Bank of Japan to Debate Ending Corporate Debt-Purchase Programs

Oct. 30 (Bloomberg) -- Bank of Japan policy makers will probably today debate ending their purchases of corporate debt as central banks around the world start phasing out emergency measures taken at the height of the financial crisis.

Board members have signaled differences over the timing of a withdrawal from three programs designed to sustain credit, and today’s vote may be divided, central bank watchers said. A majority favor allowing commercial paper and corporate bond buying to expire at year-end, while extending unlimited collateral-backed lending to banks through March, they said.

Central bank Governor Masaaki Shirakawa is aiming to avoid the financial industry becoming dependent on the central bank’s backstop facilities, while keeping alive a recovery from the nation’s worst postwar recession. As a result, Japan may lag behind other developed nations in raising interest rates at the same time as ending the corporate-debt programs, analysts said.

“The BOJ’s board will probably extend the limitless lending facility just once more because scrapping all the programs at once may fuel concern about companies’ borrowing at the end of the fiscal year,” said Mari Iwashita, chief market economist at Nikko Cordial Securities Inc. in Tokyo. “In any case, the bank will keep emphasizing its commitment to prolonging a super-low rate policy.”

The three credit programs have been in place since the bank slashed the benchmark interest rate to 0.1 percent in December amid the worst global financial crisis since the 1930s. The bank decided in July to extend all the measures to Dec. 31. Japan’s fiscal year ends March 31.

Economic Outlook

The central bank’s decision is expected early afternoon in Tokyo. At 3 p.m., the board will release its semi-annual economic outlook. Policy makers will probably forecast that the economy will expand about 1 percent in each of the next two years and deflation will extend into fiscal 2011, analysts said.

Shirakawa said twice over the past month that the need to support corporate debt markets with policy steps has receded because companies have regained access to private funding. At the same time, the governor emphasized the bank’s intention to keep rates “very low” to ensure the economy keeps expanding.

In one example of a firm able to get credit, Kirin Holdings Co. yesterday raised 100 billion yen ($1.1 billion) in bonds to fund its acquisition of Australian brewer Lion Nathan Ltd., according to data compiled by Bloomberg. The sale took place even after Moody’s Investors Service last week downgraded Japan’s largest beverage maker to A2, the sixth-highest grade.

‘Soft Landing’

Policy makers will probably keep interest rates unchanged into next year, in part to hold down corporate borrowing costs, analysts said.

“The central bank probably wants to make sure that ending the credit-easing measures won’t drive up money-market rates,” said Izuru Kato, chief market economist at Totan Research Co. in Tokyo. “If the bank seeks a soft landing, it will be necessary to extend the limitless lending program to March and give a transition period for lenders.”

Yields on 10-year government bonds climbed to an 11-week high on Oct. 28 on concern the government may have to sell more debt to pay for promised spending for households.

The bank’s likely forecasts of prolonged deflation and tepid growth will help to quash speculation for any early rate increase, analysts added. Fifteen of 16 economists surveyed by Bloomberg News last week said the bank will hold the key rate at 0.1 percent at least through the end of 2010.

Fuel Speculation

Even so, should the bank decide today to end its limitless lending program, that “may flare up speculation for policy tightening,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. “Announcing an end to the step now would be bad timing because investors worldwide are getting nervous about rate hikes.”

Australia this month became the first Group of 20 nation to raise rates since the height of the crisis and Norway’s central bank followed this week.

In the U.S., two-year Treasury note yields this week rose to the highest level in almost a month on speculation Federal Reserve officials will probably discuss next month how and when to signal the possibility of higher U.S. interest rates.

The Bank of Japan’s unlimited lending program is still in demand while few lenders have offered to sell corporate debt to the central bank. The bank’s assets as of Sept. 30 included 6.9 trillion yen in such loans and only 100 billion yen of commercial paper purchased from lenders and 300 billion yen of corporate bonds.

Some policy makers have suggested a reluctance to scrap the credit-easing programs. Board member Atsushi Mizuno said in August that the bank-loan facility had helped keep short-term interest rates low and ending it prematurely may unsettle financial markets.

“There may be a small number of dissenting votes” about the measures, said Totan Research’s Kato. “Even so, the board will probably come up with a majority consensus” to end the initiatives, he said.

The central bank will probably extend other measures, namely the temporary acceptance of low-rated debt as collateral and 0.1 percent interest payments on reserves, Kato said.