BOJ Warned of Market ‘Stress’ Beyond Fiscal Year End

By Mayumi Otsuma

April 10 (Bloomberg) -- The Bank of Japan increased its purchases of government bonds last month because financial markets would remain “under stress” beyond the fiscal year end, minutes show.

“The bank should increase such purchases as much as possible” to show its “firm intention” to ensure markets are stable beyond the fiscal year end, according to minutes of the March 17-18 meeting released today in Tokyo. Japan’s fiscal year ended on March 31.

The central bank expanded its monthly government bond purchases from lenders to 1.8 trillion yen from 1.4 trillion yen at the meeting. Since it cut the key interest rate to 0.1 percent in December, the bank has also been buying corporate debt and stocks to prevent a credit crunch from worsening the recession. This week it decided to accept local and central government debt sold directly to lenders as collateral.

The policy board seems to be “scraping the bottom of the barrel in terms of assets that can be added to the list,” said Julian Jessop, chief international economist at Capital Economics Ltd. in London.

Bank of Japan officials said it was possible to increase the monthly government bond purchases by 400 billion yen, the minutes showed. The officials added that the central bank would reach its self-imposed limit for the purchases in several years if they continued at the current pace.

Bond-Buying Rule

Japan’s central bank has a rule of preventing its sovereign bond holdings from exceeding the amount of bank notes circulating in the economy. One board member said the bank may be able to increase the purchases by 5 trillion yen each year, according to the minutes.

Some members said competition among retailers and weakening consumer spending “might exert further downward pressure on prices.” One said the bank should pay attention to the risk that inflation accelerates once the global economy begins to recover.

Japan’s consumer prices excluding fresh food were unchanged in January and February, and board members have said they will start falling in coming months.

Many members said there were signs that industrial production was “leveling out” after plunging in response to a collapse in exports since last quarter. Companies planned to increase output in March and April to replenish inventories, a Trade Ministry survey showed last month.

Production Risk

Still, some members said that the board should pay attention to the risk that production will deteriorate further because of weak global demand.

Governor Masaaki Shirakawa said yesterday that the world’s second-largest economy has worsened since the board released growth forecasts in January, signaling a downgrade is likely when new projections are due on April 30. Policy makers have predicted a 2 percent contraction for the year started April 1, the steepest drop in the postwar period.

“Falling profits will definitely damp capital investment and consumer spending from now, and we can’t find any reasons to be optimistic about the outlook,” said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. “We expect GDP to shrink about 4 percent this fiscal year.”

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