BOJ May Need to Get Bolder to Stem Credit Crunch

By Mayumi Otsuma and Theresa Barraclough

Dec. 8 (Bloomberg) -- Bank of Japan Governor Masaaki Shirakawa may be forced to adopt more aggressive measures to ease a credit shortage for companies, economists say.

The central bank may have to augment last week's decision to accept lower-grade corporate debt as collateral for loans to commercial banks by buying it from them outright. Banks shrugged off the Dec. 2 attempt to increase liquidity, driving yields on commercial paper to a record high.

“The BOJ's latest steps for corporate financing turned out to be insufficient and failed to quench lenders' thirst for cash,” said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo. “The bank may come under pressure to buy commercial paper and even trim the key rate deeper.”

The central bank said on Dec. 2 that it will take BBB-rated corporate debt as collateral, attempting to encourage lenders to underwrite financing from businesses and improve their access to cash. The BOJ will also offer unlimited loans to banks between January and April as long as they submit enough collateral.

The programs failed to stem increases in borrowing costs that had been expanding even after the central bank cut the benchmark overnight lending rate to 0.3 percent on Oct. 31.

Yields on one-month commercial paper with the second- strongest credit rating climbed to a record 1.9 percent today, more than double the interbank rate. The Tokyo three-month interbank offered rate, or Tibor, a measure of the cost of lending between banks, rose to a 10-year high of 0.903 percent.

Avoiding Risk

“We can't expect much support for lower-rated corporations unless someone becomes willing to take on credit risks,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute Inc. and a former central bank official.

Larger companies that are struggling to raise funds by selling debt are borrowing directly from banks, making it more difficult for smaller companies to get loans. Lending made by commercial banks climbed 3.6 percent in October from a year earlier, the Bank of Japan said today, the fastest pace in 16 years.

``These gains simply reflect a corporate fund-raising shift from commercial paper issuance to bank loans,'' said Nishioka. ``Small businesses will continue to face difficult conditions from weaker real economic activity and further tightening of lending stances at financial institutions.''

Japanese firms usually rely on debt sales for about a fifth of their funding and the rest comes from loans, Shirakawa said on Dec. 1. Corporate bankruptcies rose for a sixth month in November, Tokyo Shoko Research Ltd. said today in Tokyo.

Commercial Paper

One option to thaw Japan's credit markets is for the central bank to buy commercial paper and the government to guarantee losses should the securities default while they are on the bank's balance sheet, Kumano said. Parliament would need to approve such a measure, he added.

The Federal Reserve and the U.S. government already have a similar arrangement, which Kumano said “can give a powerful boost for financing companies because it signals the joint effort by a government and a central bank.” Commercial paper is short-term debt companies use to fund daily activities like paying rent and staff.

Last week's move “is going to have a negligible effect on the market because it is indirect,” said Tetsushi Nagato, a credit analyst at Schroder Investment Management Japan Ltd. While it improves commercial banks' access to cash from the Bank of Japan, there's no guarantee that lenders would become more willing to extend credit to companies.

Shirakawa acknowledged on Dec. 2 that the measures would provide funds to businesses “indirectly” via the wholesale market. He said the programs will increase the central bank's lending to commercial banks by 3 trillion yen ($32 billion).

Government Bonds

The Bank of Japan may also opt to increase its monthly purchase of government bonds from lenders from 1.2 trillion yen, said RBS Securities' Nishioka.

The step “can work as another tool to offer more funds to lenders,” Nishioka said. “This option can be more easily taken up than commercial paper purchases” because the decision can be made by the central bank alone, she said.

Global credit markets seized up after the bankruptcy of Lehman Brothers Holdings Inc. on Sept. 15. In Japan, 30 publicly traded companies have gone bust this year, the most in the postwar era.

Shirakawa may also have to lower the benchmark interest rate closer to zero percent even after repeating his reluctance to do so at least eight times in the past month, economists said. Since the October rate cut, the governor has warned that further reductions would dry up the flow of funds in the money market by diminishing returns and discouraging investors from participating in transactions.

“I think they have the ability to cut interest rates more. They may do it pretty soon,” said Guthrie Williamson, portfolio manager in Sydney at Principal Global Investors. “There is global move to cut interest rates and the BOJ wants to look like they are doing their bit.”

To contact the reporters on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net; Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net