MNI POLICY: BOJ Concern Slower Economy Will Hit Bank Lending

Bank of Japan officials are still concerned that the slower than hoped recovery in Q3 will hamper a corporate fiscal recovery, particularly in the hospitality and tourism sectors, which could lead to many firms facing financing challenges, MNI understands.

That is also likely to further increase credit costs for commercial banks, which will make them more cautious in their lending, risking a pullback in financial intermediation.

Lending facilities put in place by the government and the Bank of Japan in recent months are enabling firms to raise liquidity, but falling revenues and profits will impact their ability to repay loans and to retain staff.

Restaurants and hotels have struggled to stay afloat through the pandemic, with stay-at-home and social distancing restrictions keeping consumers away.

Japan's big banks have been upping their loan-loss reserves since the start of the new year, reacting to higher credit costs. But smaller banks haven't increased their reserves as needed, which will see them pare back on lending.

Officials at the BOJ don't see the current situation boiling over into wider systemic risk or instability in the financial system, but they are at least keeping a close eye on developments

Bank lending rose 6.4% y/y in July following June's record 6.5% gain, a 5.1% rise in May and a 3.1% gain in April after lending facilities were put in place by the BOJ and the government.

However, officials and the central bank don't see lending continuing to rise, despite a likely increase in demand for funds. The BOJ also notes many firms attempting to move their historic bank loans, borrowing implemented before the lending facility was in place, to the new loans, that are guaranteed by the government.