BOJ to end some emergency financing steps

by Takahiro Fukada

The Bank of Japan said Friday it will terminate some of the emergency financing measures it initiated after a global credit crunch took hold in late 2008 because the environment for corporate funding has since improved.

The central bank said it will halt outright purchases of corporate bonds and commercial paper from financial institutions at the end of December as scheduled, but will continue to offer unlimited 0.1 percent interest loans to banks with approved collateral through March 2010.

The BOJ said the decision at the one-day Policy Board meeting was made “to ensure financial market stability toward the end of the fiscal year.”

“It will take some more time for the economy to return to a full-fledged growth path,” BOJ Gov. Masaaki Shirakawa said, emphasizing that the central bank is not looking for an “exit plan” at this point.

As expected, the Policy Board unanimously agreed to keep the key interest rate at 0.1 percent. But one member voted against the termination of outright bond purchases and the extension of unlimited loans to next March, the BOJ said.

The BOJ also said it will continue to accept lower-rated debt as collateral until the end of 2010.

Touching on deflation, the BOJ said prices will continue to fall until fiscal 2011, projecting in its economy and prices report that the consumer price index will drop 1.5 percent in fiscal 2009, 0.8 percent in fiscal 2010 and 0.4 percent in fiscal 2011.

It also said deflation isn’t likely to worsen the recession.

The BOJ also said the economy will expand 1.2 percent in fiscal 2010 and 2.1 percent in 2011 after shrinking 3.2 percent this year.

Takuji Aida, senior economist at UBS Securities Japan, praised the BOJ’s moves.

“Corporate bond (and) credit markets have been stabilizing significantly,” Aida said. “Since demand for corporate bonds can now be seen in the market, the BOJ may have decided it doesn’t need to (offer) support anymore,” he said.

Aida said offering unlimited loans to lenders will be needed to support financial institutions whose stock prices haven’t recovered enough yet.

Toward the end of 2011, Aida predicted that the economy will continue to grow steadily as production, exports and the economies of the United States and China pick up and unemployment continues to decline.

He said the new Democratic Party of Japan-led government hasn’t indicated an intention to tighten finances, and the BOJ will keep interest rates steady at around 0.1 percent.

To support the recovery, Aida suggested the BOJ will have to maintain its monetary easing policies and the government will have to expand fiscal spending to end deflation.