BOJ’s Loan Program Stymied as Credit Demand Wanes (Update1)

By Mayumi Otsuma and Aki Ito


March 18 (Bloomberg) -- The Bank of Japan’s decision to double the size of a liquidity program for banks may prove more effective in placating the government than stemming deflation.

The bank yesterday increased its three-month lending facility for banks to 20 trillion yen ($221 billion), a “monetary easing” that may help reduce borrowing costs and bolster corporate sentiment, Governor Masaaki Shirakawa said at a Tokyo press briefing.

There’s little sign that the initial effort helped the economy: bank lending has fallen for three straight months, prices tumbled by a record and wages dropped. Where the initiative did win plaudits is among politicians -- Prime Minister Yukio Hatoyama, facing a July parliamentary upper house election as his poll numbers subside, welcomed the move.

“You can provide liquidity to banks but they don’t have to lend,” Joseph Stiglitz, the Columbia University economist and Nobel laureate, said in an interview when asked whether the BOJ is doing enough to defeat deflation. Central banks in Japan and the U.S. “have to rethink the fundamentals” and work with governments to force banks to extend more credit, he said.

Japan is in a type of “liquidity trap” where extra cash injections may not have much impact, according to Stiglitz, 67, a former White House Council of Economic Advisers chairman.

Companies from Toshiba Corp. to Sony Corp. are refraining from boosting their capital spending even after Japan’s economy pulled out of its worst recession in the postwar era.

Avoided ‘War’

The BOJ’s move is “a signal of cooperation, but it’s not effective expansionary monetary policy” because demand remains too low for companies to increase investment, said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo. Hatoyama “is under extreme pressure going into the election, and it would be a declaration of war toward the government” had the central bank done nothing, he said.

Japan’s benchmark overnight lending rate was kept at 0.1 percent by the board yesterday.

Stocks climbed and the yen weakened after the decision. Japan’s currency traded at 90.60 late yesterday in Tokyo from 90.37 before the announcement. It was at 90.39 as of 9:05 a.m. in Tokyo today. The Nikkei 225 Stock Average rose 1.2 percent, before retreating 0.2 percent in early trading today.

More to Come

The government may keep pressing the BOJ to do more, and next month offers a fresh opportunity to take additional steps. The bank will have updated economic projections and quarterly surveys of business and household confidence. Yesterday’s decision left monthly government bond purchases at 1.8 trillion yen, and the term of the loan program for banks at three months.

Hatoyama told reporters yesterday that he hopes the central bank will take action to defeat deflation, and that the BOJ’s step was in line with what the Cabinet anticipated. Finance Minister Naoto Kan said the decision shows the bank is “stepping up efforts to fight deflation.”

Kan has been leading calls for monetary action as his ability to inject fiscal stimulus is constrained by record public debt. Shirakawa, for his part, said yesterday that “monetary policy alone can’t beat deflation.”

“I wish there was a miracle, but all we can do is persist with our efforts” to reverse the drop in prices, which will “take time,” the governor said.

Next Move

Shirakawa’s next move may be to extend the period of the loans to six months or a year, said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo.

Other options include increasing the sovereign bond purchases, specifying conditions needed for ending the current monetary policy, and adopting an inflation target, a measure that Kan has been pushing for.

A price target would “put out a trigger point for inflation, and until we get there” the central bank should keep adding cash to the banking system, said Robert Feldman, head of economic research at Morgan Stanley in Tokyo.

Board members Miyako Suda and Tadao Noda opposed yesterday’s credit expansion. Both said in the past month that they expect the economy to keep improving, and Noda said further monetary easing would have limited impact because short-term interest rates are already very low.

Yields on three-month discount bills issued by the government were unchanged at 0.12 percent yesterday, according to Bloomberg data.

Manufacturers’ Confidence

Deflation persists even as the export-led recovery gains momentum. A Finance Ministry and Cabinet Office survey today showed that large firms were optimistic about the outlook for a third straight quarter. Sentiment among manufacturers with more than 1 billion yen ($11 million) in capital was 4.3 points this quarter, compared with 13.2 points in the previous three months. A number greater than zero means optimists outnumber pessimists.

The gross domestic product deflator, a broad measure of prices, tumbled a record 2.8 percent in the fourth quarter. Consumer prices slid for 11 straight months to January, while factory output climbed in the same period -- increases that haven’t been enough to prompt companies to expand.

Toshiba plans to slash capital spending by 41 percent this fiscal year, the company said in January. Sony said last month that capital investment for this fiscal year will probably be 34 percent less than a year earlier.

Not all analysts say the bank’s action will be fruitless.

“The headlines about further monetary easing might help to keep inflation expectations positive,” said Julian Jessop, chief international economist at Capital Economics Ltd. in London. The move “should also maintain the weaker bias in the yen, especially when other major central banks are perceived to be heading for the exit.”