Against such a backdrop, the Bank has decided to begin exploring specifically the provision of subordinated loans to the banks that are subject to international capital standards. This measure aims at ensuring the smooth functioning of financial intermediation and the stability of Japan’s financial system, by enabling Japan’s banks to maintain sufficient capital bases even in severe financial and economic environments.
This is undesirable, because it could undermine a central bank’s credibility and independence. On the one hand, a government guarantee to cover potential losses would protect a central bank’s financial position. But, if the government has to invoke this guarantee, the fiscal dimension of monetary policy becomes very visible, and the previously solid line between fiscal and monetary policy will be blurred.