BOJ to extend loan schemes to encourage bank lending - sources

By Leika Kihara

TOKYO (Reuters) - The Bank of Japan is likely to extend three special loan facilities that have provided more than $81 billion (50 billion pounds) in lending over the past three years to try to nudge Japan's risk-averse banks to create more credit, sources said.

An extension would signal the BOJ's commitment to driving funds through the banking sector to borrowers, even as it continues its unprecedented quantitative easing policy under Governor Haruhiko Kuroda to try to revive an economy that has suffered years of low-grade deflation and sluggish growth.

The central bank's policy board is expected to review the loan programmes in November or December before their expiry date of March 2014. Apart from extending them by at least a year, the board might also combine the programmes to simplify their operations, people familiar with the matter said.

"These facilities still have a key role to play," said one person familiar with the central bank's thinking. "There's no reason why they shouldn't be extended."

The loan programmes were cobbled together under former Governor Masaaki Shirakawa between 2010 and 2012 as a way for the BOJ to support bank lending, while resisting political pressure to ease what was already an ultra-loose monetary policy.

The first of the special BOJ programmes was created in June 2010 to extend funds to banks that lend to companies with growth potential, such as those in the environment and heath care industries.

Another 1-trillion-yen programme was added in 2011 to support financial institutions operating in areas struck by the devastating earthquake and tsunami in March of that year.

The BOJ added another programme in 2012 that promised to supply cheap, long-term funds to banks that boost lending by a total of around 15 trillion yen.

Under Kuroda, the BOJ aims to achieve 2 percent inflation in roughly two years. Japan's annual core consumer inflation stood at 0.8 percent in August, the highest in nearly five years, although the increase was mainly due to rising prices for imported energy.

One reason to extend the loans is that only part of the available funds have been taken up, reflecting years of weak demand by borrowers. Just over 8 trillion yen of the combined 21.5 trillion yen set aside under the facilities have been used so far.

Corporations sit on cash piles of more than $2 trillion in retained earnings, limiting their need to borrow funds, although there are signs that lending is picking up.

Bank lending rose 2 percent in September from a year earlier to mark nearly two straight years of increases. Lending by major banks grew at the fastest pace in four years in August.

But a benchmark 10-year government bond yield of just 0.6 percent reflects how domestic banks continue to prefer the safety of Japanese government bonds to the risk of lending.

The loan programmes have a role to play in nudging commercial banks into lending more to higher-risk businesses, the sources said.

But BOJ policymakers might disagree about how long these programmes should run and in what form, they added.

Some economists have criticised such loan schemes, along with numerous government-sponsored funds, for crowding out private financial institutions from investment opportunities.

Under Kuroda, who took up his post earlier this year, the BOJ has pledged to double the supply of money to 270 trillion yen by the end of 2014 mainly through purchases of government bonds and risky assets.

The loan schemes are not key components of Kuroda's monetary stimulus programme, so extending their deadline would not represent an expansion of monetary easing, the sources said.

(Additional reporting by Sumio Ito; Editing by Neil Fullick)