Published: Wednesday, 15 Jul 2009 | 1:37 AM ET

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The Bank of Japan voted to extend its special corporate finance-support measures by three months on Wednesday to avoid undermining a fragile recovery in the economy and investor confidence.

Photo by: Jesse Braun Japanese Yen

The central bank's board voted unanimously to keep buying commercial paper and corporate bonds from banks and keep providing long-term loans to banks at 0.1 percent interest, extending the measures it introduced to deal with a crunch in credit markets.

"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 also kept keep 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 measures to be continued. After the BOJ decision, the yen was steady around 93.54 yen against the dollar

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[JPY=  Loading...      ()   ] and 130.75 yen per euro

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Finance Minister Kaoru Yosano had said on Tuesday that the bank should keep buying commercial paper and corporate bonds beyond their planned expiry in September.

"Even though these steps may not be used, the BOJ might as well leave the door open for CP and corporate bond buying as crisis measures," Yosano said.

Many officials at the central bank appear to share that view despite some improvements in credit markets in the last few months.

Although funding conditions for big companies 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.

    
In addition, the economy is saddled with excess production capacity and labor 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.

The BOJ's 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 BOJ 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, compared with an average of less than 500 billion yen per month during 2002-2007, when the economy was expanding.

That is a sea change from late last year when corporate debt issuance virtually stopped after the collapse of Lehman Brothers.

Three-month TIBOR rate has dropped more than 30 basis points to about 0.55 percent from 0.90 percent late last year. The yield on three-month government treasury bills has dropped to around 0.15 percent from about 0.30 percent earlier this year.

Still, a Reuters survey had shown that half of big Japanese companies wanted the BOJ to extend its unconventional measures.

Many economists predict the economy will grow in April-June thanks to a rebound in output and exports from the first quarter.

So far the economy seems to be tracking the BOJ's projection in April of a slow return to moderate growth as the world economy picks up.

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