The Bank of Japan launched a new lending program worth 30 trillion yen ($279 billion) to support small businesses struggling amid the coronavirus but held off from adding major stimulus at an emergency meeting Friday.
Following data released earlier in the day showing Japan’s key inflation rate falling below zero for the first time in more than three years, the BOJ kept its policy interest rates and asset purchases unchanged.
Instead, it chose to focus on the more pressing task of preventing bankruptcies, saving jobs and stopping an economic recession from turning into a financial crisis.
The yen strengthened a touch against the dollar after the decision, moving from around 107.71 against the greenback to as much as 107.50. The Nikkei 225 stock average gave up its early gains following the announcement.
Combined with an earlier lending program and its buying of corporate bonds and commercial paper, the BOJ said its coronavirus response measures now total 75 trillion yen. By comparison, the overall size of the government’s record stimulus package in response to the pandemic is 117 trillion yen.
“This was more a demonstration of the BOJ’s aggressive stance rather than the lending programs themselves,” said Masamichi Adachi, chief Japan economist at UBS Securities and a former BOJ official. “They are certainly trying to avoid the stigma of doing ‘too little, too late’ because that led to the yen strengthening after the global financial crisis.”
Still, compared against recent emergency meetings by the Federal Reserve and the European Central Bank, there was nothing in the way of surprising action that went beyond what the BOJ itself had already telegraphed. Even the new program had first been announced in April.
The program, due to run through March next year, won’t offer direct assistance to businesses like the Fed’s Main Street Lending Program. Instead, it will funnel money to companies via commercial banks and other financial institutions. Like the BOJ’s other virus-lending program, the facility will encourage lending to companies by providing free loans to financial institutions and then paying them 0.1% interest on the amount they in turn lend out.
The combination of BOJ support programs is big enough to have an impact on the economy, said Shunsuke Oshida, head of credit research at Manulife Asset Management, comparing it in size to one of Japan’s big three banks.
“Mizuho’s total lending is about 85 trillion yen, so with BOJ programs worth a total 75 trillion yen it seems Japan now has another mega bank,” Oshida said.
The program’s financial incentive for banks to lend will likely work positively over the short term for the economy because there are companies needing cash, said Ryoji Yoshizawa, senior director at S&P Global Ratings.
“But there are negative elements as well as positive ones. If you help companies that have little prospect of surviving stay afloat, their existence might end up undermining firms that have worked hard to stay competitive,” he added.
“The Bank of Japan is moving swiftly to deliver more financial support for Japan’s hard-hit small companies, with a new 30 trillion yen loan program. If extended by commerical banks as intended, it would be a large dose — equal to 185% of total new loans extended in April.”
–Yuki Masujima, economist
As for the possible re-emergence of deflation, economists warned that keeping the economy on track was also an important first measure to contain that risk. While the government has lifted a state of emergency from most parts of the country outside Tokyo and Hokkaido, data earlier this week showed exports plunging more than 20% and the economy falling into a recession that is expected to deepen sharply.
“The BOJ will say that inflation is temporarily weak because of the virus-hit economy and the plunge in oil prices and that as soon as those effects disappear, inflation will be back on a rising trend. But I don’t think that will be the case,” Adachi at UBS said.
A bigger trigger to push the BOJ to lower its negative rate would be if central banks overseas introduce or lower their negative rates first, causing the yen to strengthen, said Masaki Kuwahara, an economist at Nomura Securities.
A stronger yen would hurt exporters already hit by a demand vacuum in global trade by further reducing the value of earnings overseas and potentially making products less price competitive.