The Bank of Japan (BOJ) concluded its two-day monetary policy meetings on February 18, 2014, and announced after the conclusion of the meetings that the BOJ would double a funding tool to Japanese Yen (JPY) 7.0 trillion (USD 68.0 billion) and allowed individual banks to borrow twice as much low-interest money as previously under a second facility. The BOJ has left its goal of increasing the monetary base from JPY 60.0 trillion to JPY 70.0 trillion per annum unchanged.
In reaction to the news, the Nikkei 225 index advanced by 3.1 percent and the Japanese Yen currency continues to decline and has been hovering steady at around USD/JPY 101.00 to 102.00 during early Asian trading hours on Feb 19. According to a Thomson Reuters news report on February 18, 2014, the BOJ Governor, Mr. Haruhiko Kuroda was quoted during a press conference with journalists following the conclusion of the meetings, as saying that the credit expansion plans outlined by the BOJ was aimed at enhancing the transmission mechanism of quantitative easing (QE) by encouraging banks to boost lending instead of sitting on piles of cash. Despite the rise of most Japanese equity prices on Feb 18, the Nikkei 225 index futures on Feb 19 were pointing to a muted to flat opening at approximately 14,780.00 levels. At the time of the write-up of this article, the Nikkei 225 was trading at approximately 14,752.00, down by 91.0 points or 0.61 percent. The Japanese Government Bond (JGB) yields remained relatively unchanged.
The latest moves by the BOJ came a day after the Japanese government announced that the annualised gross domestic product (GDP) for the fourth quarter of 2013 rose to 1.0 percent, as compared to the 2.8 percent many economists and investors have expected. This has dampened much of the 2013 hype over Prime Minister Shinzo Abe, and his so-called ‘Abenomics’ policies which seek to bolster the economy through the co-ordination of the ‘Three Arrows’ (Fiscal, Monetary and Structural) reforms. The BOJ appeared to be quite confident in its plans to revitalise the Japanese economy through the doubling of its lending facilities, and allowing financial institutions to lend more. But, there is also a question that despite the urge by the BOJ to provide financial institutions with the tools to lend more, these institutions might continue to park their reserves, and showing some hesitance in lending out. The banks do understand that there is a need to lend out, but not at price of having to face much uncertainties stemming from the declining trading revenues, onset of the upcoming consumption tax hike to 8.0 percent by April 2014 which might result in a damper in consumer and business spending.
The risks of a premature economic growth is starting to show up in recent weeks as seen by the current slump in the Nikkei 225 equity index which crossed to the lowest levels, or bear-market territory in January 2014 since its 57.0 percent to 60.0 percent rise last year. There might be questions as to whether by the act of increasing the lending facilities to financial institutions by the BOJ is enough to change their past behaviours of hoarding the cash, and not use them for lending purposes. The financial institutions have other issues including conformance to strict regulatory capital limits, and risks associated with signing off a so-called ‘blank cheque’ to borrowers and businesses with no or limited finances. The risks of operating in an economy that are showing some disappointing signs of growth might have outweighed the benefits of unlimited lending to borrowers.
Despite the general optimism expressed by BOJ Governor Kuroda, there needs to be caution being exercised as Japanese corporations have not been actively doing their part in helping the efforts of Prime Minister Abe to bolster wages, and increased spending. The need to conserve cash is even greater as the month of April draws nearer. Financial institutions do not necessarily lend out as aggressively as ever post Lehman crisis. One of the lessons learnt from post-Lehman era is that long-term lending could run into risk of having defaults later, and these are some of the large consequences for unlimited lending. Being prudent and always wanting to maintain a general good reputation, the Japanese financial institutions are careful in managing their risk exposures. I believe that this latest measure will not make much of an impact on the loan turnover ratios despite the various incentives offered by the BOJ to increase lending activities among Japanese financial institutions.