TOKYO, June 15, 2010 (AFP) - Japan's central bank on Tuesday kept its key lending rate unchanged at 0.10 percent, as widely expected, and announced details of a 3 trillion yen loan scheme to boost growth.
In a statement it said "Japan's economy shows further signs of moderate recovery", but added that raising the potential economic growth rate and productivity was its "most critical challenge".
To address this, the bank announced a temporary low-interest lending scheme, the total amount of which would not exceed 3 trillion yen (US$33 billion.)
"Aiming to rid Japan's economy of deflation and achieve sustainable growth with price stability, the Bank has been examining ways in which it can contribute in this regard," it said in a statement.
The Bank of Japan will make low interest funds available to private banks to lend to companies, a move it hopes will in turn encourage firms to make longer-term business investments in a bid strengthen the economy.
The BoJ said each participating bank will be able to borrow a maximum of 150 billion yen at an interest rate equal to the central bank's key lending rate on the day of disbursement, which is currently 0.10 percent.
"As for financial institutions that utilise the measure, the Bank expects that they will utilise the fund-provisioning measure appropriately and effectively, taking it as an opportunity to expand lending and investment to businesses that will contribute to raising productivity or creating new demand," it said.
The central bank said it would aim to start providing funds by the end of August, stressing that it would not directly involve itself in fund allocation to firms and industries to ensure "smooth conduct" of its operations.
The loan scheme will target 18 sectors including healthcare, environment and energy, tourism, science and technology as well as agriculture, forestry, and fisheries, the bank said.
Pressure on the central bank is expected to rise as Japan's new government puts fiscal discipline at the heart of its agenda in a bid to repair the country's tattered finances and slash the world's biggest public debt pile.
Crippling deflation and weak domestic demand continue to weigh on growth as consumers defer purchases, while Japanese exporters driving the country's recovery from recession are seeing overseas profits eroded by a stronger yen.
Prime Minister Naoto Kan said in parliament Monday that the government and the central bank will work together in an effort to crush deflation. Investors and households are anticipating a government announcement later this month over a long term growth strategy as well as a fiscal framework that will include debt reduction targets.