BOJ Ends Debt Buying as Central Banks Phase Out Emergency Steps

By Mayumi Otsuma

Oct. 30 (Bloomberg) -- The Bank of Japan said it will stop buying corporate debt at the end of the year, as central banks around the world phase out emergency measures taken at the height of the financial crisis.

Governor Masaaki Shirakawa and his colleagues also said they will only extend a program providing unlimited collateral- backed loans to banks one last time through March 31. Yesterday, Germany’s Axel Weber signaled the European Central Bank may pull back its handouts of emergency liquidity next year.

Policy makers from the Group of Seven nations are starting to withdraw emergency measures as some smaller nations such as Australia and Norway tighten policy in response to a global economic recovery and surging asset prices. In Japan, the jobless rate unexpectedly fell to a four-month low in September, household spending rose and stocks rallied on optimism a rebound from its worst postwar recession is taking hold.

“Given steady improvements in credit markets, it’s not wrong to end these finance-support measures,” said Masaaki Kanno, chief economist at JPMorgan Chase & Co. in Tokyo, who used to work at the central bank. Kanno added that falling prices will prompt the policy board to keep the key rate near zero for all of 2010 at least.

The yen traded at 90.97 per dollar at 8:32 a.m. in London from 91.31 before the announcement. The Nikkei 225 Stock Average climbed 1.5 percent.

The bank also left its benchmark interest rate at 0.1 percent and pledged to keep borrowing costs at “low levels” as it forecast deflation will extend into fiscal 2011. Shirakawa said he’s “committed to prolonging the current extremely accommodative financial environment.”

Lingering Deflation

“It’s hard to expect a rate increase in Japan as long as deflation lingers,” said Seiji Shiraishi, chief economist at HSBC Securities in Tokyo. “The Bank of Japan probably won’t raise interest rates before the Fed takes action.”

Two-year Treasury note yields this week rose to the highest level in almost a month on speculation the Federal Reserve will discuss next month how and when to signal the possibility of higher U.S. rates. The U.S. economy expanded for the first time in more than a year last quarter, a report showed yesterday.

Exit strategies in Europe are starting to take shape. Bundesbank President Weber yesterday said the ECB may scale back unlimited offerings of 12-month loans in 2010. Even in the U.K., where the economy unexpectedly shrank in the third quarter, the Bank of England will probably slow or pause its bond-purchase program, former policy maker Charles Goodhart said. The ECB and the Bank of England next meet on Nov. 5.

Inflation Expectations

China’s central bank said today that policy makers need to “manage inflation expectations,” curb excess capacity and encourage sustainable lending growth.

Some central banks aren’t waiting for the Fed. Australia this month became the first Group of 20 nation to raise rates since the height of the crisis and Norway’s central bank followed this week.

At the same time, Shirakawa stressed the BOJ has no plan to raise rates even though lenders’ need for the bank’s purchases of commercial paper and corporate bonds has diminished as companies find it easier to obtain credit.

“I want to underline our commitment to holding interest rates at the same level, even though the economy is recovering,” Shirakawa told reporters in Tokyo.

The bank’s forecasts of prolonged deflation will help to quash speculation for any early rate increase, analysts said. Consumer prices excluding fresh food slid 2.3 percent in September from a year ago, the government said today.

Return to Growth

The policy board said prices will fall 1.5 percent in the year ending March 2010, 0.8 percent next fiscal year and 0.4 percent in the period ending March 2012.

The economy will shrink 3.2 percent this fiscal year and grow 1.2 percent next year, board members said. The expansion will accelerate to 2.1 percent in the following 12 months.

Reports this week nevertheless show the recovery may be gaining traction. The unemployment rate fell to 5.3 percent in September and the ratio of jobs available to applicants rose for the first time in more than two years. Factory output climbed for a seventh month, figures earlier this week showed.

In one example of a firm able to get credit, Kirin Holdings Co. yesterday raised 100 billion yen ($1.1 billion) in bonds to fund its acquisition of Australian brewer Lion Nathan Ltd., according to data compiled by Bloomberg.

‘Signs of Improvement’

“Japan’s financial environment, with some lingering severity, has been increasingly showing signs of improvement,” the central bank said.

Other companies are reporting better-than-expected earnings. Sony Corp. narrowed its full-year loss forecast to 95 billion yen today, citing faster cost reductions and improving earnings from consumer electronics.

The central bank said it will stop the limitless lending facility on March 31, when companies close their books for the fiscal year end, and that the program won’t be extended further. Board member Atsushi Mizuno opposed the decision, along with the scrapping of the corporate bond purchases in December.

“The special loan program, which provides lenders with as much cash as they need, distorts price-setting in financial markets and should be wrapped up eventually,” said Izuru Kato, chief market economist at Totan Research Co. in Tokyo. “Postponing its expiry to the fiscal year end seems like a safe judgment.”

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