Japanese firms turn to bank loans as markets dry up

Tokyo: A seized-up commercial paper market has forced Japanese companies to boost borrowing from banks at a record pace as they hoard cash, fearing the global financial crisis will make fundraising even more difficult.

Fundraising has increasingly become a headache for firms struggling from slack exports and consumption as the global downturn looks set to hit Japan's economy, already in its first recession in seven years, well into next year.

The outstanding balance of commercial paper dropped 9.9 per cent in Nov-ember from a year earlier, the largest decline in nearly two years, Bank of Japan data showed, although the total paper on issue edged up from October.

"There was a conspicuous rise in lending by major banks, which means that even large companies that are considered blue chips are taking on more bank loans in the face of tighter conditions for direct financing," said Junko Nishioka, chief economist at RBS Securities.

Bank lending grew 3.2 per cent from a year earlier in November, the fastest pace on record, as companies piled up cash to guard against an increasingly uncertain market outlook.

Underscoring the pain of the global downturn on Japan's economy, the current account surplus in October more than halved from a year earlier as exports fell and high oil prices bloated import bills.

Reflecting weakening corporate activity, revised GDP data due today is expected to show the economy shrank 0.2 per cent in July-September, double the preliminary reading of a 0.1 per cent fall, a Reuters poll showed. The Bank of Japan will accept lower-rated corporate bonds as collateral for its market operations from today to help tide over companies through a year-end credit squeeze, but analysts doubt it will have a lasting effect.

Real pain

"What is happening in Japan now is that only large firms can issue commercial paper or corporate bonds, and even if the BOJ purchases some of these, it will not be able to quite get around to the capital crunch of the small and mid-sized firms," said Takeshi Minami, chief economist at Norinchukin Research Institute.

A growing number of borrowers, particularly smaller firms, are turning to banks because raising funds through markets has become increasingly difficult. The real pain could come once companies use up their credit lines.

"Corporate earnings are worsening sharply so banks will continue to curb lending to smaller firms that face the risk of bankruptcy," said Azusa Kato, an economist at BNP Paribas.