MNI INSIGHT: BOJ Cautious On March End Of Special Covid Funds

A decision to end, or extend, the Bank of Japan's special funding for companies past March of next year needs finer coordination with the government, the BOJ board and an assessment of the supply chain disruptions for automobile manufacturers to avoid any liquidity issues, MNI understands.

Bank of Japan officials want to avoid hurting an already prolonged economic recovery goal with a premature halt to measures that support financing for smaller firms, see: MNI STATE OF PLAY: BOJ To Cut GDP, CPI FY21 Views, Hold Policy.

The BOJ has already extended the program once past a September deadline to March 2022. The decision making process on the measures will include the pace of vaccinations in Japan, which has been robust, and developments among manufacturers facing supply-chain disruptions and corporates weighing capex plans against higher energy costs.

DECISION TIME

Bank officials will likely decide on the measures after the December Tankan survey, which unexpectedly showed a more upbeat view in the September survey.

Even if the BOJ discontinues the special measures, it will maintain the current easy policy to achieve sustained 2% price inflation as Japan is still far from the price target.

Internally, however the BOJ may show a split on the issue with the four reflationary board members likely against a drop in the monetary base caused by the discontinuation of the special measures.

Those board members could call for alternative ideas, such as increasing purchases of Japanese government bonds, as the balance of the monetary base would continue falling from a year earlier. Other BOJ board members however could point out that the measures are not linked to regular monetary policy.

The BOJ in March said it would continue with monetary easing based on observed CPI inflation rather than the outlook for CPI inflation and a "makeup strategy."

GOVERNMENT INPUT

The BOJ will need to take the government's stance into account as the bank and the government jointly supported corporate financing since March 2020. An election for Japan's lower house of parliament is slated for Oct. 31, which will see a new government likely led by the ruling Liberal Democratic Party-led coalition.

The Financial Services Agency has urged financial institutions to firmly support corporate financing to the end of Japan's fiscal year on March 31, 2022.

In theory, the BOJ should discontinue the special measures if coronavirus infections wane. But BOJ officials are strongly worried that financial conditions and corporate financing could worsen on any renewed spread of infections.

Bank officials also admit that preventing small business bankruptcies under current economic conditions remains a priority, but that should not extends to corporate solvency problems, which is a government responsibility.

The BOJ noted that with state of emergency measures to fight the coronavirus eased since the end of September, restaurants, hotels and services could begin to rebound. However, higher energy costs, as noted, are not easily passed along at the retail level, which cascades to salaries. Japan also has still not opened widely to in-bound tourism, a major driver for services.