Shirakawa to `Dodge' Zero Rates, Focus on Funding for Companies

By Mayumi Otsuma

Nov. 22 (Bloomberg) -- Bank of Japan Governor Masaaki Shirakawa indicated that the central bank wants to avoid cutting interest rates to zero and will instead focus on pumping cash into the financial system to buoy the economy.

``An additional rate cut would have many adverse effects on the functioning of the money market,'' Shirakawa told reporters after his policy board left the benchmark rate at 0.3 percent yesterday, three weeks after the first reduction in seven years.

Shirakawa instructed his staff to study new ways of making money available for lending, such as accepting corporate debt as collateral, on concern that businesses are struggling to obtain funds. The bank could be forced to follow the Federal Reserve and the European Central Bank in trimming borrowing costs anyway, should the global financial turmoil prolong Japan's recession.

``Governor Shirakawa's comments strongly reveal that he wants to dodge zero rates and the central bank will seek more ways to add liquidity,'' said Seiji Adachi, a senior economist at Deutsche Securities Inc. in Tokyo. ``Even so, the bank may be forced to make another rate cut should the economy deteriorate rapidly and other central banks make deeper cuts.''

Reports this week showed the world's second-largest economy slid into a recession last quarter and exports tumbled the most in seven years in October as the global downturn choked sales of automobiles and electronics. Japan will probably shrink this year and next in the first back-to-back contractions in a decade, according to economists surveyed by Bloomberg News.

The credit crunch that hobbled lending in the U.S. and Europe has spread to Japan, as the nation's banks hoard cash on concern companies won't be able to repay debt.

Strains Reach Japan

``Strains in global financial markets are reaching Japan and investors are increasingly avoiding risks,'' Shirakawa said. ``Conditions for businesses to borrow from markets are worsening'' as credit spreads widen and companies have to cancel sales of bonds and commercial paper, he said.

The balance of commercial paper, which companies use for short-term funding, fell to 12.8 trillion yen ($135 billion) last month, the lowest since March 2002. The Tokyo three-month interbank offered rate rose to 0.839 percent yesterday, posting its biggest weekly advance since February 2007.

Shirakawa told the central bank to ``swiftly'' look at ``possible changes in the treatment of corporate debt as collateral, as well as possible ways to enhance flexibility in funds-supplying operations collateralized by corporate debt,'' according to a statement yesterday.

`Supportive Stance'

``The Bank of Japan's board showed a pretty supportive stance toward companies to help them borrow,'' said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. ``The central bank will probably try to accommodate the financial market's need for liquidity.''

Economic and Fiscal Policy Minister Kaoru Yosano, speaking after his ministry downgraded the assessment of the economy for the second straight month, said he welcomed the bank's efforts to improve companies' access to credit.

The nation's corporate bond market has closed to all but the top-ranked companies, such as Tokyo Electric Power Co. No issuer ranked below the top four investment grades has sold bullet bonds since Sumitomo Mitsui Banking Corp. on Sept. 12.

Resuming the 2001-2006 policy of keeping interest rates near zero percent may have the perverse effect of stifling the flow of cash, rather than promoting it, by making returns so low that it becomes unprofitable for banks to lend to each other.

Rates that are too low would sap interest income to ``a level insufficient to cover various transaction fees,'' Shirakawa said on Nov. 6. That ``may reduce the volume of transactions in the market and bring about a reduction in market liquidity,'' he said.

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