Will weak bank lending continue to haunt Japan’s banks?

Japan's lending growth remained sluggish for a fourth month as cash-rich companies gave no heed to the lowest borrowing costs among major economies and used their own funds to invest.

Loans with the exception of trusts rose 0.9 percent in May from a year earlier, the Bank of Japan said, slowing from 1 percent in April. Lending adjusted for currency fluctuations, bad loan write-offs and securitizations climbed 1.8 percent. “Companies won't borrow money when they've got massive amounts of cash in their pockets,” said Eiji Hirano, executive vice president at Toyota Financial Services Corp. and a former executive director of the Bank of Japan. “An acceleration is unlikely and it's a tough situation for banks.”

Spending, sales and profits among Japan's largest companies ascended to a record-high in the first quarter amid the longest period of post-war economic expansion. Mitsubishi UFJ Financial Group, Japan's largest bank, forecast on May 23 that earnings this fiscal year will fall.

Japan's banks started to expand lending in February 2006, having gotten rid of bad debts accumulated after the bubble economy burst 16 years ago. Growth in borrowing has decelerated since peaking at 2.2 percent last July, the same month the Bank of Japan ended its five-year policy of keeping interest rates near zero percent.

Mitsubishi UFJ's net interest income -- the difference between what banks pay for funds and what they receive from their loan customer -- fell 1 percent in the quarter ended March 31 from a year earlier.

“Loan demand from corporate sector lacks steam,” Masayuki Oku, head of the Japanese Bankers Association, said. “Tough competition among banks is likely to continue with a weak demand for borrowing.”

Economists including Hiroshi Shiraishi say companies' abundant cash flow is just one of factors leading to sluggish lending growth.

“Companies still have a borrowing allergy after suffering from repaying debt amid a decade-long stagnation,” said Shiraishi, an economist at Lehman Brothers Japan. “They are too afraid of taking risks to borrow even with such low interest rates.”

After being suffering from debts amid a decade-long stagnation, Japanese companies have developed a phobia of borrowing. The risk of borrowing still strikes fear even with incredibly low interest rates. Will Japanese companies ever regain optimism in borrowing and investment again? What should Japan do to shake off the blight of weak lending growth that has troubled them for years?