BOJ Boost to Loan Programs Signals Room for More Easing: Economy

Bank of Japan
A pedestrian walks past the Bank of Japan headquarters in Tokyo. Photographer: Kiyoshi Ota/Bloomberg

The Bank of Japan boosted lending programs while sticking with a plan for unprecedented asset purchases, as the central bank tries to support a recovery and stamp out 15 years of deflation.

The BOJ doubled a funding tool to 7 trillion yen ($68 billion) and said individual banks could borrow twice as much low-interest money as previously under a second facility. It left unchanged a pledge to expand the monetary base by 60 trillion to 70 trillion yen per year.

The yen fell and stocks surged as the moves underscored Governor Haruhiko Kuroda’s stated commitment to do whatever is necessary to drag the nation out of deflation. At the same time, Japanese companies are already sitting on record stockpiles of cash, signaling limits on the likely benefits from expanding the lending programs.

“The doubling of the lending facility is seen as a dovish signal that the BOJ is prepared to ease further -- that it’s committed to keeping liquidity extremely loose,” said Izumi Devalier, a Japan economist at HSBC Holdings Plc in Hong Kong.

The yen weakened to as low as 102.74 against the dollar after the BOJ’s announcement and was trading at 102.54 at 4:15 p.m. in Tokyo, down 0.6 percent. The Topix index closed up 2.7 percent.

Recovery Risks

“We have strengthened the tires to fully use the large increase in horsepower that quantitative and qualitative easing has given to our engine,” Kuroda told reporters at a press conference after the meeting, referring to the boost in the loan programs.

The BOJ will flexibly buy Japanese government bonds, with monthly purchases to be in a range of 6 trillion to 8 trillion yen, Kuroda said today. The central bank previously said it would aim to buy “approximately 7+ trillion yen” a month.

Japan’s economy grew at less than half the forecast pace in the fourth quarter, underscoring risks to the nation’s recovery as a sales-tax increase looms in April.

Gross domestic product expanded an annualized 1 percent from the previous quarter in the October-December period, the Cabinet Office said yesterday in Tokyo, less than the median projection of 2.8 percent in a Bloomberg News survey of economists.

“While the outlook hinges on economic and market trends following the consumption tax hike, we continue to believe the BOJ may be pressured to take additional easing action after the consumption tax hike in April 2014,” Naohiko Baba, Goldman Sachs Group Inc.’s chief Japan economist and a former BOJ official, wrote in a note following the BOJ decision.

Growth Plans

Twenty-five of 34 economists forecast the BOJ will add to stimulus by the end of September, with 13 of those projecting action by the end of June, according to a Bloomberg News survey conducted Feb. 6-12.

Banks and businesses’ stockpiles of money have been growing as executives wait for signs that the nation’s rebound under Abenomics will be sustained. Companies’ holdings of cash and deposits rose to a record 224 trillion yen in the July-September quarter and financial institutions’ reserves at the central bank almost tripled over a year to 116 trillion yen as of Feb. 14.

Prime Minister Shinzo Abe’s first two “arrows” of monetary and fiscal stimulus helped fuel four straight quarters of expansion. Investors are now waiting for the premier to flesh out his plans to make it easier for companies to do business in Japan, the third aspect of Abenomics aimed at powering growth.

Yen Slide

Abe’s policies drove an 18 percent slide in the yen against the dollar last year, contributing to a 51 percent jump in the Topix stock index. The benchmark is down 6 percent this year ahead of the sales-tax increase.

JFE Holdings Inc., Japan’s second-biggest steelmaker, said Jan. 31 its profit increased 38 percent in the October-December quarter, helped by a revival in domestic demand and a weaker yen.

Consumer prices excluding fresh food increased 1.3 percent in January from a year earlier, the most since September 2008, as higher energy costs spurred broader inflation pressures.

Rising prices have cut into spending power of households that have seen incomes stagnate and face an April sales-tax increase that is forecast to trigger a one-quarter economic contraction.

Monthly wages excluding overtime and bonus payments fell 0.6 percent in December from a year earlier, extending a decline to 19 months, according to labor ministry data. The sales tax will rise to 8 percent from 5 percent.

Wage Increases

Abe has called on business and union leaders to agree on higher worker pay at spring wage negotiations, and yesterday reiterated his call for companies to increase salaries.

The loan programs, which were scheduled to expire at the end of March, will be extended for another year, the BOJ said. The central bank also extended a separate program aimed at supporting areas affected by the record earthquake in March 2011.

As of Feb. 10, the BOJ had extended 5.1 trillion yen in low-interest cash to banks under a so-called “unlimited” loan program established in Dec. 2012, limiting lenders to an amount matching their net increase in lending. Now, banks can borrow as much as twice the amount of any such increase.

The central bank has provided 4.1 trillion yen under what it terms a growth support facility. With the main part of this facility now doubling to 7 trillion yen, the total available under this mechanism is about 9 trillion yen.

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