Bank of Japan Steps Up Efforts to Ease Credit Crunch

The Bank of Japan extended its commercial paper buying scheme on Thursday and pledged to boost supply of low cost funds as it battles a credit crunch that is pushing the world's second-biggest economy deeper into recession.

In a widely expected move, the central bank kept interest rates unchanged at 0.1 percent, but announced several steps to ease funding strains plaguing companies and banks, including beefed up three-month fund-supply operations.

It also extended the deadlines for existing schemes, such as the 3-trillion-yen ($32.05 billion) commercial paper buying program, dollar funding operations and its acceptance of a wider range of assets as collateral.

"As expected, the Bank of Japan is focusing on measures to smooth corporate financing not just until the March fiscal year-end, but through a longer period of time," said Kyohei Morita, chief economist at Barclays Capital Japan.

"The significance is also on what the BOJ decided not to do, such as reverting to quantitative easing or boosting outright government bond purchases. Even after the terrible October-December GDP numbers, the BOJ thinks what it must do is ease corporate funding strains, not recklessly flood markets with money."

Japanese government bonds extended losses on disappointment the central bank refrained from actions aimed at directly bringing down longer-term money market rates, such as increasing buying of Treasury bills.

Japan's economy has been the hardest hit by the crisis set off by the U.S. housing market meltdown, due to its heavy dependence on exports and chronically weak domestic consumption. This week's data, which showed Japan suffered its worst quarterly decline since the 1974 oil crisis, underscored the fragile state of the economy.

The collapse of Japan's main export markets is pushing industrial giants such as Toyota and Sony deep into the red, prompting jobs and production cuts and setting the economy on course for its longest recession in modern times.

With the pain spreading to a network of suppliers, companies big and small are finding it hard to borrow as banks, hit by losses on their stock holdings and rattled by grim economic prospects, shy away from lending.

The three-month TIBOR rate, a benchmark for interbank lending, has held above 0.70 percent even as the overnight call rate target has declined from 0.5 percent to 0.1 percent in recent months.

Policymakers around the world have tried to break that vicious cycle by slashing policy rates, pumping funds into banks, rolling out stimulus packages to revive demand. Where official rates are already near zero as it is the case in the United States and Japan, central banks have been experimenting with ways of channeling funds straight to cash-starved companies.

More From CNBC.com

• Baidu Earnings Miss Expectations, Sales Decline
• Chinese Firms Turn to Pawn Shops as Loans Dry Up
• Charting Asia: Which to Buy -- Predator or Prey
• More Asia Pacific News

The Bank of Japan said it would buy 1 trillion yen of corporate bonds rated A or above and maturing within a year, giving shape to a scheme unveiled last month. It also extended other schemes beyond the March 31 deadline which marks the end of the current fiscal year.

Japan plans to spend 12 trillion yen ($128.2 billion) in fiscal stimulus programs, which amounts to more than 2 percent of its gross domestic product, although the budget and other related bills to finance this have yet to pass parliament. Government officials have signaled that more spending could come.

Copyright 2009 Reuters. Click for restrictions.