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MNI: BOJ Sees Company Liquidity A Bigger Threat Than Solvency

TOKYO (MNI)

Supporting liquidity needs of many firms in the face-to-face service sector seen as priority for BOJ.

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Bank of Japan officials see continuing liquidity needs for many companies as the health emergency continues across the, but they don't expect a shift to broader solvency concerns just yet that could cause wider stability issues for the financial system, MNI understands.

Many manufacturing firms and some non-manufacturers are already seeing a pick-up in fortunes on the faster-than-expected economic recovery, easing some worries that many firms would run into financial difficulties, struggle to repay debts and see bank loans turn to non-performing loans.

The BOJ will likely extend its lending facility to support smaller firms, currently due to end on Sept. 30, as early as the upcoming June meeting. The government has already extended its zero interest, no collateral loans to SMEs by 6 months to the end of this year.

Bank stress tests suggest to officials that there will be no sharp rise in credit costs either this year or next years unless economic and financial conditions deteriorate markedly.

But there are still concerns over parts of the service sector, with firms in the face to face service industry - particularly much of the hospitality sector -- although it is becoming clearer to the BOJ that there is a split in performance for different industries in the sector.

IMPACT

The impact of those services on the real economy isn't seen as overly large by the central bank, but the companies employ a large number of flexible and part-time workers.

Along with the loan extension, the government has extended the Employment adjustment subsidy until the end of July. But continued sluggish sales and falling revenues could see many in-person service firms close, pushing the unemployment rate higher and worsening consumer sentiment.

So while bank officials are paying close attention to the impact the virus and restrictions are having on the service sector, consequences for regional banks are not yet seen as a danger and there are few signs of financial system risk yet, with financial intermediation still functioning well.