Japanese bank lending grew at the slowest pace in a year in the 12 months to August partly as companies saddled with excess capacity have less need to borrow funds for capital expenditure. At the same time, August's money supply rose from a year earlier at the fastest rate in more than nine years, suggesting that ample funds in the economy are not flowing into new loans as companies become accustomed to lacklustre domestic demand.
The contrast between bank lending and the money supply show the limits of the Bank of Japan's policy of keeping its benchmark interest rate near zero and supporting corporate finance by purchasing assets from commercial banks. "The idea that monetary policy is pushing on a string has been around in Japan," said Naomi Hasegawa, senior fixed-income strategist at Mitsubishi UFJ Securities.
"It takes time for the negative supply gap to shrink, and that is a pre-condition for loan growth." Weak lending also highlights the tentative nature of Japan's recovery from its worst recession since World War Two as the Democratic Party prepares to take power this month, ending five decades of almost unbroken rule by the Liberal Democratic Party.
Lending rose 1.8 percent in August from a year earlier, slowing further from a record gain logged in January and marking the smallest rise since September 2008, when it rose 1.6 percent, BOJ data showed on Tuesday. Loan growth slowed for the seventh straight month, partly reflecting easing credit conditions and companies' hoarding of cash, but companies also have less need for funds as they scale back their spending plans.