TOKYO, Jan 13 - Japan's banks continued to lend less in December while money supply grew only modestly, highlighting a stubbornly weak side of a recovering economy. Bank lending fell 5.1 percent year-on-year, worsening slightly from a drop of 5.0 percent in November, the Bank of Japan said on Tuesday. Japan's most widely watched measure of money supply, M2 plus certificates of deposit (CDs), rose 1.5 percent from a year earlier, the central bank said -- marking a slowdown from gains of 1.6 percent in November and 2.2 percent in December 2002. The data showed economic activity remained sluggish, contrary to the BOJ's efforts to boost money supply and get more funds moving among businesses and consumers. "Business conditions are still quite tough," a BOJ official said, adding bank lending dropped for the seventh straight calendar year in 2003. "Firms are continuing to cut back on interest-bearing debts." The data contrasts with an upturn in other economic indicators such as capital spending, which has recovered in the past year on the back of healthy exports.
Mamoru Yamazaki, chief economist at Barclays Capital, forecast growth in money supply to remain slow and bank lending to continue falling despite some improvement in the overall economy. Even if lending attitudes improved, he said, firms would be likely to focus on repaying debt rather than taking on new risks and this would drag down the amount of lending. "It's hard to imagine the environment for money supply to suddenly improve, so we forecast M2+CD growth to stay around the one percent level and not accelerate," he said. In an example of corporate efforts to slim down and minimise exposure, banking group UFJ Holdings <8307.T> said on Tuesday that it planned to sell off 740 billion yen ($6.94 billion) in shareholdings by March 2005, bringing forward a sales scheme by three years. Japanese banks are reducing their stockholdings to limit their exposure to market volatility after a government order to halve the ratio of bad loans to total loans by March 2005 compared with levels in March 2002. Moreover, in 2004 it should become clear how successful banks have been in reviving distressed borrowers over the past couple of years and, despite better economic data, bankruptcies may start rising again, a leading research firm said. "Banks are feeling the pinch and decisions will be made on the fate of companies as banks face up to the need to clarify their bad-loan problems. This year will be full of difficulties," Katsuyuki Kumagai, general manager in the information department at Teikoku Databank, told in an interview.
LIMITED POLICY IMPACT
The weak money supply growth also underlines the limited impact of the BOJ's quantitative easing policy, which floods the money market with liquidity and pins interest rates near zero. The annual rise in M2+CDs was 1.7 percent in 2003 -- the lowest since 1993 -- and compared to 3.3 percent in 2002. Slow money supply growth has recently become a political issue, with some government officials including Economics and Financial Services Minister Heizo Takenaka calling on the BOJ to come up with ways to boost it. The BOJ's easy monetary policy has increased growth in financial institutions' current account deposits at the central bank, and officials there have said there was little more it could do as money supply can rise only along with the rest of economic activity. Recent data showed Japan's monetary base rose 13.2 percent in December from the same month a year earlier, the 27th straight month of double-digit growth. In theory, the government could adopt more fiscal pump-priming measures to boost demand. But it has little room to move, faced with massive public debt acquired through years of heavy fiscal spending. Standard & Poor's Ratings Services said in a report on Tuesday that it would maintain a negative outlook on Japan's public sector due to fiscal problems and slow reforms. It said it expected Japan's economy to continue to expand in 2004 but that long-term growth potential remained weak. It also cited weakness in the financial industry. "Acceleration of structural reforms in both the public and private sectors, therefore, will be a key to increasing the potential economic growth rate of the country," it said. ($1=106.64 yen)//