The Bank of Japan’s new unlimited lending program may further weaken the yen by reviving the carry trade after the currency sank to a six-month low last week, a senior official at the central bank said.
A weaker yen “isn’t our main objective, but it’s a common understanding that an accommodative policy eventually leads to the depreciating of one’s own currency,” Executive Director Hideo Hayakawa, 58, the official in charge of overseeing the financial system, said in an interview Monday.
The BOJ unveiled a program of low-interest loans last week in a bid to up demand for credit and spur growth as the economic recovery flags. The yen touched 80.68 per dollar last Friday, its lowest since April, three days after the BOJ announced the program and an ¥11 trillion expansion of an asset-purchase fund.
The program, which offers loans to banks at the BOJ’s overnight call rate, currently 0.1 percent, is part of the central bank’s efforts to prop up an economy hit by the global slowdown and the strong yen as the government presses for “visible results” on ending deflation.
Amid weak credit demand and low rates at home, the facility may help push down the yen by boosting capital outflows as banks look to lend money to customers abroad, a trend Hayakawa said will probably continue for at least the next few years. The loans may also drive investors to sell the yen to buy higher-yielding currencies.
“Depository money comes to banks, but lending isn’t growing,” Hayakawa said. “Under the circumstances, banks can’t make profits,” so the BOJ wants them to look into areas where they can increase lending, he said.
Hayakawa, the BOJ’s former Osaka branch manager and chief economist, said the central bank isn’t “100 percent confident yet” that the program will succeed as it hasn’t decided on all the details and is aware of the “possibility” that it will cut banks’ profits by lowering lending rates.
Bank lending in Japan has risen less than 1.5 percent from a year earlier in every month since October 2009, BOJ figures show. The average interest rate that banks charge for new loans fell to 0.95 percent in August, near its lowest since at least 1993.
The BOJ’s new facility parallels efforts by the Bank of England to stoke lending and growth.
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