BOJ Nakamura Warns Fund Conditions May Stay Severe

Bank of Japan policy board member Seiji Nakamura on Wednesday warned that corporate financing conditions could remain severe despite recent improvements, in a sign he may be in favor of extending a deadline for measures to ease credit strains.

But he was quick to stress that the central bank should not have any preset idea on whether to end the extraordinary measures, such as buying corporate bonds and commercial paper from banks, beyond their due expiry date in September.

Nakamura also signaled that the BOJ was unlikely to increase its buying of Japanese government bonds for now, reiterating that it could destabilize markets if the central bank were to hold more bonds than it is allowed to under current rules.

"The environment for corporate finance may remain severe on the whole. Financial markets are improving but have not yet normalized," Nakamura told business leaders in Niigata, 250 kilometers northwest of Tokyo.

"But because the measures taken so far are extraordinary steps for the central bank, it's important to keep them in place only up to a size and for a period deemed necessary."

The recession triggered by bank failures and market turmoil that followed defaults on U.S. mortgages has forced the BOJ and other central banks to intervene in credit and interbank markets. But the global debate has now turned to when policy makers should retreat from these markets and cut stimulus spending.

Markets are focusing on whether the BOJ will extend beyond the September expiry date its programs for buying commercial paper and corporate bonds from banks, as well as its scheme for extending loans to banks at 0.1 percent interest for collateral.

The BOJ also currently buys 21.6 trillion yen of JGBs outright each year as part of its market operations.

While the central bank has said its JGB buying was not aimed directly at pushing down bond yields, some market players speculate that its decision to increase purchases in December last year and March this year was aimed at doing just that.

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Nakamura, formerly a shipping firm executive, was among the four dissenters when the BOJ cut rates to 0.3 percent in October last year, calling instead for a cut to 0.25 percent.

Since then he has voted with the board and toed the central bank's official line.

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