Bank of Japan expands lending to fight deflation

TOKYO, March 17, 2010 (AP) - Japan’s central bank is escalating the fight against deflation by offering more cheap loans to banks.

The Bank of Japan voted after a two—day policy board meeting on Wednesday to double the amount available under its short—term lending programme to 20 trillion yen ($442 billion) from 10 trillion yen.

Introduced in December, the three—month loans at a fixed rate of 0.1 percent are intended to boost liquidity and lower longer—term interest rates.

It also voted unanimously to keep its key interest rate at a super low 0.1 percent. In a statement, it pledged to maintain an “extremely accommodative financial environment” for the time being. The central bank has not changed the overnight call rate target since December 2008, when the policy board lowered it from 0.3 percent.

The central bank’s latest move comes amid growing government pressure to take stronger action to combat falling prices, which threaten to undermine Japan’s patchy economic recovery.

The world’s second biggest economy grew at an annualized pace of 3.8 percent in the fourth quarter thanks to robust exports, but that has done little to bolster demand or wages at home.

Deflation plagued Japan during its “Lost Decade” in the 1990s. It hamstrings economic growth by shrinking company profits, sparking wage cuts and causing consumers to postpone purchases. It also can increase debt burdens.

“The bank recognizes that it is a critical challenge for Japan’s economy to overcome deflation and return to a sustainable growth path with price stability,” the central bank said. “To this end, the bank will continue to consistently make contributions as a central bank.”

The government’s ability to counter deflation with increased spending is constrained because of Japan’s ballooning debt, the highest among industrialized countries and rising.

Prime Minister Yukio Hatoyama, has proposed a record $1 trillion budget for the next fiscal year starting April, which will require the government to issue some 44.3 trillion yen ($492 billion) in bonds.