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Economy

BOJ chief aims to help business 'return to normal'

Central bank extends COVID emergency funding through March 2022

Bank of Japan Governor Haruhiko Kuroda said “The outlook on the economy has become more positive than before.” (Photo by Koji Uema) 

TOKYO -- The Bank of Japan decided on Friday to extend its emergency programs to funnel funds to businesses by six months, through the end of March, as the central bank remains on alert for a possible COVID resurgence that could throw the nation's economic recovery off track.

At issue were the BOJ's purchases of corporate bonds and commercial paper as well as one-year interest-free loans to banks supporting COVID-hit businesses. The programs, launched in March 2020, are intended to complement the government's initiative to keep small- and medium-size enterprises afloat with policy loans and credit guarantees.

"Funding conditions remain challenging for industries, including customer-facing businesses," BOJ Gov. Haruhiko Kuroda said at a news conference after the policy announcement.

The extension of the funding support is also intended to help businesses shift to post-COVID recovery, as a rapid rollout of vaccinations has raised hopes for a return to normal economic activity in Japan. "We want to provide a supportive environment for businesses as they prepare to return to normal," Kuroda said.

The government decided last month to extend SME support through the end of December. The BOJ was widely expected to move in step with the government, and also said it will introduce a new program aimed at supporting investment in clean technology. The outline of the program will be released after the next policy meeting on July 15-16.

The central bank maintained its assessment, saying that "Japan's economy is trending up, although its situation has remained in a severe situation due to the impact of COVID-19 at home and abroad."

The decision came as central banks around the world have started winding down emergency measures while maintaining their monetary easing policies, somewhat encouraged by economies that have started to recover from the pandemic. The U.S. Federal Reserve said on June 2 it would start unloading corporate bonds it purchased last year.

In March, the BOJ said it would scale back its equity purchase program. In May, the Japanese central bank skipped equity purchases for the first time in eight years.

The Bank of Japan held a two-day policy meeting until Friday. (Photo by Karina Nooka)

Still, the Japanese government and BOJ are wary of funding strains among SMEs, which have been hit disproportionately hard by the pandemic. BOJ data shows funding needs are subsiding at large corporations but remain elevated among SMEs.

After a two-day policy meeting, the central bank left its main monetary levers where they are -- guiding short-term interest rates to minus 0.1% and long-term rates to around zero.

Kuroda said there is nothing strange about central banks unwinding emergency measures at different paces. "It is natural that different countries choose different monetary policy programs based on their own economic conditions," he said.

The BOJ is sensitive to the direction of the dollar-yen rate, as a weaker dollar - and a stronger yen -- tends to hurt the nation's exports. At the moment, however, the dollar is strengthening, easing pressure on the BOJ to take action to support the domestic economy.

There is also growing optimism about Japan's virus situation. On Thursday, the government decided to lift the state of emergency for most of the country in response to an accelerating pace of vaccinations. As of Tuesday, at least 15% of the nation's population had received at least one shot.

Kuroda also said that vaccinations are progressing at a much faster pace than the BOJ had anticipated, helping improve the outlook for the nation's economy. "I believe that the outlook on the economy has become more positive than before," he said.

There are lingering concerns about a possible COVID resurgence as Tokyo hosts the Olympics next month and anticipates tens of thousands of visitors, including athletes, organizers and officials. Epidemiologists have warned that a state of emergency could be called during the Olympics if the two-week spectacle brings a surge in cases.

"Japan's economy is recovering, but it remains a two-step recovery," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute. "Strong external demand is driving the recovery but domestic business sentiment remains fragile," he said.

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