15 Jul 2009
July 15 (Bloomberg) -- The Bank of Japan extended its emergency-credit programs and cut its economic forecasts as companies struggle to borrow amid the worst postwar recession.The measures, begun this year to funnel cash to businesses, were extended to Dec. 31 from Sept. 30, the bank said today in a statement. Governor Masaaki Shirakawa and his colleagues said the economy will shrink a record 3.4 percent this fiscal year, more than the 3.1 percent predicted three months earlier.
Extending the programs of buying corporate debt from banks and providing them with unlimited loans underscores the central bank's concern that an economic rebound may be short-lived. Political turbulence ahead of Aug. 30 elections puts a bigger onus on the board to bolster the economy, said Hiroaki Muto.
Monetary policy "will provide the only major support for the economy for now," said Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. "The economy is still far from a point that would allow the central bank to scale back the programs."
The policy board also decided to keep the benchmark overnight lending rate at 0.1 percent.
Five-year government notes rose for the first time in four days, sending the yield half a basis point lower to 0.675 percent at 3:33 p.m. in Tokyo. The yen traded at 93.43 per dollar from 93.57 before the announcement.
Government Pressure
Finance Minister Kaoru Yosano yesterday urged the bank to keep buying corporate debt even as credit markets thaw. While the bank cut its forecasts for gross domestic product, it upgraded its monthly assessment of the economy, citing increases in government spending, exports and production.
"Japan's economic conditions have stopped worsening," the bank said, maintaining its view that the country will start recovering in the second half of the year ending March 2010. "Financial conditions, while remaining generally tight, have continued to show signs of improvement."
The bank had 473 billion yen ($5.1 billion) of commercial paper and corporate bonds on its balance sheet as of July 10. It began purchasing the securities this year after lowering the key rate to 0.1 percent in December.
Policy makers also offered unlimited three-month loans to commercial banks at 0.1 percent in exchange for approved collateral. The three programs have all been extended to the end of the year, and a policy of accepting a wider class of collateral was extended to March 31 from Dec. 31.
Interest on Reserves
The bank will also continue to pay interest on reserves until Jan. 15. The program, which currently pays 0.1 percent on cash parked at the central bank, was set to expire on Oct. 15.
The contraction in GDP in the year ending March 2010 would outstrip last year's 3.3 percent drop as the worst in the postwar era. The world's second-largest economy will grow 1 percent in the following fiscal year, less than the 1.2 percent predicted three months ago, the central bank said.
"The BOJ apparently wanted to impress the market by showing that it's in no hurry to exit from the current policy" and risk an increase in bond yields, said Masaaki Kanno, chief economist at JPMorgan Chase & Co. in Tokyo, who used to work at the central bank.
The Federal Reserve and the Bank of England have already taken steps toward ending emergency-credit programs amid concern that they may fan inflation. The Fed said last month it will let one lending facility expire this year and trim two others. In the U.K., the central bank decided last week to pause from purchases of government bonds at the end of July.
More Leeway
Japan's central bank has more leeway to keep its measures in place because they're smaller in scale and there is little risk of inflation taking hold, said Sumitomo Mitsui's Muto.
"The BOJ's asset purchases are focused on pretty limited areas," Muto said. "The bank has also experienced an exit in the past and policy makers won't be too nervous about their strategy."
The central bank ended an earlier quantitative easing policy in March 2006, during Japan's longest postwar expansion.
The economy probably grew for the first time in more than a year last quarter, expanding at an annual 2.4 percent pace after plunging a record 14.2 percent in the first three months, according to economists surveyed by Bloomberg News.
The revival may not be sustained as falling profits prompt businesses to trim investment and jobs and banks remain reluctant to lend to companies, the central bank's Tankan confidence survey showed this month. Bank lending grew at the slowest pace in eight months in June.
Any fillip from Prime Minister Taro Aso's 25 trillion yen in stimulus spending will wear off, said Ryutaro Kono.
"Manufacturers are boosting production to replenish inventories but this is a one-time deal, while the government's stimulus measures won't last long," said Kono, chief economist at BNP Paribas in Tokyo.
Aso called the election this week, and his Liberal Democratic Party trails the opposition Democratic Party of Japan in polls. The DPJ, which has never governed Japan, has 30.1 percent of support, more than the LDP's 24.8 percent, according to a Yomiuri newspaper poll published today.
