BOJ to Offer 3 Trillion Yen to Spur Corporate Loans

June 15 (Bloomberg) -- The Bank of Japan will offer as much as 3 trillion yen ($33 billion) in a new credit program that will extend loans to companies for as long as four years in an effort to strengthen the economic recovery.

The central bank will accept loan requests through March 2012, it said in a statement released today in Tokyo. New loans will be extended at the benchmark interest rate, which the board today unanimously voted to keep unchanged at 0.1 percent.

Pressure on Governor Masaaki Shirakawa to do more may mount in coming months as newly appointed Prime Minister Naoto Kan, who as deputy repeatedly urged further BOJ steps, unveils plans to contain the world’s largest debt. The facility will do little to spur demand and is mainly aimed at averting calls for broader monetary easing, said economist Yasunari Ueno.

“The new program is a tool to flag the BOJ’s cooperation to the government,” Ueno, chief market economist at Mizuho Securities Co. in Tokyo, said before the announcement. “It’s also an attempt to prevent the bank’s monetary policy from being driven in an unfavorable direction.”

Yesterday, on the first day of the bank’s meeting, Kan said in parliament that the government and the central bank will work together to stamp out deflation. After being sworn in as leader last week, he said his administration must focus on curbing government debt, warning the Japan could “go bankrupt” if remedies aren’t taken.

Critical Challenge

“The most critical challenge the Japanese economy is currently facing is raise the potential economic growth rate and productivity,” the central bank said. Today’s measure “aims to act as a catalyst for financial institutions in making efforts toward strengthening the foundations of economic growth.” The bank said it will seek to ensure that it “does not directly involve itself in the allocation of funds to individual firms and industries.”

Shirakawa instructed his staff to work on the credit plan in April, after previous efforts failed to stem the deflation that has discouraged spending and squeezed profits. The BOJ has discussed the boundaries of the program, with some members voicing concern that the bank should avoid getting too involved in allocating capital, minutes of an April 30 meeting show.

The Bank of Japan offered to provide dollar loans to lenders at 1.23 percent today, to help ease concerns that credit will contract in the wake of Europe’s sovereign-debt crisis. The bank decided to resume a U.S. dollar currency swap agreement with the Federal Reserve in an unscheduled policy meeting on May 10.

Interest Rates

Japan’s central bank cut the benchmark interest rate to 0.1 percent in December 2008 and all 14 economists surveyed by Bloomberg News expected it to be kept unchanged today.

Last December, following calls to act from politicians including Kan, the board unveiled a credit program that it doubled to 20 trillion yen in March, which offers three-month funds at 0.1 percent.

“The BOJ has already provided abundant liquidity” by lowering borrowing costs and through existing programs, said Mizuho’s Ueno. “Under the current circumstances surrounding interest rates, the advantages of tapping a new facility for commercial lenders is extremely small.”

If the economy were to receive a severe shock, the BOJ would consider expanding the facility, a person familiar with the matter said last week. The outstanding amount of loans provided through the program was around 20 trillion yen yesterday, according to Tokyo Tanshi, a money market brokerage.

Recovery Trend

Japan’s economy is on a recovery trend and spending by companies is showing signs of picking up, the central bank said today.

Kan, who was finance minister before becoming premier, has advocated inflation targeting and said he hopes to see consumer prices gain as much as 2 percent. Prices have slumped for 14 straight months.

He is expected to unveil the midterm growth and fiscal strategy before the Group of 20 leaders’ summit this month. Vice Finance Minister Motohisa Ikeda, who has also pressed the BOJ to do more, is attending today’s gathering as a government representative.

“With the economy recovering, political pressure on the BOJ probably won’t mount immediately,” said Chotaro Morita, chief strategist at Barclays Capital Japan Ltd. “Should the economy start to lose momentum or if European financial turmoil flares up, the government may have difficulty pushing for its fiscal reform and then put heat on the BOJ.”