ANALYSIS: BOJ gambles on risky step to help fundraising before fiscal yearend+

TOKYO, Jan. 22 Kyodo -
The Bank of Japan's decision Thursday to purchase commercial paper, or
short-term debt issued by companies, outright illustrated its resolve to accept
risks to its own balance sheet in order to support corporate finance amid the
nation's economic downturn.
The emergency policy, effective through March, is designed to help companies,
especially smaller businesses, raise operating capital to cover the approaching
end of fiscal 2008 on March 31. However, some analysts doubt the policy can
generate any positive long-term effects.
While credit conditions have been deteriorating since the bankruptcy of U.S.
investment bank Lehman Brothers Holdings Inc. in September, companies have been
charged higher costs than before to raise funds in financial markets and the
outstanding balance of CP issuance has consequently fallen to the lowest level
in two years.
Such companies then turned to banks for necessary funds but only faced stricter
attitudes from such lenders who fear possible defaults.
With the new emergency step, the BOJ aims to head off such a negative spiral
despite the fact that it may suffer losses if debtors go bankrupt.
By purchasing CP and asset-backed commercial paper, or ABCP, from banks and
other financial institutions, the BOJ will provide these lenders with a fund
basis, with the aim of encouraging them to extend more loans to companies.
Demand for cash usually rises before and after the end of a business year with
the condition of capital markets getting tighter. The BOJ's action represents
its fear that some companies could collapse if they fail to accumulate
necessary funds.
The BOJ ''has a very important role to play,'' Fujio Mitarai, chairman of the
Japan Business Federation, the nation's most powerful business lobby, told
reporters Wednesday, alluding to his hope that the central bank would make a
decisive move.
On Thursday, the government hailed the BOJ's decision. Vice Finance Minister
Kazuyuki Sugimoto told a press conference that the CP purchase plan would
''help smooth corporate finance at a time when there is a risk that financial
conditions could become tighter toward the end of the fiscal year.''
Many analysts echoed the view, expressing their hope that the tension
surrounding corporate debt markets may be eased to some extent.
Reiko Tokukatsu, fixed income strategist at JPMorgan Securities in Japan, was
one of them. But she was also skeptical about whether the policy could have any
long-term impact.
The BOJ stressed that accepting credit risks through the purchase of corporate
debts is a temporary and quite ''exceptional'' measure, and plans to hold
auctions under some conditions such as the ratings of CP it could accept.
But Tokukatsu said, ''If this is a one-off measure, it will not work
effectively.''
Hiromichi Shirakawa, chief economist at Credit Suisse in Japan, said that if
the BOJ wants to see the measure work in the most effective manner, it should
not put any conditions on the auctions, such as the ratings of debts, and
should conduct the operation without any deadline.
''The companies that now need the most help are unfortunately those that cannot
issue even CP,'' Shirakawa said, suggesting the BOJ must restore the functions
of the impaired CP market first through every possible measure.
''If the BOJ is too selective (about the conditions of CP purchase), the policy
may only end up distorting or causing a gap in financial conditions among
companies, with cash flowing into a limited number of firms,'' he warned.
==Kyodo
2009-01-22 20:44:48