Bank of Japan May Expand Corporate Debt Buying, Keep 0.1% Rate

By Mayumi Otsuma

Jan. 22 (Bloomberg) -- The Bank of Japan may today offer to expand corporate debt purchases to prevent a credit shortage from deepening the recession.

Governor Masaaki Shirakawa and his colleagues may pledge to start buying corporate bonds and other types of securities from banks at a meeting concluding today, economists say. Policy makers will keep the benchmark overnight lending rate at 0.1 percent, according to all 27 economists surveyed by Bloomberg.

Japanese companies are struggling to raise funds as the global recession erodes sales and profits, reducing investors’ appetite for corporate securities. Central banks around the world are broadening the range of assets they buy to thaw credit markets that remain frozen even as interest rates approach zero.

“The Bank of Japan’s key question is what kind of assets it will buy, rather than the level of the benchmark rate or the amount of liquidity to add,” said Kyohei Morita, chief Japan economist at Barclays Capital in Tokyo.

The policy board cut the key rate from 0.3 percent last month, authorized the purchase of commercial paper, and extended government bond-buying operations, the details of which it will probably reveal today, along with revisions to its growth and inflation forecasts.

“It’s becoming harder for companies to raise funds through commercial paper and corporate bond markets,” Shirakawa said last week. The governor instructed his staff to investigate additional measures to improve corporate financing at last month’s meeting.

Sony, Kobe Steel

Sony Corp. scaled back bond sales by a quarter from the planned amount to 37.5 billion yen ($417 million) last month as the recession worsened its earnings prospects. Kobe Steel Ltd., Japan’s fourth-largest steelmaker, also reduced its offerings.

About 1.3 trillion yen in corporate bonds will be due by March 31, according to central bank estimates, putting pressure on businesses to find new sources of funding. A dozen Japanese companies, including Nippon Telegraph & Telephone Corp. and TDK Corp., plan to sell new bonds this month.

Central banks and governments globally are stepping up efforts to assist lenders and companies.

The Bank of England this week won unprecedented powers from the British government to start buying assets as part of a plan to revive lending. The U.S. Federal Reserve plans to buy as much as $600 billion of bonds and mortgage-backed securities sold by federally chartered mortgage finance companies, and is considering purchases of longer-term Treasury securities.

Some economists say Japan’s central bank may want to keep the option of buying corporate bonds up its sleeve in case the recession worsens in coming quarters.

‘Exhausting Its Toolkit’

“The bank is exhausting its toolkit pretty rapidly,” said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. “It probably prefers to save the operation of corporate-bond purchases for the next big crisis.”

Even if they pursue the purchases, policy makers may need time to hammer out the details of the plan, such as the ratings and maturity of debt that would qualify, given that the securities would remain as risk assets on its balance sheet.

“It’s highly probable the BOJ will limit its purchases to corporate bonds with maturity of up to one year, and at least A- grade,” said Naka Matsuzawa, chief strategist at Nomura Securities Co. in Tokyo.

The central bank will probably offer to buy about 2 trillion yen in commercial paper, the same amount the government-backed Development Bank of Japan last month offered to purchase. The bank will also limit transactions to paper rated at least A1, economists said.

Buying Commercial Paper

Costs of issuing short-term debt have eased since the Dec. 19 announcement. The spread on three-month paper issued by companies rated higher than A1 against three-month government financing bills yesterday narrowed to 35 basis points from 56 before the central bank unveiled the purchase plan.

Policy makers will probably cut their forecasts for growth and signal a return to deflation in a quarterly review of the economic outlook.

The board may say the economy will contract 1.5 percent in the year ending March 31 and 1.7 percent next year before recovering to expand 1 percent in the period through March 2011, according to the median estimate of 14 economists. Consumer prices excluding fresh food will drop 0.8 percent next fiscal year and rise 0.1 percent in the year to March 2011, they said.

Reports last month showed exports, production and machinery orders all fell at a record pace in November. The recession may linger for three years to become the worst in the postwar era, Hiroshi Yoshikawa, head of the government committee that charts the economic cycle, said in an interview this week.

The bank is likely to announce its policy decisions and revised economic forecasts by early afternoon in Tokyo. Shirakawa will speak at a press briefing at 3:30 p.m.

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