By Hideyuki Sano
TOKYO, Feb 16 (Reuters) - The Bank of Japan could announce this week that it will extend a programme of buying commercial paper beyond the current March deadline to shore up an economy suffering its deepest contraction in more than three decades.
The central bank is also likely to unveil more details of how it will buy corporate bonds outright following a two-day policy meeting on Wednesday and Thursday as it looks beyond the use of overnight interest rates to try to revive lending in the ailing economy.
With little room to cut overnight rates after bringing them down to 0.10 percent late last year, the BOJ is focusing on ways to improve funding conditions for financial institutions and companies in an economy hard hit by the global slump.
Like other central banks, it has introduced temporary measures that it hopes will unclog the wheels of corporate finance. These include a 3 trillion yen ($32.7 billion) commercial paper buying programme and accepting corporate debt as collateral on loans to banks.
Those measures, aimed at helping tide over companies to the end of Japan's financial year on March 31, when funding conditions usually tighten, are currently due to expire in April.
'Markets are already factoring in an extension, so if it doesn't do so, that would be a negative surprise,' said Naomi Hasegawa, senior strategist at Mitsubishi UFJ Securities.
Waiting until the next meeting in March to extend the programme would effectively mean waiting to the last minute, creating uncertainty, analysts say.
While BOJ staff are cautiously optimistic that companies will be able to raise funds at the critical period, they say a sharp deterioration in the economy and dwindling cash flow mean conditions will remain shaky beyond March.
Data showed on Monday that Japan's economy plunged deeper into recession with its worst quarterly decline since the 1974 oil crisis as the global downturn slashed demand for its exports. Economists say more pain is ahead.
At 3.3 percent, Japan's quarterly fall in gross domestic product was three times bigger than the contraction in the U.S. economy, the epicentre of the global crisis.
Japan's heavy dependence on exports and persistently soft domestic consumption have led to a sharper contraction than other major economies.
The BOJ, which has forecast the Japanese economy will shrink for two years to March next year, said last month it would start buying corporate bonds maturing within a year to free up cash.
Analysts expect more details on that scheme this week, with some saying the BOJ will announce a buying limit of around one trillion yen.
The BOJ is also expected to say it will only buy corporate bonds that are rated single A or above, some BOJ watchers said. By comparison, the central bank accepts bonds rated at least BBB as collateral in its money market operations.
BOJ officials have said they are considering how to lower longer-term interest rates, or those for lending beyond overnight funds, such as for periods of three months, which have remained stubbornly high.
But they have also acknowledged the difficulty of this task, so BOJ watchers doubt the Bank of Japan will announce any policies this week aimed at directly influencing longer-term rates.
Unlike the overnight call rate market, where the BOJ's operations can have a decisive impact on the market, the central bank has much smaller leverage on term interest rates.
Three-month TIBOR rate, a benchmark for interbank lending, has held above 0.70 percent since the middle of 2007. That is more than 60 basis points above the overnight call rate target of 0.10 percent.
While that is much smaller than the spread of over 100 basis points between three-month dollar rates and the fed funds rate, it still reflects a high level of risk aversion among banks in Tokyo's market.
($1=91.75 yen)
(Editing by Neil Fullick) Keywords: JAPAN ECONOMY/BOJ (hideyuki.sano@thomsonreuters.com; +81 3 6441 1827; Reuters Messaging: hideyuki.sano.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
TOKYO, Feb 16 (Reuters) - The Bank of Japan could announce this week that it will extend a programme of buying commercial paper beyond the current March deadline to shore up an economy suffering its deepest contraction in more than three decades.
The central bank is also likely to unveil more details of how it will buy corporate bonds outright following a two-day policy meeting on Wednesday and Thursday as it looks beyond the use of overnight interest rates to try to revive lending in the ailing economy.
With little room to cut overnight rates after bringing them down to 0.10 percent late last year, the BOJ is focusing on ways to improve funding conditions for financial institutions and companies in an economy hard hit by the global slump.
Like other central banks, it has introduced temporary measures that it hopes will unclog the wheels of corporate finance. These include a 3 trillion yen ($32.7 billion) commercial paper buying programme and accepting corporate debt as collateral on loans to banks.
Those measures, aimed at helping tide over companies to the end of Japan's financial year on March 31, when funding conditions usually tighten, are currently due to expire in April.
'Markets are already factoring in an extension, so if it doesn't do so, that would be a negative surprise,' said Naomi Hasegawa, senior strategist at Mitsubishi UFJ Securities.
Waiting until the next meeting in March to extend the programme would effectively mean waiting to the last minute, creating uncertainty, analysts say.
While BOJ staff are cautiously optimistic that companies will be able to raise funds at the critical period, they say a sharp deterioration in the economy and dwindling cash flow mean conditions will remain shaky beyond March.
Data showed on Monday that Japan's economy plunged deeper into recession with its worst quarterly decline since the 1974 oil crisis as the global downturn slashed demand for its exports. Economists say more pain is ahead.
At 3.3 percent, Japan's quarterly fall in gross domestic product was three times bigger than the contraction in the U.S. economy, the epicentre of the global crisis.
Japan's heavy dependence on exports and persistently soft domestic consumption have led to a sharper contraction than other major economies.
The BOJ, which has forecast the Japanese economy will shrink for two years to March next year, said last month it would start buying corporate bonds maturing within a year to free up cash.
Analysts expect more details on that scheme this week, with some saying the BOJ will announce a buying limit of around one trillion yen.
The BOJ is also expected to say it will only buy corporate bonds that are rated single A or above, some BOJ watchers said. By comparison, the central bank accepts bonds rated at least BBB as collateral in its money market operations.
BOJ officials have said they are considering how to lower longer-term interest rates, or those for lending beyond overnight funds, such as for periods of three months, which have remained stubbornly high.
But they have also acknowledged the difficulty of this task, so BOJ watchers doubt the Bank of Japan will announce any policies this week aimed at directly influencing longer-term rates.
Unlike the overnight call rate market, where the BOJ's operations can have a decisive impact on the market, the central bank has much smaller leverage on term interest rates.
Three-month TIBOR rate, a benchmark for interbank lending, has held above 0.70 percent since the middle of 2007. That is more than 60 basis points above the overnight call rate target of 0.10 percent.
While that is much smaller than the spread of over 100 basis points between three-month dollar rates and the fed funds rate, it still reflects a high level of risk aversion among banks in Tokyo's market.
($1=91.75 yen)
(Editing by Neil Fullick) Keywords: JAPAN ECONOMY/BOJ (hideyuki.sano@thomsonreuters.com; +81 3 6441 1827; Reuters Messaging: hideyuki.sano.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.