16 Jul 2009
July 16 (Bloomberg) -- Bank of Japan Governor Masaaki Shirakawa indicated that yesterday's extension of emergency- credit programs until December may be the last as companies find it easier to raise funds and the economy begins to recover."We decided to extend the measures by three months this time, rather than six months, because financial conditions are improving and we expect this improvement to continue," Shirakawa said in Tokyo after the decision. "If this situation develops further, we will end" the programs, he said.
The central bank extended the policies of buying corporate debt from banks and providing them with unlimited loans to Dec. 31 from Sept. 30 because of severe borrowing conditions amid the country's worst postwar recession. Shirakawa said keeping the measures in place for too long could distort credit markets and drive yields on short-term securities excessively low.
"The bank is concerned about going too far with its policy," said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. "If the BOJ takes its policy too far, the expectation that conditions will stay easy will become entrenched, and that could damage the money market."
The policy board decided to keep the benchmark overnight lending rate at 0.1 percent at yesterday's meeting.
The bank began purchasing commercial paper and corporate bonds this year after lowering the rate in December. Policy makers also offered unlimited three-month loans to commercial banks at 0.1 percent in exchange for approved collateral.
‘Important Message'
The programs were initially slated to expire in March, and the board first extended them for six months to September. Economists anticipated a further half-year extension yesterday.
The shorter duration "was an important message from the bank," said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. "The bank is trying to prevent the credit-market mechanism from being distorted excessively."
The difference between three-month rates for commercial paper of the highest credit quality and treasury discount bills narrowed to 0.065 percent yesterday from 1.02 percent on Oct. 31, according to data compiled by Bloomberg.
Some companies are finding it easier to sell debt, while smaller and lower-rated firms are still struggling to get credit, Shirakawa said.
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.
Wants to End
"At heart, Governor Shirakawa probably wants to end or review the extraordinary measures as soon as possible," said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. "Exploring an exit policy too soon could spur unneeded speculation that the central bank will raise interest rates."
The central bank upgraded its assessment of the economy, saying it's "stopped worsening," and predicted a recovery will start in the second half of the year ending March 2010.
At the same time, the policy board said the economy will shrink a record 3.4 percent this fiscal year, more than the 3.1 percent predicted in April.
Gross domestic product 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.
Options Open
Shirakawa said the sustainability of growth depends on whether spending by companies and consumers picks up, and he left open the option of pushing forward the expiry of the credit programs past December.
"The uncertainty for the economy and finances remains high," he said. "If the situation doesn't improve enough, we will extend the steps again."
Economists say the rebound may falter because it's being driven by temporary factors such as inventory replenishment by companies and Prime Minister Taro Aso's 25 trillion yen ($267 billion) in stimulus spending.
