By Max Sato
(MaceNews) – The Bank of Japan said Friday it is ending parts of its anti-Covid special financing program aimed at supporting large firms, whose financial conditions have improved, while extending its feature of helping hard-hit small businesses, particularly those in the service sector.
As expected, the BOJ decided to maintain its interest rate targets and main asset purchase program to continue supporting economic recovery from the pandemic-caused 2020 slump and guiding low inflation toward its 2% target.
The bank expects inflation to pick up gradually from around zero now and reach 1% in about two to three years, a standard scenario provided in its quarterly Outlook Report issued in October. The BOJ will release the next updates on the board’s growth and inflation projections as well as its risk analysis after the Jan. 17-18 meeting.
BOJ Keeps Main Easing Stance
At its two-day meeting that ended around midday Friday (2200 EST Thursday), the BOJ’s nine-member board decided in an 8-to-1 vote to maintain its current monetary easing stance under the yield curve control framework it adopted in September 2016, vowing to keep zero to negative interest rates “as long as necessary” to achieve its 2% inflation target in a stable manner.
Under the current framework, the BOJ is keeping the 10-year government bond yield, the benchmark for long-term borrowing costs, at around zero percent by buying “a necessary amount” of Japanese government bonds “without setting an upper limit,” and to keep the overnight interest rate at -0.1% by charging 0.1% interest on a part of cash reserves parked at the bank by financial institutions.
“For the time being, the bank will closely monitor the impact of COVID-19 and will not hesitate to take additional easing measures if necessary, and also it expects short-and long-term policy interest rates to remain at their present or lower levels,” the bank said, repeating its recent policy statements.
Reflationist board member Goushi Kataoka, a former private-sector economist, continued dissenting, arguing that it was “desirable to further strengthen monetary easing by lowering short-and long-term interest rates, with a view to encouraging firms to make active business fixed investment for the post Covid-19 era,” according to the BOJ.
Refining Covid Funding Scheme More Toward Smaller Firms
As for the Special Program to Support Financing in Response to the Novel Coronavirus (COVID-19), the BOJ board decided in a unanimous vote to extend its fund provisions to lenders that make loans to smaller firms by six months until the end of September 2022.
The conditions will remain the same for loans financial institutions make on their own (non-government supported loans) to smaller firms in that lenders will receive an incentive from the BOJ (0.2% interest). The BOJ revised the terms for government-backed loans that financial institutions make to smaller firms: Lenders will receive zero interest, instead of the original 0.1 percent incentive.
The BOJ also decided to end its fund-providing to lenders against debt pledged as collateral, which is mainly made up of debt issued by large firms and housing, at the end of March 2022, as scheduled.
As for the other anti-Covid funding measure, the BOJ will finish its additional purchases of CP and corporate bonds as the end of March, as scheduled. This program was originally due to end in September, but the BOJ decided in June to prolong it by six months.
From April 2020, the bank will “gradually” reduce the amount of its purchases of CP and corporate bonds to pre-pandemic outstanding levels of about Y2 trillion for CP and about Y3 trillion for corporate bonds.
“With regard to financial conditions surrounding large firms, issuance for CP and corporate bonds have been favorable, and precautionary demand for liquidity has subsided in the loan market,” the BOJ said in its policy statement. “Regarding small and medium-sized firms, their financial positions have been on an improving trend as a whole, but weakness has remained in some segments, such as the face-to-face service industry.”
Last week BOJ Deputy Governor Masayoshi Amamiya told a news conference that the BOJ would decide what to do with the special funding support program in December or January, instead of waiting until the last minute in March before the special program was set to expire, to help firms plan better for their funding needs.
The BOJ board decided unanimously to leave the main asset purchase guidelines unchanged.
“The bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) as necessary with upper limits of about 12 trillion yen and about 180 billion yen, respectively, on annual paces of increase in their amounts outstanding,” the BOJ said.
“The bank will purchase CP and corporate bonds with an upper limit on the amount outstanding of about 20 trillion yen in total until the end of March 20.”
Economic Recovery Outlook Intact
The BOJ largely maintained its view from its October Outlook Report that Japan’s economy “has picked up as trend” amid severe conditions at home and aboard during the pandemic, and that it “is likely to recover, as downward pressure stemming from COVID-19 on services consumption and the effects of supply-side constraints wane, while being supported by an increase in external demand, accommodative financial conditions, and the government’s economic measures.”
The BOJ also repeated that inflation expectations have picked up and maintained its latest consumer inflation outlook.
The year-on-year change in the core CPI “is likely to increase moderately in positive territory in the short run, reflecting a rise in energy prices,” it said. “Thereafter, albeit with fluctuations due to temporary factors, it is projected to increase gradually as trend, mainly on the back of improvement in the output gap and a rise in medium- to long-term inflation expectations.”
Confidence among major manufacturers in Japan was unchanged in December from September as it had steadily recovered from the pandemic-hit 2020, while non-manufacturers – particularly in-person service providers, hotels and restaurants – reported a rosier picture, as the government eased its Covid restrictions on Oct. 1, according to the Bank of Japan’s quarterly Tankan survey released Monday.
Factories in Southeast Asia resumed operations after the Delta variant prompted lockdowns in August, alleviating supply chain constrains somewhat for automakers and electronics firms, but reports of an outbreak of the new Omicron variant in late November and surging producer costs are believed to be behind a more cautious outlook among most industries. The Tankan also showed labor shortages became more pronounced and conditions are seen tighter ahead.
The Tankan survey also showed that large companies revised down their plans for business investment in equipment for fiscal 2021 ending next March. Smaller firms continued revising up their capex plans as they often do toward the end of the fiscal year, but their upward revision was smaller than forecast.