The Bank of Japan will provide low-interest loans totaling 1 trillion yen ($11.76 billion) as early as in May for immediate recovery and rebuilding efforts of financial institutions in disaster-stricken regions.
The Bank of Japan will provide low-interest loans totaling 1 trillion yen ($11.76 billion) as early as in May for immediate recovery and rebuilding efforts of financial institutions in disaster-stricken regions.
"We will respond to the immediate needs of (businesses) for funds for recovery and reconstruction," BOJ Governor Masaaki Shirakawa told a news conference Thursday.
The central bank's program will start with 1 trillion yen, but the amount will likely expand significantly to help local businesses overcome their financial damage stemming from the March 11 Great East Japan Earthquake and tsunami.
"We will take appropriate measures if necessary," the governor said.
The BOJ's program is designed to extend 1-year loans at an annual interest rate of 0.1 percent to about 180 financial institutions.
Other details, such as when the loans will be made available, are expected to be decided at the central bank's monetary policy meeting on April 28.
Eligible institutions are commercial banks, shinkin banks, credit cooperatives and agricultural cooperatives that operate branches in northeastern Japan.
These financial institutions will play a key role in rebuilding the local economy by repaying deposits and extending loans to businesses and individuals.
To speed the flow of money into the region, the BOJ plans to accept as collateral the loans that financial institutions have already extended to small- and midsize businesses.
"Many businesses, primarily small- and medium-size businesses, appear to be having serious funding problems," Shirakawa said.
The BOJ introduced a low-interest loan program aimed at financial institutions in the Kobe area damaged in the 1995 Great Hanshin Earthquake.
The latest loan program will provide double the amount of funds the central bank made available in 1995 because the devastation in the Tohoku region is far more extensive.
The BOJ is concerned that the fragile Japanese economy could suffer a huge setback, albeit temporarily, if businesses are forced to suspend operations for a prolonged period because of fallout from the disaster.
Consumers, bracing for an economic slowdown, could stop spending, resulting in a further deterioration of the economy.
Possible additional measures by the central bank include an expansion of its fund that was established to buy financial assets.
The BOJ increased the fund to 40 trillion yen by securing 5 trillion yen at its meeting on March 14.
A move to lower an annual interest rate of 0.1 percent under a new funding program that started in December 2009 could also be effective, according to an official with a foreign brokerage.
A lower rate would make it easier for businesses to borrow money because the interest rates on loans with repayment periods longer than three months to six months would decline.
Some economists suggested cutting the 0.1 percent rate per annum for financial institutions' deposits at the BOJ.
A reduced interest rate could spur the financial institutions to extend loans to businesses rather than depositing the money at the central bank.
But financing the overall recovery effort for such a widespread--and ongoing--disaster is creating a huge challenge for the government.
If the government does not raise taxes or revise programs in the budget, it would have no choice but to issue government bonds.
However, this could prove risky because Japan is already saddled with a huge amount of debts.
In early April, reports that the ruling Democratic Party of Japan was seeking to issue bonds for the recovery efforts led to a bond sell-off and lifted interest rates.
The government has since said it will not issue bonds for the first extra budget.
Some in the market are calling on the BOJ to increase its fund to buy more national bonds held by financial institutions.
The BOJ has already set up a 40-trillion-yen fund to buy government bonds.
Some DPJ members floated the idea of having the central bank directly underwrite newly issued government bonds, in addition to buying state debts from financial institutions.
But the BOJ opposed that proposal.
"If the central bank underwrites national bonds, the issuance of new bonds would go unchecked and trigger severe inflation," Shirakawa said Thursday.
Some Cabinet members, including Finance Minister Yoshihiko Noda, have explicitly ruled out that option.
(This article was written by Toru Hatanaka, Takashi Kamiguri and Kazuo Teranishi.)