Suda Says BOJ Must Show Readiness to Take Bold Steps

By Lily Nonomiya

March 4 (Bloomberg) -- Bank of Japan board member Miyako Suda said the central bank should signal that it’s prepared to take “bold” measures to counter the deepening recession.

“When uncertainty is high, it’s important to gain the trust of markets by strongly pledging a readiness to take bold policy steps that may even stray from conventional rules,” Suda said today in a speech in Kyoto, western Japan. “Japan’s economy has fallen from a cliff into a deep, foggy valley.”

At the same time, Suda said she opposed the central bank’s decision last month to buy corporate bonds from lenders because market hasn’t deteriorated enough to warrant taking on the risk of holding the securities. With the key interest rate near zero, economists say the bank may expand its asset purchases to help companies get access to funds as credit becomes more scarce.

“The BOJ appears to be ready to gear up, but only at a gradual pace,” said Jan Lambregts, head of Asian research at Rabobank International in Hong Kong. “The problem is not so much the framework itself, but the limited size of these measures, in particular when compared to the scale of the downturn.”

Bank of Japan Governor Masaaki Shirakawa said yesterday that the bank’s purchases of corporate bonds and commercial paper are an “exceptional step” to make it easier for companies to borrow as credit markets dry up and banks grow reluctant to lend. The country’s stock market slump is depleting the value of banks’ share holdings, reducing their ability to meet an increase in demand for loans.

Market Tensions

“Should stocks decline further, we could see market tensions increase toward the end of the fiscal year,” said Suda, 60, the longest-serving board member. “We can’t make any assumptions about our financial markets amid the ongoing unstable movements in stocks.”

The Nikkei 225 Stock Average rose 0.4 percent as of 1:25 p.m. in Tokyo, reversing declines of as much as 1.7 percent. The Nikkei has lost 18 percent this year, a drop that Finance Minister Kaoru Yosano said the government can’t ignore. Last week he ordered a study into ways to boost the share market.

Shirakawa said yesterday that the world’s second-largest economy is worsening faster than the bank expected and the policy board will keep looking for ways to counter the slump.

Reports last week showed output and exports plunged at a record pace in January, adding to evidence that Japan is heading for its worst recession in 60 years. Companies including Toyota Motor Corp. have fired thousands of workers and cut production to cope with falling sales.

Corporate Bonds

The central bank today offered to buy 150 billion yen ($1.5 billion) in corporate bonds from lenders as part of a program unveiled last month to purchase 1 trillion yen of securities that mature in a year or less. Suda was the only board member to oppose the move.

“I don’t think the state of the corporate bond market fulfills conditions that warrant bond purchases,” she said today, adding that purchasing debt of up to one year of maturity will only have a “limited effect on smoothing out corporate financing.”

Companies can raise funds by selling commercial paper instead of bonds, Suda said. Policy makers need to be mindful about the amount of risk they are shouldering by buying such assets, the former economics professor said, adding that excessive intervention in markets by central banks could distort the allocation of resources in the economy.

‘Thinking Hard’

The central bank last month extended programs to buy commercial paper and provide unlimited collateral-backed loans to financial institutions and said it will start purchasing shares owned by banks.

“The BOJ must be thinking hard on the next easing move,” said Takuji Okubo, a senior economist at Merrill Lynch & Co. in Tokyo. The policy board is likely to “modestly expand the scope of its private credit purchase program,” he said.

Okubo said there’s a “high possibility” the bank will increase its monthly purchases of government bonds and may buy a wider range of commercial paper and corporate bonds.

In anticipation companies will demand more funds before they close their books on March 31, Finance Minister Yosano yesterday said the government will use some of its foreign reserves to help funnel low-interest loans to companies.

Toyota’s financial-services unit is in talks to receive aid from the state-run Japan Bank for International Cooperation, the company said yesterday. Honda Motor Co. may also seek loans from JBIC, spokeswoman Akemi Ando said today.

To contact the reporter on this story: Lily Nonomiya in Kyoto at lnonomiya@bloomberg.net