A seized-up commercial paper market has forced Japanese companies to boost borrowing from banks at a record pace as they hoard cash, fearing the global financial crisis will make fund raising even more difficult.
Fund raising has increasingly become a headache for firms struggling from slack exports and consumption as the global downturn looks set to hit Japan's economy, already in its first recession in seven years, well into next year.
The outstanding balance of commercial paper dropped 9.9 per cent last month from a year earlier, the largest decline in nearly two years, Bank of Japan data showed, although the total paper on issue edged up from October.
"There was a conspicuous rise in lending by major banks, which means that even large companies that are considered blue chips are taking on more bank loans in the face of tighter conditions for direct financing," said Junko Nishioka, chief economist at RBS Securities.
Bank lending grew 3.2 per cent from a year earlier in November, the fastest pace on record, as companies tapped credit lines and piled up cash to guard against an increasingly uncertain market outlook.
Underscoring the pain from the global downturn on Japan's economy, the current account surplus in October more than halved from a year earlier as exports fell and high oil prices until the middle of this year bloated import bills.
Reflecting weakening corporate activity, revised GDP data out today is expected to show the economy shrank 0.2 per cent in July-September, double the preliminary reading of a 0.1 per cent fall, a Reuters poll showed.
The Bank of Japan will accept lower-rated corporate bonds as collateral for its market operations from today to help tide over companies through a year-end credit squeeze, but analysts doubt if the step will have a lasting effect.
"What is happening in Japan now is that only large firms can issue commercial paper or corporate bonds, and even if the BOJ purchases some of these, it will not be able to quite get around to the capital crunch of the small and mid-sized firms," said Takeshi Minami, chief economist at Norinchukin Research Institute.
"So within its current framework, it is difficult for the BOJ to take action in this area."
A growing number of borrowers, particularly smaller firms, are turning to banks because raising funds through markets has become difficult and costly due to the global credit crisis.
The Bank of Japan's interest rate cut in October, to 0.3 per cent from 0.5 per cent, has done little to ease strains.
Average yields on newly issued three-month commercial paper rose to 1.48 per cent in November from 1.18 per cent in October, the highest since April 1995, Bank of Japan data showed.
The real pain could come once companies use up their credit lines and need to go elsewhere for funds, some analysts say.
"Corporate earnings are worsening sharply so banks will continue to curb lending to smaller firms that face the risk of bankruptcy," said Azusa Kato, an economist at BNP Paribas.
"Just because bank loans are increasing, that doesn't necessarily mean banks have turned active in lending."
Weakness in the global economy is likely to hobble Japan's export-oriented economy.
The expected fall in July-September gross domestic product would follow a 0.9 per cent contraction in the second quarter, its sharpest quarterly fall in seven years, and the two quarters together tipped Japan into recession, going by the widely used definition of two straight quarters of contraction.
Sentiment in Japan's service sector fell to a record low in November, a government survey showed on Monday, signalling further deterioration in the economy.
Many analysts speculate the Bank of Japan will cut interest rates again by the end of March, although derivative contracts are still pricing in less than a 30 per cent chance of that.