BOJ may deploy new tool to stimulate economy

Tokyo

A LARGELY overlooked scheme created by the Bank of Japan (BOJ) to mitigate the drawbacks of its massive stimulus programme may become the central bank's new weapon to stimulate the economy, sources familiar with its thinking say.

The key takeaways from a policy review last month were steps to tiptoe away from a radical monetary experiment that has sought, but failed, to fire up inflation through decades of heavy money printing.

Drawing less attention was the creation of a new "interest scheme to promote lending", a highly technical programme aimed at compensating banks for the hit from negative interest rates.

Offsetting the negative rate charge, the scheme will pay banks varying rates for taking up cash from the BOJ, depending on the purpose of the loans they make.

The key aim was to convince markets that with tools available to deal with the side-effects, the BOJ can take rates deeper into minus territory to combat economic shocks.

But the scheme also gives the BOJ discretion over which sectors to divert money to, making it a potentially useful tool to assist initiatives such as green investment, say four sources familiar with its thinking.

The move underscores how the BOJ, left with a dearth of monetary tools, is veering closer to fiscal policy to spur growth in an economy hit by the Covid-19 pandemic.

"This scheme has the potential to become the BOJ's new tool," said one of the sources. "It can be used to incentivise or promote lending for certain growth areas."

While the BOJ does not plan to deploy such new targeted lending anytime soon, it is an idea being brain-stormed as a future possibility, the sources say.

The European Central Bank also pays banks to tap its cash coffers to cushion the blow from negative rates. What makes the BOJ's scheme unique is the three-layered structure where loans qualifying as "high priority" receive higher interest.

If the BOJ deepens negative rates, the interest reward rises in tandem.

It was an idea the BOJ had been studying internally for years amid criticism over its negative rate policy, sources say.

The bank now uses the scheme only for Covid-19 relief. But it can add new type of loans even before deepening negative rates.

The tool may allow the BOJ to more efficiently pump money to areas in need, and respond to future government pressure for stronger action to protect the economy. REUTERS