Japanese Real Estate Loans Closing In On Bubble-Era Levels, Prompting FSA Anxiety

The Financial Services Agency in Japan is increasing surveillance of regional and ‘shinkin’ (credit) banks for any signs their operations may be negatively affected by the flood of real estate loans, industry sources said.

Property loans by banks are surging on strong demand for redevelopment projects in the greater Tokyo area and to meet the asset management needs of individuals, sources in Japan have said.

In fiscal 2014, commercial banks extended just over ¥10.1 trillion in loans for real estate investment, topping ¥10 trillion for the first time in seven years, according to a Bank of Japan survey. The amount of new loans grew close to the level reached in the heyday of the asset-inflated bubble economy in fiscal 1989.

The lending spree has been driven by demand from big companies for investment in redevelopment projects in and around Tokyo and from real estate investment trust fund managers.

Regional and shinkin banks are enjoying sharp growth in real estate loans to small businesses, including firms set up by individuals for asset management.

The growth at the smaller lenders also reflects an inheritance tax increase in January this year, which has spurred wealthy individuals to buy properties with borrowed money to reduce inheritance tax payments.

Fresh real estate loans by shinkin banks stood at ¥2.1 trillion, exceeding ¥2 trillion for the first time, the survey said.

Regional banks are also increasing real estate loans because of a lack of borrowers for which wide interest margins can be expected, due to rock-bottom interest rates reflecting the Bank of Japan’s radical, super-loose monetary policy.

So far, the BOJ and the FSA have not seen any major signs of a real estate bubble. But the FSA is cautious about potential downside risks.

“The real estate market tends to deteriorate rapidly once it starts slowing,” a senior FSA official said. At a regular meeting held earlier this month, the FSA urged regional bank heads to scrutinize their real estate lending. The FSA will check banks’ risk management systems through regulatory inspections.

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