Japan's financial regulator will make unprecedented inspections of banks to avert a loan drought that would increase bankruptcies, as real estate manager Pacific Holdings Co. collapsed after failing to raise funds.
The Financial Services Agency will visit Japan's biggest lenders, including Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc., and examine their records to ensure they provide credit and do not force borrowers to repay loans early as the recession deepens, the regulator said Tuesday.
"The new measures include some drastic steps which leave the impression the agency is pulling out all the stops," said Shinichi Ina, an analyst at Credit Suisse Group AG in a report. "It underlines the government's commitment to avoid bankruptcies."
Japanese corporate bankruptcies have risen for nine months as the global recession makes creditors wary of lending to smaller companies. Pacific Holdings, the third-biggest publicly traded company to collapse in Japan this year, filed for bankruptcy Tuesday with ¥163.6 billion (US$1.7 billion) in liabilities, saying it had struggled to raise funds for more than four months.
The government is also offering to help buy stock holdings from banks and acquire stakes in lenders to aid loan growth.
Leaders in China, South Korea, Australia and Hong Kong have taken steps to make sure credit keeps flowing as their economies are buffeted by the global recession. In China, banks extended a record amount of new loans in January after the government pushed them to support its economic stimulus package.
"Providing companies with ready funds is one of our most important societal roles," said Takashi Takeuchi, a spokesman for Mitsubishi UFJ, in response to Japan's inspection plan. "We want to continue to supply customers with funds ahead and be sensitive to their various needs."
The Japanese regulator, which will run its checks of banks for three months starting in April, said it may penalize any lender found to have "viciously" cut off borrowers. Banks would get greater leeway in classifying loans to support their capital ratios, it said in a statement.
"It is the duty of a financial institution to provide companies with funds smoothly," said Chika Togawa, a spokeswoman for Sumitomo Mitsui Financial Group Inc. in Tokyo. "We will engage proactively in readying funds for companies, taking into account the main point of these measures."
Mizuho is "keenly aware of expectations of our role to provide funds readily and maintain a sound financial status," company spokeswoman Masako Shiono said. "We are sincerely involved in supplying funds, while taking appropriate risk."
Even if the regulator conducts inspections, it might not lead to more lending as financial institutions want to protect their capital base, Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo, said Wednesday.
"For most small and medium-sized companies, the funding situation will stay tough," he said.
Japanese corporate bankruptcies rose for a ninth month in February, climbing 10.4 percent from a year earlier to 1,318 cases, Tokyo Shoko Research Ltd. said this week.
The failure of Tokyo-based Pacific Holdings, the 12th by a publicly traded company in Japan this year, comes as investment-grade borrowers, including Panasonic Corp. and Mitsubishi UFJ, sell record volumes of bonds and bank lending gains. Loans by Japanese banks increased in February by 3.8 percent, though the growth rate slowed for the second straight month.
Getting really squeezed'
"The banks may be lending more, but they are being very cautious about who they lend to," said Edwin Merner, who helps manage about $3 billion at Atlantis Investment Research Corp. in Tokyo. "Smaller companies are getting really squeezed."
Small companies, which employ about 70 percent of the workforce, say access to finance is the harshest it's been in at least 23 years, according to a survey published by Shoko Chukin Bank last month.
"Pacific is the latest in a long list of industry firms filing for rehabilitation," Sachiko Okada, a Goldman Sachs Group Inc. analyst, said in a report Wednesday. "This trend could cause financial institutions to become even more reluctant to lend."
The government announced plans in December to inject as much as ¥12 trillion into the nation's banks to make it easier for them to lend. The government also passed a bill on March 4 allowing it to provide an additional ¥20 trillion in guarantees to buy back stocks from banks to boost their capital ratios and encourage lending.