The Bank of Japan (BoJ) will inject trillions of yen into the country's major banks to stimulate consumer lending and fight deflation. Central bankers increased the three-month lending programme by ¥10 trillion (Dh405.3 billion) to ¥20tn, the BoJ said yesterday after its meeting in Tokyo. The move came in response to price declines that are deepening even as the economy sustains a revival from its worst post-war recession. The prime minister Yukio Hatoyama's administration, restrained from adding to fiscal stimulus by a record debt load, has been pushing the bank to do more to bolster growth.
Masaaki Shirakawa, the governor of the BoJ, said yesterday the additional monetary easing steps being introduced by the central bank were aimed at ensuring both the economy and prices improved in a sustainable manner. "Showing the BoJ's clear stance against deflation will help ensure an improvement in the economy and prices," Mr Shirakawa said, adding that measures could help lower longer-term interest rates and prop up domestic demand.
The credit expansion "could implant a strong impression among the government that the stronger it presses, the more it can get from the BoJ", said Mitsuru Saito, the chief economist at Tokai Tokyo Securities. The expansion "is highly unlikely to shore up the macro-economy, while having only a limited impact on liquidity", he said. But the move supported by Mr Shirakawa was not unanimous. The BoJ board members Miyako Suda and Tadao Noda opposed the decision. The entire board also held the overnight rate at 0.1 per cent, where it has been since December 2008, and left unchanged its assessment that the economy was "picking up".
The moves came as prominent government officials have called on the central bank to do more to stop deflation, saying a persistent fall in prices could stand in the way of the nascent economic recovery. The finance minister Naoto Kan has said he would like deflation to be banished this year. The BoJ has said it does not tolerate deflation, but that it is likely to continue for the next couple of years.
Its extension of the loan programme comes as many of its counterparts are withdrawing stimulus as their economies recover from the global recession. For example, the US Federal Reserve has confirmed it will let a record mortgage-security purchase programme conclude at the end of this month. The Democratic Party of Japan-led government does not have much leeway to support the economy through fiscal policy because the government is already deep in the red, with Japan's gross public debt approaching 200 per cent of the nation's GDP. If the BoJ's move does not help push up prices, the central bank may be forced to implement more aggressive measures in the coming months.
Japan's nationwide core consumer price index fell for the 11th straight month in January, down 1.3 per cent from a year earlier. Fears persist about whether deflation will drag down domestic demand by making consumers hold off on spending in the hopes of even cheaper prices and by increasing the real debt burdens of individuals and companies. Mr Kan said this month he hoped to stamp out deflation this year, and wanted an inflation target of about 1 per cent or higher. BoJ board members next month will update their growth and price forecasts in a semi-annual outlook and check quarterly household and business confidence surveys.
"The BoJ certainly can't ignore all the political pressure that it's under," said Kyohei Morita, a chief economist at Barclays Capital in Tokyo. "Investors were already expecting this decision. If the BoJ didn't do something, it would have taken the ladder away from the markets." Beefing up the loan programme will help the central bank sustain its ¥20tn balance-sheet expansion since the global financial crisis intensified in September 2008. Under the facility expiring this month, the bank provided ¥5.9tn in unlimited collateral-backed loans to lenders as of February 28. The latest programme expansion lent ¥9.6tn. Both offer three-month credit at 0.1 per cent.
The BoJ's efforts may have little impact because banks are declining to boost credit growth, Joseph Stiglitz, the Columbia University professor and Nobel laureate, said yesterday. The bank is suffering from a "liquidity trap" where additional injections of funds into the economy may have little effect, he indicated. Central banks in Japan and elsewhere should consider ways to "make banks go back to being banks" and restart the provision of credit, Mr Stiglitz said.
* with Bloomberg and Dow Jones