March 18 (Bloomberg) -- The Bank of Japan will increase its purchases of government bonds from banks in addition to extending subordinated loans to lenders as it widens efforts to counter the deepening recession.
The central bank will buy 1.8 trillion yen ($18.3 billion) of government debt each month, up from 1.4 trillion yen, it said in Tokyo today. Last night, the BOJ outlined plans to offer banks as much as 1 trillion yen in subordinated loans.
The purchases may help to contain bond yields and enable the world’s most indebted government to pay for Prime Minister Taro Aso’s third stimulus package. The Bank of England last week started buying U.K. government bonds and the Federal Reserve may unveil a similar program later today.
“At a time when the country’s economy is shrinking at a double-digit pace, fiscal spending is the remedy, and the central bank can contribute by buying government bonds,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “The bank can’t avoid entering the field of fiscal policy.”
The yield on Japan’s 10-year bond was unchanged at 1.3 percent at 5:47 p.m. in Tokyo, and earlier touched 1.285 percent, the lowest in more than a week. It’s still higher than the 1.165 percent at the start of the year. The yen traded at 98.65 per dollar from 98.48.
Governor Masaaki Shirakawa said expanding the central bank’s supply of longer-term funds to the economy will help to “keep financial markets stable beyond the fiscal year end.”
Long-Term Rates
The increase in debt purchases was “favorable and stabilized long-term interest rates regardless of growing concerns over excessive supply,” said Susumu Kato, chief economist at Calyon Securities in Tokyo.
Bank shares rose on the plan to buy subordinated debt, helping the Nikkei 225 Stock Average climb 0.3 percent. Mizuho Financial Group Inc., Japan’s second-largest lender, jumped 3 percent. Sumitomo Mitsui Financial Group Inc., the third biggest, advanced 3.4 percent.
Japanese banks traditionally have large equity holdings, making them vulnerable to the Nikkei’s 31 percent drop over the past six months and reducing their ability to lend.
In the U.S., Fed purchases of government debt are hardly a done deal. At least three of the 17 top Fed officials want to buy Treasuries or target the supply of money, while Chairman Ben S. Bernanke has favored reviving specific credit markets.
Stimulus Package
Aso last week said he’d draft a new spending package to add to the 10 trillion yen pledged since he became Japan’s leader six months ago. The world’s second-largest economy shrank at an annual 12.1 percent pace last quarter as Toyota Motor Corp. and Sony Corp. cut output and fired workers after an unprecedented drop in exports.
Shirakawa stressed that the bank increased the debt purchases to shore up financial markets and not to fund fiscal expansion. “It would be dangerous to use the government bond- buying operations as a financing tool,” he said.
“Whatever the Bank of Japan argues officially, there’s no doubt that the bond purchase increase is aimed at easing strong concern in the bond market that the government will have to sell more debt,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo.
The Bank of Japan has been buying government bonds since 1989 and increased the purchases in December to 1.4 trillion yen a month from 1.2 trillion yen. Shirakawa said the central bank has “very limited room” to expand them further.
Largest Public Debt
Japan’s public debt is more than 170 percent of gross domestic product, the Organization for Economic Cooperation and Development estimates, the highest in the industrialized world. By comparison, the U.S.’s debt will rise to 78 percent of GDP this year and Italy’s will reach 114 percent, the OECD says.
The Bank of Japan kept its benchmark overnight lending rate at 0.1 percent at today’s meeting. Since cutting the rate in December, the central bank has turned to buying assets from financial institutions in an effort to encourage lending.
Shirakawa said the central bank won’t seek government guarantees of losses it might incur should financial institutions be unable to repay the subordinated loans. The central bank would be have to line up behind other creditors should a lender go bankrupt.
In January, the BOJ started buying commercial paper to improve companies’ access to short-term funding. Last month it extended the asset-purchase program to one-year corporate bonds as well as stocks owned by banks.
The asset-buying policy has expanded the amount of money in the economy and is “quantitative easing in all but name,” according to Julian Jessop, chief international economist at Capital Economics Ltd. in London.
The Bank of Japan avoids describing the steps as quantitative easing, which in the past referred to its 2001- 2006 policy of setting a target for reserves that commercial banks hold at the bank.
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