In the Bank of Japan’s rate review meeting held in July, some board members cautioned that a resurgence in coronavirus infections could cause the Japanese economy to take longer to recover and even destabilize the banking system by driving more businesses towards bankruptcies. BOJ policymakers were in agreement about the need for further stimulus but with profits of financial institutions declining, banks have lesser capacity to boost lending and support the economy.

The minutes offer key insight into the possible threats to economic recovery in Japan, with board members observing, “Infection numbers are increasing at a faster pace globally, so we need to be on alert of the possibility of a re-insurgence including in Japan. If infection numbers rise again, the timing of an economic recovery will be delayed.”

The BOJ had elected to hold its monetary policy unchanged, with short term interest rates -0.1% and government bond yields at around zero. Earlier this year, when the pandemic initially spread around the world, the central bank had resorted to easing its policy through higher asset purchases and rolling out lending to support corporate funding.

Although it has one of the loosest policies, some board members of the BOJ have backed the need for more easing, in order to ease funding strains. But with limited tools available, will the central bank be able to do more to boost economic recovery?