BOJ may have bigger role to play in helping firms hit by COVID-19 - Suga ally

By Kaori Kaneko and Antoni Slodkowski

TOKYO (Reuters) - The Bank of Japan may have a bigger role to play in helping firms suffering from the hit by the coronavirus pandemic, said a former economy minister with close ties to Yoshihide Suga - the front-runner to become next prime minister.

Heizo Takenaka said Japan must shift to loans from pay-outs in helping firms survive the blow from the pandemic.

"Pay-outs will leave behind a huge fiscal burden...We need to shift to support via loans," he told Reuters on Thursday.

"There may be a somewhat bigger role the BOJ can play," such as directly lending to companies hit by the pandemic, he said.

The BOJ currently has a lending facility that encourages financial institutions to boost loans to companies, but does not directly offer loans to them.

On the BOJ's negative interest rate policy, Takenaka said that while the central bank still had room to take rates deeper into minus territory, it was "hard to predict the effectiveness".

Takenaka, currently professor at Toyo University, and a member of a government panel on future investment, has the ears of Suga due to a relationship dating back to when Takenaka was a minister in charge of financial services in the early 2000s.

Takenaka's views may thus influence the economic policies of Suga, who is the favourite to become Japan's next prime minister later this month after incumbent Shinzo Abe's abrupt decision to step down.

Takenaka, who played a key role in battling Japan's domestic banking crisis in the late 1990s, said regional banks needed to adapt their business models heavily reliant on traditional lending in order to weather structural woes weighing on profits.

"They needs to rebuild their business models. Obviously, if there is legitimate competition, the number (of regional banks) would decline."

His viewpoint echoes with that of Suga, who said on Wednesday that there were too many regional banks in Japan.

Suga has said he would push forward Abe's "Abenomics" stimulus policies, but offered little clue on what specific new steps he would take to revitalise the economy.

Takenaka said the government should focus on its recent goal of promoting digitalisation in Japan, such as by setting up a temporary agency specialising in the area.

He was against the idea, floated by some lawmakers, of cutting Japan's sales tax rate from the current 10% to stimulate consumption. "Once you've raised it, it's better to offer payouts in a different form rather than trying to cut the rate again."

(Reporting by Kaori Kaneko and Antoni Slodkowski, Editing by Leika Kihara and Mark Heinrich)