BOJ May Buy Shares Owned by Banks, Yamaguchi Says

By Mayumi Otsuma

Oct. 27 (Bloomberg) -- The Bank of Japan is considering buying shares in Japanese companies owned by commercial banks, the central bank's newest board member said after the stock market plunged to a 26-year low.

``Stock prices are falling drastically and market volatility is rising, increasing the risk for financial institutions to hold shares to the point where we can't ignore it,'' Deputy Governor Hirohide Yamaguchi said in his inaugural press conference in Tokyo today. ``Regarding stock purchases, we will consider what we can do.''

Japanese companies listed on the first section of the Tokyo Stock Exchange lost 108 trillion yen ($1.2 trillion) in market value this month, undermining the nation's banks, which traditionally hold large equity stakes. Finance Minister Shoichi Nakagawa said today that he expects the central bank will consider resuming purchases of shares from banks in conjunction with the government.

The Nikkei 225 Stock Average sank 6.4 percent to the lowest since 1982 today on concern banks will need government help to restore their financial health. The gauge has lost 36 percent this month.

The Bank of Japan and the government bought about 4 trillion yen in stocks held by banks from 2002 to protect lenders' capital from being eroded by slumping equity values. The central bank started selling its stake two years ago, though it halted the sales this month as the stock market tumbled.

Rate Cut

Asked about the possibility of an interest-rate cut by the central bank, Yamaguchi said Japan's borrowing costs are already ``very low'' considering the state of the economy and prices.

Japan's benchmark interest rate is 0.5 percent, the lowest in the industrialized world. The bank will continue to set policy by examining ``upside risks'' for inflation and ``downside risks'' to the economy, he said.

The yen's ``rapid'' gains may affect trade, corporate profits and the confidence of consumers and companies and the Bank of Japan will ``carefully examine'' currency market moves when it decides policy, Yamaguchi said.

Japan's currency is trading near a 13-year high against the dollar, prompting the Group of Seven nations to issue a statement today expressing concern about its ``excessive volatility.''

The Bank of Japan will keep providing ``ample'' liquidity to money markets ``in a flexible manner,'' Yamaguchi said. The bank this month began offering lenders an unlimited amount of dollars, expanded the range of Japanese government bonds it accepts from them, and increased the frequency and size of commercial paper purchases to improve companies' access to funds.

Yamaguchi said the central bank is studying further ways to help companies obtain financing, while adding that the bank doesn't plan to buy commercial paper without repurchase agreements. Companies rely on commercial paper for daily business activities such as paying staff and rent.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net