19 Feb 2009
Feb. 19 (Bloomberg) -- The Bank of Japan said it will buy 1 trillion yen ($10.7 billion) in corporate bonds from financial institutions and extend lending programs to prevent a shortage of credit from deepening the recession.Governor Masaaki Shirakawa and his colleagues said the bank will buy bonds rated A or higher from March 4 to Sept. 30, the central bank said in a statement in Tokyo today. The board kept the overnight lending rate at 0.1 percent in a unanimous vote.
The recession is making it difficult for companies to raise finance by selling debt or shares, and banks are struggling to meet an increase in demand for loans. The cost to protect Japanese corporate debt against default soared to a record this week on concern bankruptcies will increase after the economy shrank last quarter by the most since the 1974 oil shock.
"So far the scale of asset purchases has been fairly modest, but at least a framework has been established that could be developed into a more ambitious program," said Julian Jessop, chief international economist at Capital Economics Ltd. in London.
The central bank said it will extend programs to buy commercial paper and provide unlimited collateral-backed loans to financial institutions until September and continue accepting lower-rated assets as collateral until December.
Buying Stocks
The yen traded at 93.36 per dollar at 2:22 p.m. in Tokyo from 93.46. The currency's 15 percent gain in the past year has eroded the value of exporters' sales made abroad. The yield on Japan's 10-year bond rose one basis point to 1.265 percent.
Earlier this week, the bank said it will resume buying stocks owned by lenders on Feb. 23, a step it took between 2002 and 2004, to help them replenish capital and lend more.
Exporters are losing money as demand collapses and the yen rises. Nissan Motor Co., facing its first loss in nine years, plans to tap European capital markets, win government loans and sell real estate to maintain cash. The automaker has been "burning cash in the first nine months," Chief Financial Officer Alain Dassas said in an interview yesterday.
While the central bank is attempting to channel funds to companies, the government is doing little to spur demand. Political gridlock has delayed the implementation of a 10 trillion yen stimulus package. Finance Minister Shoichi Nakagawa's resignation this week amid lawmakers' accusations he was drunk at a Group of Seven briefing has further damaged Prime Minister Taro Aso's administration.
Weak Government
The government's weakness makes it unlikely there will be a "major fiscal expansion financed by central bank purchases of government bonds," Jessop said.
Gross domestic product shrank at an annual 12.7 percent pace last quarter, more than twice as fast as declines in the U.S. and Europe, as exports plunged the most on record.
Policy makers added a sentence to today's statement saying the bank must watch "the risk of a decline in mid- and long- term inflation expectations of firms and households." The board predicts consumer prices will start falling in the next few months.
The economy may suffer an even bigger contraction in the current quarter, Kazuo Momma, the central bank's chief economist, said this month. Economic and Fiscal Policy Minister Kaoru Yosano, who took over Nakagawa's job, this week said Japan is going through "the worst postwar economic crisis."
"There is a high chance that the central bank will be forced to extend more support for the economy through steps such as buying more debt of the government, which will need to pay for fiscal stimulus measures," said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo.
‘Would Do Little'
Governor Shirakawa's next moves may include adding stocks as eligible collateral and increasing monthly government bond purchases from 1.4 trillion yen, economists said. Analysts are divided on whether he will resort to lowering rates to zero.
"A cut in the key rate would do little to boost growth but would at least show the central bank's commitment to shoring up the economy," said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo.
Others said the policy board will try to avoid a reduction because cutting rates would make it unprofitable for investors to trade in the money market.
"Lowering the benchmark rate to zero is unacceptable to Governor Shirakawa, who's called for the importance of protecting the financial-market mechanism," said Masaaki Kanno, chief economist at JPMorgan Chase & Co. in Tokyo and a former central bank official.
The low-rate policy is already impairing money-market trading. Lenders are hoarding cash at the central bank because it pays 0.1 percent on their excess deposits there, the same as the benchmark borrowing cost. The central bank said today that it will keep paying that interest until Oct. 15, extending a program that was due to end on April 15.
"The payment of interest on reserves has encouraged financial institutions to park spare cash at the central bank rather than use it to increase lending or buy assets," said Capital Economics' Jessop.
