Bank of Japan Considers Extending Credit Policies

July 8 (Bloomberg) -- The Bank of Japan may extend its emergency-credit programs as soon as next week as policy makers await evidence that banks are increasing lending to companies.

Officials may want to decide on the matter months before the programs expire at the end of September to quell any speculation they’re ready to scale back their efforts, said Masaaki Kanno, who worked at Japan’s central bank from 1974 to 1999 and served as a senior adviser on research and statistics. The Bank of Japan’s board next meets July 14-15 in Tokyo.

The debate reflects concern that the world’s second-biggest economy will struggle to emerge from its deepest postwar slump, and is a contrast from the U.S., where the Federal Reserve has already taken steps toward ending emergency-credit measures. BOJ Governor Masaaki Shirakawa this week said many companies are still struggling to borrow, after the bank’s quarterly Tankan survey last week showed access to credit remains constrained.

“Policy makers may conclude the bank had better decide on the extension this month if they need to do so anyway,” said Kanno, who is now chief economist in Tokyo at JPMorgan Chase & Co. “Making such an announcement in July can work as an anchor to prevent premature speculation about an exit policy.”

The Bank of Japan started purchasing commercial paper and corporate bonds this year, after lowering the overnight lending rate to 0.1 percent in December. Policy makers also offered unlimited loans to commercial banks at 0.1 percent in exchange for approved collateral. The three programs are scheduled to expire on Sept. 30.

Tankan Report

The Bank of Japan’s Tankan report showed on July 1 that the nation’s largest companies still consider their access to financing at close to the lowest level on record, and small firms perceived banks as reluctant to lend. Lending growth at Japanese banks slowed in June for a sixth straight month, a report showed today.

The Tankan also showed businesses plan deeper spending cuts than three months ago. Large firms estimate profit will fall 20 percent this year, almost twice the March forecast.

Another report today showed that machinery orders unexpectedly fell 3 percent in May from April, as sliding profits forced companies to cut spending on plant and equipment. The median estimate of 25 economists surveyed by Bloomberg was for a 2 percent increase.

The Nikkei 225 Stock Average dropped 1.9 percent at 10:02 a.m. in Tokyo. The yield on the benchmark 10-year bond fell two basis points to 1.285 percent, the lowest in more than three months.

Policy Makers

Bank of Japan policy makers have said they aren’t confident yet whether a recent rebound in exports and output will be sustained.

“The Tankan results turned out to be worse than expected, and there are no reasons in sight to be optimistic about the economy’s outlook,” said Teizo Taya, a former central-bank board member and now adviser to the Daiwa Institute of Research in Tokyo. “There is no merit for the Bank of Japan to adopt an exit policy too early.”

In the U.S., the Fed last month announced it will let one of its emergency-lending programs expire later this year, and trim two others.

Fed policy makers also said in their June 24 statement that they “currently anticipate that a number of these facilities may not need to be extended beyond February 1.” At the same time, they pledged to extend the terms of the remaining credit programs beyond February “as needed to promote financial stability and economic growth.”

Special Programs

Shirakawa said last month that Japan’s central bank will make a judgment on its special programs “by the end of September in a predictable manner to market participants” based on an assessment of the economy, financial markets and funding conditions for businesses.

“There is some speculation that the BOJ may want to be pro-active and indicate an extension of the programs rather than waiting for either next month or September,” said Marc Chandler, head of currency strategy at Brown Brothers Harriman & Co. in New York. “On balance, the BOJ most likely will have to extend the programs, probably until next March, but look for a decision in August, not next week.”

The Bank of Japan already extended the emergency-credit policies at its February board meeting, one month before the initial expiration date of March 31. That example led some analysts to anticipate the bank will again make its announcement a month before the expiration.

Gains Momentum

That view gained momentum in May after minutes of the BOJ’s April meeting showed one board member said the bank should consider ways to unwind the emergency measures should the economy recover in line with the bank’s forecast.

Board member Atsushi Mizuno said in May that it’s necessary for the bank to have discussions on how to unwind the emergency steps even while the global economy remains fragile.

There may not be much point in waiting, said Naomi Hasegawa, a senior bond strategist in Tokyo at Mitsubishi UFJ Securities Co.

“It’s not conceivable that environments for corporate financing will improve just over the next one month,” Hasegawa said. “Rather, tension in financial markets may rise” if the bank postpones its decision.

An early decision would also allow policy makers to avoid acting in the middle of a potential general-election campaign. Prime Minister Taro Aso, whose support fell below 20 percent in recent polls, has to call the vote by mid-September.