By Toru Fujioka and Keiko Ujikane
Feb. 3 (Bloomberg) -- The Bank of Japan will buy 1 trillion yen ($11.1 billion) of shares owned by financial institutions to shore up their capital, which has been ravaged by the global stock-market rout.
The central bank will purchase stocks until April 2010, resuming a program it ended more than four years ago, it said in a statement after Governor Masaaki Shirakawa and his policy colleagues met in Tokyo today. The bank will hold the shares until at least March 2012.
“This is a good move,” said Jesper Koll, chief executive officer at Tokyo-based hedge fund adviser TRJ Tantallon Research Japan. “It frees the banks to focus on their main business, assessing credit risks rather than riding the fortunes of the stock market.”
The Nikkei 225 Stock Average’s record decline has forced Mizuho Financial Group Inc. and Mitsubishi UFJ Financial Group Inc. to cut earnings forecasts and restricted their ability to lend. Policy makers worldwide are trying to keep their economies afloat as the global recession deepens. Australia’s central bank cut interest rates to the lowest in 45 years today and the government pledged additional spending.
The Nikkei climbed as much as 2.7 percent after the announcement before sliding 0.6 percent to 7,825.51 at the close in Tokyo. Japan’s benchmark stock average lost a record 42 percent in 2008 and has dropped a further 11.7 percent this year. Australia’s benchmark S&P/ASX 200 stock index rose 0.3 percent and the MSCI Asia Pacific Index gained 0.5 percent.
‘Safety Net’
“This measure aims to act as a safety net to stabilize the financial markets,” Governor Shirakawa said at a press briefing in Tokyo. “It’s always appropriate to prepare for the worst factors and the worst-case scenario.”
Shirakawa added that the plan isn’t necessarily focused on boosting the stock market. Rather, he said, the central bank is concerned that banks will become reluctant to lend toward the fiscal year end, when companies settle accounts, out of fear that declining stock values will deplete their capital. The bank will start the purchases after getting the government’s approval.
“The Bank of Japan wants to improve banks’ balance sheets, which would make it easier for them to lend more money to companies,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo, who used to work at the central bank.
In Australia, Governor Glenn Stevens lowered the overnight cash rate target to by one percentage point to 3.25 percent and Treasurer Wayne Swan said the government will spend A$42 billion ($27 billion) for households and on infrastructure.
‘Avoiding Armageddon’
“Such a proactive approach from governments and central banks is the only hope we have of avoiding Armageddon,” said Prasad Patkar, who helps manage $800 million at Platypus Asset Management in Sydney.
The U.S. government is considering guarantees for home loans modified by their servicers, seeking to stem the record surge of foreclosures that’s hammering property values. The proposal is aimed at shielding lenders from default after they loosen loan terms for struggling borrowers.
The Bank of Japan has already reduced interest rates to 0.1 percent and is buying corporate debt from lenders to encourage them to extend credit and prevent a deeper recession. Today’s move comes less than two weeks after the bank said it will buy up to 3 trillion yen of commercial paper and consider purchasing corporate bonds to channel funds to companies.
‘Big Surprise’
“The timing is quite a big surprise,” said Masamichi Adachi, a senior economist at JPMorgan Chase & Co. in Tokyo. “My understanding is the result of the outright purchase of the CP probably wasn’t exactly as the BOJ wanted. So they thought they needed to introduce a new measure earlier than expected.”
The central bank said it will buy stocks of companies with a credit rating of BBB- and higher. To be eligible, banks will need stockholdings exceeding 500 billion yen and a “capital adequacy ratio based on international standards,” it said. The bank will only buy up to 250 billion in stocks from each lender.
Japan’s six biggest banks hold about 11 trillion yen of shares by book value, and plans to buy less than a tenth of that amount would do little to strengthen their finances, Dai-Ichi Life’s Kumano said.
“The measure will contribute to stabilizing the financial system, and we’ll consider it carefully,” said Masako Shiono, a spokeswoman for Mizuho. Sumitomo Mitsui Financial Group Inc. spokeswoman Chika Togawa said the bank may get involved “under certain circumstances, while taking into account the will of share issuers.” Mitsubishi UFJ spokesman Tomohiro Kato declined to comment.
Bank Losses
Mizuho, Japan’s second-largest bank by revenue, last week reported a loss of 145.1 billion yen in the third quarter ended Dec. 31, after booking 204.9 billion in losses on shareholdings. Mitsubishi UFJ, the country’s largest lender, said last month it expects to book 288 billion yen in losses on domestic equities.
“It doesn’t really solve the fundamental problem; the fundamental problem is how much the earnings are being damaged,” said Diane Lin, Sydney-based portfolio manager at Pengana Capital, which oversees about $1.9 billion. “Last week was a total shock to us.”
A collapse in global demand is prompting Japanese manufacturers to forecast losses, cut production and fire workers. Hitachi Ltd. last week projected a record 700 billion yen annual loss and said it may eliminate 7,000 jobs.
Helped to Stabilize
Shirakawa said the central bank’s previous share-buying program helped to stabilize the financial system. The bank bought shares in 2002 to 2004, when it pledged to purchase up to 3 trillion yen in equities as the stock market plunged to a 20- year low and banks were laden with bad debts.
The bank started selling those shares in October 2007. It stopped the sales the following October, after the collapse of Lehman Brothers Holdings Inc. sparked the global market rout and sent the Nikkei below its 2003 bottom to 7,162.90. The bank held 1.27 trillion yen in shares as of Jan. 31.
The government earlier this decade also bought shares owned by banks, and in December said it will allocate 20 trillion yen for a possible resumption of purchases. The opposition- controlled upper house has yet to approve the proposal.
To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net; Keiko Ujikane in Tokyo at kujikane@bloomberg.net
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