The Bank of Japan extended its special corporate finance-support measures by three months today and kept interest rates on hold to avoid undermining a fragile recovery in the economy and investor confidence.
The BOJ board voted unanimously to keep buying commercial paper and corporate bonds from banks and keep providing long-term loans to banks at 0.1 per cent interest, extending the measures it introduced to deal with a crunch in credit markets.
The three-month extension was shorter than the six months some had expected, possibly signalling that the bank is also concerned about keeping its unconventional measures in place for too long.
“The fact that it hasn't extended the measures for six months to cover the fiscal year-end suggests that the BOJ thinks the corporate funding situation is not deteriorating,” said Kenro Kawano, strategist at Credit Suisse said.
“Depending on the situation three months from now, it may consider ending the measures.”
The bank kept interest rates at 0.10 percent and stuck to the main scenario it outlined in April of a slow return to moderate economic growth towards the end of the year.
Financial markets had been expecting the BOJ's special measures to be continued. After the BOJ decision, the yen was steady around 93.54 yen per dollar and 130.75 yen per euro, while JGB futures were also little changed.
Although funding conditions for big companies have improved for the first time in eight quarters, small firms were struggling to gain access to credit, the bank's tankan corporate survey showed earlier this month.
“The BOJ felt it was necessary to provide some assurance about its corporate support measures, recognising that the economy is still quite fragile, as reflected in the tankan survey,” said David Cohen, director of asian economic forecasting at Action Economics in Singapore.
“It seems the BOJ wants to avoid the impression that they're tightening the screws. There may be some debate about whether some of these measures are still needed, but what's the hurry? There's no inflation in Japan, so the BOJ can afford to be patient,” he said.
In addition, the economy is saddled with excess production capacity and labour after four straight quarters of contraction.
Still, the BOJ is worried that its heavy intervention in credit markets could distort the normal workings of the economy, which it says should be guided by market forces.
Its buying of commercial paper has pushed interest rates on such debt so low that some issuers have been able to borrow funds even more cheaply than the government.
The central bank's recent offers to buy CP have attracted few bids, in another sign markets no longer need this support.
The BOJ has already achieved most of what it wanted from these steps, increasing the availability of funds and bringing down “term interest rates” such as three-month rates.
Issuance of corporate bonds surged to a record 2.29 trillion yen in June, according to Reuters data, after freezing up late last year in the wake of the collapse of Lehman Brothers. Corporate bond issuance averaged less than 500 billion yen per month during 2002-2007, when the economy was expanding.
Reuters