By Makiko Yamazaki
TOKYO, May 11 (Reuters) – Private-sector members of Japan’s key economic advisory panel urged the Bank of Japan on Monday to be cautious about the risk of funding strains on smaller firms from prolonged tensions in the Middle East.
The proposals, submitted to the Council on Economic and Fiscal Policy (CEFP), effectively call for caution in policy normalisation even as the BOJ has signalled a near-term rate hike on inflation risks stemming from the Iran war.
The council oversees Japan’s fiscal blueprint and long-term economic policies.
“We expect the BOJ to conduct appropriate monetary policy while closely monitoring price developments, including inflation expectations, and taking into account trends in supply and demand for funds across financial markets,” the four private-sector members said in a statement.
While there are no clear signs of financing strains on small and midsize firms right now, the members cited concerns that higher energy costs and supply disruptions could potentially increase funding needs at those companies.
Bracing for prolonged supply shocks, companies have already been scrambling to secure cash as a precaution. According to BOJ data, contracts for commitment lines, which allow companies to borrow from banks within a pre-agreed limit, rose by 2.5 trillion yen ($16 billion) in March, the largest monthly increase since May 2020 during the COVID-19 pandemic.
The BOJ kept interest rates steady last month, but dropped strong signals about the chance of a hike as soon as June due to growing concern that higher energy costs could push up inflation, leaving it behind the curve.
Analysts say the slow pace of rate hikes is behind the yen’s persistent weakness, which is turning into a policy nightmare for authorities as it ramps up the cost of imports from crude oil to food.
But higher interest rates could also translate into increased debt servicing burdens particularly at small and midsize firms that tend to rely more heavily on bank lending and often have thinner cash buffers.
The four private-sector members, two of whom are seen as reflationist aides of Prime Minister Sanae Takaichi, also stressed the importance of close coordination between the BOJ and the government.
In addition, the members recommended that the government use a range of indicators on fiscal conditions rather than relying on a single gauge, moving away from Japan’s long-standing focus on the primary balance as the main measure of fiscal discipline.
($1 = 156.6500 yen)
(Reporting by Makiko Yamazaki; Editing by Kim Coghill)
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