By Leika Kihara and Takahiko Wada

TOKYO, Reuters – If infections continue to decline in Japan, the Bank of Japan will consider ending its COVID-19 loan program. Sources told Reuters that this could allow the Bank to end a critical crisis-mode policy earlier than expected.

The market was anticipating that the third extension would be granted to the scheme which is due to end in March. Three people who are familiar with central bank thinking said that discussions have been preliminary and no consensus has occurred. A decision will be made before December.

Sources said that some policymakers have been considering ending the emergency program in March because of the decreasing corporate funding, falling infections, and the reopening of the third largest economy in the world.

Sources also suggested that there is concern that the banks may be using this scheme to get a bonus for tapping in rather than to pass on cash to the companies.

This is due to growing concern about the negative side effects of financial institutions paying 0.1% interest for tapping the programme. However, this does not allow them to closely examine whether or not the money is being used to help smaller businesses in dire need.

Sources said that “excepting certain sectors, corporate financing conditions have generally improved” and that the urgent need for liquidity support has waned. “What was originally intended to be an emergency measure will not last forever.”

The market would not be happy with the end of the programme, given the string of comments made by policymakers stressing that their focus will remain on the healing of the pandemic.

As economies recover from the crisis-induced slump, this move will put the BOJ in line more closely with the other large central banks.

The BOJ will support the economy even if the emergency program is ended. They will do so with huge money printing and the promise to limit long-term borrowing costs to zero.

NO SHORT-SALE

In May 2020, the BOJ launched the loan program to help cash-strapped small businesses. It was created at the height of the pandemic-driven financial market crash. Japan extended the deadline two times due to slower vaccinations and growing infections.

Sources said that some policymakers believe there is scope for ending the program, despite slowing bank lending growth and large cash reserves held by many companies after a cash crunch.

Government data shows that Japanese firms had liquid assets of 20% or more in the three-months to June. This is an increase from the 15% they held before the pandemic.

Last month, the scheme provided 78 trillion yen (or $680 billion) in loans.

Although banks tapped 22.25 trillion yen for a market operations in September, which was more than twice as much in June, the pace of their lending has continued its slowdown, raising suspicions that they are tapping the scheme solely to earn interest rewards and not to loan the money to companies.

The BOJ cannot guarantee that the program will be phased out smoothly. There are nine members on the board, with each side supporting ending the program and others who support keeping it in effect as a precaution.

Asahi Noguchi is a BOJ member and advocate for aggressive easing. He said that the BOJ may have to continue the program unless economic activity returns to levels pre-COVID.

It is also complicated by political factors.

Fumio Kishida is the Prime Minister and has promised to create a new spending package that will cushion the impact of pandemics. He also plans to concentrate on increasing wealth distribution for low-income families.

Politicians might be hesitant to end a loan program for pandemic relief, if the government continues to deal with the impact of the current health crisis.

According to a second source, “There is no rush in deciding,” and that the fate of the program was not in jeopardy. However, he added that it would be important to consider “many factors” in arriving at a final decision.

($1 = 114.0100 yen)