The cost-cutting strategy adopted by Japanese firms amid an ongoing decline in sales and inventory levels and a return of focus to direct financing by corporations are driving a slowdown in the pace of lending growth by Japanese banks, a report released by BNP Paribas said on Tuesday.
Overall bank lending increased 1.5% year-on-year in October, following the revised 1.5% annual gain in September. Excluding trusts, bank lending rose 1.5% after the revised 1.6% increase in the previous month. Adjusted lending showed a 1.9% annual increase following the 2.3% gain a month earlier.
BNP Paribas said that the sharp growth in lending until February this year was fueled by large corporations shifting away from direct financing owing to deteriorating conditions for corporate bond issuance after the financial crisis, along with efforts to secure cash flow amid rapidly declining sales. But with market conditions improving again, the firm said that corporations have returned to direct financing, leading to the slowdown in lending growth.
"This resurrection of the direct finance market played a particularly important role through the summer months of this year," said Azusa Kato, an economist at BNP Paribas. "But more recently it would appear that the biggest factor has been a reduced need for working capital as many firms cut back on capital spending amid an ongoing decline in sales and inventory levels."
The firm noted that despite the slowdown in overall lending, lending growth to large firms remained a very respectable 9.5% year-on-year, while in contrast, lending to small firms declined 2.3%. The firm said the precarious financial state of many small firms are making financial institutions more reluctant to offer standard loans.
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