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June 29, 2010

BOJ Offers Y3 Trillion To Spur Bank Lending

Filed under: Uncategorized — bigcapital @ 4:23 pm

 

BOJ Offers Y3 Trillion To Spur Bank Lending

TOKYO (Dow Jones)–The Bank of Japan Tuesday decided to make Y3 trillion of funds available to banks to lend to cash-hungry companies, the latest step by the central bank to try to support demand by making more cash circulate in the economy.

Banks will each be able to borrow a maximum of Y150 billion of one-year funds at a 0.1% interest rate from the BOJ, the BOJ’s policy board said. In an unusual arrangement for a central bank measure, the banks will have to outline to the BOJ beforehand how they will use the loan funds. The loans are supposed to go to companies in high growth areas such as environment-related businesses and child care services.

The BOJ’s latest measure follows other recent monetary easing steps to try to jump-start private demand and rid the economy of deflation. It’s also made Y20 trillion of 0.1% funds available to banks without strings attached, and it has kept the overnight call rate at 0.1% since December 2008. The policy board voted unanimously Tuesday to keep that rate unchanged.

The new lending scheme is aimed at directing loans to smaller companies that are in promising business areas but that aren’t getting the funds they need due to banks’ worries about hurting their balance sheets. The policy board said in a statement it wants loans to go to “businesses that will contribute to raising productivity or creating new demand,” and hopes the plan will help strengthen the “foundation of growth” in Japan.

Analysts say that while the BOJ’s measure could aid some segments of the corporate sector, it likely won’t have a big impact on the overall economy because the money involved is relatively small, much less than the earlier Y20 trillion BOJ lending facility, for example.

Kyohei Morita, chief Japan economist at Barclays Capital, said the plan “would have virtually no direct effects in terms of revitalizing the economy,” because bank lending is held back by lack of corporate demand for funds, and that deregulation would do more to encourage companies to make new investments.

While other major central banks have taken steps to encourage lending after the global financial crisis, the BOJ’s system is unusual in that it requires banks to disclose how they will make the loans. The European Central Bank, for example, has several lending programs, and has lent out hundreds of billions of euro at 1.0%, but banks are free to use the money as they see fit. The Federal Reserve tried at one point during the financial crisis to bypass banks and lend directly to businesses in the commercial paper market.

Analysts say that the BOJ’s unconventional new measure was likely aimed at forestalling political pressure on the central bank to take even more radical easing steps such as buying up more government bonds, by taking an incremental step. Putting the BOJ in a tight spot is that even though it’s said it doesn’t tolerate deflation, consumer prices have been falling for more than a year, leading politicians to urge the BOJ to do more to reverse the deflationary trend.

Bank lending has also been declining for half a year, falling 2.1% from the previous year in May, the sharpest drop since August 2005

One official at a major Japanese bank said his bank will likely use the BOJ facility because the bank and BOJ had already discussed the plan beforehand, and the 0.1% lending rate is appealingly low.

Banks will be able to roll over the loans up to three times, meaning that they will be able to hold on to the funds for four years.

The BOJ said the loans should go to either domestic residents, excluding the government, municipal governments and financial institutions, or foreign firms which have a business establishment in Japan and are able to contribute to the nation’s economic growth.

The BOJ will prepare to start providing funds by the end of August and plans to accept new applications for loans until March 31, 2012.

Meanwhile, the BOJ left its assessment of the economy unchanged, saying that “Japan’s economy shows further signs of a moderate recovery, induced by improvements in overseas economic conditions.”

At the same time, the central bank stressed that it will keep the current extremely easy monetary conditions to combat Japan’s lingering deflation.

-By Megumi Fujikawa and Tomoyuki Tachikawa , Dow Jones Newswires

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