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As widely expected, the Bank of Japan decided to keep the benchmark interest rate steady at 0.10%. According to the central bank, Japan’s economy has been showing more and more signs of picking up. Exports to fellow Asian nations have been growing at a fast pace, which has encouraged businesses to invest. Although still very weak, their labor sector has also showed improvement.

What makes yesterday’s statement different from all the previous ones was the announcement of a brand spankin’ new loan tool. I don’t know about you but this just sounds like another form of good ol’ quantitative easing to me!

You see, Japan has been suffering from deflation for quite a long while now and the recent rise of the yen isn’t helping their cause. With their economy still in recovery mode, the BOJ believes that Japan could use a bit more stimulus.

Instead of using old fashioned monetary policy tools to tackle these problems, the BOJ decided to try out a fresh move. Central bank officials unveiled their new loan facility targeted to boost lending to firms in growing industries, such as health care and energy. Under this so-called “new” lending scheme, the BOJ is willing to lend up to 3 trillion JPY. With this loan scheme, the BOJ could ensure that the additional funds are directed to companies that have a high potential for driving up economic growth.

The question tickling my monetary policy analysis bone is this: What will this new program mean for the yen and will it actually work?

Such quantitative easing measures, including those that are very similar in structure, are intended to stimulate the economy and could eventually lead to inflation. Take note that inflation makes a currency cheaper because it decreases the currency’s purchasing power. This new credit facility could keep the yen weak, which is exactly what the BOJ wants! Remember, a cheaper currency helps boost exports because it would make Japanese goods more affordable as compared to those from other nations.

Of course, the program could help the economy by simply providing more liquidity in the credit markets. While the intended effect remains the same as more conventional quantitative easing measures, I’m not so sure the process will be as simple.

The selection of who actually gets to have their hands on additional credit will depend largely on the judgment of financial institutions. If they choose the wrong companies to give the credit to, it could undermine the whole program as it would restrict additional funding for companies with more potential. If this is the end result, it would make the facility totally useless. Of course the BOJ would be careful not to let that happen, right?

At the end of the day, it’s all about the correct allocation of funds. If only the BOJ could find a way to get the funds in the hands of the right companies, then we just may see Japan crawl out of its deflation rut.