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Japan's central bank increases cheap loans to boost lending

The Bank of Japan has doubled the amount of cheap short-term loans avaliable to banks.

Escalating its fight against deflation, the Bank of Japan has increased stimulus measures to encourage more lending by financial institutions.
After a policy board meeting, the central bank decided to double the amount of cheap short-term loans available under its short-term lending program from 10trn to 20trn yen (£146bn).

The scheme, introduced in December, lends money for three-month loans at a fixed rate of 0.1 per cent to boost liquidity and lower longer-term interest rates. In a statement, the bank vowed to maintain an "extremely accommodative financial environment" to tackle the deflation that is undermining Japan's economic recovery.

Data shows that Japan's economy grew by a less-than-estimated 3.8 per cent in the final quarter of 2009. The Japanese government is constrained to counter deflation with increased spending because of ballooning debt in the world's second biggest economy. Prime Minister Yukio Hatoyama has proposed a record $1trn budget for the next fiscal year, which starts in April. The move will require the issuance of about 44.3trn yen (£325bn) in bonds.

The Japanese economy has a history of struggling with deflation. The 1990s are often referred to as Japan's "lost decade" because of its 10-year struggle with falling prices.