Shirakawa Says Central Banks Must Keep Balance Sheets Healthy

By Mayumi Otsuma

May 27 (Bloomberg) -- Bank of Japan Governor Masaaki Shirakawa said central banks should be mindful about the soundness of their balance sheets as they purchase more assets to combat global financial turmoil.

“In times of crisis, a central bank attempts to provide liquidity aggressively sometimes with taking some credit risk,” Shirakawa said at a speech in Tokyo today. Even so, “a central bank should be cautious about the risk of undermining its credibility, which is prerequisite for any policy implementation.”

Central banks in Japan, the U.S. and Europe have lowered interest rates and purchased government and corporate debt since the collapse of Lehman Brothers Holdings Inc. in September froze credit markets around the world. The Bank of Japan has also eased requirements for securities it accepts as collateral to channel more funds to companies.

“Outright purchases of credit instruments imply that a central bank shoulders credit risk in a more straightforward manner,” Shirakawa said. “In that regard, monetary policy approaches the region of fiscal policy.”

Shirakawa’s policy board last week decided to add government bonds issued by the U.S., the U.K., Germany and France to its eligible collateral to make it easier for lenders to borrow from the central bank.

“The effectiveness of monetary policy measures crucially depends on the central bank’s credibility, which is partly affected by the soundness of the central bank balance sheet and central bank’s neutrality perceived by the public at large,” he said.

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