The Bank of Japan (BOJ) launched a new lending program worth ￥30 trillion (US$279 billion) to support small businesses struggling amid the COVID-19 pandemic, but held off from adding major stimulus at an emergency meeting yesterday.
Following data released earlier in the day showing Japan’s key inflation rate falling below zero for the first time in more than three years, the central bank kept its policy interest rates and asset purchases unchanged.
Instead, it focused on the more pressing task of preventing bankruptcies, saving jobs and stopping an economic recession from turning into a financial crisis.
Combined with an earlier lending program, and its buying of corporate bonds and commercial paper, the BOJ said its pandemic response measures now total ￥75 trillion. By comparison, the overall size of the government’s record stimulus package in response to the pandemic is ￥117 trillion.
“This was more a demonstration of the BOJ’s aggressive stance rather than the lending programs themselves,” said Masamichi Adachi, chief Japan economist at UBS Securities and a former BOJ official. “They are certainly trying to avoid the stigma of doing ‘too little, too late,’ because that led to the yen strengthening after the global financial crisis.”
Still, compared with recent emergency meetings by the US Federal Reserve and the European Central Bank, there was nothing in the way of surprising action that went beyond what the BOJ itself had already telegraphed. Even the new program had been announced last month.
The program, due to run through March next year, would not offer direct assistance to businesses like the Fed’s Main Street Lending Program. Instead, it will funnel money to companies via commercial banks and other financial institutions. Like the BOJ’s other virus-lending program, the facility will encourage lending to companies by providing free loans to financial institutions and then paying them 0.1 percent interest on the amount they in turn lend out.
The combination of BOJ support programs is big enough to have an impact on the economy, said Shunsuke Oshida, head of credit research at Manulife Asset Management, comparing it in size to one of Japan’s big three banks.
“Mizuho’s total lending is about ￥85 trillion, so with BOJ programs worth a total ￥75 trillion, it seems Japan now has another mega bank,” Oshida said.
“The program’s financial incentive for banks to lend will likely work positively over the short term for the economy because there are companies needing cash, but there are negative elements as well as positive ones,” S&P Global Ratings senior director Ryoji Yoshizawa said. “If you help companies that have little prospect of surviving stay afloat, their existence might end up undermining firms that have worked hard to stay competitive.”
As for the possible re-emergence of deflation, economists warned that keeping the economy on track was also an important first measure to contain that risk.
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