The Bank of Japan decided Wednesday to start a multiyear program by late July to buy asset-backed securities worth up to 1 trillion yen to make it easier for small and medium-size companies to raise funds.

The BOJ said its Policy Board agreed in a unanimous vote during a two-day meeting that the operation will involve purchases of risky securities and will end in March 2006.

It will be the first time the central bank has purchased such private, risk-bearing securities. Until now, the BOJ has mainly bought government bonds to pump liquidity into the financial markets and prevent its finances from deteriorating.

The BOJ said separately the board left the outline of its money market operations unchanged, retaining its target for the outstanding balance of current accounts held by private financial institutions at the central bank between 27 trillion yen and 30 trillion yen.

BOJ Gov. Toshihiko Fukui said the ABS-purchase plan is intended to develop the ABS market, which he described as still in its early stages but with strong potential for growth.

He said the central bank will be careful to ensure the operation does not distort the price-formation mechanism of the ABS market.

The central bank said it will buy ABS with ratings as low as BB and asset-backed commercial paper rated A-1.

Market players were surprised at the BOJ’s decision to buy ABS with speculative-grade ratings of BB, which is below BBB, the lowest rating within the investment-grade category.

Fukui said the planned purchase of risky ABS indicates the BOJ’s serious desire to develop the ABS market in a self-revolving manner.

A BOJ official, meanwhile, said ABCP has a market of considerable size with an outstanding balance of 6 trillion yen to 7 trillion yen.

The BOJ said the program is designed to fix a deep-rooted problem in the nation’s financial system, where the BOJ injects ample liquidity into the money market but banks are reluctant to lend money to companies for fear that such loans become unrecoverable.

The nine-member board expects that expediting fundraising by small firms will bolster the BOJ’s ultra-easy monetary policy and curb deflation by having funds percolate through the economy.

Despite Fukui’s high hopes for the ABS market, financial analysts are skeptical that the new scheme can actually help lift the sluggish economy.

“The BOJ apparently fails to take into account the view that the real problem lies in the weak funding demand by companies amid persistent deflation,” said Yasunari Ueno, chief market economist at Mizuho Securities Co.

“It will be difficult for us to expect that the measure will have some sort of (favorable) impact on the economy as a whole, particularly given the size of the underdeveloped ABS market,” he said.

The board decided in early April to study possible outright ABS purchases in a bid to stimulate the economy at a time when many small and midsize firms are being refused loans by banks.

Trust banks’ BOJ plea

Kyodo News The Trust Companies Association of Japan asked the Bank of Japan again Wednesday to buy a new type of beneficiary certificate that entitles holders to receive yields stemming from accounts receivable by small and midsize companies.

The association of trust banks made the request in a statement because the certificate was excluded from the central bank’s decision Wednesday to buy asset-backed securities as a step to help smaller companies raise funds.

An increasing number of small and midsize companies have put their sales credits into the custody of trust banks so they may be converted into beneficiary certificates with the banks as intermediaries. This enables smaller firms to raise funds with the aid of trust banks by selling the certificates to investors.

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