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The Bank of Japan (BoJ) has begun new financing for banks that are estimated to reach 30 trillion yen (US$ 280 billion) to help them make loans to companies affected by the coronavirus pandemic.  The new measures aim to strengthen the government’s financial aid. However, in the long run, these Bank of Japan actions could lead to a prolonged recession.

The central bank said it plans to make zero-interest loans for up to a year to banks participating in a government lending program. This program provides funds for smaller companies without money, without interest and also without guarantees.

The BoJ will effectively subsidize banks by applying a positive interest rate of 0.1% to deposits kept at the central bank, based on the amount of loans granted by the new program.

Pandemic-related bankruptcies have increased rapidly in recent months in Japan. About 174 companies declared bankruptcy on May 21 related to the pandemic, according to Teikoku Databank.

At recent meetings, the BoJ has expanded its purchases of stocks, corporate bonds and commercial paper in an attempt to support corporate financing. It had also promised to buy unlimited government bonds to keep interest rates low.

B0J’s policy board decided to keep its short-term interest rate target at less than 0.1% and its target for ten-year government bond yields around zero.

Bank of Japan and the risks of a prolonged recession

The BoJ initiative reinforces the movement to increase public spending promoted by several nations to combat the pandemic of the new coronavirus. The increase in public spending should lead to an increase in the debt of countries, and as a consequence, increasing the risks of downfalling their economic fundamentals. In addition, the BoJ maintains its stock buying policy, which artificially raises the price of the papers. A possible need for an interest rate hike due to increased risk could bring corporate valuation down and cause a big fall in stocks. In this context, the mechanism for injecting more resources into the economy will lose its effectiveness and could cause a major recession.

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