BOJ Widens Asset-Purchase Program to Ease Credit Woes

By Mayumi Otsuma

Feb. 19 (Bloomberg) -- The Bank of Japan said it will buy corporate bonds for the first time, widening its asset-purchase program to prevent a shortage of credit from deepening the recession.

The central bank will buy as much as 1 trillion yen ($10.7 billion) in bonds rated A or higher from March 4 to Sept. 30. The policy board kept the overnight lending rate at 0.1 percent in a unanimous vote, it said in a statement in Tokyo today.

Governor Masaaki Shirakawa said the economy will remain in a “severe” state next quarter and companies will continue to struggle to obtain financing as investors shun risk. With the key rate close to zero, the central bank is buying assets from lenders to lower longer-term borrowing costs, and its next moves may include adding stocks as collateral and purchasing more government bonds, economists said.

“The only policy options the bank has available to it are to either accelerate or deepen existing corporate financial- support measures,” said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong.

The yen traded at 93.55 per dollar at 9:34 a.m. in London from 93.46 before the announcement. The currency’s 17 percent gain in the past six months has eroded the value of exporters’ sales made abroad. The yield on Japan’s 10-year bond rose half a basis point to 1.26 percent.

Extending Programs

The central bank said it will extend programs in place to buy 3 trillion yen of commercial paper and provide unlimited collateral-backed loans to financial institutions until September. It will also continue accepting lower-rated assets as collateral until December.

“We implemented these measures to ease concerns companies are having about funding,” Shirakawa said. “Unfortunately, we have to assume that conditions for corporate financing will remain very severe.”

Exporters are losing money as demand collapses and the yen rises. Nissan Motor Co., facing its first loss in nine years, plans to tap European capital markets, win government loans and sell real estate to maintain cash. The automaker has been “burning cash in the first nine months,” Chief Financial Officer Alain Dassas said in an interview yesterday.

The cost of protecting corporate debt against default soared to a record this week on concern bankruptcies will increase as the recession deepens. The economy shrank at an annual 12.7 percent pace last quarter, the most since 1974.

Easier Access

Lenders have easier access to capital, with Mitsubishi UFJ Financial Group Inc.’s banking unit increasing a bond sale to a record 450 billion yen on higher demand from investors, according to a document filed with the Finance Ministry today.

The bank will purchase as much as 1 trillion yen of bonds with maturities of up to one year at competitive auctions with minimum set yields. Board member Miyako Suda opposed the plan.

About 5 trillion yen of those securities are outstanding in Japan, and about 90 percent of them are rated at least A, the bank said. Overall corporate bonds in issue total 44 trillion yen.

“So far the scale of asset purchases has been fairly modest, but at least a framework has been established,” said Julian Jessop, chief international economist at Capital Economics Ltd. in London.

The assets on the central bank’s balance sheet expanded 15 percent since Sept. 10 to 124.1 trillion yen as of Feb. 10, according to the BOJ’s Web site.

Earlier this week, the bank said it will buy as much as 1 trillion yen of stocks owned by lenders on Feb. 23 to help them replenish capital. In December it increased the amount of government bonds it buys each month to 1.4 trillion yen.

Political Gridlock

The government is doing little to spur demand. Political gridlock has delayed the implementation of a 10 trillion yen stimulus package. Finance Minister Shoichi Nakagawa’s resignation this week amid lawmakers’ accusations he was drunk at a Group of Seven briefing has further damaged Prime Minister Taro Aso’s administration.

Policy makers added a sentence to today’s statement saying the bank must watch “the risk of a decline in mid- and long- term inflation expectations of firms and households.” The board predicts consumer prices will start falling in the next few months.

Shirakawa said the policy board didn’t discuss cutting the overnight rate at today’s meeting. Analysts are divided on whether it will resort to lowering rates to zero in the future.

“A cut in the key rate would do little to boost growth but would at least show the central bank’s commitment to shoring up the economy,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo.

Others said the policy board will try to avoid a reduction because cutting rates would make it unprofitable for investors to trade in the money market, which is already being impaired.

Lenders are hoarding cash at the central bank because it pays 0.1 percent on their excess deposits there, the same as the benchmark borrowing cost. The central bank said today that it will keep paying that interest until Oct. 15, extending a program that was due to end on April 15.

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