BoJ To Buy More Corporate Bonds

From the Financial Times:

The Bank of Japan stepped up measures to help embattled companies weather the credit crisis, unveiling plans to buy up to Y1,000bn in corporate bonds and extend its purchases of other assets in an acknowledgement that Japan’s economic downturn would last longer than it had initially expected.

The BoJ said it would buy corporate bonds rated A and higher from financial institutions as well as extend its programme to buy commercial paper and provide unlimited collateral-backed loans to financial institutions, but kept its key policy rate unchanged at 0.1 per cent.


“Economic conditions have deteriorated significantly and are likely to continue deteriorating for the time being,” the BoJ said in a statement, adding that Japan was likely to see prices falling by the spring.

Although the central bank continues to predict that the Japanese economy will start recovering from the latter half of fiscal 2009, “uncertainty is high,” it said.

The gloomy assessment follows the release of data earlier this week showing the Japanese economy was in its worst slump in 35 years.

Japan’s gross domestic product contracted sharply in the third quarter, by a seasonally adjusted 3.3 per cent, as export demand evaporated.

However, the Japanese government has been paralysed by political instability following the sudden resignation of the finance minister on Tuesday, which has hardened the political opposition’s stance against passage of the 2009 budget.

The central bank’s move, which was widely anticipated, failed to ease concerns about the outlook for the Japanese economy.

“There were no surprises,” said Masaaki Kanno, chief economist at JP Morgan in Tokyo.

The BoJ’s moves have had somewhat of an impact, “but this is not going to solve (companies’) credit problems,” he said.

The latest measures come on the heels of the BoJ’s decision to buy a total of up to Y3,000bn in commercial paper by the end of the fiscal year, increase its purchases of government bonds and accept corporate bonds issued by real estate investment trusts as collateral for loans to financial institutions.

The central bank has also re-introduced a stock purchase programme under which it will buy up to Y1,000bn in shares held by financial institutions.

Analysts, including the central bank’s own chief economist, expect the Japanese economy to suffer another large decline in the fourth quarter as well, prompting calls that the BoJ needs to do more to support the economy.

“We fear that Japanese policymakers will continue to do too little, too late,” said Julian Jessop, chief international economist at Capital Economics.

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 board kept the overnight lending rate at 0.1 percent in a unanimous vote, it said in a statement in Tokyo today.

The recession is making it hard 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.

Suda Opposes

The yen traded at 93.59 per dollar at 3:59 p.m. in Tokyo from 93.46 before the announcement. The currency’s 17 percent gain in the past six months has eroded the value of exporters’ sales made abroad. The yield on Japan’s 10-year bond rose half a basis point to 1.26 percent.

Board member Miyako Suda opposed the plan to buy corporate bonds, the central bank said. The bank will purchase as much as 1 trillion yen of bonds with maturities of up to one year at competitive auctions with minimum set yields. About 5 trillion yen of those securities are outstanding in Japan, and about 90 percent of them are rated at least A, the bank said. Overall corporate bonds in issue total 44 trillion yen.

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.

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.

Political Gridlock

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.

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.

Worsen Further

The central bank said the economy is likely to keep worsening for now, and that “uncertainty is high” over whether it will start to recover around the last quarter of 2009 as forecast. 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.”

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.

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.