Japan's First Post Earthquake Stimulus Is Here In The Form Of A Tiny 500 Billion Yen Loan Program

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The BOJ just concluded its two-day operation, and while not announcing any new monetary program or changing its interest rate, both of which had been widely anticipated, it did announce a new Y500 billion loan program for "growth industries" the result of which is some substantial strength in overnight equity markets. Alas, just like everything else by BOJ terms, this stimulus will prove largely insufficient, and will be followed by yet another loan program, until finally Shirakawa relents and restarts the printers.  And in other ridiculous news, the BOJ raised its outlook of the second half, saying the economy was "picking up." There is no point in even commenting on this, suffice to say that instead of engaging in what it does best, i.e., monetary stimulus, Japan, and of course the US, will now be delighted to live in bizarro world that things will improve on their own. Best of luck with that.

Reuters recaps the key terms of the new loan program:

The Bank of Japan expanded a loan scheme for growth industries on Tuesday by setting up a new credit line targeting asset-based lending, in an effort to battle chronic ills that have been plaguing the economy since long before it was hit by the March 11 earthquake.

As widely expected, the central bank held off on easing monetary policy further and kept its benchmark interest rate at a range of zero to 0.1 percent by a unanimous vote.

Below are details of the new step:

  • The BOJ will lend up to 500 billion yen ($6.23 billion) to commercial banks that make equity investments and extend asset-based lending, or loans without real estate collateral or guarantees.
  • It will allow each bank to borrow up to 50 billion yen at 0.1 percent interest for up to four years. The lending cap is set separately from the 150 billion yen ceiling for the existing 3 trillion yen loan scheme for growth industries.
  • It will allow commercial banks to borrow within the outstanding amount of eligible equity investments and loans including asset-based lending made from April 2010. The minimum amount of loans that the banks can make to their clients will be 1
  • million yen, compared with 10 million yen in the existing scheme.
    It will accept applications for the loans until March 31, 2012, keeping the deadline unchanged from the main loan scheme.

Summarizing the other (lack of) actions by the BOJ:

As widely expected, the central bank held off on easing monetary policy further and kept its benchmark interest rate at a range of zero to 0.1 percent by a unanimous vote.

The BOJ decided to create a 500 billion yen ($6.23 billion)new credit line for banks that extend asset-based lending. This will be part of the BOJ's loan scheme targeting growth industries but loans will be offered separately. Each bank can borrow up to 50 billion yen at 0.1 percent interest for up to four years.

The central bank slightly upgraded its assessment of the economy, saying it continues to face downward pressure but is showing some signs of picking up.

Governor Masaaki Shirakawa will hold an embargoed news conference with his comments expected to come out sometime after 4:15 p.m

And market commentary:

DAISUKE KARAKAMA, MARKET ECONOMIST AT MIZUHO CORPORATE BANK, TOKYO

"Unless we see some drastic moves, I don't think BOJ decisions can
heavily impact the forex market as Japan's monetary policy is already
super-loose.

"The yen has lost ground a bit but going into
European time, I would be surprised to see it under more pressure only
on this news."

YASUO YAMAMOTO, SENIOR ECONOMIST, MIZUHO RESEARCH INSTITUTE, TOKYO

"The BOJ's upgrade of its economic view is due largely to a faster
recovery in supply chain problems. The BOJ is expected to keep its
policy rate unchanged for a while as the economy is recovering in line
with its scenario, or even at a faster pace than previously expected.

"But whether the BOJ increases its asset buying scheme depends on
financial markets. Although the economy is rebounding from falls seen
right after the disaster, volatile market moves could prompt the central
bank to expand the scheme.

"The BOJ's loan scheme is expected to support small- to medium-sized corporations such as venture businesses."

MASAMICHI ADACHI, SENIOR ECONOMIST, JPMORGAN SECURITIES JAPAN

"The BOJ will wait to see future economic developments before taking
more action. It is not sitting idly by but focusing on downside economic
risks. The BOJ is also sending a message to the public that it is doing
its part to enhance growth and beat deflation by boosting loans for
growth sectors.

"The BOJ remains ready to loosen policy by
expanding its asset-buying scheme if risks to the economic become
evident, but it is unlikely to ease policy further at least near term.

"As supply-side constraints resolve, the Japanese economy will recover
more quickly than world economy later this year, and this will lead the
BOJ to shift its focus away from downside risks in the coming months.

"If the global economy falters due to factors such as a spike in oil
prices, Europe sovereign risks, or a slack recovery in the U.S. jobs
market, that might prompt a BOJ easing, but chance of this happening is
rather small."

TETSU AIKAWA, DEPUTY GENERAL MANAGER OF CAPITAL MARKETS AT SHINSEI BANK, TOKYO

"We already have a 3 trillion yen asset-purchasing scheme, so the
amount for the new asset-based lending plan looks small. That's why swap
rates are rising a little right now.

"The truth is there are
more reasons to be concerned about the outlook than to be optimistic.
Reconstruction demand isn't coming as soon as many people were
expecting, which we saw in weak machinery orders data.

"Some people were looking for yields to start rising toward the end of the year, but this could come later rather than sooner.