TOKYO -- The outstanding loan balance at major Japanese banks shrank in July for the first time in 45 months, signaling a weak investment appetite among businesses despite the Bank of Japan's negative interest policy.
Top commercial banks had 186.8 trillion yen ($1.83 trillion) in loans outstanding at the end of July, or 0.7% less than a year earlier, according to the Japanese Bankers Association. That balance had climbed rapidly coming out of 2012, when Abenomics kicked in. But growth began slowing around a year ago as funding demand petered out, barely remaining in positive territory with a 1.8% uptick when the Bank of Japan introduced negative interest rates in February.
Regional banks' loan balance grew a brisk 3.9% on the year in July, indicating that shrinking funding demand is concentrated on large corporations, which mainly turn to top banks for their funding needs.
A look at Japan's three megabanks -- Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group -- underscores this point. At the end of June, banks in these groups had a total of 237.07 trillion yen in outstanding loans, marking the first year-on-year drop in five years.
MUFG's balance dipped 1.8% to 95 trillion yen at the end of June, with lower lending to public-sector organizations, where fierce bidding wars drive interest rates down, eating away at a slight uptick in loans to Japan's private sector. The strong yen also made dollar-denominated loans overseas appear smaller in conversion. Mizuho's balance declined 3.2% to 71 trillion yen.
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The BOJ's negative rates have driven down yields on Japanese government bonds, pushing companies to put cash into bank accounts rather than JGBs. Deposits at the top commercial banks thus grew 6.5% on the year in July to 319.35 trillion yen. But banks that keep too much cash in their BOJ accounts now face a minus 0.1% interest rate -- effectively, a 0.1% interest payment to the central bank -- making them eager to put those funds to work through avenues such as loans.
Businesses have been less than cooperative. Top banks' lending interest rates on outstanding loans averaged 0.89% in June, compared with 0.94% in February, according to the central bank. This dip should have driven up borrowing for investment. But low interest rates are nothing new for business managers here, meaning it will take more than a slight decline to stoke demand for funding.
"Companies' lack of confidence in the economic outlook is the largest factor inhibiting investment growth," a megabank chief said. Businesses are reluctant to take risks when unforeseen developments overseas could punish them for it.
Others say companies could be waiting to take out loans in the expectation that the BOJ will take its policy rate even further below zero. A signal that rates have in fact hit bottom could therefore cause borrowing to rise.