Q+A-What will the BOJ’s new loan scheme look like?

(For more stories on the Japanese economy click [ID:nECONJP])

By Leika Kihara

TOKYO, May 14 (BestGrowthStock) – The Bank of Japan is considering a
new loan programme aimed at encouraging private banks to lend
more to industries with growth potential, in what it describes as
a long-term approach to beating deflation.

Governor Masaaki Shirakawa last month instructed staff to
come up with the framework, which may be announced at a rate
review next week or at the following policy meeting in June.

Below are some questions and answers on the scheme:

WHY IS THE BOJ DOING THIS?

The BOJ has flooded markets with cash but the money is not
flowing into broader sectors of the economy as weak domestic
demand keeps companies wary about borrowing more for investment.

That has led the central bank to believe that loosening
monetary policy without tackling what it sees as the root cause
of deflation — weak demand — will not work.

The BOJ thus wants to redirect money to industries with areas
of potential new demand as part of an effort to boost Japan’s
productivity and potential economic growth, which now hovers
around 0.5 percent.

The central bank acknowledges that supporting particular
industries falls outside the realm of traditional monetary
policy, and that the role it can play is limited.

But it hopes the move will pressure the government to craft a
credible plan to meet its target of achieving annual economic
growth of more than 2 percent over the next decade. Details of
the government’s long-term growth strategy are due to be
finalised in June. [ID:nTOE5BT059]

Some analysts, however, say the BOJ is trying to buy time and
defuse calls for more aggressive action such as increasing its
outright government bond purchases.

HOW WOULD IT WORK?

The BOJ will offer cheap funds to banks that lend to firms in
new areas of demand such as the environment, health care, and
research and development.

The scheme will be similar to one the BOJ launched 12 years
ago, when it tried to beat a credit crunch by offering cheap
funds to match half of any increase in new lending by banks.

While details are yet to be finalised, the BOJ is considering
offering private banks loans with maturity of three months or
longer at 0.1 percent.

Banks may be allowed to borrow unlimited amounts of money
against collateral, and roll over the loans so they can be used
to fund long-term investment. The BOJ may also expand the type of
assets it accepts as collateral to prompt banks to lend more to
the targeted industries.

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 in May.

HOW IS IT DIFFERENT FROM OTHER BOJ STEPS TAKEN SO FAR?

The BOJ already has in place a market operation in which it
offers three-month loans to banks at 0.1 percent.

But there is no guarantee private banks can procure the
amount they need because the auction, held twice a week, usually
draws bids about five to six times the amount offered.

Under the new lending programme, banks would more easily be
able to borrow cheap money from the BOJ as long as they had
collateral.

The BOJ says the new programme is not monetary easing but a
long-term effort to create new demand and revitalise an economy
that is faltering partly because of Japan’s ageing society. It
will therefore not set a target for new lending.

WILL IT BE SUCCESSFUL AND HOW WILL MARKETS REACT?

Setting up an effective framework is not easy. For a start,
defining which industries have “growth potential” will be tough.

The government defines them as being areas like environment,
health care and R&D. The BOJ will roughly trace this line but is
wavering on how rigid a guideline it will set for banks.

Making it too rigid would make the programme less attractive
to banks. But one that is too vague could expose the BOJ to
credit risk, which some board members are opposed to. The dilemma
could split the board and delay a decision on the programme.

The BOJ does not expect the scheme to lead to an immediate
increase in lending but hopes it will act as an incentive for
private banks to seek new areas of growth.

Analysts are doubtful, however.

“It’s capital markets, not banks, that are good at funnelling
money efficiently to companies with growth potential. The BOJ has
no role to play here,” said Takeshi Minami, chief economist at
Norinchuki Research Institute in Tokyo.

Many traders expect the new programme to have little impact
on financial markets as yen borrowing costs are already very low.

Investment Tools
(Editing by Michael Watson)

Q+A-What will the BOJ’s new loan scheme look like?