BOJ May Decide to Let Corporate Buying Program Expire

By Mayumi Otsuma

Oct. 13 (Bloomberg) -- The Bank of Japan may decide tomorrow to start withdrawing its emergency credit-easing programs because businesses have regained access to private funding.

Governor Masaaki Shirakawa and his colleagues may say it will allow their corporate debt purchase programs to expire on Dec. 31 as scheduled. The central bank will also hold the benchmark interest rate at 0.1 percent, according to all of the 20 economists surveyed by Bloomberg News.

Shirakawa said on Oct. 3 the need for the bank’s purchases of commercial paper and corporate bonds has diminished, indicating the bank is preparing to terminate the operations. Companies surveyed in the central bank’s Tankan survey released Oct. 1 said it is becoming easier to borrow from banks as the global credit crisis eases.

“The Bank of Japan has explicitly indicated it wants to end the programs,” said Izuru Kato, chief market economist at Totan Research Co. in Tokyo. “Discontinuing them would have little impact on the economy.”

Government bonds fell, sending 10-year yields one basis point higher to 1.29 percent at 12:20 p.m. in Tokyo. The yen traded at 89.82, unchanged from late yesterday and weaker than the eight-month high of 88.01 reached on Oct. 7.

Emergency Programs

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.

People with direct knowledge of the bank’s discussions said in September the bank may make a decision as soon as this month because officials are concerned that continuing the programs for too long would distort capital markets. Economists expect the bank to keep the limitless lending program.

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

Central banks around the world are moving to pare back unprecedented measures to unfreeze credit as the financial industry stabilizes. The Federal Reserve last month said it would shrink programs that auction loans to banks and Treasuries to bond dealers. The European Central Bank said Sept. 24 it will stop its longer-dated dollar liquidity operations because of limited demand.

Bank of England

Meanwhile the British Chambers of Commerce urged the Bank of England to expand its bond-purchase program to as much as 200 billion pounds ($315 billion). “This fragile recovery we’ve started to see really needs to be nurtured,” BCC Director General David Frost said in an interview.

The strengthening yen may dissuade the Bank of Japan from deciding tomorrow to let the programs expire, some economists say. Japan’s currency has risen more than 3 percent against the dollar in the past three months, squeezing profits of exporters and threatening the economy’s recovery from its worst postwar recession. The Nikkei 225 Stock Average has fallen 4.2 percent since Aug. 31. It rose 0.4 percent in morning trading.

“It may be difficult for the bank to make a decision this week, given that the stability in the yen and stocks is crucial for ending the corporate programs,” said Naka Matsuzawa, chief investment strategist at Nomura Securities Co. in Tokyo.

Thrown Punches

Government officials have 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 last week he hopes the bank will take into account the “severe” state of funding for smaller firms when it debates ending the programs.

“The government has already thrown preemptive punches to the Bank of Japan, but the bank should end buying commercial paper and corporate bonds as planned because the facilities aren’t really being used,” said Teizo Taya, a former BOJ board member and now adviser of the Daiwa Institute Research.

The bank will probably maintain the limitless lending program because there is demand for it, analysts say. It has 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 bank held 200 billion yen of corporate bonds, only one-fifth of the limit set by officials.

‘Big Presence’

“The lending facility has a big presence in Japan’s money market, and its end would create a rift between the central bank and the government,” said Seiji Shiraishi, chief economist at HSBC Securities in Tokyo. “The bank will probably extend the program through March 31.”

Scaling back its stimulus doesn’t mean the bank is preparing to raise interest rates, analysts surveyed said. The bank will probably keep the key rate around 0.1 percent at least through the end of 2010, 16 of 17 economists who gave forecasts through the period said.

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