The Bank of Japan's loan scheme targeting growth industries drew solid demand on Tuesday, pushing its cumulative lending to just 60 billion yen ($740 million) from a 3 trillion yen cap and paving the way for debate within the board about expanding it.

The central bank will consider topping up the program as early as its next rate review in June, so that it can put it to use later this year to support Japan's reconstruction from the devastating March 11 earthquake.

But some analysts said the BOJ should focus on directly supporting the quake-hit economy rather than worrying about nurturing growth industries.

This scheme is basically a subsidy to commercial banks and isn't helping to boost bank lending much, said Takeshi Minami, chief economist at Norinchukin Research Institute.

The BOJ doesn't really have the power to decide which industry has growth potential. I think it should stick to basics, which is to support the economy with monetary policy.

The loan scheme is among a variety of programs the BOJ has put in place since last year to battle problems plaguing Japan, including the quake's damage to the fragile economy, persistent deflation and sliding potential growth.

The BOJ said on Tuesday that it would lend an additional 829.6 billion yen under the program, which offers 0.1 percent loans to financial institutions that lend to sectors with growth potential, such as environmental protection and health care.

NO BOJ CONSENSUS

The fourth tranche, to be disbursed on June 8, will bring the cumulative lending to 2.94 trillion yen, near the 3 trillion yen set aside for the program.

That limits room for the BOJ to extend loans even though it plans four more tranches before the scheme expires in March of next year.

BOJ Governor Masaaki Shirakawa has said he hoped to consider ways to enhance the scheme, put in place in June last year as a long-term approach to revitalize the economy and beat deflation, and use it for post-quake reconstruction.

But there is no consensus within the BOJ yet on how this would be done. Several ideas are being floated, including simply adding reconstruction to the list of eligible loans for the scheme, or setting up a similar but entirely new framework focusing on reconstruction assistance.

Reaching a conclusion will not be easy. Some BOJ officials are cautious about expanding the scheme, which has drawn complaints from regional lenders, such as credit unions, that it is excessively squeezing their profit margins.

There is a possibility that the BOJ will maintain the cap at 3 trillion yen or hold off on a decision until July, sources familiar with the central bank's thinking said.

With interest rates virtually at zero, the BOJ has launched various measures aimed at funneling money into the fragile economy and pulling it out of deflation.

The loan scheme targeting growth industries is separate from the BOJ's asset buying program, under which it buys government bonds and private debt.

The asset buying scheme, put in place in October last year and doubled to 10 trillion yen in March, is a direct, short-term monetary easing measure, whereas the loan scheme for growth industries is a longer-term, less direct approach to fighting deflation.

The BOJ is likely to hold off on expanding the asset buying scheme when its board next meets on June 13-14, unless a sudden market shock such as a renewed spike in the yen hurts business sentiment.

($1 = 80.955 Japanese Yen)

(Reporting by Leika Kihara; Editing by Edmund Klamann)

Japan