Bank of Japan Unveils New Program to Encourage Corporate Lending in the Private Sector

June 15, 2010

The Bank of Japan after a two-day, six-hour and 11-minute meeting

  • Voted 8-0 to keep the uncollateralized overnight call rate at 0.1% where such has been since December 2008.  In contrast to multi-hundred basis point rate declines by most central banks during the world recession, this rate is just 40 basis points below its prior cyclical peak.
  • Released a schedule of dates for future monetary policy meetings through June 2011.  The next one will be on July 14-15.
  • Gave an upbeat assessment of economic prospects and reaffirmed the belief that deflation will diminish as the output gap shrinks eventually.
  • Introduced a 3 trillion yen program to act as a catalyst for promoting lending by financial institutions to businesses.  The plan will mostly involve private lending efforts and is intended to strengthen the “foundations for economic growth.”

Click here to read the Bank of Japan’s Statement on Monetary Policy and here to learn more details about the new program, which will provide long-term funds at the key interest rate to financial institutions that then utilize those funds appropriately and effectively to expand their lending to firms.  There is a political element to the new measure.  Politicians have criticized BOJ policy for not doing more to combat deflation, and monetary officials have in turn complained about the lack of a strategy to consolidate fiscal debt.  This is an olive branch from the Bank of Japan, the quid pro quo of which is an expected fiscal package.  Investors will no better than to hold their breath.  Both sides are talking more than acting.  The main economic strategy of both relies on a favorable external environment consisting of brisk Asian market demand and a yen that doesn’t appreciate unduly and undermine factor number one’s support.  It helps, too, that long-term interest rates in Japan remain extremely low at 1.24% on 10-year government debt.  Japan’s experience suggests that Treasury yields are unlikely to rise as much as critics of Washington’s deficit are predicting.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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