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Unlimited Lending May Help Weaken the Yen, BOJ Official Says

BOJ Executive Director Hideo Hayakawa
Hideo Hayakawa, evecutive director of the Bank of Japan. Photographer: Tomohiro Ohsumi/Bloomberg

The Bank of Japan’s new unlimited lending program may further weaken the yen by reviving the carry trade after the currency sank to a six-month low last week, a senior central bank official said.

A weaker yen “isn’t our main objective but it’s a common understanding that an accommodative policy eventually leads to the depreciating of one’s own currency,” Executive Director Hideo Hayakawa, 58, the official in charge of overseeing the financial system, said in an interview in Tokyo yesterday.

The central bank unveiled a program of low-interest loans last week in a bid to boost demand for credit and spur growth as the nation’s economic recovery flags. The yen touched 80.68 per dollar on Nov. 2, its lowest since April, three days after the BOJ announced the program and an 11 trillion yen ($137 billion) expansion of an asset-purchase fund. The currency was at 80.23 as of 11:24 a.m. in Tokyo.

The program, which offers loans to banks at the BOJ’s overnight call rate, currently 0.1 percent, is part of the central bank’s efforts to prop up an economy hit by the global slowdown and a strong yen as the government presses for “visible results” on ending deflation.

Amid weak credit demand and low rates at home, the facility may help push down the yen by boosting capital outflows as banks look to lend money to customers abroad, a trend Hayakawa said will probably continue for at least the next few years. The loans may also drive investors to sell the yen to buy higher-yielding currencies.

Loan Demand

“Depository money comes to banks but lending isn’t growing,” Hayakawa said. “Under the circumstances, banks can’t make profits,” so the BOJ wants them to look into areas where they can increase lending, he said.

Hayakawa, the BOJ’s former Osaka branch manager and chief economist, said that the BOJ isn’t “100 percent confident yet” that the program will succeed as it hasn’t decided on all the details and is aware of the “possibility” that it will cut banks’ profits by lowering lending rates.

Bank lending in Japan has risen less than 1.5 percent from a year earlier in every month since October 2009, BOJ figures show. The average interest rate Japanese banks charge for new loans fell to 0.95 percent in August, near its lowest since at least 1993.

BOE Initiative

The BOJ’s new facility parallels efforts by the Bank of England to stoke lending and growth. The U.K. central bank’s Funding for Lending Scheme began in August, and the bank said last week that 30 lenders had signed up so far, with the potential to borrow an initial 66.3 billion pounds ($106 billion) under the plan.

The yen has gained about 22 percent against the dollar in four years after central banks worldwide started to cut lending rates during the global financial crisis in 2008. Faced with falling demand for TVs and the strong yen, Sony Corp., Panasonic Corp. and Sharp Corp. plunged to record losses last year.

Japan’s economy, the world’s third biggest, may have entered a “recessionary phase,” a few central bank board members said, according to minutes of the BOJ’s Oct. 4-5 meeting released last week. A Cabinet Office official said it’s important for the BOJ to produce “visible results” by achieving its 1 percent inflation goal soon, the record showed.

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