Japanese bank lending grew at the slowest pace in a year in the 12 months to August partly as companies saddled with excess capacity have less need to borrow funds for capital expenditure.
At the same time, August's money supply rose from a year earlier at the fastest rate in more than nine years, suggesting that ample funds in the economy aren't flowing into new loans as companies become accustomed to lacklustre domestic demand.
The contrast between bank lending and the money supply show the limits of the Bank of Japan's policy of keeping its benchmark interest rate near zero and supporting corporate finance by purchasing assets from commercial banks.
"The idea that monetary policy is pushing on a string has been around in Japan," said Naomi Hasegawa, senior fixed income strategist at Mitsubishi UFJ Securities.
"It takes time for the negative supply gap to shrink, and that is a precondition for loan growth."
Weak lending also highlights the tentative nature of Japan's recovery from its worst recession since World War Two as the Democratic Party prepares to take control of the government this month, ending five decades of almost unbroken rule by the Liberal Democratic Party.
Lending rose 1.8 per cent in August from a year earlier, slowing further from a record gain logged in January and marking the smallest rise since September 2008, when it rose 1.6 per cent, BOJ data showed today.
Loan growth slowed for the seventh straight month, partly reflecting easing credit conditions and companies' hoarding of cash, but companies also have less need for funds as they scale back their spending plans.
Machinery orders - one leading indicator of such capital spending - are expected to have fallen 3.5 percent in July, a Reuters poll showed, suggesting firms are still cautious about spending on equipment. The data is due on Thursday.
"The bank lending data reflects a lack of funding needs at companies as capital spending remains restrained and inventories still need to be cut back. It shows weak demand in line with economic activity," said Masamichi Adachi, senior economist at JPMorgan Securities Japan.
Japan's output gap narrowed in April-June to minus 7.4 per cent from a record minus 8 per cent the previous quarter, but supply continued to outstrip demand by a large margin, government data showed last month.
Japan's M3 money supply rose 2 per cent in August from a year ago, separate data from the BOJ showed today. That was the biggest increase since May 2000, when it rose an annual 2.1 per cent.
Reuters