Japanese Banks Curtail US Activity

JAPAN's major banks plan to sharply curtail the growth of their lending in the United States. That will raise financing costs for the many American municipalities and corporations that have come to depend on Japanese funds. ``Our forecast is that Japanese banks will slow their expansion, but will not halt or reverse it,'' says Robert Dugger, chief economist at the American Bankers Association (ABA). ``The bad news is that some American companies will not be visited now, and some will be offered credit only on more expensive terms.''

Fuji Bank, the world's fourth largest bank, plans zero or slightly negative growth in its American assets over the next six months, says Masahiro Nagayasu, vice president for planning. ``Overall, there will be less Japanese money available in the US,'' he says. Fuji is not alone, says Yutaka Inoue, vice president at Sumitomo Trust. ``The rate of asset growth for all Japanese banks in the US will probably be slower.''

Herbert Baer, an economist at the Federal Reserve Bank of Chicago, says the slowdown in Japanese lending has begun to affect American corporations. ``The Japanese are not trying to make the same inroads they were before,'' he said. ``We already see prices on loans firming up.''

The Japanese banks have been compelled to retrench by the decline of the Tokyo Stock Exchange and tough new international banking regulations.

When the Tokyo Stock Exchange was soaring, the major banks raised huge pools of funds for overseas expansion by simply issuing stock. Easy access to cheap funds enabled the banks to charge less on loans. Lagging profits were bolstered by occasional sales of shares from the large portfolios of corporate stock held by each bank. Unlike their American counterparts, Japanese banks are allowed to own large blocks of corporate stock.

The dramatic drop in Tokyo share prices that began early this year hit banks two ways, devaluing their portfolios and cutting off the source of cheap funds - issues of new bank stock. The banks are now scrambling to meet more stringent capital/asset ratio requirements adopted by the Bank for International Settlements (a Basel, Switzerland, institution owned by major central banks), which are scheduled to become effective in early 1993. With little prospect for improving their capital base, the banks have little choice but to slow asset growth.

Until they encountered these domestic problems, Japanese banks were expanding in the US at a torrid pace. The Federal Reserve reports that Japanese banks now control more than 12 percent of all banking assets in the US, which includes everything from home mortgages to government securities. They have made important inroads into the lucrative corporate finance market.

According to the Chicago Fed, Japanese banks account for more than 11 percent of all commercial and industrial loans made to corporations in the US, a fourfold increase from the 1980 level.

Much of the corporate lending by Japanese banks has been to large borrowers involved in mergers and acquisitions. But they have also begun reaching mid-size American firms, a market increasingly seen as too risky by the many American banks already suffering from large losses on loans. ``American companies will be affected by the Japanese slowdown,'' Mr. Baer says.

With asset growth expected to stay slow for the foreseeable future, most Japanese banks are searching for ways to boost profits in the US. Mr. Nagayasu says Fuji Bank plans to liquidate some of its junk bond portfolio, and concentrate on finding new customers among mid-size firms. Fuji will then concentrate on extending investment-banking services to its expanded corporate customer base.

Unfortunately for American banks, whose profits have been squeezed by the aggressive pricing tactics of their Japanese competitors, their own problems leave little room for them to capitalize on Japan's financial woes.

``The US money center banks have to set aside more funds for loan-loss reserves and that will limit their growth,'' Baer says. Mr. Dugger of the ABA agrees. ``The deposit insurance premiums scheduled to go into effect in January are likely to reduce credit growth,'' Dugger says, ``so there is increasingly a slowdown in credit availability from US and Japanese sources.''