BOJ Said to Consider Ending Corporate Debt Purchases

By Masahiro Hidaka and Mayumi Otsuma

Sept. 30 (Bloomberg) -- The Bank of Japan may decide as soon as next month to let its emergency corporate-debt buying programs expire as businesses regain access to private funding, people with direct knowledge of the discussions said.

Officials are concerned that maintaining their purchases of corporate bonds and commercial paper beyond the scheduled end in December would distort capital markets, according to the people, who spoke on condition of anonymity because the deliberations are private.

The decision would echo steps by central banks around the world to pare back unprecedented measures to unfreeze credit as the financial industry stabilizes. At the same time, because Japan’s economic recovery is threatened by rising unemployment and deflation, policy makers are likely to keep the benchmark interest rate target near zero into next year, analysts said.

“There is no doubt that the central bank is heading toward unwinding the credit-easing steps,” said Eiji Hirano, who worked at the central bank for 33 years until 2006 and served as an executive director. “BOJ policy makers are now signaling their intention to end them and they seem to be having a sort of dialogue with markets to test their reaction,” said Hirano, who is now a Tokyo-based director at Toyota Financial Services Corp.

Fed, ECB

The Federal Reserve this month said it would shrink programs that auction loans to banks and Treasuries to bond dealers, citing “continued improvements” in markets. The European Central Bank said Sept. 24 it will stop its longer- dated dollar liquidity operations because of limited demand.

Bank of Japan Deputy Governor Hirohide Yamaguchi said on Sept. 18 that the central bank needs to “be mindful that keeping the temporary measures for a long time may hurt an autonomous recovery of market functions and invite the distortion of the allocation of resources.” Earlier in the month, Miyako Suda, a Bank of Japan board member, said the need for the measures is “diminishing.”

The yen rose to 89.76 per dollar at 3:18 p.m. in Tokyo from 90.09 late yesterday in New York. The yield on benchmark 10-year government bonds rose one basis point to 1.29 percent after a Trade Ministry report showed industrial production climbed for a sixth month in August.

Waning Usage

Japan’s central bank found no lenders offering to sell it commercial paper on Sept. 18; as of the end of August, it had 100 billion yen ($1.1 billion) of the securities on its balance sheet, about 3 percent of the 3 trillion yen the bank allowed itself to hold. The Bank of Japan held 200 billion yen of corporate bonds, only one-fifth of the limit set by officials.

Borrowing costs have tumbled in the market for commercial paper, the short-term securities that companies typically use to pay for day-to-day items such as payrolls and rent. The yield on three-month paper issued by top-rated companies was as low as 0.12 percent today -- lower than before Lehman Brothers Holdings Inc. collapsed in September 2008 -- from a high of 1.25 percent in October.

A rally in Japanese corporate bonds left them with their best back-to-back quarterly performance since 2001, returning 3.6 percent to investors including reinvested interest, index data compiled by Merrill Lynch & Co. show.

While it will be “appropriate” to consider halting the debt buying, the central bank should consider ways to help smaller companies, which are still struggling to get funds, said Susumu Kato, chief economist in Tokyo at Calyon Securities.

Unlimited Lending

Policy makers may keep their third extraordinary credit program beyond December, while changing its size or the loan repayment period, one of the people familiar with the matter said. That measure offers banks unlimited loans backed by collateral, and has been tapped by lenders more than the corporate debt plans. The central bank had lent 7.3 trillion yen under the facility as of Aug. 31.

Bank of Japan board member Atsushi Mizuno said in August that the bank-loan program had helped keep yields on short-term securities low. Ending it prematurely “may increase the volatility of financial markets,” he said.

The strategy is to withdraw the facilities “in stages,” Hirano, the 59-year-old former central banker, said. Markets “still face fragility, but on the other hand the bank can’t allow speculation that the programs will stay in place for one or two more years,” added Hirano.

Tankan Survey

The Bank of Japan’s quarterly Tankan report tomorrow will give Governor Masaaki Shirakawa an update on business sentiment and firms’ ability to raise cash. Economists estimate the survey will show that pessimism among large manufacturers diminished for a second straight quarter.

The bank will hold two meetings next month -- on Oct. 13- 14 and Oct. 30. Officials will publish their twice-yearly forecasts for the economy and inflation at the second gathering.

The Bank of Japan said this month that it saw “signs of improvement” in company financing and removed funding concerns from its list of risks for the economy.

After lowering the key rate to 0.1 percent in December, the Bank of Japan started buying commercial paper and corporate bonds from lenders and offering them unlimited loans backed by collateral to channel funds to companies. The policy board extended all three plans until Dec. 31 when it met in July.

Some 14 of 16 analysts surveyed by Bloomberg this month anticipated a 0.1 percent rate target through the end of 2010.

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