Dec. 25 (Bloomberg) -- Bank of Japan policy makers discussed taking on credit risk a month before deciding to purchase short- term corporate debt for the first time, meeting minutes show.
While the eight board members agreed that it was becoming more difficult for Japanese companies to obtain financing, they were divided on whether the central bank should buy commercial paper, according to minutes of the Nov. 20-21 meeting released today in Tokyo.
The bank lowered the key lending rate on Dec. 19 to 0.1 percent from 0.3 percent, the second cut in two months, and said it would buy commercial paper and more government bonds to pump cash into the economy. The board pledged to explore other ways to ease the credit shortage and counter the deepening recession.
“The Bank of Japan has taken an aggressive stance, which we haven’t seen before,” said Ryutaro Kono, chief economist at BNP Paribas in Tokyo.
The board members at the November meeting “agreed that financial conditions in Japan had become less accommodative” and the central bank should find ways to help companies get credit toward the calendar and fiscal year-ends.
Some members said “financial conditions might not be so severe as to require the central bank to directly take on credit risk,” the minutes showed. Others said assuming such risk is “crucial” when the financial system was “under stress.”
‘Exceptional Step’
Less than two weeks after the meeting, the board agreed to begin accepting lower-grade corporate bonds as collateral for loans to banks to help businesses get access to funds. Then on Dec. 19 it decided to buy commercial paper outright, taking on the risk that companies may default on the debt.
Bank of Japan Governor Masaaki Shirakawa said this week that purchasing corporate debt from lenders amounts to “taking over the business of private financial institutions” and is therefore an “exceptional step taken by a central bank.”
Shirakawa said the central bank needs to focus on making funds available to companies since the benchmark interest rate is close to zero. With the rate so low, the focus “needs to be placed on how to improve the availability of funds and alleviate the cost of corporate borrowing,” he said in a speech on Dec. 22.
At the November meeting, many members said the central bank should “examine the effects” of its Oct. 31 decision to lower the benchmark rate to 0.3 percent from 0.5 percent, the first reduction in more than seven years. Reports since then showed production, exports, household spending and business confidence all tumbled, deepening the first recession since 2001.
The central bank this week cut its assessment of the economy, using the language “deteriorating” for the first time since 2002. Shirakawa said exports will probably decline significantly because of the yen’s strength and the global slowdown. Japan’s exports plunged the most on record in November.
Source: bloomberg.com/apps/news