Bloomberg News

BOJ Limits Extra Assistance to $6 Billion Lending Package

June 14, 2011

(Updates with Shirakawa comment in 11th paragraph.)

June 14 (Bloomberg) -- The Bank of Japan limited its extra assistance for the earthquake-hit economy to a $6 billion lending program to help companies without real estate collateral.

Governor Masaaki Shirakawa and his policy board will make 500 billion yen in funds available to banks to make equity investments and to lend to companies, the bank said in a statement released in Tokyo today. “Weakness has been observed in the financial positions of some firms, mainly small ones, since the earthquake,” it said.

Japan’s central bank cited signs of a pick-up as it also kept the benchmark overnight rate in a range of between zero percent and 0.1 percent and left unchanged its 10 trillion yen asset-buying program. The step today won’t be enough to support an economy still reeling after the March earthquake, said economist Yoshimasa Maruyama.

“The new loan isn’t bad, but it doesn’t have much effect on boosting Japan’s potential growth and increasing lending,” said Maruyama, a senior economist at Itochu Corp. in Tokyo. “Japan’s economy is recovering from a slump after the earthquake, but the level of the recovery still remains low. Given that, the BOJ should expand its asset-purchase program.

The International Monetary Fund last week called on the central bank to boost its program to buy assets from government bonds to exchange-traded funds to “guard against deflation risks and support the recovery.”

Shares Rise

The Nikkei 225 Stock Average rose 1.1 percent to 9,547.79 at the 3 p.m. close in Tokyo today, the biggest gain in two weeks. The yen traded at 80.35 per dollar, from 80.22 before the announcement.

Loans will be offered at a 0.1 percent interest rate, and will be available for two years, with a two-year extension possible, the bank said.

“The BOJ wanted to show its readiness to deal with a capital shortage should one occur,” said Jun Fukashiro, a money manager who helps oversee about 1.36 trillion yen at Toyota Asset Management Co. in Tokyo.

The nation’s largest manufacturers were pessimistic about business prospects for a third consecutive quarter, a government survey showed today, with sentiment plunging to minus 23.3 points this quarter compared with minus 3.2 three months ago. A negative number means pessimists outnumber optimists.

Signs of Pick-up

Still, the BOJ maintained its view that the economy will return to a moderate recovery from the second half of the fiscal year through March 2012. It also raised its monthly economic assessment for the first time since February, saying that there are some signs of a pick-up.

“Over the short term, there have been some positive surprises,” with output and supply-chain constraints recovering faster than expected, Shirakawa said at a press conference after the decision. He warned that power shortages could depress growth in the longer term as they can increase manufacturing costs and prompt companies to review their domestic capital investment plans.

Industrial production rose in April, rebounding from a record plunge in March, and companies said they plan to boost output in May and June.

Nissan Motor Co.’s Chief Executive Officer Carlos Ghosn said last month that the automaker plans to invest 3 billion yen to reinforce the foundation of its most heavily damaged domestic factory after the March quake disrupted output.

Output Restored

Renesas Electronics Corp., the largest maker of microcontrollers used in cars, last week said its output will be restored to normal levels by the end of September, one month earlier than it previously forecast. Toyota Motor Corp. also predicts that its domestic production will recover to 90 percent of usual levels this month.

Japan’s economy shrank at an annualized 3.5 percent rate in the first quarter, revised data showed last week. The economy will shrink for the third straight quarter before resuming growth in second half of the year, according to the average forecast of 43 economists in a survey by the government- affiliated Economic Planning Association.

Recent data suggest the slump has extended into this quarter. Machinery orders fell 3.3 percent in April, the first decline in four months, exports had their biggest drop since October 2009, the unemployment rate climbed and households cut spending. Exporters’ woes have also been compounded by the stronger yen, which has gained 4 percent against the dollar in the past six months.

Quake Damage

The March 11 earthquake and tsunami in northeastern Japan left more than 23,000 people dead or missing and triggered a nuclear crisis. The government estimated that direct damage from the quake may climb to 25 trillion yen.

The BOJ last year introduced a 3 trillion yen credit program to provide funds to industries such as energy, environment and social infrastructure that the bank feels has growth potential. It has extended 2.94 trillion yen of the pledged amount as of this month.

Some BOJ policy makers had voiced reluctance to increase the program. Board member Seiji Nakamura said on June 2 there have been signs of side-effects, including intensifying competition among lenders to reduce loan rates, which hurt their earnings. The program was also introduced as a “catalyst” to encourage private lending and shouldn’t be expected to remain in place perpetually, he said.

Shirakawa said today increasing the program’s size wouldn’t enhance its effectiveness and noted that financial institutions had voiced concern about the facility intensifying competition.

--With the assistance from Yoshiaki Nohara, Keiko Ujikane, Masahiro Hidaka, Minh Bui and Theresa Barraclough in Tokyo. Editors: Ken McCallum, Lily Nonomiya

To contact the reporters on this story: Mayumi Otsuma in Tokyo motsuma@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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