Tue, Jan 26, 2010 page11

• BOJ mulling expanding banks’ emergency loans

  BOOSTING THE ECONOMY Analysts say the Japanese central bank will move to protect corporations and consumers from the impact of the yen rising any higher

  • BLOOMBERG
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  Bank of Japan (BOJ) policymakers are prepared to consider expanding an emergency-loan program for banks and increasing purchases of government debt should the recovery falter, people with knowledge of the matter said.

  The central bank’s board will leave interest rates and its lending program unchanged today, 16 of 17 economists said in a Bloomberg News survey. How it responds in coming months will depend on the extent of any further economic shocks — such as a surge in the yen to November’s 14-year high — the people said on condition of anonymity because the talks are private.

  “Should a rise in the yen threaten to damp corporate and consumer sentiment and exacerbate deflation, the BOJ will probably expand the loan program,” said Masaaki Kanno, a 25-year veteran of the bank who is now chief economist at JPMorgan Chase & Co in Tokyo. “If that’s not enough, the bank may turn to more bond buying.”

  While increased liquidity injections may help restrain the yen, an expansion of the monthly ¥1.8 trillion (US$20 billion) of bond purchases may spark concern that the BOJ is financing the government’s deficit spending. Central bankers would have to counter any such perception and may need to stress the urgency for Japanese Prime Minister Yukio Hatoyama’s administration to rein in the budget gap, one of the people said.

  The BOJ may be unique in considering additional monetary stimulus among the G20 major economies this year. Exporters have led the rebound from the country’s worst postwar recession as falling wages, job losses and factory overcapacity hamper spending and deepen price declines.

  BOJ Governor Masaaki Shirakawa and his colleagues, who began a two-day meeting yesterday, will leave the benchmark interest rate at 0.1 percent today, all of the 17 economists said in the survey.

  One of the analysts, Hiromichi Shirakawa, chief economist at Credit Suisse Group AG in Tokyo, said the bank may expand the ¥10 trillion lending program it introduced on Dec. 1 in reaction to the yen’s climb to ¥84.83 per US dollar. The currency jumped more than 1 percent at the end of last week, to as high as ¥89.79 in Tokyo trading, underscoring the risk to the exporters.

  The emergency lending facility, which provides commercial banks with funds for three months at 0.1 percent, could be expanded in stages, one of the people said. Along with increasing the size, officials might extend the maturity of the loans to six months and later to 12 months, the person said.

  “The government may put the heat on the BOJ should the yen gain rapidly and stocks slide before the fiscal year-end,” said Mari Iwashita, chief market economist at Nikko Cordial Securities in Tokyo. “The government is overwhelmed by the task of passing next year’s budget bill, so it has no choice but to depend on the BOJ if the economy stumbles.”

  So far, borrowing costs remain contained even as the fiscal condition deteriorates, as deflation attracts investors to government debt. The yield on the 10-year note was at 1.325 percent on Friday.

  “I see a 30 percent chance that the bank will buy more bonds,” said Yasunari Ueno, chief economist at Mizuho Securities Co in Tokyo.

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