Central Bank's Move to Spur Loan Demand Falls Short

TOKYO—The Bank of Japan earlier this month took the unorthodox step of providing funds to the country's financial institutions in a bid to kick-start perennially sluggish lending. But the effort hasn't been a hit: Many banks say they don't expect a dramatic improvement in loan demand.

The central bank has made up to three trillion yen ($35 billion) available to commercial banks at a rock-bottom 0.1% interest rate. In return, the banks are required to make new low-interest loans to companies in growth sectors the central bank has designated, such as environment-related businesses and nursing care. Although banks are eager to lend and some companies have tried to draw on the program, many others remain reluctant to tap banks for funds, remaining cautious about borrowing because of concerns over the economic downturn and a strong yen.

The central bank's move was considered a last resort designed to spur lending, which has been declining year on year for nine consecutive months. The bank was also facing pressure from the government to take action to help bring the economy out of deflation.

The central bank hoped the low-cost funds would act as a catalyst to stimulate economic growth. The one-year Tokyo Interbank Offered Rate, or Tibor, a benchmark for financial institutions' borrowing rates, stands at around 0.5%, compared with the 0.1% offered by the Bank of Japan.