JAPAN’S RATE CUT : Incremental Change : Japanese Banks Like Cut, Little Borrowers Not Sure

Takeo Tanaka, the owner of three small shops and an apartment building, hopes that Japan’s extraordinarily low interest rates will bring him some relief on his mortgage payments. But he isn’t going to go out and borrow money.

Even with the Bank of Japan halving its key interest rate Friday to a record low 0.5%, thereby pushing the cost of borrowing money in Japan dramatically lower than in other industrialized nations, Tanaka still worries that taking on fresh debt to expand his business would be too dangerous in today’s weak economy.

“Interest rates have gone down, so on the one hand I feel like borrowing money and aggressively trying to expand,” said Tanaka, who owns a baby clothing store, a toy shop and a women’s clothing boutique along a single roofed-over shopping street. “But I’m not sure how things will go. I’m very nervous and afraid to do anything. . . . Customers’ feelings aren’t the same as they used to be. Housewives are worried that their husbands might lose their jobs.”

Tanaka’s ambivalence reflects a harsh reality: Although the yet-lower interest rates should help Japan’s stalled economy avoid slipping back into recession, low rates are still no panacea.

Rates were already extremely low by U.S. and European standards and that hadn’t prompted any rush to borrow. The interest rates charged to healthy companies for a one-year loan might decline to 1.75% from 2% as a result of Friday’s action, analysts said. A home mortgage might slip to 2.8% from 3.1%.

But many smaller businesses that would like to borrow money lack the required collateral, which must normally be in the form of real estate. Tanaka, for example, thinks he may be able to get the mortgage interest on his apartment building reduced. But with the real estate collapse, he doubts that his land is worth enough these days to support major new borrowing even if he were willing to take the risk.

Although some companies will be happy to be able to borrow for even less, many other strong firms have no desire to boost investment in the current climate, however low interest rates may fall.

Given the lack of inflation in Japan, even the seemingly low interest rates of recent months can be viewed as rather high in real terms, Mitsubishi Bank economist Donald Kimball said. But the lack of more corporate borrowing is because credit-worthy companies “have little need for new financing,” not because rates needed to be lower or banks lacked funds, he said.

It is theoretically possible, Kimball added, that if a severe deflationary spiral developed, interest rates could be cut to zero and still not attract more borrowers: “If you’re in actual severe, prolonged deflation, even a zero rate is perhaps not attractive if you have to pay for it out of future earnings, which would be in lower prices.”

Still, Friday’s cut in the rate banks pay for money was deemed good news for the economy. The immediate beneficiaries will be Japan’s troubled banks.

The discount rate cut does ease the burden of carrying non-performing loans, Kimball said. “That is probably the greatest impact.” Banks’ operating profits “may rise to unprecedented levels in the first half of this fiscal year, and that’s due to a widening of the margin between banks’ cost of funds and their lending rates,” he added.

The Finance Ministry has estimated that Japanese banks are burdened with about $500 billion in non-performing loans, of which about one-third will prove uncollectible. Some private estimates run several hundred billion dollars higher. Whereas smaller banks may need a taxpayer bailout, the major banks are expected to solve their problems gradually by using profits to write off their bad loans. The Bank of Japan helps this process when it provides cheaper money.

In addition, falling interest rates weaken the yen by making higher overseas returns relatively more attractive. A weaker yen makes Japanese exports more competitive and more profitable, thereby boosting prospects for corporate profits and overall economic growth.

Thus for some companies--especially big exporters with major capital investment plans but relatively little cash on hand--lower interest rates and the weaker yen are extremely positive developments.

“Companies that really do need heavy amounts of capital for investment are very pleased by this movement,” said Mark Pearce, a spokesman for electronics giant NEC Corp. “This year, just in semiconductors alone, we’re investing over $2 billion. This is very helpful for us.”

Even foreign companies could be tempted to borrow in Japan to take advantage of low interest rates--so long as they’re not afraid of the risk of volatile currency exchange rates.

At Mitsubishi Bank, loans to strong corporate customers have been pegged this summer at 2% for loans of up to one year and 2.5% for longer loans. Those rates, typical of Japan’s major “city banks,” are likely to drop 0.25 percentage points as a result of Friday’s action, Kimball said.

These low rates make it “attractive for overseas corporations to do some yen financing,” particularly if currency exchange trends make them comfortable that the yen will not dramatically strengthen during the period of the loan, Kimball said.

But for American and other non-Japanese firms, borrowing in yen carries risks, he noted. “Many corporations that borrowed yen, particularly 10 years ago, are just suffering so much from the yen’s appreciation,” he said.

Foreign companies can hedge against exchange-rate risks, but that increases the cost of borrowing. If a U.S. company tried to hedge yen borrowing to be fully as risk-free as borrowing in dollars, the effect would be to make the total loan costs about equal to the cost of borrowing from an American bank in New York, Kimball said. In any case, a U.S. business would have difficulty getting a yen loan unless it were selling in Japan and earning yen to pay off the debt. “A bank would be hesitant to take the currency risk,” said Monica Williams, foreign exchange manger for Sanwa Bank California.

Some Japanese homeowners are benefiting from the opportunity to refinance mortgages. Rates at commercial banks are now about 3.1% for 25-year mortgages fixed for the first five years but adjustable after that, and 3.0% for regular 25-year adjustable-rate mortgages.

But many Japanese remain hunkered down. Norimichi Suzuki, owner of Suzuki Manufacturing Co., a maker of precision machine tools that is carrying about $6 million of debt, said: “I think nothing will change. Even if they lower the rate, nobody will borrow money due to the recession.”

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Megumi Shimizu and Chiaki Kitada of The Times’ Tokyo bureau contributed to this report.

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Fuel for the Dollar’s Rally

The latest cut in Japanese interest rates helped boost the dollar over the 100-yen mark in Tokyo Friday, though it fell back to close at 99.70 in New York. Lower Japanese rates should make foreign investments more appealing for Japanese investors, encouraging an “exporting” of Japanese capital that could further weaken the yen. Yen per U.S. dollar, monthly closes except latest:

Friday close: 99.70

Source: TradeLine

Reduced Rates

Japanese home mortgage rates are expected to slip about 0.3 percentage points as a result of Friday’s action by the Bank of Japan, which lowered its key interest rate to 0.5%. The move will make home mortgage rates less than half of what they were in 1987 and allow home owners to refinance.

Twenty-five year fixed mortgage rates:

August, 1995: 3.1%

Source: Mitsubishi Bank

Researched by DAVID HOLLEY / Los Angeles Times