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Thread: Japan floods economy with cheap loans

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    Default Japan floods economy with cheap loans

    Dec 2, 2009

    Japan floods economy with cheap loans

    BoJ offers $160b to boost liquidity and keeps key interest rate at 0.1%

    TOKYO: Japan's central bank decided yesterday to further ease monetary policy by massaging the fragile economy with cheap loans amid government pressure to respond to a surging yen and falling consumer prices.

    In an emergency meeting, the Bank of Japan (BoJ) voted unanimously to offer about 10 trillion yen (S$160 billion) in short-term loans to commercial banks to boost liquidity.

    It also maintained its key interest rate at a super low 0.1 per cent.

    The BoJ will provide three-month loans at a fixed rate of 0.1 per cent. It will accept as collateral corporate bonds, Japanese government bonds, commercial paper and loans on deeds.

    Standard & Poor's analyst Takahira Ogawa called the announcement 'better than nothing' but said it likely will not be very effective against falling prices.

    The yen has climbed sharply in recent days, and government officials have criticised the central bank as being too complacent. The bank has also been under pressure to do something about deflation after months of falling prices.

    Deflation hurts an economy as it reduces corporate earnings and consumers tend to delay spending in hopes of further price falls.

    The yen's rise to a 14-year high against the United States dollar has piled further pressure on the economy because it makes companies' exports less competitive and reduces their overseas earnings when converted back from dollars into yen.

    Yesterday, the dollar - which fell to a 14-year low of 84.81 yen on Friday - jumped above the 87-yen line on news of the BoJ meeting.

    But it later returned to around 87 yen as investors concluded that the BoJ action was not as aggressive as it could have been. The central bank could have expanded its purchases of long-term Japanese government bonds to depress yields and ease deflationary pressures, for example.

    Japan's Cabinet earlier yesterday approved plans for the new stimulus package, although no exact figure has been announced and the spending is still subject to parliamentary approval. The government has said the spending would be more than 2.7 trillion yen.

    Prime Minister Yukio Hatoyama, who warned last week that Japan must avoid a double-dip recession, was to meet BoJ Governor Masaaki Shirakawa today.

    Recent signs point to a mixed outlook for the economy. Gross domestic product has expanded in the past two quarters but factory output is now slowing again. Wages continue to fall, and deflation threatens to undermine the nascent recovery.


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