Has BOJ policy failed?

Has the BOJ failed?

Japanese bank lending dropped for the third consecutive month and matched the largest drop in more than four years, sparking concerns over the effectiveness of the Bank of Japan's (BOJ) policy on fighting deflation.

The most concerning thing for the Japanese economy is that it is the smaller firms, who employ a significant chunk of the nation's workforce, that are refraining from borrowing.

As a result the BOJ are considering expanding a cheap short-term funding scheme for commercial banks to help them fight price slumps. However such a drop in demand for borrowed cash could seriously destabilise the nation's economic infrastructure leaving it vulnerable to a liquidity trap.

Sterner response to deflation

The 1.5 percent decline in bank lending is likely to spur the government into pressing the BOJ for a sterner response to deflation. Prime Minister Yukio Hatoyama (pictured) needs to look proactive on economic policy before an upper house election expected in July as his approval ratings are slipping.

This is likely to force Japan's increasingly unpopular Hatoyama, into being proactive in his economic policy in an effort to stimulate support before a possible upper house election in July.

"The data shows a lack of (funding) demand from small and mid-size enterprises. The economic recovery is helping big companies that export, but this is not spreading to SMEs," said Seiji Adachi, senior economist at Deutsche Securities in Tokyo.

Japan's recovering economy

"We need to raise overall growth. The government is trying to do its part with fiscal policy, and the best thing is for the BOJ to finance some of that spending."

In December, the central bank decided to offer banks up to 10 trillion yen (US$155 billion) of three-month funds at 0.1 per cent interest, caving in to pressure from the government for more action to fight deflation and support the economy.

In general the Japanese economy has benefitted from an upturn in global trade flow but it would appear this money is to filter through the system down to the smaller companies, who export far less than big firms, but remain essential to Japan's recovering economy.

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Daniel Jones

Daniel is a Politics and Philosophy graduate from Cardiff University where he also worked as a section editor on the award winning student newspaper. After university he joined an IT support company where he was a B2B online writer. He loves anything to do with sport and joined GDS in July 2009.

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