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Wednesday, Aug. 4, 2010


BOJ's plan to boost business

The Bank of Japan has announced a new lending plan to back up the government's economic growth strategy. It will lend a total of ¥3 trillion at an annual interesting rate of 0.1 percent — the same rate as the central bank's key interest rate — to banks, which will then lend the money to enterprises at an interest rate lower than usual rates. The new loan scheme is unusual in that the central bank has allowed itself to be directly involved in the government's economic policy. The BOJ must be feeling a sense of urgency about the poor state of the economy.

What is significant with the new plan is that the loans are aimed at helping enterprises in 18 areas where high economic growth is expected. The BOJ hopes that the loans will help invigorate economic activities in these areas and create new demand, thus helping pull the nation out of the current deflation.

The 18 areas overlap the areas the government plans to support under its growth strategy. They include such areas as the energy industry, the eco-friendly industry, tourism, agriculture, the child rearing-related industry and large-scale projects in other Asian countries. Each bank can borrow up to ¥150 billion. The term of a loan is one year, but the loan can be renewed three times so that the maximum term will be four years. The BOJ plans to start lending toward the end of August.

Many small and midsize companies and newly established firms operate in the 18 areas. If the loans are actually made and used for research and development and for capital investment, some positive effects can be expected.

The plan faces obstacles. Generally speaking, companies are presently avoiding taking new risks and are reluctant to borrow money. Meanwhile, banks are inclined to use their funds to buy national bonds. Since the BOJ cannot judge the prospects for individual enterprises, the banks' role will be critical to the success of the new loan plan. They must strive to find companies that need funding for innovative projects that have a strong chance of being commercially successful.

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