With Japan’s economic retaliation measures straining relations between Japan and South Korea, the total amount of loans given out to South Korean entities by Japanese banks plunged 3 trillion won (US$2.56 billion) from 21 trillion won (US$17.93 billion) to 18 trillion won (US$15.36 billion) this year.
The total outstanding loans extended by four Japanese banks operating in South Korea ― Mitsubishi UFJ Financial Group, Sumitomo Mitsui Banking Corp., Mizuho Bank Ltd. and Yamaguchi Bank Ltd.― amounted to 18.30 trillion won (US$15.62 billion) as of the end of March this year, down 2.78 trillion won (US$2.37 billion) from six months ago, according to data from the Financial Supervisory Service (FSS) on July 7.
Japanese banks have already been decreasing loans to South Korea from the second half of last year. Banking analysts say that they had to reduce their external exposure as their overseas loan-deposit ratio exceeded 100 percent as a result of their aggressive extension of loans based on the zero interest rate,.
In particular, as the preference for risky assets declined around the world, Japanese banks have reduced their exposure to the Asian market, including South Korea, first. Among Japanese banks operating in South Korea, Mitsubishi has been most active in reducing the size of loans as it had 125 percent of foreign currency loan to deposit ratio and 52 trillion won (US$44.39 billion) of overseas loans as of the end of last year. It curtailed lending in Korea by 1.19 trillion won (US$1.02 billion) over the past six months. This is why an increasing number of experts are saying that the effect of Japanese banks’ withdrawal of loans would be limited as it is caused by a change in their fund operation strategies.
However, some also point out that the South Korean government needs to pay sharp attention to the recent drop in lending considering the status of Japanese banks in the domestic financial market. The amount of loans made by the four Japanese lenders accounted for 27 percent of the total loans provided by multinational banks in Korea at the end of September, the second largest share following Chinese banks’ 34.3 percent. Notably, there are also more than 12 trillion won (US$10.24 billion) of Japanese funds in the domestic stock and bond markets.
The problem is that the Japanese banks can withdraw their funds from the South Korean market at a faster pace if the Japanese government decides to expand its economic retaliation measures to the financial sector. Therefore, South Korean financial regulators are also keeping an eye on the liquidity of domestic banks and companies which have borrowed money from Japanese banks and raised funds by issuing bonds.
The total amount of loans directly and indirectly provided to South Korean banks and firms by Japanese banks was estimated at US$58.60 billion (68.65 trillion won) as of September last year, according to the Bank for International Settlements. The figure includes samurai bonds, which are yen-denominated bonds issued in Tokyo by domestic banks. Especially, about 60 percent of the loans were offered to South Korean companies operating in other countries. So, they can’t help but have difficulty in running overseas business if they experience a drop in these loans.
The financial regulators are checking on the Japanese government’s scenario for financial regulations but it believes that the impact would be limited. “We looked into what options we have in case Japan takes retaliatory measures in the financial sector," said Financial Services Commission (FSC) Chairman Choi Jong-ku during a luncheon meeting with reporters on July 5. "They may refuse to extend fresh loans to local businesses or roll over existing debt. But even if they do so, we won't have any great difficulty handling such a situation.”