BOJ to Buy Bonds, Sees Deflation as Exports Slide

The Bank of Japan said it would buy corporate bonds to ease an increasingly severe funding squeeze and warned the country faced two years of deflation, as the global crisis sends exports plunging.

The central bank, completing a two-day review as new figures showed a record fall in exports and business confidence at an all-time low, kept interest rates on hold just above zero but announced a string of other steps to try to ease a deepening recession.

Japanese companies face not only sliding orders but also a severe funding squeeze, and the BOJ said it would buy corporate debt with up to a year in maturity to help them with financing.

"The fact that the BOJ is going to take credit risk is significant. It is a serious announcement," said Jun Miyata, a senior fund manager at T&D Asset Management Co, but he said bonds of up to three years should be in the central bank's sights.

Japanese exports plunged a record 35 percent in December from a year earlier as Asian consumers buckled under the global financial crisis and a U.S. recession crushed demand for electronics and autos.

The collapse in exports pushed Japan deeper in to recession in the fourth quarter, analysts said, and with the global economy crumbling and the yen at 13-year highs against the dollar, there was no light at the end of the tunnel.

The central bank was similarly bleak in its outlook.

"Exports are falling sharply on slowing overseas economic growth. Domestic demand is also weakening as corporate revenues as well as household's job and income environment worsens," the central bank said in a statement.

"Japan's economy is worsening sharply and is expected to continue worsening in the near term."

It saw consumer prices falling 1.1 percent in the year to March 2010 and a 0.4 percent fall the following year, along with two years of economic contraction up till early 2010.

The central bank said it saw the economy turning up by early next year but warned uncertainty was high and analysts said this was pretty optimistic.

"I'd like to hear from the governor how he sees Japan's economy returning to a recovery path, namely what he expects regarding economic developments in the second half of fiscal 2009 and the first half of the following year," said Kyohei Morita, chief economist at Barclays Capital.

Trade Hit Both Ways

Along with exports, Japanese imports slumped in December, signalling sinking domestic demand, and a survey showed business sentiment tanking, adding to the gloomy outlook.

"External demand will likely cut Japan's GDP by more than one percentage point for the final quarter of last year," said Junko Nishioka, chief economist at RBS Securities.

"Exports are likely to continue to fall at least until the first quarter of this year and possibly longer."

Exports to Europe, the United States and the rest of Asia all fell at a record pace in December.

While exports to the United States have falling since the U.S. mortgage defaults mutated in to a global credit crisis 17 months ago, Asian demand held up for most of last year. Now regional shipments are tumbling just as fast.

Exports to Asia sank 36.4 percent, the third straight month of decline. Shipments to China fell 35.5 percent.

Most of the decline was to due to falling demand for electronic parts to China, South Korea, Hong Kong and Malaysia, where technology factories are shutting down in the face of the recession in their biggest market, the United States, a finance ministry official said.

While the U.S. recession is still the main drag on Asian trade, there are signs the global financial crisis is rippling across Asian economies, forcing consumers and companies that were once expected to be drivers of growth to shrink from spending.

The volume of automobile shipments to Asia fell 32.9 percent in December from a year earlier, a finance ministry official said, almost twice as fast as previous month.

Shipments to China of chemicals used in the construction industry also fell, the official said.

"The sharp fall in exports to Asia shows that worsening economic conditions in the United States and Europe are damaging Asian economies," said Yoshiki Shinke, senior economist at Dai-ichi Life Research Institute.

Exports to United States plunged 36.9 percent as automobile shipments sank.

It was the 16th straight month of decline.

Yen Rally

"The yen's sharp rise is also very damaging and will delay a recovery in Japan's economy," Shinke said.

Rising risk aversion amid fears about the stability of U.S. and European banks sector woes pushed the safe haven yen to a 13-year high of 87.1 per dollar on Wednesday.

Top Japan currency bureaucrat Naoyuki Shinohara said he was monitoring exchange markets but declined to comment on whether Tokyo would intervene to rein in the currency. Finance Minister Shoichi Nakagawa warned against rapid moves.

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Collapsing exports and a surging yen are hitting Japanese companies. The mood among Japanese manufacturers' hit a new low and service sector sentiment sank to the worst in seven years, the Reuters Tankan survey showed.

To deal with the downturn, many companies are cutting jobs, raising more concerns over domestic consumption.

Japan's imports tumbled 21.5 percent, more than a 16.5 percent fall economists had forecast. They had predicted a 30.1 percent decline in exports.

Sliding exports left Japan with a trade gap for three months in a row, the longest time it has run a deficit since 1980.

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