TOKYO, May 11 - Four private-sector members of a key Japanese economic advisory panel have urged the Bank of Japan to exercise caution over potential funding stress for smaller companies as tensions in the Middle East persist. The recommendations were submitted to the Council on Economic and Fiscal Policy, which oversees Japan's fiscal plan and long-term economic strategies.
The advisers effectively advocated for a cautious approach to policy normalisation even as the BOJ has signalled a near-term rate increase in response to inflationary risks tied to the Iran conflict. In their statement, the four private-sector members said: "We expect the BOJ to conduct appropriate monetary policy while closely monitoring price developments, including inflation expectations, and taking into account trends in supply and demand for funds across financial markets."
While the advisers noted there are currently no clear signs of financing strain among small and midsize enterprises, they warned that rising energy costs and possible supply disruptions could elevate those firms' funding needs. Firms, anticipating longer-lasting supply shocks, have already been taking steps to bolster liquidity as a precaution.
BOJ figures show contracts for commitment lines - arrangements that allow companies to borrow from banks up to a pre-agreed limit - increased by 2.5 trillion yen in March. That gain represented the largest monthly rise since May 2020, a period during the COVID-19 pandemic when firms similarly sought to shore up cash.
The BOJ held interest rates steady last month, but it tempered the strength of its signals about the likelihood of a rate increase as soon as June. Officials cited concerns that higher energy costs could feed into inflation and risk leaving policy behind the curve.
Analysts cited by the advisers point to the slow pace of rate increases as a factor behind the yen's persistent weakness - a development described as a growing policy challenge because a weaker currency raises the cost of imports ranging from crude oil to food. At the same time, faster rate hikes could lift debt servicing costs, a particular worry for small and midsize firms that rely heavily on bank lending and often hold thinner cash buffers.
Beyond monetary policy, the four private-sector members - two of whom are viewed as reflationist aides to Prime Minister Sanae Takaichi - stressed the need for closer coordination between the BOJ and the government. They also urged a shift in fiscal monitoring: rather than depending on a single measure, they recommended the government adopt a range of indicators to assess fiscal conditions, moving away from Japan's long-standing emphasis on the primary balance as the principal gauge of fiscal discipline.
The advisers' proposals underline the tensions policymakers face as they balance the risks of imported inflation against financial stability concerns for smaller borrowers. Their recommendations place emphasis on vigilance in monitoring both price trends and funding flows across financial markets while urging greater alignment between monetary and fiscal authorities.