PREVIEW-BOJ seen unveiling outline of new loan scheme

* What: Two-day Bank of Japan policy-setting meeting

* When: May 20-21, announcement due May 21 0330-0500 GMT

* Forecast: Policy rate steady at 0.1 pct

* BOJ seen announcing outline of new loan scheme

By Leika Kihara

TOKYO, May 18 (BestGrowthStock) – The Bank of Japan is expected to
outline a new loan scheme on Friday aimed at encouraging
private banks to lend more to industries with growth potential
and presented as part of its long-term approach to beating
deflation.

BOJ policymakers may also discuss Europe’s debt crisis and
the ensuing market turmoil, although the central bank will
probably hold off with loosening monetary policy any further as
the impact on Japan’s economy so far has been limited.

It is widely expected to keep its policy rate at 0.1
percent.

Here are possible outcomes:

UNVEILS LOAN PLAN BUT NO MONETARY EASING

Governor Masaaki Shirakawa last month instructed staff to
come up with a framework aimed at redirecting money to
industries with areas of potential new demand such as the
environment, health care, and research and development.

The BOJ is considering lending private banks funds for six
months or longer at 0.1 percent, so that the money will be used
to fund long-term investment. [ID:nTOE64G05E]

It would not a set a target for new lending, but would keep
the scheme in place for several years to give banks plenty of
time to benefit from the cheap loans on offer.

The central bank says monetary easing is not the aim of the
plan that would focus on specific borrowers and have no set
targets. Analysts are doubtful, however, how much the scheme
can boost lending.

The central bank is still in the process of asking private
banks to see what kind of framework best suits their needs.
That means full details of the programme may not come out until
June, with only a rough outline of it to be announced on
Friday.

Probability: High

Market reaction: Money market rates may briefly fall if the
BOJ decides to offer cheap loans with maturities of six months
to one year.

NO ANNOUNCEMENT ON LOAN SCHEME OR OTHER INITIATIVES

Preparing the framework may take longer than expected, with
defining industries with “growth potential” possibly most
challenging.

The BOJ is leaning toward setting broad guidelines that
would allow private banks to decide which of their loans
qualify, though too vague rules might expose the central bank
to credit risk, something some board members are concerned
about. The dilemma may delay the final decision on the scheme.

Central bank officials say they hope to announce at least
a rough outline on Friday. But they may run out of time.

Probability: Less Likely

Market reaction: The delay in announcement is unlikely to
affect markets because traders expect the BOJ to come up with
the cheap loan framework either this month or in June.

EASES POLICY FURTHER

Solid private consumption and robust exports to Asia led
some BOJ officials to believe the bank might be able to upgrade
its assessment of the economy to say it is already recovering.

But the European debt crisis, which nudged up the yen
against the euro to the disappointment of Japanese exporters,
dampened such optimism.

Still, the BOJ sees only a limited impact from the crisis
on the Japanese economy and the view there is that a slowdown
in Europe would not derail Japan’s moderate recovery unless its
damage spread to China and other Asian export destinations.

The BOJ has not ruled out easing policy further in case of
market turmoil. But with rates already near zero, the BOJ is
likely to save the few policy options it has left for later.

Among the possible future options is for the BOJ to
increase its outright government bond purchases or to expand a
fund supply operation put in place in December last year.

Probability: Highly unlikely

Market reaction: A surprise move would push down money
market rates and the short end of the bond yield curve,
triggering yen selling.

Stock Market Report

(Editing by Tomasz Janowski)

PREVIEW-BOJ seen unveiling outline of new loan scheme