BOJ May Unveil Debt Program, Extend Commercial Paper Purchase

Feb. 19 (Bloomberg) -- The Bank of Japan will today unveil details of a plan to buy corporate debt and may extend lending programs in place to prevent a shortage of credit from deepening the nation’s recession.

Governor Masaaki Shirakawa and his colleagues have said they want to lower companies’ borrowing costs rather than trim the key interest rate, which is already close to zero. Policy makers will probably keep the overnight lending rate at 0.1 percent today, according to 27 of 28 economists surveyed by Bloomberg News.

The world’s second-largest economy shrank at the steepest pace since the 1974 oil shock last quarter as a global slowdown triggered record declines in exports and output. The resignation of Finance Minister Shoichi Nakagawa this week amid lawmakers’ accusations he was drunk at a Group of Seven briefing in Rome is hampering government efforts to implement a stimulus package to spur growth.

“We can’t count on the government and politicians, who are too incompetent to support the economy,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “The BOJ will need to come up with more remedies instead.”

Policy makers may say today the central bank will buy as much as 1 trillion yen ($10.8 billion) in corporate bonds with a rating of at least A1, economists surveyed said. They may also extend a commercial paper purchase program, which is due to end on March 31, as well as an unlimited collateral-backed lending facility for banks slated to end in April.

Twice as Fast

Gross domestic product shrank an annualized 12.7 percent last quarter, more than twice as fast as declines in the U.S. and Europe, a report showed on Feb. 16. The same day, Nakagawa came under fire in parliament for dozing off and slurring his speech at a Group of Seven press conference. His subsequent resignation dealt a blow to Prime Minister Taro Aso, who is struggling to get approval for a 10 trillion yen stimulus package because of political gridlock.

The downturn is set to intensify. The economy may suffer a bigger contraction in the current quarter, Kazuo Momma, the central bank’s chief economist, said this month. Economic and Fiscal Policy Minister Kaoru Yosano, who’s taken over Nakagawa’s job, this week said Japan is going through “the worst postwar economic crisis.”

“Even though they have a sense of crisis, the Bank of Japan’s policy actions have been pretty minor so far,” said Yuji Shimanaka, chief economist at Mitsubishi UFJ Research and Consulting in Tokyo. “It should buy government bonds more aggressively and trim the key rate to zero immediately.”

Credit Squeeze

The central bank last month started to buy commercial paper from lenders and pledged to purchase corporate bonds to ease the credit squeeze. The bank will also resume buying stocks owned by lenders, a step it implemented between 2002 and 2004, from Feb. 23. Economists say policy makers may also decide to buy more financing bills, or short-term government securities.

As its next steps, the bank may consider adding stocks as eligible collateral and increase monthly government bond purchases from 1.4 trillion yen, economists said. It’s unlikely the central bank will cut the key rate to zero even if the downturn worsens, other economists said.

“The central bank won’t cut the key rate further unless Governor Shirakawa abandons his commitment to protecting the financial market mechanism,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. Shirakawa has said keeping rates too low would make money-market trading unprofitable and discourage investors.

Excess Reserves

The bank’s low-rate policy is already impairing money- market transactions. Foreign banks increased the amount of excess reserves they hold at the central bank by 32 percent in January from February as they seek safer returns amid financial- market turmoil, BOJ data show. The bank pays interest of 0.1 percent on excess reserves, the same level as the key rate.

“However hard the BOJ provides money to the market, it is held by lenders and returned to the BOJ,” said Tokuyoshi Takano, manager of the financial derivatives section at Mitsui Sumitomo Insurance Co. in Tokyo.

The central bank will probably announce its policy decisions and release its assessment of the economy by early afternoon in Tokyo. Shirakawa will speak at a press conference at 3:30 p.m.