BOJ cuts Japan growth forecast, unveils climate scheme plan

© Reuters. FILE PHOTO: A Japan yen note is seen in this illustration photo taken June 1, 2017. REUTERS/Thomas White/Illustration/File Photo

By Leika Kihara and Daniel Leussink

TOKYO (Reuters) -The Bank of Japan cut this fiscal year's growth forecast on Friday but maintained its view the economy was headed for a moderate recovery, a sign that monetary policy will be in a holding pattern for some time.

The central bank also edged a step closer to uncharted territory by laying out details of a new scheme aimed at funding activities for combating climate change.

Under the scheme to be launched this year, the BOJ said it will offer zero-interest loans that can be rolled over until 2030 to banks that boost lending for green and sustainable projects. The BOJ said it will also include "transition finance", or lending to help polluting firms shift to greener operations, among loans eligible for the scheme.

While the banks will not be paid interest incentives for tapping the scheme, a bigger portion of their deposits parked at the BOJ will be exempt from negative interest rates.

"Aside from what governments and parliaments do, we debated what central banks can do on this front. The biggest issue was how much we should do as a central bank, and what we can do," BOJ Governor Haruhiko Kuroda told a news conference.

As widely expected, the central bank left its yield curve control (YCC) target unchanged at -0.1% for short-term interest rates and 0% for 10-year bond yields at its two-day rate review that ended on Friday. It will also continue to buy assets such as government bonds and exchange-traded stock funds (ETF).

In fresh quarterly projections released on Friday, the BOJ said it expects the economy to expand 3.8% in the current fiscal year ending in March 2022, down from 4.0% projected in April.

But it revised up its growth forecast for next fiscal year to 2.7% from 2.4% on expectations that consumption will pick up as vaccinations accelerate.

"Japan's economy is likely to improve ... as the pandemic's impact gradually subsides due to progress in vaccinations," the BOJ said in a quarterly report.

"But the outlook is highly uncertain as domestic and overseas economies could be swayed by developments regarding the pandemic," it said.

The BOJ sharply revised up its consumer inflation forecast for the current fiscal year to 0.6% from 0.1% due in large part to recent rises in energy costs and commodities prices.

GREEN SHIFT

Separately, the BOJ also said it would start buying green bonds using its foreign reserves.

The BOJ's new green push showed it was now focusing on issues beyond the pandemic, said Capital Economics Senior Japan Economist Marcel Thieliant.

"While the Board is under no illusion that it will hit its 2% inflation target anytime soon, it has nonetheless scaled back policy support in recent months," Thieliant said.

"Indeed, the Bank has now shifted from crisis mode towards addressing long-term structural issues," he added.

A resurgence in infections has led the government to impose a new state of emergency in Olympic host city Tokyo less than two weeks before the Games, dashing policymakers' hope of a strong rebound in growth during the quarter.

Japan's economy shrank an annualised 3.9% in January-March and likely barely grew in the second quarter, as the pandemic took a toll on consumer spending.

Analysts polled by Reuters now expect the economy to grow 4.2% in the current quarter, lower than an estimate they made last month, due the hit from new pandemic curbs.