Barclays Looks to Japan for £470m Cash Injection

Barclays is close to agreeing a 100bn yen cash injection (£470m) from Sumitomo Mitsui, Japan's third biggest bank.

Shares in Barclays were suspended on the Tokyo Stock Exchange earlier today amid growing speculation that Sumitomo Mitsui is poised to become the latest Asian financial powerhouse to fund western banks that have been hit hard by the US sub-prime mortgage crisis.

Sumitomo is also thought to be considering an alliance with Barclays to set up new banking services and asset management in Asia.

Following the credit crunch, Barclays is looking to raise up to £4bn to bolster its capital reserves. Its shares fell in London this morning, as analysts digested the implications of the possible deal.

A London analyst said: "They [Barclays] need to do something from a capital position. And if they can get a joint venture out of it that would be positive in order to get into the [Asian] market."

It is likely that Sumitomo will take a stake of several percent in Barclays through a private placement of shares, and look to form an alliance in Asia and in the asset management business.

Asian lenders, which have avoided the worst of the sub-prime crisis, are well-placed to step in with funding for their overstretched western rivals.

Shares in Sumitomo fell by a modest 1.5% to 883,000 yen today. One analyst cautioned that the $926m investment was too small to have much of an impact on the Japanese group's earnings.

"This is certainly an opportunity for Sumitomo Mitsui, but they don't seem to be taking full advantage of it," Mitsushige Akino of Ichiyoshi Investment Management in Tokyo told Reuters. "If they are going to do this properly, they will need to increase the size of their investment."

Sumitomo is one of several Japanese banks looking to secure more overseas business to offset shrinkage in the domestic market.

Earlier this year, Japan's second-biggest bank Mizuho injected $1.2bn into Merrill Lynch at the US brokerage's request. The move also comes after the ratings agency, Standard and Poor's, called on Japanese banks to raise their overseas investments.

The Nikkei business newspaper reported today that Sumitomo would take a small stake in Barclays when it issues billions of pounds of new shares, adding that the Japanese bank was likely to be the only foreign investor.

A formal announcement is expected at the end of the month. Sumitomo declined to comment when contacted by the Guardian.

Britain's third-largest bank said at the start of the week that it is looking to raise at least £4bn from existing investors and sovereign wealth funds. It is not clear whether the Sumitomo deal would be part of of the £4bn. Monday's trading update on Monday did not suggest that any fresh write-downs would be needed, whereas fundraisings by Royal Bank of Scotland, HBOS and Bradford & Bingley have all been accompanied by extra write-downs. Barclays reported £1.9bn of write-downs in May, compared with the £5.9bn announced by RBS.

In London, Barclays shares rose in early trading before falling back 5p, or 1.6% to 310.75p. Its Tokyo shares are due to be delisted by the end of the month under plans previously announced by Barclays.