TOKYO (Reuters) ? The Bank of Japan on Tuesday kept monetary policy on hold but expanded a loan scheme targeting growth industries, keeping up efforts to address chronic ills that have been plaguing the economy even before a devastating earthquake struck in March.
The central bank reiterated its forecast that the world's third-largest economy should resume a moderate recovery before the end of the year despite recent signs of a global slowdown.
It also sounded less concerned than last month in describing current economic conditions, reflecting the steady progress manufacturers are making in restoring production and supply chains which were disrupted by the March 11 quake and a tsunami.
"Japan's economy is under downward pressure, mainly on output, due to the quake's impact but showing some signs of picking up," the central bank said in a statement after its regular policy review.
It said last month that the economy was under strong downward pressure.
As widely expected, the central bank, which eased policy by doubling asset purchases days after the March 11 disaster, held fire on the asset plan and kept interest rates in a 0-0.1 percent range.
It added 500 billion yen ($6 billion) to its 3-trillion-yen loan scheme aimed at encouraging banks to lend to industries with growth potential.
The new money would be offered under a new credit line for banks that lend against inventory and receivables as collateral. That would make funds more available to small firms that do not own property -- a standard collateral for bank loans.
The scheme is part of a long-term effort to nurture economic growth, which is being weighed down by an aging population, low productivity and grinding deflation, but the funds be also used to help rebuilding after the quake, expected to start in earnest in autumn.
TOO OPTIMISTIC?
The decision to top up the loan scheme briefly weakened the yen but market players dismissed the impact as short-lived given the small amount involved.
Some analysts also warned that the BOJ may be too optimistic about the outlook and should focus on propping up near-term growth rather than worry about Japan's long-term problems.
"The truth is there are more reasons to be concerned about the outlook than to be optimistic. Reconstruction demand isn't coming as soon as many people were expecting, which we saw in weak machinery orders data," said Tetsu Aikawa, deputy general manager of capital markets at Shinsei Bank in Tokyo.
One concern is that reconstruction spending may get delayed, given Prime Minister Naoto Kan's struggle to stay in power and prepare a second extra budget that could get passed in a parliament where the opposition controls the upper house.
Japan is slowly emerging from its worst crisis since World War Two after the magnitude 9.0 earthquake and ensuing tsunami hit its northeast coast on March 11, triggering meltdowns at a nuclear power plant and pushing the economy into its second recession in three years.
Shortages of electricity could disrupt some manufacturing activity in the summer, but companies have been making progress in restoring lost production and mending supply chains.
That has led the BOJ and many analysts to believe that the economy was poised for a gradual recovery later in the year.
A government survey of big Japanese manufacturers supported the recovery scenario. While business sentiment dived in the April-June quarter, firms ramped up capital expenditure plans for the fiscal year that started in April.
Under the loan scheme targeting growth sectors in place since June last year, the BOJ offers 0.1 percent, one-year loans to banks that lend to 18 industries with growth potential such as clean energy and nursing care. The loans can be rolled over three times, so banks can lend for up to four years.
It is the BOJ's long-term approach to beat deflation and is separate from its asset buying program, introduced in October 2010 as a direct, short-term monetary easing measure.
To encourage banks to extend longer-term loans, the BOJ will offer two-year loans to banks that lend to such firms under the new credit line. The loans can be rolled over once, meaning banks can borrow from the BOJ for up to four years.
($1 = 80.225 Japanese Yen)
(Additional reporting by Rie Ishiguro; Editing by Tomasz Janowski)
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