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Japan Tries To Lubricate Lending

January 09, 2009 | "Forbes.com"

The central bank offers billions in emergency loans to banks, but they still face high credit risks in 2009.

As in the United States, Japan wants its banks to lend rather than sit on their money. To that end, furthering the provision of credit to cash-strapped businesses, Japan's central bank will extend 1.2 trillion yen ($13.3 billion) in emergency loans to financial institutions. But as long as corporate earnings remain bleak, the banks risk incurring more bad debts in the new year.

The Bank of Japan said Thursday it will offer near-zero-interest loans to banks and will accept corporate bonds and commercial paper as collateral, in a bid to lubricate short-term funding for company operations. There will be six rounds of lending between now and March, and the interest rate on the loans will be 0.1%, the same as the central bank's key overnight lending rate.

But, even with an extra source of financing from the government, Japanese banks face higher credit costs. Exporters have seen their earnings savaged as a consequence of the global demand slump and the yen's surge in 2008. The risk of nonperforming loans is shifting from the real estate and construction sectors to manufacturing, and from small and medium-sized enterprises to large companies, Merrill Lynch analyst Mitsumasa Okamoto wrote in a report issued Thursday. Despite rock-bottom interest rates that will boost bond-related incomes and lower the risk of heavy equity losses as the stock market becomes less volatile in 2009, "it's unlikely that bank earnings will improve in isolation while industry earnings deteriorate," the report said.

Major Japanese banks, formerly flush enough to embark on a Wall Street shopping spree during last year's U.S. financial meltdown, have since had to scramble to raise capital. The latest central bank measure follows government moves to shore up the banking system by buying the shares of banks, which suffered heavy losses on their own equity portfolios--which they count as part of their reserves--last year as the country's stock market went into a dive. The central bank also took the aggressive step last month of buying commercial paper outright for the first time.

In Thursday trading, Tokyo's Nikkei 225 index tumbled by 362.82 points, or 3.9%, to 8,876.42, before the central bank's announcement.

By Tina Wang

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