Japan Puts Pressure on Central Bank to Bolster Policy

By Toru Fujioka and Keiko Ujikane

Dec. 16 (Bloomberg) -- Japan’s government increased pressure on the central bank to implement measures to spur economic growth after plunging business confidence indicated the recession will deepen.

“I hope the BOJ considers economic conditions and the liquidity problems and reaches a conclusion” on what to do, Finance Minister Shoichi Nakagawa said in Tokyo today. “The Bank of Japan is responsible” for easing concern about the economy’s deterioration, he said.

Bank of Japan Governor Masaaki Shirakawa’s policy board may decide to purchase commercial paper held by financial institutions at its policy meeting this week after the government announced similar measures last week, the Nikkei newspaper reported today. Prime Minister Taro Aso is increasing spending to lift his declining approval rating and spur growth, worsening the government’s already strained finances.

“Aso wants to show his leadership by implementing monetary and fiscal policy at the same time,” said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. “He’s turning to the central bank as a last resort, as fiscal constraints and his weakening political position limit his options.”

Aso said he wants the Bank of Japan to consider ways to stimulate the nation’s ailing economy, Economic and Fiscal Policy Minister Kaoru Yosano said.

The central bank’s Tankan survey yesterday showed business sentiment dropped the most in 34 years as the global economic crisis weakens exports.

Second Stimulus

Aso last week unveiled his second economic stimulus package since taking office in September, pledging to spend more money to help the unemployed as slower growth prompts exporters including Toyota Motor Corp. to fire workers. The government also said it will buy commercial paper to help improve funding for businesses.

Next year’s budget is expected to swell to a record 89 trillion yen ($982 billion), the Nikkei newspaper reported today, without citing where it obtained the information. At 1.7 times the size of gross domestic product, Japan’s debt burden is the largest in the industrialized world.

Companies are having difficulty raising funds as the deepening recession causes investors to shun riskier assets. This month, the central bank began accepting lower-grade corporate debt from lenders to improve funding for businesses.

The Bank of Japan currently accepts commercial paper, used by companies to finance daily business activities, as collateral when lending, rather than buying it outright.

Cut Rates

Investors see a 22 percent chance the central bank will cut rates at the end of its two-day meeting in Tokyo on Dec. 19, according to calculations made by JPMorgan Chase & Co. based on interest-rate swaps trading, up from 16 percent yesterday. Four of 26 economists surveyed by Bloomberg News expect the overnight call rate to be lowered from 0.3 percent.

A report today showed households’ assets fell 5.2 percent in the third quarter, the central bank said, the biggest drop since the BOJ started tracking the figures in 1998. Consumer wealth has been depleted by a 24 percent drop in the Nikkei 225 Stock Average since September.

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net; Keiko Ujikane in Tokyo at kujikane@bloomberg.net