BOJ takes steps to thaw credit crunch

Central bank to lower bar on debt used as loan collateral

by Takahiro Fukada

In an extraordinary monetary policy meeting Tuesday, the Bank of Japan said it would help companies get operating funds toward the yearend by accepting lower-rated corporate debt from banks as collateral for loans.

The central bank said corporate bonds and loans rated BBB or higher will be accepted as collateral starting Dec. 9. The BOJ currently accepts debt rated only A or higher.

By making it easier for financial institutions to get money, the BOJ hopes banks will increase lending toward the end of the calendar and fiscal years, when demand for funds is usually high. To that end, the BOJ said it would establish a new lending facility for financial institutions.

The facility will provide an unlimited amount of funds to financial institutions at an interest rate of 0.3 percent against the value of corporate debt pledged as collateral, it said.

The BOJ used a similar method in 1998 to cope with the financial crisis triggered by the collapse of Yamaichi Securities the previous year.

The new measures will stay in effect through April 30.

BOJ Gov. Masaaki Shirakawa said that the overall situation with corporate financing is worsening.

“The financial positions of small firms have deteriorated and an increasing number of large firms are faced with worsening funding conditions in the markets,” he said at a news conference.

“The bank will attempt to ensure market stability during the runup to the calendar and fiscal yearend by conducting appropriate money market operations, utilizing the newly introduced measures.”

Companies large and small are struggling to make ends meet as loans remain scarce and a global recession looms.

A record number of listed companies have gone bankrupt this year after the collapse of Lehman Brothers on Sept. 15 paralyzed global credit markets and prompted banks to hoard money and clamp down on nearly all kinds of lending.

Shirakawa repeated his reluctance to cut interest rates further.

“We need to note the possibility that at an extremely low interest rate level, various problems could arise in terms of ensuring the smooth functioning of short-term financial markets,” he said. A regular monetary policy meeting is scheduled for Dec. 18 and 19.

Finance Minister Shoichi Nakagawa said he approved of the BOJ’s measures.

“I would like to welcome” the BOJ’s measure, Nakagawa said at a news conference.