Bank of Japan May Extend Credit Programs as Recession Lingers

By Mayumi Otsuma

July 15 (Bloomberg) -- The Bank of Japan may extend its emergency-credit programs today as companies struggle to borrow and political turbulence threatens to stifle an economic revival.

The measures, begun this year to funnel cash to companies amid Japan’s worst postwar recession, expire at the end of September. Governor Masaaki Shirakawa and his colleagues will also hold the overnight lending rate at 0.1 percent, according to all 25 economists surveyed by Bloomberg News.

Prime Minister Taro Aso this week called an election for Aug. 30, a contest that polls show his ruling Liberal Democratic Party may lose to an opposition that has never governed. Extending the credit programs more than two months before their expiry would also quell speculation that the central bank is willing to unwind them before Japan emerges from its worst postwar recession.

“Announcing the extension of the measures this month would provide relief” to investors and companies, said Naoki Iizuka, a senior economist at Mizuho Securities Co. in Tokyo. “A new government won’t be able to get settled until mid- September,” leaving political uncertainty until then, he said.

The central bank will hold its view that the economy will start recovering later this year and avoid any major changes in a review of forecasts made three months ago, said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo.

Growing Again

The world’s second-largest economy probably grew for the first time in more than a year last quarter, expanding at an annual 2.4 percent pace after plunging a record 14.2 percent in the first three months, according to economists surveyed.

The rebound may not be sustained as falling profits prompt businesses to trim investment and jobs, the central bank’s Tankan confidence survey showed this month. That report also showed banks remain reluctant to lend to companies.

“Downside risks for the economy linger,” said Akio Makabe, an economics professor at Shinshu University in Nagano, central Japan. “Policy makers are well aware that they could spark another economic decline if they end the credit-support measures.”

The Federal Reserve and the Bank of England have already taken steps toward ending emergency-credit programs amid concern that they may fan inflation. The Fed said last month it will let one lending facility expire this year and trim two others. In the U.K., the central bank decided last week to pause from purchases of government bonds at the end of July.

More Leeway

Japan’s central bank has more leeway to keep its measures in place because they’re smaller in scale and there is little risk of inflation taking hold, said economist Seiji Shiraishi.

“The bank doesn’t have any pressing need to hurry toward an exit,” said Shiraishi, chief economist at HSBC Securities Japan Ltd. in Tokyo. “Given that the Japanese economy is facing explicit downside risks, the BOJ will probably extend all of the measures.”

The central bank started purchasing commercial paper and corporate bonds this year, after lowering the key lending rate to 0.1 percent in December. Policy makers also offered unlimited three-month loans to commercial banks at 0.1 percent in exchange for approved collateral. All of the programs are scheduled to end on Sept. 30.

Shirakawa said last week that access to cash remains tight for “many” companies and the bank will watch whether the economy and prices slip below its April forecasts. The central bank will “continue to exert its utmost efforts” to shore up economic growth, he added. The board meeting is scheduled to end early afternoon in Tokyo and Shirakawa will speak at a press conference at 3:30 p.m.

Keep Window Open

Finance Minister Kaoru Yosano said yesterday that the bank should keep purchasing corporate debt even as credit markets thaw. “The BOJ may not use the window for its emergency measures of buying commercial paper and corporate bonds, but it would be better off keeping the window open,” Yosano said.

The central bank is likely to maintain the conditions of the credit programs, including the kinds of eligible collateral and amounts on offer, said Teizo Taya, a former Bank of Japan board member. Extending the measures in a way that makes it tougher for lenders to borrow from the bank would give the impression that it’s heading toward an exit, said Taya, who is now an adviser at the Daiwa Institute of Research in Tokyo.

“The BOJ could decide the extension of the programs in August, but some board members may say they’d better announce it this month,” said Masaaki Kanno, chief economist at JPMorgan Chase & Co. in Tokyo, who used to work at the central bank. “The BOJ’s biggest concern is that financial markets would start to price in speculation about an exit policy.”

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