TOKYO (Reuters) – The Bank of Japan is discussing phasing out a COVID-19 loan programme if infections in the country continue to dwindle, sources told Reuters, potentially setting the bank up to exit a key crisis-mode policy sooner than investors expect.
Markets have been anticipating a third extension of the scheme, set to expire in March. Policymakers have not reached a consensus as discussions are preliminary, said three people familiar with the central bank’s thinking, and a decision is unlikely before December.
But with corporate funding strains easing, infections falling sharply and the world’s third-biggest economy reopening, some policymakers are contemplating ending the emergency programme in March, the sources said.
There is also a concern that banks are using the scheme to reap a reward on tapping in, rather than passing on the cash to companies, the sources said.
This reflects a growing concern over side-effects of paying financial institutions 0.1% interest to tap the programme, without close scrutiny into whether the money is going, as targeted, to smaller firms in need of cash.
“Excluding some sectors, corporate funding conditions have generally improved and the need for immediate liquidity support is fading,” one source said. “What was intended as an emergency measure cannot last forever.”
Ending the programme would defy market expectations, given a string of comments from policymakers stressing that the bank’s focus would remain on healing the wounds of the pandemic.
The move would put the BOJ more in line with other big central banks in heading for an exit from crisis-mode policies, as economies emerge from the pandemic-induced doldrums.
Even if the emergency programme is terminated, the BOJ will continue to support the economy with massive money printing and a pledge to keep long-term borrowing costs capped at zero.
The BOJ created the loan scheme at the peak of a pandemic-driven market rout in May 2020 to channel money through financial institutions to cash-strapped smaller firms. The deadline has been extended twice as slow vaccinations and rising infections forced Japan to maintain curbs on economic activity.
With bank lending growth slowing and many firms sitting on huge piles of cash after weathering an initial cash crunch, some policymakers see scope to end the programme, the sources said.
Japanese companies held liquid assets worth 20% of sales in the three months to June, up from 15% before the pandemic hit, government data show.
The scheme lent 78 trillion yen ($680 billion) through last month.
Banks tapped 24.2 trillion yen in a market operation in September, more than double the amount in June, but their lending has continued to slow, raising concerns they were tapping the scheme mainly to get the interest reward rather than lend the money on to companies.
There is no guarantee the BOJ can smoothly phase out the programme. The nine-member board is split between those who favour ending the programme and those who see merit in keeping it in place longer as a precaution.
BOJ board member Asahi Noguchi, an advocate of aggressive easing, said this month the BOJ “may have no choice” but to extend the programme unless it becomes clear economic activity will return to pre-COVID levels.
Political considerations also complicate the outlook.
Prime Minister Fumio Kishida has pledged to compile another spending package to cushion the pandemic’s blow and focus on distributing more wealth to low-income households.
Ending a pandemic-relief loan programme could raise eyebrows among politicians when the government continues to focus on dealing with the hit from the health crisis.
“There’s no rush in deciding,” a second source said on the fate of the programme, adding that “many factors” need to be considered in reaching a conclusion.
($1 = 114.0100 yen)