Strength in Japanese loan demand expected to leave scope for more BOJ hikes
By Leika Kihara
TOKYO, Oct 22 (Reuters) - Major Japanese banks are seeing increased demand for funds among corporate borrowers compared with three months ago, a central bank survey showed on Thursday, indicating that recent interest rate hikes have yet to hamper lending.
The data, which comes ahead of the Bank of Japan's policy meeting next week, reinforces the dominant view in the market that it will continue to raise interest rates from 1.25% currently to lessen the risk of inflation going beyond its target.
"The economy's overall resilience to higher interest rates may allow the BOJ to hike its policy rate beyond 1.75% to prevent further weakening of the yen" and the de-anchoring of inflation expectations, said Shigeto Nagai, head of Japan economics at Oxford Economics.
In the survey conducted from September 9 to October 13, a diffusion index measuring the ratio of major banks that saw corporate fund demand rise versus those seeing demand shrink stood at +3, compared with -1 in a survey three months earlier.
The positive reading indicates more banks saw corporate fund demand increase compared with those that saw demand fall.
It follows the BOJ's "tankan" quarterly survey, released on October 1, which showed there are more firms that believe funding conditions are loose compared with those who see conditions as tight.
The BOJ raised its policy interest rate to 1.25%, a 31-year high, on September 18 and signalled a pivot towards a policy focusing on mitigating the risk of inflation overshooting its 2% target. Analysts expect another hike in December or January.
Lending conditions are becoming an increasingly important factor in predicting the timing of the BOJ's next rate hike. The bank has said it will scrutinise how past increases affect corporate funding to assess how close its rate is to a level it deems neutral to the economy.
"Even after last month's rate hike, financial conditions remain accommodative" as seen in still-low real borrowing costs and strong growth in bank lending, BOJ Deputy Governor Ryozo Himino said on Wednesday — comments that signal readiness to raise rates further.
Markets will also focus on how the BOJ describes financial conditions in a quarterly outlook report due after its two-day meeting ending on October 30 for clues on how far it could raise rates.
Japanese Prime Minister Sanae Takaichi's administration has toned down its criticism of the BOJ's rate-hike stance but some analysts say pressure may grow again if rising borrowing costs hurt smaller firms.
Economy Minister Minoru Kiuchi, seen as a reflationist ally of Takaichi, said on Tuesday he hoped to attend the BOJ meeting next week as one of the government's two representatives.
A summary of opinions at the BOJ's September meeting showed a government representative urging the central bank to tread cautiously in further rate hikes.
"Whether the tone of the government representative changes relative to the September meeting will be an important clue as to the extent to which the administration has shifted toward a stance that respects the BOJ's independence," said Ayako Fujita, chief economist at JPMorgan Securities Japan.