By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) – Japan’s central bank is bracing for a protracted battle against the coronavirus pandemic as a second wave of infections cannot be ruled out, governor Haruhiko Kuroda said on Tuesday, signalling its readiness to top up monetary support.
The Bank of Japan stuck to its view that the world’s third-largest economy will gradually recover as the pandemic subsides in the latter half of the year, suggesting it has taken enough steps for now.
But the central bank increased the nominal size of its lending packages for cash-strapped firms to $1 trillion from about $700 billion announced last month.
“We can’t rule out the risk of a second wave of infections,” which would add to concerns over the surging number of cases in emerging economies, Kuroda told a news conference.
Such uncertainties over the pandemic cloud Japan’s economic outlook and may force the BOJ to extend its crisis-response tools beyond the current March 2021 deadline, he said.
“If the need for our support diminishes, we can ponder an exit. But we are ready to keep these supports in place for quite a long time,” Kuroda said.
In a widely expected move, the BOJ maintained its yield curve control targets at -0.1% for short-term interest rates and 0% for long-term rates.
At Tuesday’s rate review, the central bank also made no major changes to its programmes to ease corporate funding strains, including a lending facility aimed at channeling funds to firms.
The amount of money to be pumed out via the programmes will likely reach 110 trillion yen ($1 trillion), higher than an estimate of 75 trillion yen made in May, due to an increase in loans eligible for government guarantees.
KURODA PLEDGES MORE
The BOJ is among a host of major central banks that have pumped trillions of dollars into financial systems to support businesses hit by the coronavirus pandemic.
Kuroda said the BOJ was ready to expand the size of the lending programmes, or take other means to support the economy such as cutting interest rates and ramping up asset buying.
“Given uncertainty on how the pandemic could affect our economy and markets, we may need to ponder new measures. We’ll respond flexibly,” he said. As of Tuesday, Japan had 17,601 infections with 929 deaths.
The BOJ eased policy in March and April, pledging to buy more assets, gobble up unlimited amounts of government debt and create lending facilities to channel money to firms.
The moves accompanied the government’s announcement of two stimulus packages worth a combined $2.2 trillion.
Kuroda said Japan had lost momentum toward achieving the BOJ’s 2% inflation target due to the pandemic, and conceded that inflation will remain subdued in the coming years.
Despite the governor’s dovish rhetoric, some analysts expect the BOJ to sit on the sidelines for some time.
“Fiscal policy will play a main role in responding to the virus fallout, so the central bank will continue to indirectly help the government by keeping borrowing costs low,” said Hiroshi Shiraishi, senior economist at BNP Paribas Securities.
Prime Minister Shinzo Abe declared a state of emergency in April, requesting businesses to close and citizens to stay home, a move that dealt a severe blow to consumption.
The emergency was lifted in late May, but analysts expect the economy to have contracted more than an annualised 20% in the current quarter, after having slipped into recession.
($1 = 107.4000 yen)
(Additional reporting by Kaori Kaneko and Daniel Leussink; Editing by Jacqueline Wong and Sam Holmes)