Small businesses in Japan are having severe cash-flow difficulties, even though the Bank of Japan is pumping plenty of money into the banking system. This is because debt-burdened banks are following restrictive lending practices. In an unprecedented move to help those cash-strapped companies, the central bank's policy board has decided to study the feasibility of purchasing securities backed by small-business assets directly from the market.
The decision reflects an anomalous monetary situation. Short-term interest rates are virtually zero, while yields on 10-year government bonds -- a benchmark for long-term interest rates -- are hovering below just 1 percent. Private banks' reserves with the central bank -- ready cash set aside for day-to-day banking transactions -- are well beyond the upper limit of 22 trillion yen.
In spite of all this, the economy remains in the doldrums. Simply put, the super-easy monetary policy is not working as it should. Deflation -- the continuous decline in the prices of goods and services -- appears to be worsening. One major reason for this is that the credit pipeline from lenders to businesses is clogged. In particular, small businesses are bearing the brunt of the credit squeeze.