BOJ to launch `unusual` corporate bond purchase as crisis deepens

TOKYO, Feb. 19 Kyodo - The Bank of Japan said Thursday it will purchase outright up to 1 trillion yen
($10.7 billion) worth of corporate bonds from financial institutions, taking a
further step in the battle against the global economic downturn and financial
turmoil.
The central bank's latest measure is ''extremely unusual,'' BOJ Governor
Masaaki Shirakawa told reporters after a two-day policy meeting at which the
central bank's Policy Board maintained its key interest rate at 0.1 percent for
the second consecutive month. The BOJ also extended its existing emergency
policy measures to facilitate corporate financing amid the global credit
crunch.
The purchase by the BOJ of corporate debt in order to boost the capital of
banks and other financial institutions means that it will include the
associated credit risk on its own balance sheet as the central bank could
suffer losses if debt issuers go bankrupt.
The BOJ has separately introduced an outright purchase of commercial paper, or
short-term debt issued by companies, but corporate bonds have longer maturities
and therefore carry higher risks than CP, experts said.
The BOJ will start buying corporate bonds next month with a single-A rating or
higher and residual maturities of one year or less as part of efforts to
encourage financial institutions to lend more to businesses.
Shirakawa said he is worried about the functioning of the corporate bond market
and that with the planned policy the BOJ is aiming to restore functionality by
boosting trade in the market.
The governor also told the news conference that Shoichi Nakagawa made a
''momentous decision'' in choosing to resign as the country's finance minister
on Tuesday.
Nakagawa stepped down after apologizing for his erratic behavior at a press
briefing after the weekend meeting of financial chiefs from the Group of Seven
major industrialized economies in Rome.
But Shirakawa, who sat next to Nakagawa at the briefing, declined to comment
further on the sudden resignation, including speculation that the minister was
drunk at the time.
In its battle against the ongoing crisis, the BOJ has already taken a series of
emergency policy measures including the outright purchase of CP as well as a
special loan program that offers unlimited funds at low interest rates against
specified collateral.
With those steps, the bank aims to facilitate corporate financing as companies
are facing difficulty raising capital to cover the approaching end of fiscal
2008 through March. Demand for cash usually rises before the end of a business
year.
The BOJ board also decided to continue the temporary CP purchase until the end
of September, beyond its initial deadline of late March.
The deadline for the special loan program, the end of April, has also been
extended until the end of September, while the bank will continue providing
dollar funds in money market operations by deferring its original deadline of
late April to late October.
The BOJ announced Wednesday that it will resume buying shares held by banks
starting next Monday under the plan revealed earlier in the day. It is aiming
to strengthen the financial health of banks and boost their lending capacity at
a time when they have suffered losses on their stock investments.
The purchase of corporate bonds signals the urgency that the BOJ attaches to
preventing the Japanese economy from falling into a deep recession, said Hideo
Kumano, chief economist at Dai-ichi Life Research Institute.
But Kumano also said the bank's latest decision would ''cause bigger risks to
the bank's own financial health'' and that the central bank may ''become
cautious'' about taking additional credit-easing steps.
In their vote, seven of the eight Policy Board members supported the bond
purchase plan with the eighth, Miyako Suda, opposing it.
Japan's ''economic conditions have deteriorated significantly and are likely to
continue deteriorating for the time being,'' the BOJ said in a statement,
downgrading its basic assessment released last month and suggesting the need
for the bank to take decisive action to battle the burgeoning crisis.
The BOJ looked carefully at Japan's economy, after the nation's latest growth
figures released Monday showed that real gross domestic product in the three
months through December shrank an annualized 12.7 percent from the previous
quarter, the fastest rate of contraction in nearly 35 years.
Shirakawa pointed to uncertain prospects, saying the world's second-largest
economy may also see ''severe'' growth figures in the next two quarters.
==Kyodo