BOJ takes risk, may buy corporate debt

By Mayumi Otsuma  |   2008-12-26  |     NEWSPAPER EDITION

THE Bank of Japan may consider "extraordinary steps" to counter financial-market turmoil and a deepening recession, policy board member Hidetoshi Kamezaki said.

"The Bank of Japan is committed to doing its utmost to contribute to stabilizing financial markets," Kamezaki, 65, said yesterday at a business meeting in Takamatsu, western Japan. "Extraordinary times demand extraordinary steps."

The central bank decided to buy corporate debt for the first time to pump in money and lowered the overnight lending rate on December 19 to 0.1 percent from 0.3 percent, the second cut in two months.

Kamezaki later told reporters that room for cutting the rate further is "limited" and the bank's next policy steps should focus on improving funding for companies and influencing longer-term borrowing costs.

"The sense of crisis about the economy and financial markets mounted drastically within the central bank over the past month," said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. "We expect the bank to start buying corporate bonds, resume purchasing stocks and even go further if credit markets face a crisis," he said.

Japanese companies have struggled to find investors who are willing to buy their debt since the global financial crisis intensified in September. Kamezaki said taking on credit risk of businesses is a "very extraordinary step for a central bank."

Purchasing commercial paper, or short-term corporate securities, means the central bank assumes the risk that companies will default on the debt, a concern highlighted by board members at their November meeting, the minutes of which were showed yesterday. Japan needs to discuss how far the bank should go to support funding for companies, Governor Masaaki Shirakawa said December 22.

Central bank officials are examining the feasibility of buying a wider range of securities, including corporate bonds and stocks, and the policy board will make a decision based on their findings, Kamezaki said at yesterday's press conference. He echoed remarks by Shirakawa that a key rate at 0.1 percent barely keeps the money market working and the bank should avoid a policy that impedes its function. The former executive at trading company Mitsubishi Corp said he has no preconceptions about future interest-rate policy.

The bank "has virtually exhausted what it can do with rates to support the economy," said Mamoru Yamazaki, an international strategist at RBS Securities Japan Ltd in Tokyo. "The question now is how far the BOJ can expand the range of assets it buys to provide money, particularly to companies."

Meanwhile, Japanese banks' borrowing costs eased for a sixth day. The Tokyo three-month interbank offered rate, or Tibor, fell to 0.76 percent after reaching a decade-high 0.922 percent on December 16.