• Bloomberg

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The Bank of Japan is expected to maintain its stimulus policy Friday while weighing an extension to its COVID-19 aid program at the end of a big week of central bank decisions.

With the vast majority of economists expect no change in the BOJ’s negative interest rate or its main asset purchases, attention is likely to be on whether the bank might extend or tweak a funding program for businesses affected by COVID-19, which is set to expire in March, or hold off on deciding until later.

Such a move could come this week or in January, according to people familiar with the matter. Most economists don’t anticipate a decision until next month’s policy meeting, given uncertainties over the omicron variant. Some 20% see the BOJ waiting until March.

The BOJ’s policy meeting Thursday comes just hours after the Federal Reserve opted to accelerate the tapering of its own bond purchases.

The fact that most analysts expect the BOJ to wait until early next year to decide the fate of an aid program set to expire in little more than three months is evidence of how quickly omicron has clouded the recovery picture.

In the U.K., where Prime Minister Boris Johnson has announced new restrictions to contain the spread of the new strain, the Bank of England is expected to push back into 2022 its first rate increase since the pandemic began later on Thursday, according to economists.

When the BOJ does make its decision on the aid program, about two-thirds of analysts expect a partial extension.

That could involve keeping incentives for private-sector lending to help smaller firms while scaling back the BOJ’s direct buying of corporate bonds and commercial paper, a measure that helps larger firms. Credit markets appear to have healed enough that corporations aren’t having trouble selling debt.

“We think the BOJ could extend the support program past its March 2022 expiry. This would be prudent, in our view, given the increased uncertainty that the omicron variant has cast on the economic outlook,” said Yuki Masujima, a Bloomberg economist.

Regardless of timing, the BOJ could also scale down the part of its COVID-19 funding program that helps small businesses: its support to banks making pandemic-related loans. Deputy Gov. Masayoshi Amamiya said last week that overall funding conditions have improved.

If the BOJ chooses to trim its purchases of corporate debt, investors will want to know how they’ll do it. They could lower the ceiling in steps, given that the BOJ now owns ¥11 trillion ($97 billion) of such debt — about double the pre-pandemic maximum.

Any shrinking of the COVID-19 program will probably come with strong assurances from the BOJ that the moves aren’t steps toward normalization. That will keep downward pressure on the yen as other central banks head toward tightening.

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