BOJ Holds Rate at 0.1%, Stays Silent on Credit Steps

By Mayumi Otsuma

Oct. 14 (Bloomberg) -- The Bank of Japan held the benchmark interest rate near zero and refrained from saying whether it would end its emergency programs of buying corporate debt from lenders.

Governor Masaaki Shirakawa and his colleagues all voted to keep the key rate at 0.1 percent, the central bank said in a statement in Tokyo. They became more optimistic about the economy, saying it has “started to pick up.”

Shirakawa said this month that the need for the funding measures has diminished because companies have regained access to private financing and credit markets have stabilized, sparking speculation the bank would decide to end them as early as today. The policy board may want more time to examine whether ending the steps will squeeze small companies, which government ministers say are struggling to borrow.

“There’s no need for the bank to hurry; they’ll have two more opportunities” to decide to let the programs expire on Dec. 31 as scheduled, said Susumu Kato, chief economist at Calyon Securities in Tokyo. “Funding conditions for large companies are getting better but for smaller firms they remain severe.”

Since lowering rates to 0.1 percent in December, the bank 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 the three plans to Dec. 31 when it met in July. Its next two meetings are on Oct. 30 and Nov. 19-20.

Yen’s Gains

The yen traded at 88.91 per dollar at 3:15 p.m. in Tokyo from 89.03 before the announcement. The currency reached an eight-month high of 88.01 on Oct. 7, eroding exporters’ repatriated earnings and making their products less competitive. Ten-year government bond yields were unchanged at 1.295 percent.

Central banks around the world are moving to pare back unprecedented measures to unfreeze credit.

The Federal Reserve last month said it would shrink programs that auction loans to banks and Treasuries to bond dealers. Australia’s central bank last week raised interest rates, becoming the first country in the Group of 20 nations to boost borrowing costs since the start of the financial crisis. The Reserve Bank of New Zealand said today it is removing some of the liquidity facilities put in place last year.

The Bank of Japan raised its assessment of the economy for a second month, citing improvements in corporate sentiment. “The decline in business fixed investment, which mainly reflects weak corporate profits, has been moderating,” it said.

Rising Confidence

Consumers are also more upbeat: Household confidence rose to a 23-month high in September, the Cabinet Office said today.

“The financial environment, with some lingering severity, is increasingly showing signs of improvement,” the bank said, reiterating language used last month. Still, it maintained that there is a “significant level of uncertainty” surrounding its prediction that the economic recovery will be sustained.

Government officials last week acknowledged the lack of demand for some of the BOJ’s programs, while also calling on policy makers to mind that smaller companies still have difficulty raising funds. Deputy Prime Minister Naoto Kan said he hopes the bank will consider the “severe” state of funding for smaller firms when it debates ending the measures.

Financial Services Minister Shizuka Kamei plans to submit a bill to parliament giving small companies a moratorium on loan repayments to banks.

Laid Groundwork

“The Bank of Japan has laid the groundwork for ending its purchases of commercial paper and corporate bonds, which are being little used, but today’s decision may give the impression that it’s mindful of the government’s view,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo.

Major companies said their access to funding improved compared with three months ago, the bank’s quarterly Tankan survey showed this month. Large firms’ access to credit has recovered to last year’s levels while small companies’ funding conditions were still tighter than December, the survey showed.

Calyon’s Kato said the central bank will let the bond- purchasing programs expire while extending the unlimited lending facility, which banks are tapping more.

The central bank lent 7.3 trillion yen ($82 billion) under the facility as of Aug. 31. In contrast, it had 100 billion yen of commercial paper on its balance sheet, about 3 percent of the amount it’s allowed itself to hold.

The board will probably hold interest rates near zero at least through the end of 2010, 16 of 17 economists who gave forecasts through the period said last week.

“The Bank of Japan will probably continue to indicate it remains cautious about any policy changes that would lead to a rate increase,” said Masaaki Kanno, a former BOJ official and now chief economist at JPMorgan Chase & Co. in Tokyo.

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