Analysis: Even if it decreases, the BOJ invents a new weapon to stimulate growth
By Leika Kihara
TOKYO (Reuters) – A largely overlooked program created by the Bank of Japan to ease the drawbacks of its massive stimulus package could become the central bank’s new weapon to boost the economy, people close to its thinking have said.
The main takeaways from a policy review last month were measures to tiptoe away from a sweeping monetary experiment that sought, but failed, to trigger inflation in the decades of massive money printing.
Less attention has been drawn to the creation of a new “interest system to promote loans“, a highly technical program to compensate banks for the blow of negative interest rates.
By offsetting negative rate charges, the program will pay banks variable rates for withdrawing money from the BOJ, depending on the purpose of the loans they make.
The main objective was to convince the markets that with tools available to deal with side effects, the BOJ can take rates deeper into negative territory to combat economic shocks.
But the program also gives the BOJ discretion over which areas to divert money to, making it a potentially useful tool to help initiatives like green investing, according to four sources close to its thinking.
The move highlights just how close the BOJ, which finds itself with a dearth of monetary tools, is moving closer to fiscal policy to spur growth in an economy hit by the COVID-19 pandemic.
“This program has the potential to become the new tool of the BOJ,” said one of the sources. “It can be used to induce or promote loans for certain areas of growth. “
Although the BOJ does not plan to roll out such new targeted loans anytime soon, it is an idea being considered as a future possibility, according to the sources.
“The BOJ can choose opportune themes like green and pay higher interest to lenders,” said another source.
The plan also highlights how the BOJ’s policy aims to align with government goals, even though Prime Minister Yoshihide Suga’s administration does not directly guide the central bank.
Nodding his head to Suga’s political priorities, Vice Governor Masazumi Wakatabe said the BOJ must “examine and discuss” ways to promote a green and digitized Japan.
“With this program, the BOJ probably wanted to appeal to the government to do its part to support the economy,” said former BOJ board member Takahide Kiuchi.
(Click here https://tmsnrt.rs/3a3ju1N and here https://tmsnrt.rs/3wEmknB for interactive charts on total central bank loans and the country’s basic consumer prices) liquidity, https://graphics.reuters.com/JAPAN-ECONOMY/BOJ/yxmvjwzropr/chart.png) (Chart: Inflation remains far from the BOJ’s 2% target, https: // graphics. reuters.com/JAPAN- ECONOMY / BOJ / xlbvgxqbxpq / chart.png)
BETTER THAN NOTHING?
The European Central Bank also pays banks to dip into its coffers to cushion the blow from negative rates. What makes the BOJ program unique is the three tier structure where loans rated as “high priority” receive higher interest. If the BOJ worsens the negative rates, the interest rate increases at the same time.
It was an idea the BOJ had been studying internally for years amid criticism of its negative rate policy, sources say.
The BOJ now uses the program only for relief from COVID-19. But it can add new types of loans even before negative rates get worse.
The tool can enable the BOJ to more effectively inject money into areas that need it and respond to future government pressures for stronger action to protect the economy.
By approaching the area of fiscal policy, however, the BOJ risks undermining its independence from political interference.
Markets also suspect that the program would make it easier for the BOJ to cut rates or help it meet its elusive inflation target.
“It’s better than nothing, but not enough to boost lending,” said Satoru Kado, analyst at Mitsubishi UFJ Research and Consulting.
“Bank profits won’t improve unless short-term rates rise further. This is something the BOJ has not addressed and likely will not be able to do for the foreseeable future. “
(Reporting by Leika Kihara; Editing by Kim Coghill)