14 Oct 2009
Oct. 14 (Bloomberg) -- The Bank of Japan held the benchmark interest rate near zero and refrained from saying whether it would end its corporate debt purchase programs.Governor Masaaki Shirakawa and his colleagues voted to keep the key rate at 0.1 percent, the central bank said in a statement in Tokyo. The central bank became more optimistic about the economy, saying it has "started to pick up."
Shirakawa said earlier this month the need for the credit steps has diminished because companies have regained access to private funding and credit markets have stabilized, sparking speculation the bank would decide to end them as early as today. The bank may want to take more time to examine whether ending the steps will squeeze small companies, which members of Prime Minister Yukio Hatoyama's Cabinet say are struggling to borrow.
"The Bank of Japan has made it clear that it wants to end the purchase programs," said Mari Iwashita, an economist at Nikko Cordial Securities in Tokyo. "By taking time, BOJ policy makers may want to indicate they are also mindful about the yen and the government's judgment."
The yen traded at 88.99 per dollar at 1:27 p.m. in Tokyo from 89.03 before the announcement. The currency reached an eight-month high of 88.01 on Oct. 7, eroding exporters' repatriated earnings and making their products less competitive.
Since lowering rates to 0.1 percent in December, the bank started buying commercial paper and corporate bonds from lenders and offering them unlimited loans backed by collateral to channel funds to companies. The policy board extended the three plans to Dec. 31 when it met in July.
"Japan's economy has started to pick up," the central bank said. "The decline in business fixed investment, which mainly reflects weak corporate profits, has been moderating."
Pare Back Measures
Central banks around the world are moving to pare back unprecedented measures to unfreeze credit. The Federal Reserve last month said it would shrink programs that auction loans to banks and Treasuries to bond dealers. The European Central Bank said Sept. 24 it will stop its longer-dated dollar liquidity operations because of limited demand.
Australia's central bank last week raised interest rates, becoming the first country in the Group of 20 nations to boost borrowing costs since the start of the financial crisis. The Reserve Bank of New Zealand said today it is removing some of the liquidity facilities put in place last year.
"The financial environment, with some lingering severity, is increasingly showing signs of improvement," the Bank of Japan said, reiterating language used in last month's assessment.
Few Lenders
Government officials have acknowledged the lack of demand for some of the BOJ's programs, while also calling on policy makers to mind that smaller companies still have difficulty raising funds. Deputy Prime Minister Naoto Kan said last week he hopes the bank will take into account the "severe" state of funding for smaller firms when it debates ending the programs.
Finance Minister Hirohisa Fujii said that few lenders have been bidding to sell corporate debt to the central bank and the future of the measures is up to the policy board. Earlier he said the bank's policies should complement the government's goals and he's confident the policy board won't do anything to undermine a recovery.
Major companies said their access to funding improved compared with three months ago, the bank's quarterly Tankan survey showed this month. Large firms' access to credit has recovered to last year's levels while small companies' funding conditions were still tighter than December, the survey showed.
Unlimited Lending
Banks are tapping the unlimited lending facility more than the programs of selling corporate debt to the central bank.
The bank lent 7.3 trillion yen ($82 billion) under the lending facility as of Aug. 31. In contrast, it had 100 billion yen of commercial paper on its balance sheet, about 3 percent of the amount it's allowed itself to hold. The bank held 200 billion yen of corporate bonds, only one-fifth of the limit set by officials. No lenders offered to sell commercial paper to the bank on two latest auctions on Sept. 18 and Oct. 9.
The central bank will probably hold interest rates near zero at least through the end of 2010, 16 of 17 economists who gave forecasts through the period said last week.
"The Bank of Japan will probably continue to indicate it remains cautious about any policy changes that would lead to a rate increase," said Masaaki Kanno, a former central bank official and now chief economist at JPMorgan Securities in Tokyo. "The bank will attempt to avert speculation that would try to factor in any rate hikes."
Despite the recent improvement in access to credit, companies are faced with a strengthening yen against the dollar that is eating into their profits just as global demand stabilizes. Japan's currency has advanced 11 percent against the dollar in the past six months.
"We must assume companies will continue to be pretty cautious about making new investment later this year," said Chotaro Morita, chef fixed-income strategist at Barclays Capital in Tokyo. "The recent gain in the yen hasn't been reflected in companies' capital investment plans and profit outlooks."
