Japan: Special Funds-Supplying Operations

The Bank of Japan responded to the COVID-19 economic downturn in March 2020 with several financial stability interventions. The Special Funds-Supplying Operations to Facilitate Financing in Response to the Novel Coronavirus (COVID-19) (SFSO) offered interest-free loans of up to one year in maturity to eligible financial institutions in an attempt to encourage broader lending to Japanese businesses and households. Counterparties could pledge as collateral a broad range of corporate and private debt, including corporate bonds and asset-backed securities. Enhancements made throughout the program's operation led to substantial increases in SFSO use. First, the BoJ expanded institution and collateral eligibility, as well as maximum lending limits, to encourage SFSO-eligible financial institutions to increase lending to small and medium-sized enterprises (SMEs) and households. Second, the BoJ said it would pay a positive interest rate on a portion of a financial institution's balances with the central bank, corresponding to the amount of its outstanding SFSO loans. Third, the BoJ essentially reduced the amount of reserves financial institutions held with the central bank at negative interest rates. These provisions meant that the BoJ effectively paid banks to use the new facility. SFSO lending to a broad range of financial institutions, including regional banks and financial cooperatives, totaled JPY 64.8 trillion (roughly USD 0.6 trillion) as of year-end March 2021, helping spur active lending to businesses.