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BOJ boost to loan programs seen as sign for more easing

Bloomberg

The Bank of Japan on Tuesday boosted lending programs while sticking with a plan for unprecedented asset purchases, as the central bank tries to support a recovery and stamp out 15 years of deflation.

At its Policy Board meeting, the BOJ doubled a funding tool to ¥7 trillion and said individual banks could borrow twice as much low-interest money as previously under a second facility. The board left unchanged a pledge to expand the monetary base by ¥60 trillion to ¥70 trillion per year.

The yen fell and stocks surged as the moves underscored BOJ Gov. Haruhiko Kuroda’s stated commitment to do whatever is necessary to drag the nation out of deflation.

At the same time, Japanese companies are already sitting on record stockpiles of cash, signaling limits on the likely benefits from expanding the lending programs.

“The doubling of the lending facility is seen as a dovish signal that the BOJ is prepared to ease further — that it’s committed to keeping liquidity extremely loose,” said Izumi Devalier, a Japan economist at HSBC Holdings in Hong Kong.

The Japanese economy grew at less than half the forecast pace in the fourth quarter, underscoring risks to the nation’s recovery as the consumption tax will rise in April.

Gross domestic product expanded an annualized 1 percent from the previous quarter in the October-December period, the Cabinet Office said Monday, less than the median projection of 2.8 percent in a Bloomberg survey of economists.

Twenty-five of 34 economists forecast the BOJ will add to stimulus by the end of September, with 13 of those projecting action by the end of June, according to a Bloomberg News survey conducted Feb. 6 to 12.

Banks’ and businesses’ stockpiles of money have been growing as executives wait for signs that the nation’s rebound under “Abenomics” will be sustained.

Companies’ holdings of cash and deposits rose to a record ¥224 trillion in the July-September quarter and financial institutions’ reserves at the BOJ almost tripled over a year to ¥116 trillion as of last Friday.

Prime Minister Shinzo Abe’s first two “arrows” of monetary and fiscal stimulus helped fuel four straight quarters of expansion. Investors are now waiting for Abe to flesh out his plans to make it easier for companies to do business in Japan, the third aspect of Abenomics aimed at powering growth.

Abe’s policies drove an 18 percent slide in the yen against the dollar last year, contributing to a 51 percent jump in the Topix stock index. The benchmark is down 6 percent this year ahead of the consumption tax increase.

Consumer prices excluding fresh food increased 1.3 percent in January from a year earlier, the most since September 2008, as higher energy costs spurred broader inflation pressures.

Rising prices have cut into spending power of households that have seen incomes stagnate and face the April sales tax increase that is forecast to trigger a one-quarter economic contraction.

Monthly wages excluding overtime and bonus payments fell 0.6 percent in December from a year earlier, extending a decline to 19 months, according to labor ministry data. The sales tax will rise to 8 percent from 5 percent.

Abe has called on business and union leaders to agree on higher worker pay at spring wage negotiations, and on Monday reiterated his call for companies to increase salaries.

As of Feb. 10, the BOJ had extended ¥5.1 trillion in low-interest cash to banks under a so-called unlimited loan program established in December 2012, limiting lenders to an amount matching their net increase in lending. Now, banks can borrow as much as twice the amount of any such increase.

The BOJ has provided ¥4.1 trillion under what it terms a growth support facility. With the main part of this facility now doubling to ¥7 trillion, the total available under this mechanism is about ¥9 trillion.