Haruhiko Kuroda, governor of the Bank of Japan, speaks during a news conference at the central bank’s headquarters in Tokyo. The BoJ has pledged to double the size of the monetary base to ¥270tn by the end of this year.
Bank of Japan wants commercial banks to reduce amount of cash parked in safe Japanese government bonds and increase exposure to riskier assets like loans
Few Bank of Japan watchers expect the central bank to tweak its monetary policy when its board meets next week, but the members are likely to consider expanding a pair of lending programmes they see as supporting the BoJ’s efforts to achieve a stable 2% inflation target.
To help get the economy out of 15 years of deflation, the BoJ wants commercial banks to reduce the amount of cash parked in safe Japanese government bonds and increase exposure to riskier assets such as loans. Under the two programmes, the BoJ offers loans at an annual interest rate of 0.1% to commercial banks that increase lending to customers.
As an end-March deadline to the programmes nears, the nine board members must decide either at their February 17-18 or March 10-11 meeting whether to continue them.
“There aren’t any good and decisive reasons to end those programmes now,” said Takahiro Sekido, Japan strategist at Bank of Tokyo-Mitsubishi UFJ.
Many of the board members, including governor Haruhiko Kuroda, appear intent on expanding the programmes, as they have yet to produce their intended results. Commercial bank lending to firms and households has increased, but only gradually, with their outstanding loans rising by 2.5% in January from a year earlier.
Yet for the BoJ, continuing the programmes can also help fend off criticism that the BoJ’s current policy has only flooded financial institutions with cash, failing to channel the money into the real economy. But there are differences of opinion among members over the size and the duration of any expansion, a person familiar with the BoJ’s policy said.
Under an aggressive monetary easing policy introduced under Kuroda last April, the BoJ has pledged to double the size of the monetary base to ¥270tn by the end of this year, mainly through massive purchases of government bonds. The BoJ’s lending through those facilities is also counted toward the monetary base, even though the contribution is small.
One of the two loan programmes, designed to encourage commercial banks to lend more to the growth sector, has already reached ¥3.3tn, near its ¥3.5tn ceiling. The other programme, in which the BoJ provides funds to banks without limit in accordance with an increase in their loans outstanding, has totalled only ¥5tn so far in three fund-provisions operations, with only two more planned, suggesting the programme will fall well short of its initial target of ¥15tn.
Some commercial banks say they feel no urgency to turn to the BoJ programmes, having other tools to raise low-cost funds amid a near zero interest rates.
“We won’t be in trouble without those programmes. But we want to tap them if they will be extended,” said an official at a major Japanese bank. Some banks even complain that the BoJ’s financing has resulted in more pressure from customers to cut their loan margins, squeezing banks’ profits.