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BoJ Starts $13 Billion Emergency Lending Program

AP
Thursday, 8 Jan 2009 | 8:57 AM ET

The Bank of Japan said Thursday it will provide 1.22 trillion yen ($13 billion) in emergency loans to financial institutions as part of a new program to spur lending to the country's businesses.

Japan is mired in a recession with little relief in sight, and many of its major banks have tightened their purse strings, cutting back on purchases of bonds and commercial paper from domestic companies.

This can paralyze the country's businesses, which rely on such mostly short-term funding to underwrite their everyday operations.

The situation is expected to get worse at the end of the fiscal year in March, when demand for new funds increases.

Under the new program, Japan's central bank will accept bonds, commercial paper and short-term debt issued by companies as collateral and provide low-interest loans to the country's banks, hoping to encourage lending back to the companies, said Hidetsu Chida, a BOJ official.

There is no limit to the amount of loans the BOJ can provide, and it will issue the loans until the end of March in a total of six lending operations.

The interest rate for the loans is 0.1 percent, the same as the BOJ's benchmark overnight rate.

Longer-term loans typically have higher interest rates.

As the housing bubble in the U.S. burst, risky lending of mortgage-backed securities by financial institutions around the world was exposed, and many banks had to be bailed out through government intervention.

Credit markets have tightened as banks laden with bad debt refused to lend out fresh funds, and companies have found it increasingly difficult to raise the cash they need to operate.