© Reuters. FILE PHOTO: A man in a protective mask walks past Bank of Japan headquarters amidst the outbreak of coronavirus (COVID-19) in Tokyo
By Leika Kihara
TOKYO (Reuters) – A plan created by the Bank of Japan to mitigate the limitations of a major stimulus program could become the central bank’s new weapon to stimulate the economy, sources know well.
The bottom line drawn from a policy review last month are steps to steer clear of a thoroughly sought, but unsuccessful, currency experiment that has caused inflation for decades of dense money printing.
Attracting less attention is the creation of a “interest rate scheme to boost lending”, a highly technical program that compensates banks that are affected by negative interest rates.
To offset the negative interest charge, the program will pay banks different rates to receive cash from BOJ, depending on the purpose of the loans they make.
The main purpose is to convince markets that with the tools available to deal with side effects, the BOJ can move interest rates deeper into subtractive territories to counter economic shocks.
However, the scheme also gives the BOJ full discretion to move money into which areas, making it a potentially useful tool to support initiatives like green investment, four sources of expertise. news said.
The move underscores how the BOJ, leaving its monetary instrument scarcity, is moving closer to fiscal policy to spur growth in the COVID-19 epidemic.
“The plan has the potential to become the new BOJ tool,” said one of the sources. “It can be used to encourage or boost lending for certain areas of growth.”
While the BOJ has no plans to launch such new targeted loans, it is an idea that is being scrutinized as a future possibility, the sources said.
“BOJ can choose trendy topics like green, and pay higher interest rates to lenders,” another source said.
The plan also highlights how BOJ’s policy is geared toward being aligned with government goals, even when Prime Minister Yoshihide Suga’s administration does not directly guide the central bank.
Nodding over Suga’s policy priorities, Deputy Governor Masazumi Wakatabe said the BOJ must “scrutinize and debate” ways to promote a green and digital Japan.
“With this plan, the BOJ probably wants to call on the government that they are doing their part to support the economy,” said Takahide Kiuchi, a former BOJ board member.
(Click here https://tmsnrt.rs/3a3ju1N and here https://tmsnrt.rs/3wEmknB to see an interactive graphic of central bank lending and country’s core consumer prices) (Graphics: Japanese bank loans spike due to COVID-hit cash hoarding companies, https://graphics.reuters.com/JAPAN-ECONOMY/BOJ/yxmvjwzropr/chart.png) (Figure : Inflation is still far from BOJ’s 2% target, https://graphics.reuters.com/JAPAN- ECONOMY / BOJ / xlbvgxqbxpq / chart.png)
NOTHING LESS THAN?
The European Central Bank also pays banks to exploit its cash treasury to reduce the impact of negative interest rates. What makes BOJ’s plan unique is the three-tier structure in which loans that qualify as “high priority” receive higher interest rates. If the BOJ raises interest rates negatively, the interest rate rewards will increase in parallel.
Sources say this is an idea that the BOJ has been researching internally for years before criticism of its negative interest rate policy.
The BOJ is currently only using this program to bail out COVID-19. But it could add new types of loans even before the negative rate hike.
This tool could allow the BOJ to pump money more efficiently to areas that need money and respond to future government pressure to take stronger action to protect the economy.
However, by approaching the fiscal policy realm, the BOJ risks undermining its independence from political interference.
The markets also suspect the plan will allow the BOJ to more easily cut interest rates or help achieve its elusive inflation target.
Satoru Kado, analyst at Mitsubishi UFJ (NYSE 🙂 Research and Consulting, said: “It’s better to have nothing but not enough to boost lending.
“Bank margins won’t improve unless the short-term rates rise more. That’s something the BOJ hasn’t settled on and probably won’t be able to do in the near future.”