Global Market: Japanese banks see rising corporate loan demand ahead of BOJ meeting

Japan’s corporate borrowing demand strengthens despite higher interest rates, as markets assess the Bank of Japan’s next move amid inflation risks and resilient financial conditions.

The findings come ahead of the BOJ's policy meeting next week and reinforce market expectations that the central bank will continue raising interest rates from their current level of 1.25% to contain the risk of inflation exceeding its 2% target.

A diffusion index measuring the balance between major banks reporting an increase in corporate funding demand and those reporting a decline stood at +3 in a survey conducted between September 9 and October 13, compared with -1 in the previous survey three months earlier, according to the BOJ data cited by Reuters.

The positive reading indicates that more banks experienced an increase in corporate demand for funds than a decline.

The results follow the BOJ's quarterly Tankan survey, released on October 1, which showed that more companies considered funding conditions to be loose than those that viewed them as tight.

The BOJ raised its policy rate to 1.25%, a 31-year high, on September 18, signalling a greater focus on preventing inflation from overshooting its target. Analysts expect another rate increase in December or January, Reuters reported.

The resilience of corporate borrowing is becoming an increasingly important factor in determining the timing of the BOJ's next policy move. The central bank has said it will assess how previous rate increases affect corporate funding conditions to determine how close interest rates are to a level considered neutral for the economy.

Financial conditions remain accommodative despite the latest rate increase, BOJ Deputy Governor Ryozo Himino said on Wednesday, pointing to low real borrowing costs and strong growth in bank lending. His remarks indicated that the central bank remains open to further monetary tightening, according to Reuters.

Shigeto Nagai, head of Japan economics at Oxford Economics, said the economy's resilience to higher interest rates could give the BOJ room to raise rates beyond 1.75% to limit further yen weakness and prevent inflation expectations from becoming unanchored.

Markets will also scrutinise the BOJ's assessment of financial conditions in its quarterly outlook report, due after its two-day policy meeting ends on October 30, for indications of how far interest rates could rise.

Government stance in focus

Prime Minister Sanae Takaichi's administration has softened its criticism of the BOJ's rate-hiking approach, although concerns could resurface if higher borrowing costs put pressure on smaller companies, Reuters reported.

Economy Minister Minoru Kiuchi, considered an advocate of reflationary policies and an ally of Takaichi, said on Tuesday that he hoped to attend next week's BOJ meeting as one of the government's two representatives.

A summary of opinions from the BOJ's September meeting showed that a government representative had urged the central bank to proceed cautiously with further rate increases.

Ayako Fujita, chief economist at JPMorgan Securities Japan, said any shift in the government representative's tone at the upcoming meeting would offer clues about whether the administration has moved toward a position that respects the BOJ's independence, Reuters reported.

The balance between persistent inflation risks, resilient corporate borrowing and the government's concerns over higher financing costs is likely to remain central to the BOJ's next policy decision.