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BOJ signal may seek exit from corporate funds steps

Posted on: June 16, 2009

Reuters – Wednesday, June 17

* BOJ upgrades economic view, cautious on outlook

* Central bank keeps rates at 0.1 pct, no new measures

* Shirakawa: to decide on special measures in predictable way

* Shirakawa says bond yield gains reflect recovery hopes

By Leika Kihara

TOKYO, June 16 – The Bank of Japan signalled that it may begin to seek a way to exit in September some of the special measures it has taken to support corporate financing, as funding revives and signs emerge that the worst of the recession may have passed.

The central bank upgraded its economic assessment and said corporate funding conditions had improved, but it warned that the outlook was highly uncertain with companies not yet convinced that a recovery, if any, would be sustainable.

As widely expected, the BOJ kept interest rates on hold at 0.1 percent and held off on any new initiatives at its two-day policy review.

The recession triggered by bank failures and market turmoil that followed defaults on U.S. mortgages has forced the BOJ and other central banks to intervene in credit and interbank markets. But the global debate has now turned to when policy makers should retreat from these markets and cut stimulus spending.

Markets are focusing on whether the BOJ will extend beyond beyond the September expiry date its buying of commercial paper and corporate bonds from banks, as well as its scheme for extending loans to banks at 0.1 percent interest for collateral.

At a news conference after the rate review, BOJ Governor Masaaki Shirakawa said the central bank would carefully examine the effect of each measure and decide whether to extend it by the end of September in a way that is predictable for markets.

He dropped no hints on whether the measures would run beyond September, but some market players found it significant that he referred to that expiry date at all.

“Shirakawa seems to have mentioned a time element regarding an exit strategy, after the central bank presented no particular time frame the last time it tried to normalise monetary policy,” said Noriyuki Fukuda, a fixed-income strategist at Morgan Stanley.

The BOJ’s special measures launched from December last year to February have greatly eased financial conditions.

The average issuance rate for three-month commercial paper fell to 0.39 percent in May from a peak of 1.48 percent in November last year. A BOJ offer to buy CP on June 5 drew no bids — the first time it has attracted no interest — suggesting the need for these measures may be waning.

Corporate bond issuance is also coming back to life, particularly for companies with triple A ratings. Toyota Motor Corp <7203.T> is set to pay on its new 10-year bonds a coupon just 24 basis points above the benchmark government bond yield, far below the 75-basis-point premium it paid in February.

But companies with low ratings are still struggling to raise funds from the market, which is one reason why Shirakawa and his fellow BOJ policymakers are in no rush to decide on whether to end the unconventional measures in September.

Yasunari Ueno, chief market economist at Mizuho Securities, said the BOJ may end or scale down its CP and corporate bond purchasing programmes while extending other steps as a backstop.

The BOJ said in its statement that the economy has begun to stop worsening and will likely show clearer evidence of levelling out in coming months, a less pessimistic view than in May.

But it also signalled that weak domestic demand could be a drag as it was uncertain whether companies would boost production beyond restocking of inventories.


Shirakawa signalled the BOJ was unlikely to immediately increase its buying of government debt, saying that recent bond yield rises reflected an improving global economic outlook.

Long-term yields have climbed around the world in recent months as investors prepare for economic recovery and more government debt sales to finance stimulus spending.

For a graphic of JGB and Treasury yields, click on:

Japan’s government plans to sell a record 44 trillion yen of new debt in the fiscal year to March 2010 to finance its regular and stimulus spending. [ID:nT35034]

Bond issuance may grow as tax revenues fall short of initial forecasts due to weak corporate earnings, which may pile more pressure on the BOJ to increase its bond buying target from the current 21.6 trillion yen , analysts say.

The BOJ has shown no sign of being perturbed by the spike in bond yields and has said its government bond buying is not aimed directly at pushing down yields. The benchmark Nikkei share average <.N225> has gained more than 11 percent this year.


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