Japan - Japan hikes lending to spur growth, battle deflation

Japan's central bank Tuesday boosted a loan programme by almost $25 billion to kickstart growth and battle deflation as it said the country's stagnant economy was showing signs of picking up.

The bank of Japan said it would hike a lending programme to commercial banks by about 2.0 trillion yen ($24.4 billion) to 5.5 trillion yen, amid reconstruction efforts seen as crucial to reviving the disaster-struck economy.

It also granted a one-year extension to a separate loan programme for banks in areas hit by last year's earthquake and tsunami, while leaving interest rates unchanged at zero to 0.1 percent.

"Japan's economy is expected to gradually emerge from the current phase of flat growth and return to a moderate recovery path as the pace of recovery in overseas markets picks up," bank governor Masaaki Shirakawa told a news briefing.

However he warned that there remained a "high degree of uncertainty" over the health of global financial markets, while a high yen and slackening demand overseas have dented exports.

The bank chief said expanding a loan programme to boost growth was also part of a wider plan to tackle stubborn deflation that has haunted Japan's economy for years, adding that economic growth was key to fighting price declines.

"We came up with the measure as part of a package" to battle deflation, Shirakawa said, according to Dow Jones Newswires.

"(But) defeating deflation will not happen overnight," he added.

Last month, the bank surprised markets after saying it would increase its asset purchase programme by 10 trillion yen to about 65 trillion yen in a bid to combat the problem.

Deflation continues to pose a threat to Japan's recovery as a fall in general prices cuts into corporate profits, leading firms to slash jobs and put off capital investment that generates growth.

It also hurts demand because it encourages consumers to put off purchases.

Japan has seen a mixed bag of economic data lately. It logged its biggest-ever trade deficit in January as exports stuttered and energy costs soared, but revised gross domestic product data revealed the economy contracted less than first thought.

Last year's quake-tsunami disaster battered Japanese industry while the stronger yen and record flooding in Thailand, which hurt manufacturers with operations in the southeast Asian nation, only added to the pain.

The BoJ move in February would see the bank buy financial assets such as government bonds and commercial paper from financial institutions, effectively providing more money to banks who can then lend to cash-strapped firms.

The central bank was forced to resort to the unconventional measure as its ability to free up money has been limited since interest rates were cut to between zero and 0.1 percent at the end of 2008 during the global financial crisis.

Despite expectations from some market players, the bank left the asset purchase plan unchanged after its two-day policy meeting wrapped up Tuesday.

AFP

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