Japanese bank lending fell in February from a year earlier, matching the largest drop in more than four years and casting doubt on the effectiveness of central bank policy in fighting deflation as firms saddled with excess capacity refrain from fresh borrowing.
The Bank of Japan (BoJ) may soon mull expanding its cheap short-term funding scheme for commercial banks as a way to fight price falls, but the overall lack of demand to borrow money could stymie its efforts and drag the economy into a liquidity trap.
The 1.5 per cent decline in bank lending is likely to spur the government into pressing the BoJ for a sterner response to deflation.
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