Analysis: As it tapers, BOJ invents new weapons to stimulate growth

© Reuters. FILE PHOTO: A man wearing a protective mask walks past Bank of Japan headquarters while coronavirus disease (COVID-19) breaks out in Tokyo

By Leika Kihara

TOKYO (Reuters) – A largely overlooked program by the Bank of Japan to mitigate the disadvantages of its massive stimulus package could become the central bank’s new weapon to stimulate the economy, according to sources familiar with its thinking.

The key takeaway from a policy review last month was steps to ditch a radical monetary experiment that sought, but failed, to boost inflation through decades of pressure with strong money.

Less attention has been drawn to the creation of a new “Interest System to Promote Lending,” a highly technical program that aims to compensate banks for negative interest rates.

In exchange for the negative interest rate fee, the system pays banks different interest rates for borrowing cash from the BOJ, depending on the purpose of the loans they grant.

The main objective was to convince the markets that with the tools available to manage the side effects, the BOJ can push rates deeper into negative territory in order to combat economic shocks.

But the system also gives the BOJ the discretion in which sectors money should be diverted, making it a potentially useful tool in supporting initiatives like green investments, say four sources familiar with their thinking.

The move underscores how the BOJ, lacking in monetary instruments, is moving closer to fiscal policy to spur growth in an economy hit by the COVID-19 pandemic.

“This program has the potential to become the BOJ’s new tool,” said one of the sources. “It can be used to incentivize or encourage specific areas of growth.”

While the BOJ has no plans to deploy such new targeted loans anytime soon, it is an idea to get rushed into the brain as a future possibility, the sources say.

“The BOJ can pick hot topics like greens and pay lenders higher interest rates,” another source said.

The plan also shows how the BOJ’s policies are aligned with government goals, even if Prime Minister Yoshihide Suga’s government does not directly run the central bank.

Deputy Governor Masazumi Wakatabe nodded to Suga’s political priorities and said the BOJ must “question and discuss” ways of promoting a green and digitized Japan.

“With the program, the BOJ probably wanted to appeal to the government to do its part to support the economy,” said former BOJ board member Takahide Kiuchi.

(Click here and here for interactive graphics on the central bank’s total lending and the country’s core consumer prices.) (Graphic: Japan’s bank lending peaks as COVID Hit companies hoard cash, (Graphic: Inflation remains far away from the BOJ’s 2% target, https: //graphics.reuters .com / JAPAN- WIRTSCHAFT / BOJ / xlbvgxqbxpq / chart.png)


The European Central Bank also pays banks to tap their coffers to cushion the blow against negative interest rates. What makes the BOJ’s system unique is the three-tier structure in which “high priority” loans receive higher interest rates. If the BOJ deepens negative interest rates, the interest premium rises at the same time.

It was an idea the BOJ had been researching internally for years, amid criticism of its negative interest rate policies, sources say.

The BOJ now only uses the scheme to relieve COVID-19. But it can add new types of credit even before negative interest rates deepen.

The tool could enable the BOJ to pump money more efficiently to areas in need and to respond to future government pressures for stronger measures to protect the economy.

However, by moving closer to the area of ​​financial policy, there is a risk that the BOJ will undermine its independence from political interference.

Markets are also suspicious that the system would allow the BOJ to more easily cut rates or meet their elusive inflation target.

“It’s better than nothing, but not enough to boost lending,” said Satoru Kado, an analyst at Mitsubishi UFJ (NYSE 🙂 Research and Consulting.

“Banks profits will not improve until short-term interest rates rise faster. The BOJ has not addressed this and is unlikely to be able to do so in the foreseeable future.”

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