(Bloomberg) — The Bank of Japan lengthened its cautious withdrawal from emergency pandemic aid on Friday in a move that contrasts with the urgency of other major central banks winding back stimulus.
Governor Haruhiko Kuroda’s board extended loan assistance for struggling smaller businesses by another six months, while indicating support for larger firms would be pared back gradually from April.
Friday’s decisions underscore the different dynamics facing the BOJ as it struggles to stoke inflation even as prices surge almost everywhere else across the globe, fueled in part by pandemic stimulus settings.
Those overseas inflation concerns prompted the Bank of England on Thursday to become the first central bank in a Group of Seven economy to raise interest rates since the emergence of Covid-19.
That followed a Federal Reserve decision to end its bond-buying program sooner and signal three rate hikes next year. The European Central Bank is also winding down emergency measures.
All now see inflation as a bigger threat to their economies than the virus.
Read More: Central Banks Bet Economies Can Tolerate Omicron, Not Inflation
In Japan, a far weaker price pulse is enabling the BOJ to continue its pandemic support and stick to a generally more cautious national view over Covid.
“The BOJ is making it very clear that it’s an outlier after the Fed, ECB and BOE moves,” said Masamichi Adachi, chief Japan economist at UBS Securities.
“The biggest point is that Japan has no inflation compared with others. Companies are not passing their costs on for fear of losing customers who have a deflationary mindset. So in a way, the BOJ can just relax while continuing with its current stimulus,” he said.
The emergence of the omicron variant of the virus likely played a role in the BOJ’s decision to extend its Covid loan support for a fourth time, even with the economy forecast to return to growth this quarter, credit conditions improving and a larger-than-expected stimulus package from Prime Minister Fumio Kishida’s administration set to take effect.
The fast-spreading variant made some BOJ officials wary of ending or pulling back their aid, people familiar with the matter said earlier this month.
That’s even with overall daily virus infections in the hundreds in Japan while most other G-7 nations are dealing with tens of thousands of cases.
What Bloomberg Economics Says…
“The Bank of Japan is dialing back Covid-19 support — the start of a shift to a post-pandemic policy — but is keeping up stimulus in the face of the omicron threat to growth and core inflation stuck near 0%.”
–Yuki Masujima, economist
To read the full report, click here.
The BOJ said it will keep in place until the end of September incentives that encourage banks to lend to smaller businesses hurt by the pandemic using funds provided by the central bank. The lending facility had been scheduled to finish at the end of March.
At the same time, reflecting the more favorable funding environment for bigger companies, the BOJ said it will gradually lower its holdings of corporate bonds and commercial paper back to pre-pandemic levels of around 5 trillion yen ($44 billion), starting from April.
A raised ceiling on the debt holdings was also scheduled to expire at the end of March.
“Given the uncertainty added by the latest omicron variant, and that smaller firms are more vulnerable to its impact, I think extending the program there was a good move,” said economist Harumi Taguchi at IHS Markit.
Yen Weakness
With the prospect of interest rate rises nowhere near the horizon in Japan, the yen is this year’s worst performing major currency, as moves in the opposite direction by the Fed draw global investors back into U.S. debt markets.
The yen is down around 9.5% against the dollar in 2021 and the Fed’s speedier taper and road map for rate increases next year could put further downward pressure on the currency in 2022.
On balance, a weaker yen benefits Japan’s economy because it fuels profits for exporters like Toyota Motor Corp., which have long been drivers of the country’s growth.
But it also causes pain for businesses that have to pay more for imports and are facing the biggest cost pressures in decades.
Read More: Hidden Inflation Bubbles Up From the Japanese Energy Market
Kuroda is set to brief the press at 3:30 p.m. in Tokyo.
(Adds details on yen weakness)
More stories like this are available on bloomberg.com
©2021 Bloomberg L.P.
