BOJ seen scaling back pandemic-relief funding support

TOKYO: The Bank of Japan is expected to decide as early as next week to scale back emergency funding deployed last year to combat a pandemic-induced cash crunch, sources say, following other central banks in gradually phasing out crisis-mode policies.

At a two-day rate review ending on Dec. 17, the BOJ is set to maintain ultra-loose monetary policy but debate whether to extend its emergency pandemic-relief programmes beyond the current the March 2022 deadline.

While details are yet to be finalised, the board is leaning toward tapering the BOJ's corporate bond and commercial paper purchases given sharp improvements in big firms' funding conditions, four sources familiar with its thinking said.

Another funding scheme targeting smaller firms may be scaled back, too, though a portion of it could be extended beyond March to keep supporting retailers still struggling with weak consumption, they said.

The decision will be a close call and could be delayed until January if the spread of the Omicron coronavirus variant heightens uncertainty over a fragile economic recovery, they said.

"The programmes were intended to be emergency steps, so they must end at some point," one of the sources said. "The timing of doing so is tricky with Omicron clouding the outlook," another source said. All of the sources declined to be named as they were not authorised to speak publicly.

There is no consensus yet on the final decision, which will depend largely on whether the spread of Omicron disrupts markets or forces the government to take tighter curbs on activity.

Policymakers will scrutinise the BOJ's "tankan" business sentiment survey, due on Monday, for clues on whether corporate funding strains have eased enough to warrant scaling back crisis-mode funding support, the sources said.

If Omicron developments increase risks around the outlook, the BOJ may delay the decision to its next meeting on Jan. 17-18, they said.

As part of efforts to deal with a cash crunch caused by the pandemic, the BOJ last year ramped up corporate bond and commercial paper purchases, and introduced a loan scheme aimed at channeling funds to cash-strapped smaller firms.