 388 trillion yen ($3.2 trillion)
in April, down from the record 537 trillion yen in March 1996.

The bank doubled the key overnight lending rate to 0.5 percent
in February. Governor Toshihiko Fukui's policy board will keep
borrowing costs on hold at its next meeting on May 16-17, according
to all 29 economists surveyed by Bloomberg News.

Interest rates are ``very low'' given the economy's strength
and failing to increase borrowing costs could cause overinvestment,
Fukui said in a speech to business leaders in Tokyo today.

Fujio Mitarai, chairman of the Japan Business Federation, said
he's ``not uncomfortable'' with the country's interest-rate levels.
``There's no great demand for financing'' among Japan's companies,
Mitarai, who is also chairman of Canon, said on May 7.

Canon, the world's largest maker of digital cameras, posted a
record profit last quarter. Toyota, the world's largest automaker
by market value, said yesterday that profit rose 8.9 percent in the
three months ended March 31.

Largest Banks

Growth in lending last month was dragged down by the country's
largest banks, while loans offered by regional banks accelerated.

Lending by Japan's 10 mega banks contracted 0.3 percent in
April from a year earlier, after rising 0.1 percent in March, the
report showed. Regional banks' loans climbed 2.4 percent, faster
than the 2.2 percent growth the previous month.

``Growth in loans has been driven by regional banks lending to
consumers and mid-sized companies,'' Takamasa Hisada, the Bank of
Japan's deputy director of bank surveillance.

An index of demand for loans from companies fell to 9 in April,
the lowest in more than a year, from 14 in January while that of
consumers rose to 13 from 7 in the same period, the Bank of Japan
said in a quarterly report last month.

Lack of loan demand is forcing banks to keep their borrowing
rates low, reducing interest income, said Tomoko Fujii, a senior
economist and strategist at Bank of America N.A. in Tokyo.

Sumitomo Mitsui Financial Group Inc., Japan's third-biggest
bank by assets, said last month full-year profit fell 36 percent,
worse than its forecast.

Other economists have a different view on the stalled growth
in loans.

`Sick of Borrowing'

``Companies are so sick of borrowing,'' said Richard Koo,
chief economist at Nomura Research Institute Ltd. They're slowly
regaining confidence to borrow after repaying debt amid a decade of
economic stagnation. ``This may take a while,'' Koo said.

The collapse of the bubble in the early 1990s triggered a
slump in stock and land prices, leaving companies laden with debt
and smothering demand for loans. Banks, which had secured loans
with land, became reluctant to extend credit, plunging the economy
into more than seven years of deflation.

Interest-bearing liabilities held by Japanese companies have
fallen to about 80 percent of gross domestic product, the lowest
since 1970, from more than 125 percent of GDP in the mid-1990s,
according to Merrill Lynch & Co.

Japan's money supply, or M2 plus notes in circulation, rose
1.1 percent in April, the central bank said in a separate report.
Broad liquidity, which includes bonds and investment trusts, gained
2.6 percent.

Savers, taking advantage of higher interest rates, have been
shifting money from current accounts to time deposits since the
central bank increased borrowing costs in July. Time deposits grew
3.7 percent in April and funds in current accounts dropped 1.3
percent, the bank said today.

``We expect a continuing shift from current accounts to time
deposits, as the impact of the additional rate hike in February
works through the economy,'' said Chiwoong Lee, research assistant
at Goldman Sachs Japan Ltd.

To contact the reporters on this story
Toru Fujioka in Tokyo at