Japan's Central Bank Acts to Ease Funding Squeeze

The Bank of Japan unveiled on Tuesday a new lending scheme and other measures to ease an acute squeeze in corporate funding, as a poll showed manufacturers' confidence falling at its sharpest pace on record, fuelling debate about rate cuts.

The central bank, which kept interest rates steady at 0.30 percent at the emergency meeting where it introduced the new measures, said it would accept a wider range of corporate debt as eligible collateral as the financial crisis cuts the access of Japanese companies to funding over the end of the year.

The decision came a day after Governor Masaaki Shirakawa warned credit strains were driving up corporate borrowing costs at the fastest pace since Japan's financial crisis a decade ago, adding to woes for an economy already in recession.

"The launch of the new lending scheme may help reinvigorate the securitised market, which had been the main source for corporate funding but stopped working properly due to the credit crisis," said Yasuhiko Onakado, chief economist at Daiwa SB Investments.

"Having said so, I also feel that the BOJ could have
introduced such a scheme at a more appropriate time or that the decision fell behind the curve."

Growing fear of a global recession has rocked financial
markets around the world with Japan's Nikkei stock average sliding 6.4 percent, tracing a slide on Wall Street.

Euroyen futures extended their gains, rising 5.5 basis points at 99.280 from 99.240 before the BOJ's announcement.

The BOJ, which until now has only accepted corporate debt rated single-A or higher for its fund operations, said it would start taking on triple-B rated bonds from Dec. 9.

It will also launch a new market operation to boost fund supply toward the end of Japan's financial year in March, when liquidity demand tightens.

Under the scheme, the central bank will lend unlimited amount of funds to financial institutions at the overnight call rate of 0.3 percent, accepting corporate debt as collateral.

More Needed

While economists generally welcomed the decision, some said the BOJ could be forced to do more as Japan's economic downturn looks set to deepen.

"Technically, the new lending facility should be taken as a back-up tool, as this instrument itself is not capable of channeling funds directly to non-financial firms but can relieve the burden of balance sheet problems at banks only temporarily," said Yoshihiro Nozoe, senior economist at Okasan Securities.

"If the government and the BOJ want to prop up lending to firms facing funding difficulty, they should consider outright purchase of commercial paper and straight bonds held by financial institutions, which is the only way of stripping off debts from balance sheet of financial institutions, transferring related risk to other entities and creating some room for new lending."

Japan has been relatively immune to the damage from the global credit crisis but the fallout has spread recently with investors shunning credit products, forcing companies to turn to bank loans as rates on commercial paper have jumped.

While Shirakawa has acknowledged a sharp deteriorating in credit conditions, the Bank of Japan stayed away from measures as dramatic as those implemented by the Federal Reserve, such as buying commercial paper outright.
    
More Gloom

The Fed already pumps money directly into specific markets, such as those that commercial paper, short-term debt companies use to finance day-to-day operations, and its chairman has signalled more steps could come.

The BOJ had come under pressure from the money markets to take more aggressive funding steps as money market rates inch up due to mounting concerns about market tightness and fall-out on companies from the global financial crisis.

A Reuters poll showed on Tuesday that confidence among Japanese manufacturers fell at its sharpest pace on record in November.

The Reuters Tankan, a monthly poll of big Japanese firms that tracks the BOJ's closely watched quarterly tankan next due on Dec. 15, showed business confidence had fallen sharply to its lowest in seven years.

Shirakawa has repeatedly expressed caution over further rate cuts, saying that doing so could distort market functions but debate rages over whether he will hold to that stance.

"The Bank of Japan's tankan survey will undoubtedly show quite a sharp deterioration in business sentiment. Capital spending is also expected to be revised down from September," said Naoki Iizuka, senior economist at Mizuho Securities.

"The Bank of Japan might cut interest rates to 0.15 percent at its Dec. 18-19 meeting and even opt to return to a quantitative easing policy early next year."

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