BOJ May Expand Corporate Debt Buys, Yamaguchi Says
Bank of Japan Deputy Governor Hirohide Yamaguchi said the central bank may need to expand its purchases of corporate debt to prevent a credit shortage from worsening the recession.
“We can’t deny corporate financing will become even more difficult” toward the fiscal year end on March 31, Yamaguchi said in an interview in Tokyo yesterday, his first since joining the board in October. “If that happens, we’ll consider whether we can enhance operations already implemented and act if necessary.”
Yamaguchi is the first member of the board to hint at further policy actions since it unveiled the plan to purchase corporate bonds from banks last month. Having cut interest rates close to zero, the central bank is buying assets to channel funds to businesses whose profits are falling the most in more than 30 years as demand dries up at home and abroad.
Toyota Motor Corp., Honda Motor Co. and Mazda Motor Corp. said this week they may request government loans as demand plunges. The Finance Ministry said on March 3 it would use some of its foreign-exchange reserves to enable the state-owned Japan Bank for International Cooperation to increase lending.
‘Beef Up Operations’
“The Bank of Japan seems prepared to beef up its operations,” said Hiroshi Shiraishi, an economist at BNP Paribas Securities Japan Ltd. in Tokyo. “We’re still seeing tensions in financial markets with banks tightening their lending attitudes and corporate sales declining.”
The Nikkei 225 Stock Average’s 16 percent drop this year, on top of a record 42 percent decline in 2008, has eroded banks’ capital, making them reluctant to lend before companies close their books this month.
“Japan’s economy will remain in a severe condition beyond the fiscal year end,” said Yamaguchi, who turned 58 today. “The speed and magnitude of the deterioration is something we haven’t experienced for decades.”
An unprecedented drop in exports since last quarter has forced Japanese manufacturers to cut production at a record pace and fire thousands of workers. Governor Masaaki Shirakawa and his policy board forecast the economy will shrink 2 percent in the year starting April 1, the worst in 60 years.
Yamaguchi, one of two deputies at the bank, said investors are shunning risk, making it difficult for companies to sell bonds, and a growing number of small businesses are concerned that banks will curtail loans to them.
Biggest Bankruptcy
SFCG Co., a bank focused on lending to small businesses, collapsed last month in Japan’s biggest bankruptcy by a publicly traded company in almost seven years. Chairman Kenshin Ohshima said getting funding had become “almost impossible.”
Small companies, which employ about 70 percent of the workforce, said access to finance is the harshest it’s been in at least 23 years, according to a survey published by Shoko Chukin Bank last month.
The central bank started buying as much as 3 trillion yen ($30 billion) of commercial paper in January and this week it commenced a program of purchasing 1 trillion yen of corporate bonds held by financial institutions free online credit report. It’s also offering them unlimited loans in exchange for approved collateral.
“Naturally, we think about whether we need to change the requirements on purchases and collateral for commercial paper and corporate bonds,” Yamaguchi said. “We will take action by thoroughly considering whether these measures merit action and have significance.”
Yamaguchi said the central bank’s response so far has helped to reduce borrowing costs.
Lehman Collapse
The spread on three-month commercial paper issued by companies rated A1 against government financing bills of the same maturity narrowed to 44.5 basis points yesterday from 141 before the BOJ’s Dec. 19 announcement that it will buy the debt. It’s still higher than the 12.5 basis points before Lehman Brothers Holdings Inc. collapsed in September.
Yamaguchi said the central bank won’t take any measures to bolster the stock market, stressing that share values are mainly influenced by the outlook for profits and the economy. Finance Minister Kaoru Yosano last week ordered a study into ways to bolster stocks, bringing the government closer to buying equities in the market.
The central bank last month announced plans to buy as much as 1 trillion yen in shares owned by financial institutions to protect banks’ capital. “Influencing stock prices is not our intention,” Yamaguchi said.
Yamaguchi declined to comment on whether the bank will increase its monthly purchases of government bonds from 1.4 trillion yen, a tool it uses to inject money to the economy. The amount was raised from 1.2 trillion yen in December.
Fund Stimulus
When asked whether the bank would increase the purchases to fund economic stimulus spending, Yamaguchi said buying bonds for that reason would spur concern that public debt will rise, driving yields higher and compounding Japan’s fiscal woes.
On whether the policy board would consider cutting the benchmark interest rate to zero from 0.1 percent and adopt quantitative easing, Yamaguchi said: “I don’t think we can rule out any possibilities.”
The board would need to examine how zero rates might impair the functioning of the money market, he said, echoing comments made repeatedly by Governor Shirakawa that such a move would make trading unprofitable.
He said policy makers would also have to assess the relative merits and demerits of quantitative easing, a policy of flooding the banking system with reserves that the bank undertook from 2001 to 2006.
Yamaguchi and Shirakawa, who got economics degrees from Tokyo University within two years of each other, are the only board members to have spent their entire careers at the bank.
Yamaguchi has served in policy planning, financial supervision and research departments. He joined the board last October, filling a seat left vacant for seven months after the opposition-controlled upper house rejected other nominees.
Filed under: finance by Wolf