If infections in Japan continue to decline, the Bank of Japan is considering phasing out a COVID-19 lending program, sources told Reuters, potentially allowing the bank to exit a major crisis-mode policy sooner than investors think.
The program is slated to expire in March, and markets have been anticipating a third extension. Sources with knowledge of the central bank's plan of action said that policymakers have not established an agreement because conversations are still early, and a decision is unlikely before December.
However, with business financial constraints easing, infection rates plummeting, and the world's third-largest economy reopening, some policymakers are considering discontinuing the emergency program in March, the sources disclosed.
There is also concern that banks would use the system to earn a benefit for tapping in rather than passing the money on to businesses, the sources added.
This underscores a rising concern about the consequences of paying banking institutions 0.1% interest to tap the program without a thorough examination of whether the money is flowing to smaller businesses in need of cash as intended.
"With the exception of a few sectors," one source said, "business finance conditions have generally improved and the need for quick liquidity support is decreasing.... w hat was meant to be an emergency solution can't remain forever."
Given a spate of comments from authorities underlining that the bank's focus would remain on healing the pandemic's wounds, ending the program would contradict market expectations.
Economists say that as economies emerge from the pandemic-induced doldrums, the BOJ's approach would align it with other major central banks in moving away from crisis-mode policies.
Even if the emergency program is ended, the BOJ will continue to boost the economy by printing enormous amounts of money and promising to keep long-term borrowing costs at zero.
"The decision will be heavily influenced by infection levels in the coming months and the government's pandemic-relief plan, the details of which are expected to emerge in December," Mari Iwashita, chief market economist at Daiwa Securities, said.
In May last year, at the height of a pandemic-driven market collapse, the BOJ established the loan plan to distribute money through financial institutions to cash-strapped small businesses.
Slow vaccines and mounting diseases compelled Japan to maintain fiscal restraints, therefore the deadline was extended thrice.
