BOJ’s Suda Said Buying Debt Unwarranted, Minutes Show

By Mayumi Otsuma

Feb. 24 (Bloomberg) -- Bank of Japan board member Miyako Suda said last month she didn’t think purchasing corporate debt was necessary, meeting minutes show.

“Recent overall conditions for corporate financing were not so severe as to require the bank to conduct outright purchases of corporate bonds,” Suda said, according to minutes of the Jan. 21-22 meeting released today in Tokyo. Companies can borrow from banks or sell commercial paper as an alternative to issuing bonds, she added.

The central bank unveiled a plan to buy corporate bonds at the meeting, when it also cut its growth forecast and predicted a two-year bout of price declines. With the key interest rate at 0.1 percent, the bank will probably focus on expanding the range of assets it purchases to prevent the recession from deepening, economists said.

“The Bank of Japan is expected to buy a broader range of risky assets and it has just taken the first step in such attempts,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “In any case, there is little room left for the bank to maneuver policy with interest rates.”

The central bank last week announced details for the corporate bond purchase plan, saying it will buy as much as 1 trillion yen ($10.7 billion) in such debt from lenders. The bank also decided to extend programs in place to buy commercial paper and provide unlimited collateral-backed loans to financial institutions until September.

Lowering Yields

Some members at the meeting said policy should focus on lowering yields on so-called term instruments given that the benchmark interest rate is at “extremely low levels.” A few members said the bank should continue to examine ways to reduce yields on such instruments, which typically mature within a year.

Some members said last month that the bank should emphasize that buying corporate debt was an “exceptional measure for a central bank.” One person said that excessive purchases of debt could impair the functionality of the market, the minutes said.

Many members said a possible decline in inflationary expectations over the longer term requires “careful monitoring” as a risk for the economy. Governor Masaaki Shirakawa has said policy makers need to pay attention to such expectations for signs of a deflationary spiral.

Consumer Prices

Consumer prices excluding fresh food will drop 1.1 percent in the year starting April 1 and 0.4 percent in the year to March 2011, they predicted. Inflation by that measure probably fell for the first time in more than a year in January, economists say a report due this week will show.

Japan’s gross domestic product fell at an annual 12.7 percent pace last quarter, the steepest drop since the 1974 oil shock. Shirakawa said economic growth will remain “severe” in the first and the second quarters of this year.

Bank of Japan policy makers predicted last month that the economy will shrink 2 percent next fiscal year, the most since 1945. Economists surveyed by Bloomberg last week said they expect GDP to contract 4 percent.

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