May 23, 2020

JAPAN: Government and BOJ coordinate to stabilize business as outlook worsens

BY Tobias Harris

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( 3 mins)

On Friday, 22 May, the Bank of Japan (BOJ) held an emergency meeting – and BOJ Governor Haruhiko Kuroda issued a joint statement with Finance Minister Taro Aso for the first time in four years – as the BOJ braced for a renewed fight against deflation and the threat that a prolonged slowdown could pose to financial stability. Accordingly, the BOJ and the Abe administration agreed that they would coordinate to ensure uninterrupted access to credit for businesses and to safeguard the financial system more broadly. The BOJ’s emergency meeting and the joint statement with the government had little immediate market impact but reinforce the impression that political and monetary authorities are still prepared to do whatever it takes to protect banks, businesses, and households from the deepening recession.

To this end, the BOJ announced Friday that it would introduce a new JPY 30tn (USD 278.9bn) funding vehicle to make interest-free loans to financial institutions to ensure that they keep lending to small businesses affected by the Covid-19 pandemic. The measure is intended to support the Abe administration’s programs, included in last month’s stimulus package, to encourage interest-free and unsecured lending to small businesses. To support this lending, the BOJ will offer interest-free lending to smaller regional banks and credit unions to enable them to provide interest-free loans to businesses. This program is part of what is now a JPY 75tn (USD 697.2bn) set of BOJ policies aimed at countering the Covid-19 recession, which also includes previous decisions to buy up to JPY 20tn (USD 185.9bn) of commercial paper and corporate bonds, and a separate JPY 25tn (USD 232.4bn) lending program that provides lending to financial institutions against a wide range of private debt as collateral. In its announcement Friday, the BOJ decided that these measures, initially intended to expire in September, would be extended until the end of the fiscal year in March 2021.

The Abe administration for its part has indicated that it will expand an additional JPY 12tn (USD 111.6bn) to companies as part of a new Fiscal Investment and Loan Program (FILP) plan that will be passed along with a second supplemental budget in June. This plan will provide direct loans to companies and purchases of corporate bonds to ensure that they have capital on hand to avoid downgrades and are able to access other sources of credit.

Beyond providing a safety net for financial institutions and other businesses – particularly small businesses – the BOJ could be increasingly preoccupied with inflation. Core inflation, excluding fresh food, fell in April for the first time in more than three years, to -0.2% year-over-year. Attention during the run-up to the bank’s next scheduled policy board meeting on 15-16 June could therefore focus more on whether the BOJ will adjust its monetary policy program – including changes to its interest rate targets – to combat the risk of deflation than on financial stability or business continuity.

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