BOJ to Accept More Debt to Help Businesses Get Funds

By Mayumi Otsuma and Toru Fujioka

Dec. 2 (Bloomberg) -- The Bank of Japan will accept lower- grade corporate bonds as collateral for loans to banks to help businesses get access to funds as the country’s recession deepens.

The central bank will begin accepting BBB or higher-rated corporate debt on Dec. 9 and will start a new lending facility for commercial banks in January, it said in a statement after an emergency meeting today in Tokyo. The policy board kept its overnight lending rate at 0.3 percent.

The cost banks charge each other for three-month loans in Tokyo today surged to the highest since Japan’s credit crunch a decade ago. With benchmark rates approaching zero in Japan and the U.S., Governor Masaaki Shirakawa and Federal Reserve Chairman Ben S. Bernanke are adopting other ways to support their economies.

“The Bank of Japan is trying to use all available tools to revive the economy and ease concerns in the market,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute and a former central bank official. “It remains to be seen how effective today’s measures will be” in easing credit, he said.

The steps are aimed at encouraging banks to purchase and underwrite a wider range of corporate debt that they would then use as collateral for borrowing from the central bank. Lending to banks will increase by about 3 trillion yen ($32 billion) once both measures take effect, Shirakawa told reporters today.

“It’s only liquidity support for banks, not the companies themselves,” said Tetsushi Nagato, a credit analyst at Schroder Investment Management Japan Ltd., whose parent manages the equivalent of $204.5 billion. “We can expect the downturn to last for a long time.”

‘Unlimited Amount’

The central bank said it will provide funds to commercial lenders at the benchmark rate “for an unlimited amount against the value of corporate debt pledged.” The types of debt accepted include bonds, commercial paper and discount bills. The policy board will discuss more details of the plan at its Dec. 18-19 meeting and aims to implement it in January.

Today’s measures will be in effect until April 30, helping banks get enough cash to accommodate companies’ demands for money for settling accounts at the end of the calendar and fiscal years.

“We expect the announced measures will encourage commercial banks to lend more and activate trading of corporate bonds and commercial paper in the credit market,” Shirakawa said.

Global credit markets seized up after the bankruptcy of Lehman Brothers Holdings Inc. on Sept. 15, spurring governments and central banks around the world to bail out financial institutions and pump cash into money markets.

Australia Slashes Rate

Australia’s central bank slashed its benchmark interest rate by one percentage point to 4.25 percent today, extending the biggest round of reductions since 1991. Fed Chairman Bernanke said yesterday that he has “obviously limited” room to lower the 1 percent rate further and may buy Treasuries to revive the economy.

Shirakawa said yesterday that Japanese companies’ access to funding is deteriorating “at an accelerating pace.” Yields on corporate bonds are climbing at a pace “comparable to that in 1998 and 1999,” he said.

The collapse of Long-Term Credit Bank of Japan Ltd. and Nippon Credit Bank Ltd. a decade ago prompted other lenders to hoard cash, cutting off funds for businesses and triggering a wave of bankruptcies in a pattern that’s being repeated this year. Some 30 publicly traded companies went bust in 2008, the most in the postwar era, according to Teikoku Databank Ltd.

“The Bank of Japan probably wants to avoid the situation in which healthy companies would go bankrupt just because of funding problems,” said Masafumi Yamamoto, head of foreign-exchange strategy at Royal Bank of Scotland Plc in Tokyo.

Tibor Rate

Lending between banks has tightened even after the central bank’s Oct. 31 decision to cut its key rate to 0.3 percent from 0.5 percent. The three-month Tokyo interbank offering rate, or Tibor, rose to a 10-year high of 0.893 percent today.

The Bank of Japan currently accepts A-rated corporate bonds. By accepting BBB-rated debt, the range is extended three notches to all 10 investment grades. The central bank took 850 billion yen in corporate bonds as of Nov. 28.

The government is also putting heat on lenders to ease companies’ financing difficulties. Finance Minister Shoichi Nakagawa will meet with heads of commercial banks today to discuss funding for small firms, the Financial Services Agency said. Nakagawa doubles as minister of the banking regulator.

Shirakawa is reluctant to cut the key rate again, reiterating today that further reductions would reduce the flow of funds in the money market by making returns so scant that investors have little incentive to trade. Future decisions depend on how the economy, prices and financial conditions develop, he said.

“The Bank of Japan remains cautious about an additional rate cut for the moment,” said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. “But the bank will probably be forced to alter its policy stance as the downside risks for the economy intensify.”

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