Japanese central bank acts to stave off liquidity crisis

The Bank of Japan plans to raise "aggressively" its purchases of short-term corporate debt instruments to stave off a liquidity squeeze in Tokyo money markets, the central bank's governor said yesterday.

The move had been triggered partly by the increasing difficulties Japanese banks now faced raising dollars in international markets, officials said.

"Due to concerns about (Japanese) banks' foreign-denominated fund-raising, there are strong upward pressures, even in the domestic market, on rates for borrowing," said Mr Masaru Hayami, the governor. "The bank has decided to purchase commercial paper more aggressively. We will take all measures to supply ample funds to the markets."

The move highlights the increasingly crucial controversial, role that the bank is playing as an intermediary in Japan's financial markets, amid a broader credit squeeze.

Mr Ken Okamura, chief strategist at Dresdner Kleinwort Benson, said: "This raises all kinds of questions about moral hazard. But extreme times call for extreme moves."

The central bank has not traditionally played a role in the market for commercial paper - promissory notes issued by companies instead of using bank overdrafts. This paper was held mainly by commercial banks. But when private banks started to slash lending after last November's financial turmoil, the central bank began buying commercial paper to inject liquidity into the financial system.

By the end of September it held 5,612 billion yen (£31.6 billion), worth 40 per cent of the market.

The Bank of Japan's plans also illustrate the mounting pressures on Japanese banks, despite the government's attempts to reform the sector.

The central bank had expected funding pressures in Japanese markets to ease after the fiscal half-year end on September 30th, and cut its commercial paper holdings to about Y4,000 billion in October.

But in recent days funding pressures have begun to rise, rather than fall, largely because of the intensifying "dollar squeeze". The central bank may therefore soon buy commercial paper issued by banks for the first time, officials say. In a further move to calm the squeeze, the bank injected Y3,000 billion into Long-Term Credit Bank of Japan last week.

Meanwhile, it was reported yesterday that 10 Japanese banks have agreed to set up a one-year loan commitment line of up to Y500 billion for the embattled Nissan Motor Company

Fuji Bank and Industrial Bank of Japan would provide up to Y100 billion each, with the eight others offering the rest, Kyodo news agency quoted informed sources as saying.

Some have already signed a separate contract with Japan's second largest motor manufacturer as others will conclude the deal by the end of this year, the sources told Kyodo.

The deal came amid lingering concern about the financial health of Nissan as Moody's Investors Service of New York downgraded its ratings in August, the sources said.

The major credit ratings agency cut its rating for Nissan to just one step above junk bond status.

The motor manufacturer, the fifth largest in the world, faces serious debt problems, mounting competition, and a depressed home market, Moody's said, noting its ratings outlook was negative because of uncertainty over its debt future. Moody's cut Nissan's long-term rating two notches to "Baa3" from "Baa1" and the short-term commercial paper rating of its finance subsidiaries to "P-3" from "P-2".

Nissan was suffering weakness in both its Asian and US operations, which account for 70 per cent of its car sales volume, the agency said in a statement.