UPDATE 4-Japan bank lending grows at record pace amid crisis

(For more stories on the financial crisis click [ID:nCRISIS]) (Adds extra budget bills, S&P rating)

By Tetsushi Kajimoto and Hideyuki Sano

TOKYO, Jan 13 (Reuters) - Japanese bank lending grew at a record pace in December from a year earlier as companies, shut out from raising funds in markets, grabbed cash from their bankers amid a global recession.

The plunge in overseas demand and subsequent collapse in Japanese industrial production are paralysing the country's export-oriented economy, with Japan's current account surplus shrinking for a ninth straight month.

With much of the rich world in recession and growth slowing in China and other big emerging markets, many economists expect corporate anxiety over fund-raising to persist and even strengthen should the economy deteriorate further.

"Corporate executives are very worried because their cashflow is clearly dwindling," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.

"Corporate managers have recently been gossiping a lot about things like 'Such-and-such a company that's had no debt went to the bank just in case'. That kind of talk is fuelling their worries."

Japan's lower house of parliament passed on Tuesday an extra budget worth 4.79 trillion yen ($53.58 billion) aimed at keeping the world's second-biggest economy from sliding deeper into recession.

But the budget and related bills -- including a plan for 2 trillion yen in payouts to households that opposition parties say would do little to shore up the economy -- could face a delay in clearing the opposition-controlled upper chamber.

Despite deteriorating economic conditions, Standard & Poor's Ratings Services affirmed Japan's sovereign debt ratings, citing its robust net external asset position and relatively sound financial system. Still, such strengths were moderated by factors such as large fiscal deficits and outstanding debt, it added. [ID:nT169003]

SQUEEZED

Lending by Japanese banks rose 3.7 percent in December from a year earlier, the largest increase since the Bank of Japan started publishing the data in 2000 and faster than 3.2 percent in November. [JPBNK=ECI]

The country's biggest banks, for which the BOJ has data going back further, increased their lending by 4.2 percent, the largest rise since December 1991.

Borrowers have been turning to banks as rates on new commercial paper (CP) have jumped and issuing corporate bonds has become difficult for firms with low credit ratings, while companies are feeling the pinch from the economic slump.

Outstanding commercial paper issued in Japan fell 15 percent in December from a year earlier, the biggest fall in nearly two years.

For graphics on bank lending and outstanding CP, click on -- here

"I'd say half of the increase in lending is due to the fall in CP. The other half is due to cash hoarding," said Dai-ichi Life's Kumano.

Economists said the loans were likely going to bigger firms seen as better risks, rather than to struggling small ones.

"The sharp drop in outstanding CP shows that corporate financing continues to shift towards bank lending. It leads to the concern that small and midsize firms could be squeezed out," said Junko Nishioka, chief economist at RBS Securities.

The BOJ decided last month to temporarily buy commercial paper outright to try to stem the credit crunch, while Japanese companies are bracing for tighter credit conditions as the end of the business year approaches on March 31.

The BOJ is widely expected to keep rates unchanged at its policy meeting on Jan. 21-22, but it may examine expanding the types of assets it accepts in addition to CP to help corporate financing.

EXPORT GLOOM

The Nikkei share average .N225 slid nearly 5 percent on Tuesday, hit by a stronger yen that nailed exporters and fears of losses that reinforced worries about the global economy. [.T]

Sony Corp (6758.T) shares sank nearly 9 percent as a source with knowledge of the matter said the company may post its first annual operating loss in 14 years. [ID:nT345549]

Japan's current account surplus shrank for the nine month in a row as exports slowed and high oil and raw materials costs earlier in the year inflated the country's import bills.

It was the longest slide in the current account surplus since 16 months of contraction in 1995-1996 when a rising yen sent exports sliding. [JPCURA=ECI]

Adding to trouble from weakening exports, a government survey showed Japan's service sector sentiment fell for the the ninth straight month to mark a record low in December. [ID:nTKB003249]

A separate survey by a government-affiliated body pointed to further pessimism, with 36 economists polled saying the economy likely shrank an annualised 5.14 percent in October-December, against a 1.8 percent contraction forecast a month ago.

"The current account balance is still in the black, but the trade and service balance is running a huge deficit. Much depends on how much income surplus Japan can earn ahead," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"Exports to China and other emerging economies are weakening, so the outlook for Japanese exports is grim," he added, saying they may not hit a bottom until the third quarter of this year. (Additional reporting by Yuzo Saeki; Editing by Hugh Lawson and Chris Gallagher)