UPDATE 2-BOJ holds fire despite soft GDP, expands loan programs

Tue Feb 18, 2014 4:10am EST

* BOJ keeps base money target intact as widely expected
    * Maintains view Japan's economy recovering moderately
    * BOJ expands special loan facilities, extends deadline
    * Kuroda says loan schemes will enhance QE transmission


    By Leika Kihara and Stanley White
    TOKYO, Feb 18 (Reuters) - The Bank of Japan maintained its
expansionary monetary policy on Tuesday and extended special
loan programs to help buoy economic growth, signalling its
resolve to keep the positive mood generated by premier Shinzo
Abe's reflationary policies from fading.
    The central bank reiterated its upbeat view on the economy,
unfazed by recent signs of slowing growth and suggesting that
any additional stimulus will be some time away.
    But the Nikkei stock average surged 3.1 percent and
the yen sagged on its decision to extend special loan facilities
by one year and double the size of funds available to banks.
 
    BOJ Governor Haruhiko Kuroda said the expansion was aimed at
enhancing the transmission mechanism of quantitative easing by
encouraging banks to boost lending instead of sitting on piles
of cash.
    "We have an engine with big horsepower, so it makes sense to
have stronger tires," he told reporters after the decision.
    While some investors viewed the loan program expansion as a
policy signal the BOJ may take a more accommodative stance if
necessary, Masashi Murata, senior currency strategist at Brown
Brothers Harriman, cautioned that the reaction in the Japanese
government bond market suggested this was not the case.
    "Bank shares drove the Nikkei, which drove the yen, but JGBs
did not react much," he said.
    As widely expected, the BOJ on Tuesday maintained its pledge
of increasing base money, its key monetary policy gauge, at an
annual pace of 60-70 trillion yen ($589-$687 billion).
    The central bank also stuck to its assessment that Japan is
recovering moderately, a sign it remains confident the world's
third-largest economy can weather the pain from a sales tax
increase in April without additional stimulus.
    "The BOJ already expects the economy to contract immediately
after the sales tax hike, so this cannot be the basis for
additional easing," said Hiroaki Muto, senior economist at
Sumitomo Mitsui Asset Management in Tokyo.
 

    BULLISH TONE INTACT?
    The BOJ has stood pat on policy since launching an intense
burst of stimulus last April, when it pledged to accelerate
inflation to 2 percent in roughly two years via aggressive asset
purchases in a country mired in deflation for 15 years.
    Monday's weaker-than-expected fourth-quarter GDP has dashed
hopes that a rush in household spending ahead of the April tax
hike would cushion the pain from sluggish export growth.
    While the BOJ is in no mood to act immediately, market
pressure for further stimulus may heighten in coming months if
there is more evidence that personal consumption is losing
momentum, some analysts say. 
    Kuroda, however, remained sanguine, saying he saw no threat
to the bank's rosy projections with overseas demand seen picking
up and rising income underpinning consumption.
    "If risks materialise, we will not hesitate adjusting
policy, but for now Japan's economy is on track and moving in
line with our forecasts," he said.
    As expected, the BOJ extended three special loan facilities
by one year from their scheduled expiry in March.
    Of the three, it doubled funds available to banks under two
facilities -- one that encourages banks to funnel money to
industries with growth potential and another that offers cheap
funds to banks that boost lending. Both give banks access to
funds for four years at a fixed rate of 0.1 percent.
    But analysts doubt how much the expansion will do to boost
lending, which has increased only moderately despite the BOJ's
aggressive stimulus on sluggish corporate demand for funds.
    Of the combined 21.5 trillion yen that had already been set
aside under the three facilities, less than 9 trillion yen has
been tapped so far.
    Kuroda acknowledged that the BOJ was counting somewhat on
the psychological effect by boosting the lending facilities.
    "We attempt to strengthen the incentive for banks to tap
these facilities," he said. "We've included a strong message of
support for these programs."
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