EDITORIAL: BOJ's new loan program

The Bank of Japan on Friday outlined a new lending program designed to make more money available to industries with high growth potential as part of its efforts to help the economy extricate itself from the grip of deflation.

The BOJ's new monetary policy initiative is certainly an unconventional measure based on new thinking, but it reflects the central bank's commendable commitment to promoting economic growth.

The BOJ's new loan scheme encourages commercial banks to provide more credit to companies in growth industries. The program will, in principle, provide one-year funding at the BOJ's policy interest rate, currently 0.1 percent, for commercial bank loans.

Since loans under the program can be rolled over, the program can provide businesses with stable funding for several years.

The BOJ's latest policy board meeting, which ended Friday, formulated the outline of the scheme, whose details will be determined in next month.

A central bank's monetary policy basically means adjusting market interest rates to keep the nation's economy in good shape while securing price stability.

The scheme, which could be seen as an attempt to support specific industries and companies, represents an unusual move.

But the BOJ is grappling with the challenge of deflation as the world economy struggles to recover from the greatest crisis since the Great Depression and eroding confidence in the euro is roiling the world's financial markets. Given these circumstances, the central bank's decision to try an "nontraditional" monetary policy approach is reasonable.

The economy grew at a real annual rate of 4.9 percent in the January-March quarter, according to the latest gross domestic product data released by the government.

The economy is apparently regaining its footing, supported by strong exports.

But weak domestic demand keeps exerting deflationary pressure on the economy.

The reality is Japan is struggling to nurture next-generation industries vital for its future growth. But this has been difficult, causing equipment investment and consumer spending to remain weak.

We applaud the BOJ for expanding its policy instruments to the limit to encourage entrepreneurial efforts among companies.

Also, behind the central bank's new approach is the fact that its extremely loose monetary policy is losing its effectiveness and creating unwanted effects.

A large portion of the funds the BOJ provides to commercial banks are either cycling back to their deposit accounts with the central bank or being used to purchase government bonds, instead of flowing into the corporate sector.

One urgent policy challenge facing the nation is how to stoke demand for investment funds among companies.

The BOJ's new lending program, however, raises some tough questions. The biggest is how the central bank can identify growth sectors. Areas that have been cited as examples include high-tech industries, the environment and energy industries and the tourist and agricultural sectors.

But the BOJ lacks the ability to narrow down the list. Under the program, the BOJ will select funding recipients from among commercial banks that extend loans to promising companies as determined by the banks.

If the scope of areas that receive the central bank's support is too narrow, the program will degenerate into something similar to lending operations of a government-affiliated financial institution. If, as a result, the program causes any skewing or distorting effects on the economy, it will be bitterly criticized by the market.

Noting great diversity in the characteristics of financial institutions and the business areas of companies, BOJ Governor Masaaki Shirakawa said, "We want to provide support as widely as possible."

Prime Minister Yukio Hatoyama's administration is working on a growth strategy to create fresh domestic demand. The government is expected to unveil this strategy in June, which it says will focus on such areas as environment and energy, health and nursing care services, Asian markets and tourism.

The BOJ's new loan program should complement the government's strategy. It should consider the potential of various industries and stimulate activity among companies and consumers in a wider range of areas.

We hope the central bank will work out a well-balanced scheme that meets these conditions.

--The Asahi Shimbun, May 22