Nishimura Warns Against Prolonging BOJ Credit Steps

By Toru Fujioka

Oct. 21 (Bloomberg) -- Bank of Japan Deputy Governor Kiyohiko Nishimura said financial markets are improving and keeping the central bank’s emergency credit programs in place for too long may cause distortions.

“Excessive concerns are easing considerably and market functions are improving significantly,” Nishimura said at a press conference today in Kobe, western Japan. “Prolonging safety-net measures may cause the problem of moral hazard.”

Earlier in a speech, Nishimura stressed that ending the programs of buying corporate debt from lenders is a separate matter to interest-rate policy. Economists expect the central bank to end the credit steps by the end of the year, while leaving the benchmark rate at 0.1 percent through all of 2010 amid prolonged deflation and tepid economic growth.

“The central bank wants to make it clear that ending some measures doesn’t mean raising rates soon,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. Adachi predicts the corporate asset-purchase programs will expire in December as scheduled and the BOJ will “be one of the last central banks to raise interest rates.”

Nishimura, 56, said policy makers will decide the fate of the credit measures “after determining the extent to which market functions recover and whether excessive concerns among investors will return.” The bank will make an assessment by looking at the financial market “overall,” rather than the market for specific securities.

Easier to Sell

In the speech, he said companies with higher credit ratings are finding it easier to sell bonds and commercial paper. Since lowering the key interest rate to 0.1 percent in December, the bank has been buying the assets and offering banks unlimited loans backed by collateral to channel funds to companies. The three programs are due to expire on Dec. 31.

Japan’s “road to recovery will be very bumpy,” the deputy governor said at the news briefing, while adding that stimulus from governments and central banks worldwide will ensure it avoids a “double-dip” slump. In the speech he said it will take “a while” before consumer prices stop falling and return to a “desirable” level.

“It’s all too true that deflation is already putting some pressure on Japan’s economy by squeezing corporate profits and wages,” said Yoshimasa Maruyama, senior economist at Itochu Corp. in Tokyo. “The Bank of Japan is very far from raising rates.”

Consumer prices excluding fresh food slid a record 2.4 percent in August from a year earlier. The central bank is likely to forecast price declines will extend to 2011 when they release their twice-annual economic outlook on Oct. 30, analysts say.

The central bank will probably hold interest rates near zero at least through the end of 2010, according to 16 of 17 economists surveyed by Bloomberg News this month.

Nishimura said the policy board will continue to focus on the risks to growth, and uncertainty over the global economic outlook is the biggest concern.

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net