The BOJ has cut its growth forecast, Reuters reported on the climate scheme

By Leika Kihara and Daniel Leussink

TOKYO (Reuters) -The Bank of Japan cut its growth forecast for this year on Friday, but maintained its view that the economy will have a moderate recovery, a sign that monetary policy will be maintained for some time.

The BOJ has also released an outline of its new scheme aimed at boosting activities to combat climate change, to provide banks with long-term loans that are of no interest.

The climate scheme will be launched this year and will run until the 2030s. The BOJ will provide funds to banks that extend green loans and sustainability-related loans, as well as invest in green bonds and sustainability-related bonds. Transitional financing loans will also be applicable to the scheme.

The BOJ has said it will not pay interest incentives to banks that apply the scheme.

In its new quarterly projections released on Friday, the BOJ said it expects the economy to grow by 3.8% in the current fiscal year ending March 2022, down from the 4.0% forecast in April.

But it revised up its growth forecast for next year, from 2.7% to 2.4% as expected as consumption accelerated as vaccines accelerated.

“The Japanese economy is likely to improve … as the impact of the pandemic is gradually eroding as a result of vaccine advances,” the BOJ said in a quarterly report.

“But the forecasts are very certain, as the domestic and foreign economies could be affected by developments around the pandemic,” he said.

As expected, the central bank left its target of yield curve control (YCC) at 0.1% in short-term interest rates and 0% in 10-year bond yields in a two-day rate review that ended on Friday.

The BOJ recently revised its consumer inflation forecast for this year to 0.6%, up from 0.1%, largely due to recent increases in energy costs and commodity prices.

The BOJ’s new green scheme showed it was now focusing on issues outside the pandemic, Japan’s chief economist Marcel Thieliant Capital Economics said.

“While the Commission is not excited that it will meet its 2% inflation target, it has nevertheless reduced policy support in recent months,” Thieliant said.

“In fact, the Bank has shifted from a crisis mode to focusing on long-term structural issues,” he added.

The resurgence of infections has set the state a new state of emergency in the host city of the Tokyo Olympics two weeks before the Games, and politicians have ruled out hopes of a big rebound in quarterly growth.

The Japanese economy fell 3.9% year-on-year in January-March and is likely to have barely grown in the second quarter as the pandemic caused service spending.

Analysts surveyed by Reuters expect the economy to grow by 4.2% in the current quarter, lower than the estimate they made last month, due to the success of the new pandemic limits.