Japan Acts to Spur Loans By Freeing Up Reserves

LONDON -- Following the lead of the United States, Japanese bank regulators are acting to help generate new lending after years of adhering to a tight monetary policy.

In the first such move in a decade, the Bank of Japan has cut its commercial banking system reserve requirements by a hefty 40%.

The measure, which became effective last week, will pump about $15 billion into the Japanese banking system.

The reserves dictate the amount of funds banks have to deposit on an interest-free basis with the central bank.

The action coincides with the Bush administration's own initiative to help banks increase lending, mainly through pushing for moderation of regulatory examinations.

Robin Monroe-Davis, managing director of the credit rating agency IBCA Ltd., based in London, said the actions in both Tokyo and Washington showed regulators are "worried abut the frailties of their banking systems."

The latest Japanese easing signals the success of the tight credit restraints that Japan has imposed over the last two years. These restraints were designed to combat inflation and an overheated economy that's been pushed by skyrocketing real estate values.

Land prices in the crowded Tokyo area have fallen for the first time in 16 years.

Danger of a Recession

Japan's monetary authorities are now concentrating on the danger that the slowing economy could lurch into a full recession, analysts said. The last time banking reserve ratios were reduced was in 1981, during a similar period of sluggish economic activity.

There is also pressure in Tokyo for a new cut in interest rates, after the nation's industrial production fell 2.5% in August.

The Japanese economy is facing the "most serious slowdown" since the first oil crisis of 1973-1974, said a spokesman for the Ministry of International Trade.

Demands for more credit-priming measures, including a cut in Japan's 5.5% discount rate, partly reflect the fact that Japanese banks have been cutting back on the growth in their assets in order to meet the forthcoming Bank for International Settlements' risk-weighted capital adequacy ratios.

Core Capital Ratios

While most leading banks appear to have achieved core capital equal to at least 8% of assets, the minimum under Bank for International Settlements standards, they are not ready to see these key ratios eroded by a new lending spree, analysts said.

One major bank, Mitsui Taiyo Kobe Bank, is still lagging, with a ratio of around 7.5%, its officials said.

While the banking industry as a whole is restraining asset growth to meet the international rules, "we are forced to continue to trim risk-weighted assets to attain the 8% capital as our problem is a shortage of Tier 1 capital," a Mitsui Taiyo Kobe spokesman said.

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