Japan's strong bank lending can't mask economic challenges

Mon Jul 8, 2013 3:25am EDT
 
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By Leika Kihara and Kaori Kaneko

TOKYO (Reuters) - Japanese bank lending marked its biggest annual increase in four years in June, though service-sector sentiment worsened for the third straight month, undercoring the challenges facing the government even as its sweeping stimulus policies continue to spur economic momentum.

Outstanding loans held by Japanese banks rose 1.9 percent in June from a year earlier, Bank of Japan data showed on Monday, marking the 20th straight month of increase and posting the biggest gain since July 2009.

"The recent increase in demand for funds is related to mortgage lending and the housing market," said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

"I expect bank lending to continue to steadily increase, which is part of the portfolio rebalancing that the BOJ is trying to encourage."

Borrowing for investment in real-estate trust funds, and overseas mergers and acquisitions, also contributed to the increase, which followed a 1.8 percent rise in May, a BOJ official told a briefing.

The data bodes well for the BOJ, which hopes its aggressive stimulus plan will encourage banks to funnel money to lending and risky assets, instead of loading up on low-risk, low-return government bonds. It forms part of the central bank's strategy to spur growth and vanquish years of entrenched deflation.

SENTIMENT FRAGILE

The BOJ stunned markets on April 4 by setting in motion an intense burst of monetary stimulus, pledging to double its holdings of government bonds and boost purchases of risky assets to achieve its 2 percent inflation target in two years.   Continued...

 
A security guard stands at a bank in front of the Bank of Japan headquarters in Tokyo July 5, 2013. REUTERS/Toru Hanai