Bank of Japan downgrades regional economic assessments; chaos in the consumer credit industry on the way?

October 22, 2008
By Ken Worsley

In its most recent quarterly Regional Economic Report, the Bank of Japan listed economic conditions as “downward” in all nine regions of the country for the first time since the report has been issued in 2005. The report sums up the past three months in stark language:

The pace of increase in exports slowed. Corporate profits continued to decrease mainly due to the deterioration in the terms of trade, and business sentiment became even more cautious. In this situation, business fixed investment remained more or less flat in some regions, but was generally decreasing recently. Private consumption was relatively weak, mainly due to sluggish growth in household income and the increase in prices of energy and food. Meanwhile, housing investment was flat. Under these circumstances, production was relatively weak.

With this report, as well as the global financial crisis, as a backdrop, it’s also worth noting that a recent Nikkei poll found that 21.8% of small and midsize firms surveyed reported that conditions for borrowing from banks have worsened over the past year. This figure was double that of the previous poll, conducted in March. Still, 69.9% of firms surveyed said that borrowing conditions had not changed.

Yesterday, the Bank of Japan also released its survey of loan officers, which showed that willingness to lend stayed at an 8 year low over the past quarter. As the government seems to slowly be coming to the conclusion that the economic recovery is over, and bankruptcies continue to occur at their highest level in eight years, the Financial Services Agency is reportedly considering a 2 trillion yen package to provide infusions to major and regional banks.

It’s worth noting that while a large number of construction and real estate firms have been going bust over the past months, Inoue Kogyo, a firm that filed for bankruptcy on October 16, was also hit hard by the fact that one of its managers managed to embezzle 1.5 billion yen from the company’s coffers.

The Nikkei is even reporting that the survival of major consumer credit firms such as Aiful and Takefuji has recently come under speculation. We expect to see further consolidation in this sector, and perhaps continued downward pressure on share prices. At the same time, how much lower can some of them go? Shares in Aiful traded at an all-time high of 23,420 yen in February 2000, and were still above 10,000 yen as late as January 2006. Today, Aiful shares closed at 495 yen, having lost 80 yen over the day’s session.

Aiful must be nervous that its main lenders, including Sumitomo Trust and Aozora Bank, will cut back their lines of credit to the point that it becomes difficult to manage day-to-day operations. Should that happen - or worse, should they cut off credit lines altogether, Aiful has reportedly suggested that it will use funds gathered from borrowers to meet daily obligations.

Recent headlines have tried hard to convince us that Japan has enough cash to help bail out the world and that Japanese banks are healthy enough to afford massive forays into foreign equity stakes - and the contrarian take on this rosy depiction should be obvious. Still, the headlines may all be true. However, with private banks making large outward investments and the government now reportedly considering pitching in to help bail out Iceland, one is forced to wonder what the domestic consequences of such actions could be.

It was not so long ago that Finance Ministry officials stood in front of reporters and said that the nation’s foreign reserves were held as property of the people of Japan, to be used to help the nation in the time of crisis (this was the reason given for MOF opposition to the setting up of a sovereign wealth fund with capital taken from foreign reserves). It will be interesting to see what statements come from the Ministry of Finance over the following weeks and months, especially if money is pumped out of Japan (wasn’t that one of the problems to begin with?) when some could find a better use for it back home.

Filed Under Bank of Japan, Banking, Business