LA BOJ EXCLUSIVE discusses phase-out of pandemic support to reopen economy – sources

Businessmen wearing face masks walk on a pedestrian walkway, amid the spread of coronavirus disease (COVID-19), in a business district in Tokyo, Japan, June 24, 2020. REUTERS / Issei Kato

  • Markets expect program March deadline extension
  • Pandemic loan program decision due no earlier than December
  • Some worry about the costs of paying banks to operate the BOJ program
  • BOJ board divided on the feasibility of the end program

TOKYO, Oct.21 (Reuters) – The Bank of Japan is discussing phasing out a COVID-19 loan program if infections in the country continue to decline, sources told Reuters, potentially preparing the bank to exit from ‘a key policy in crisis mode sooner than investors expect.

Markets were anticipating a third extension of the program, which will expire in March. Policymakers have not reached a consensus as talks are preliminary, said three people familiar with central bank thinking, and a decision is unlikely until December.

But with corporate funding constraints easing, infections plummeting and the world’s third-largest economy reopening, some policymakers plan to end the emergency program in March, the sources said.

There are also concerns that banks will use the program to reap a reward by drawing down, rather than passing the money on to businesses, the sources said.

This reflects growing concern about the side effects of paying financial institutions 0.1% interest to operate the program, without careful scrutiny to see if the money is going, as expected, to small businesses in need of liquidity.

“With the exception of some sectors, corporate financing conditions have generally improved and the need for immediate liquidity support is fading,” a source said. “What was intended as an emergency measure cannot go on forever.”

Ending the program would defy market expectations, given a series of comments from policymakers stressing that the bank would continue to focus on healing the wounds of the pandemic.

This decision would put the BOJ more in tune with the other major central banks by moving towards an exit from crisis policies, as economies emerge from the doldrums induced by the pandemic.

Even if the emergency program is ended, the BOJ will continue to support the economy with massive printing of money and a commitment to keep long-term borrowing costs capped at zero.

“The decision will depend very much on the number of infections in the coming months and the government’s pandemic contingency plan, details of which will likely become clearer in December,” said Mari Iwashita, chief market economist at Daiwa. Securities.

“If the program ends, it could have a pretty big impact on investors who put together next year’s investment plans assuming it will be extended.”


The BOJ created the loan program at the height of a market rout caused by a pandemic in May 2020 to funnel money through financial institutions to cash-strapped small businesses. The deadline has been extended twice as slow vaccinations and rising infections have forced Japan to maintain restrictions on economic activity.

With the growth of bank loans slowing and many companies sitting on huge piles of cash after going through an initial liquidity crunch, some policymakers are considering the possibility of ending the program, the sources said.

Japanese companies held liquid assets representing 20% ​​of sales in the three months to June, up from 15% before the start of the pandemic, according to government data.

The program lent 78 trillion yen ($ 680 billion) until last month.

Banks took 24.2 trillion yen in a market operation in September, more than double the amount in June, but their lending continued to slow, raising fears that they were exploiting the program mainly to get interest rather than lending money to businesses.

There is no guarantee that the BOJ will be able to phase out the program. The nine-member board is split between those who are in favor of ending the program and those who see merit in keeping it in place longer as a precautionary measure.

BOJ board member Asahi Noguchi, a proponent of aggressive easing, said this month that the BOJ “may have no choice” but to extend the program unless let it become clear that economic activity will return to pre-COVID levels. Read more

Political considerations also complicate the outlook.

Prime Minister Fumio Kishida has pledged to compile another spending program to cushion the blow of the pandemic and focus on delivering more wealth to low-income households.

The end of a pandemic relief loan program could raise eyebrows among politicians as the government continues to focus on tackling the blow of the health crisis.

“There is no rush to decide,” a second source said on the fate of the program, adding that “there are many factors” that must be taken into account in reaching a conclusion.

($ 1 = 114,0100 yen)

Reporting by Leika Kihara and Takahiko Wada; Additional reporting by Kantaro Komiya; Editing by William Mallard

Our standards: Thomson Reuters Trust Principles.

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