TOKYO -- With profits squeezed at home, Japanese banks continued piling on overseas investments and loans in the first quarter of 2017, remaining the top international lenders while taking on associated risks.
Such operations grew by about $60 billion over the previous quarter to $3.83 trillion on an ultimate risk basis, according to the Bank for International Settlements. That put Japan about 20% ahead of the U.K., which has foreign claims totaling $3.17 trillion, and the U.S., with $3.06 trillion.
European lenders held the crown before the 2008 financial meltdown and the continent's subsequent debt crisis. Their lending capacity shrank, and regulations were strengthened, forcing them to reduce foreign investment and loans. The U.K.'s foreign claims have dropped 25% in five years, while Germany's have plunged 31%.
As if to fill the gap, Japanese banks raised their foreign claims by 38% over that period. Capital needs remain low at home, and the Bank of Japan's negative interest rate policy drove down lending rates as well as yields on Japanese government bonds -- a pillar of surplus fund investment. Overseas activity makes up about 40% of overall outstanding loans for megabank Mitsubishi UFJ Financial Group, which lends heavily to infrastructure businesses in Asia covering areas such as railroads and power generation.
The U.S. was the largest recipient, with investment and loans from Japanese banks growing nearly 3% on the quarter to $1.66 trillion -- more than triple the next-largest borrower. Increasing lending to regional businesses played a major part in that gain, though investments in government bonds were counted as well. Megabank Sumitomo Mitsui Financial Group's U.S.-bound investments and loans totaled $223 billion in March, including credit lines and other financing, compared with just 7 trillion yen ($64 billion at present rates) in foreign debt holdings including Treasurys.
The Cayman Islands ranked as the second-largest recipient, with lending and investments to the British territory rising 5% to $478.3 billion. Many entities have set up mutual funds on the territory, enticed by tax benefits. Japanese banks are buying into such funds as investing in JGBs yields lower returns.
The next six spots were occupied mostly by European countries -- the U.K., France, Germany, Luxembourg and the Netherlands -- interrupted only by Australia in fifth place.
Shift to emerging economies
Thailand's investments and loans from Japanese banks have doubled to $73.7 billion over the past five years, making it the ninth-largest recipient.
China rounded out the top 10, as financing climbed just under 1% to the $70 billion range. Claims by Japanese banks declined in 2016 amid economic uncertainty in the country, but "we couldn't leave out the world's second-largest economy after all," one megabank official said.
Lending and investment into developed countries in the West and elsewhere dipped to 69.5%, falling below 70% for the first time in the last five years and indicating growth in lending to emerging economies.
Japanese banks have sought to increase overseas investment for years, but doing so carries risk. Factors such as the creditworthiness of foreign companies can be tough to measure, and overseas activity is susceptible to fluctuations in the global economy. Lending abroad has left scars before, such as the blow to U.S. investment-banking business during the Lehman crisis.