BOJ Doubles Lending Program to Combat Deflation

The Bank of Japan expanded a bank- loan program aimed at shoring up liquidity in the deflation- plagued economy, a boost that offsets the impact of separate credit measures expiring this month.

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Governor Masaaki Shirakawa and his board doubled the three-month loan facility to 20 trillion yen ($222 billion), the bank said in a statement after its meeting in Tokyo. Miyako Suda and Tadao Noda opposed the decision. The board also held the overnight rate at 0.1 percent by a unanimous vote.

Today’s increase matched the forecast by six of 17 economists in a Bloomberg News survey. Record price declines have spurred Prime Minister Yukio Hatoyama’s government to press the BOJ for more stimulus.

“The government’s pressure on the BOJ to aid the economy will remain strong, and the board members probably want to save policy options as much as possible,” Akio Makabe, a professor of economics at Shinshu University in Matsumoto, central Japan, said before the decision.

The yen rose to as high as 90.03 against the dollar, before trading at 90.25 at 1:06 p.m. in Tokyo from 90.37 before the announcement. The bank left unchanged its assessment that the economy is “picking up.”

Estranged From Counterparts

Today’s decision underscores the BOJ’s estrangement from counterparts around the world that are, from China to India to the U.S., withdrawing liquidity from their banking systems. The U.S. Federal Reserve yesterday affirmed it will let a record mortgage-security purchase program conclude at the end of March.

“The BOJ’s decision to expand the lending program may signal that Japan still can’t exit from the emergency mode and heads in the opposite direction from the global trend,” said Mari Iwashita, chief market economist at Nikko Cordial Securities Inc. in Tokyo.

Shirakawa may indicate later today the bank is ready to do more as needed because price are still falling even as the economy picks up momentum. He is scheduled to speak about the policy decision at a press conference at 3:30 p.m.

Given the expiry of separate steps to facilitate corporate financing, “the bank will expand the measure to encourage a decline in longer-term interest rates by substantially increasing the amount of funds to be provided through the fixed-rate operation,” it said in the statement. The bank refrained from calling the action monetary easing.

Bigger Balance Sheet

Beefing up the loan program will help the central bank sustain its 20 trillion yen balance-sheet expansion since the global financial crisis intensified in September 2008, assuring investors and politicians anticipating additional liquidity.

Under the facility expiring this month, the bank provided 5.9 trillion yen in unlimited collateral-backed loans to commercial lenders as of Feb. 28. The program expanded today has lent 9.6 trillion yen. Both offer three-month credit at 0.1 percent.

Shirakawa and his board are grappling with data that show prices are dropping even as the export-led recovery begins to generate jobs. The unemployment rate fell to a 10-month low in January. A report today showed demand for services climbed 2.9 percent in January from December, the biggest jump in more than a decade.

Falling Prices

Meanwhile consumer prices slid for an 11th month, and the gross domestic product deflator, a broad measure of prices, tumbled a record 2.8 percent in the fourth quarter. Falling prices undermine corporate earnings and make debts harder to pay off — bank lending has contracted for three straight months amid diminished demand for credit.

Finance Minister Naoto Kan, who has led calls on the central bank to do more to fight deflation, said this week there are “budding signs” that a pickup in domestic demand can sustain itself. Kan said this month that he hopes to stamp out deflation as soon as this year, and he wants an inflation target of about 1 percent or higher.

Japan’s central bankers have overseen a 19 percent expansion of their balance sheet to 128.1 trillion yen since before the September 2008 Lehman Brothers Holdings Inc. collapse worsened the credit crisis.

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