MNI POLICY:  Firms, Banks Financial Outlook Clearer by BOJ FSR

Bank of Japan officials see a growing risk that a greater number of companies than originally envisaged will face financial challenges as revenues and profits slump on the back of Covid-19 restrictions, MNI understands.

This will result in higher credit costs at commercial banks, which will tighten their attitude towards lending and dilute the impact of recent measures to boost corporate financing, the BOJ warns.

Bank officials see the next three months as crucial in highlighting the challenges facing many firms, with the impact on corporate profitability and bank lending to be clearer by the time of the October Financial System Report.

HOTELS, AIRLINES WORSENING

The BOJ's April FSR voiced concern over the Covid-19 impact on sales for hotels, airlines and automobiles. As expected, those sectors have been hit hard by the economic fallout from the virus, along with other parts of the hospitality sector, still seeing weak revenue flows and relying on the BOJ and government measures to get financing and to cover a large percentage of staff wage costs through September.

Loans under the BOJ's special programs total JPY27.1 trillion to date and fully guaranteed by credit guarantee associations, leaving banks with limited concern over credit risk and non-performing loans. However, the colossal lending to businesses before the coronavirus hit aren't guaranteed by the government.

EXISTING LOANS

Total loans by Japan's major and regional banks were JPY497.8 trillion in June, up 6.5% y/y and accelerating from +5.1% in May and +3.1% in April. The BOJ has allowed financial institutions to include some existing loans which are equivalent to the government's programs (interest-free, unsecured loans and loans guaranteed by the credit guarantee corporations) into the special program. The BOJ has set the maximum amount for each counterparty at JPY100 billion, although eligible loans are estimated to be several trillion yen.