BOJ to create fund scheme to backstop government during crises

PHOTO: BOJ to create fund scheme to backstop government during crises

TOKYO - The Bank of Japan will create a new scheme to extend funds to the government when a natural disaster or other crises prevent it from issuing enough bonds, giving the government more room to lean on the central bank's printing press in times of emergency.

The government approved on Tuesday a US$1.02 trillion (S$1.26 trillion) draft budget for the next fiscal year that aims to nudge tax revenues above new bond sales for the first time in four years, but still relies on borrowing to cover 46.3 per cent of its spending.

It plans to rein in new bond issuance at 42.8 trillion yen (S$583 billion), below this year's 44.2 trillion yen initial target, despite increases in public works spending to revive the ailing economy.

In doing so, it tapped 7 trillion yen from a 10-trillion-yen pool of funds it sets aside for bond redemption and as a backstop for when a sudden crisis - such as a severe natural disaster or a computer system glitch - disrupts financial markets and prevents the government from selling enough bonds.

That leaves it with just 3 trillion yen to safeguard against the risk of defaulting on its debt.

The BOJ will thus create a substitute framework, under which it will extend single-day funds to the government when it faces difficulty raising enough funds from the market, the central bank said in a statement on Tuesday.

The government can borrow from the BOJ at an interest slightly higher than the yield for three-month treasury discount bills at the time, and ask the central bank to roll over the loans for as long as necessary.

The BOJ will not set a ceiling to the amount the government can borrow under the scheme, making it vulnerable to keep printing money to help it finance spending in times of crises.

The central bank said it will put the new framework in place as soon as necessary preparations are made.