Bank of Japan May Pause Policy on Signs Economic Decline Easing

April 7 (Bloomberg) -- The Bank of Japan may refrain from introducing new policy steps today for the first time in seven months amid signs the economy’s deterioration is moderating.

Governor Masaaki Shirakawa and his colleagues will keep the overnight lending rate at 0.1 percent, according to 25 of 26 economists surveyed by Bloomberg News. The decision is expected by early afternoon in Tokyo.

Japan’s major manufacturers expect to become less pessimistic in three months, the first improvement since 2006, after sentiment plunged to a record low in March, the central bank’s Tankan survey showed last week. The policy board will examine Prime Minister Taro Aso’s stimulus package due this month before deciding whether to add to its program of buying government and corporate debt, analysts said.

“The central bank will wait and see how the government’s fiscal stimulus program develops,” said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. “Though there are some positive signs, the Bank of Japan will remain on the alert.”

The Bank of Japan has taken action every month since Lehman Brothers Holdings Inc.’s bankruptcy in September made banks worldwide reluctant to lend. Borrowing costs have fallen since December, when the bank cut the key rate to 0.1 percent and redirected its policy toward buying commercial paper and corporate bonds to spur lending and revive credit markets.

Falling Rates

The difference between three-month commercial paper rated A1 against government financing bills of the same maturity was 19.8 basis points yesterday, down from 141 on Dec. 16. The Tokyo three-month interbank offered rate, or Tibor, a measure of the cost of lending between banks, has fallen from a decade high since the BOJ started offering banks unlimited collateral- backed loans in December.

Executives at large manufacturers expect an index of their confidence will improve to minus 51 in June from a record low of minus 58 in March, the Tankan showed last week. A separate Trade Ministry survey last month indicated companies planned to increase production in March and April to replenish inventories that they managed to get rid of even as exports collapsed.

Still, managers said in the Tankan survey that they have too many workers, indicating unemployment already at a three- year high is likely to climb further. Companies planned to cut investment by the most since 2002, and both large and small firms reported the most difficult access to funding in a decade.

Cutting Costs

“Though the pace of the economy’s plunge is clearly easing, it’s still difficult to confirm any sign of a recovery” that’s sustainable, said Naka Matsuzawa, chief strategist at Nomura Securities Co. in Tokyo. “Companies will step up cost-cutting efforts from now on.”

Some analysts said the BOJ may today decide to further broaden the range of collateral it accepts from banks to encourage lending. The bank may start taking municipal bonds sold privately, the Nikkei newspaper reported yesterday.

“Companies continue to struggle to borrow, and that’s the Bank of Japan’s biggest focus now,” said Hiromichi Shirakawa, chief economist at Credit Suisse Group AG in Tokyo and a former BOJ official who isn’t related to the central bank governor.

The policy board might face renewed pressure to expand its asset-purchasing programs in May, when companies report earnings for the year ended March 31 that may show a bleaker economic outlook and drive down the stock market, according to Masaaki Kanno, chief economist at JPMorgan Chase & Co. in Tokyo.

“In the next month, we will probably see manufacturers’ profits plunging and their cash flow evaporating,” said Kanno, who used to work at the central bank.

Government Debt

The bank may step up its government debt purchases in coming months to help fund stimulus measures, according to Ryutaro Kono, chief economist at BNP Paribas in Tokyo.

The central bank increased its monthly purchases to 1.8 trillion yen ($18.1 billion) last month from 1.4 trillion yen. Shirakawa said there’s “very limited” room to escalate the program further.

“Though the governor signaled his reluctance, we expect the bank to buy more government debt in tandem with the expansion of fiscal spending,” Kono said.

Finance Minister Kaoru Yosano said yesterday that the government aims to outline stimulus measures by April 10 that exceed 2 percent of gross domestic product. That would be higher than the 10 trillion yen Prime Minister Aso pledged to spend in two packages since taking office in September.

Shirakawa will speak at a press conference at 3:30 p.m., following the bank’s announcement.