By Mayumi Otsuma
Jan. 22 (Bloomberg) -- The Bank of Japan cut its growth forecasts and said it will consider buying corporate bonds to prevent a shortage of credit from deepening the recession.
The central bank may buy corporate bonds with a maturity of up to one year, it said in a statement released today in Tokyo. Governor Masaaki Shirakawa and his board forecast the economy will shrink until the year starting April 2010 and signaled a return to deflation in a quarterly review of the outlook.
Exports plunged a record 35 percent in December, a report showed today, evidence the global recession is likely to keep hurting the world’s second-largest economy and discourage investment in Japanese companies. 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.
“They’re trying to supplement corporate finance” as the economy deteriorates, said Tomoko Fujii, head of Japan economics and strategy at Bank of America Corp. in Tokyo. “That’s all they can do,” she said, adding that the government should spend more to spur growth.
The policy board also decided unanimously to keep the key overnight lending rate on hold after cutting it to 0.1 percent last month from 0.3 percent.
The Nikkei 225 Stock Average rose 1.9 percent to 8,051.74 at the close, paring its drop this year to 9.1 percent. The yen traded at 89.07 per dollar from 89.04 before the announcement.
Forecasts Cut
The world’s second-largest economy will shrink 1.8 percent in the year ending March 31 and 2 percent next year before recovering to expand 1.5 percent in the period through March 2011, according to median estimates of the eight board members.
Consumer prices excluding fresh food will drop 1.1 percent next fiscal year and 0.4 percent in the year to March 2011, they said. The economy is “likely to continue deteriorating for the time being,” the bank said in today’s statement.
Shirakawa instructed his staff to “swiftly map out a concrete plan” for purchasing corporate bonds from financial institutions, the statement said. The bank also provided details of plans unveiled last month to buy commercial paper.
“The mechanism of the corporate bond market has deteriorated sharply,” Shirakawa told reporters after the meeting. Given that the overnight lending rate is already at 0.1 percent, the central bank will focus on trying to bring down longer-term borrowing costs for companies, the governor said. At the same time, he added, the policy board isn’t considering additional steps to those announced today.
‘Right Direction’
“It’s the right direction for the BOJ to shift its policy focus to measures to support corporate financing,” said Eisuke Sakakibara, former top currency official of Japan’s finance ministry and now a professor at Waseda University. “Deeper interest-rate cuts probably wouldn’t have any impact, and Governor Shirakawa is probably reluctant to do so.”
Sony Corp. reduced its bond sales by a quarter from the planned amount to 37.5 billion yen ($421 million) last month as the recession worsened its earnings prospects. Kobe Steel Ltd. also reduced its offerings.
About 1.3 trillion yen in corporate bonds will come due by the end of March, 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 offer new bonds this month.
Commercial Paper
The bank will start buying up to 3 trillion yen of A1-rated commercial paper of up to three-month maturity this month, it said today. The purchases will include asset-backed paper, or securities based on receivables such as credit-card debt.
The central bank described the purchases as an “exceptional measure” and said it would only buy the debt “for a term required and in an appropriate scale” to ensure the market doesn’t start relying too much on the operations. It said it would “properly manage credit risks” by setting limits on the quality and maturity of securities it buys.
“The focus of the BOJ’s policy is shifting to the composition of its assets; what the bank will buy under what conditions,” said Masaaki Kanno, chief economist at JPMorgan Chase & Co. in Tokyo and a former central bank official.
The bank also released details of plans announced last month to increase monthly government bond purchases to 1.4 trillion yen from 1.2 trillion yen and avoid holding too many securities of either short or long maturities.
Central banks and governments globally are implementing additional measures 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 broader 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 companies, and is also considering purchases of longer-term Treasury securities.
To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net
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