BOJ to Hold Emergency Meeting Tomorrow on Corporate Funding
The Bank of Japan will hold an emergency board meeting tomorrow to consider ways to help companies obtain funds as the recession deepens.
The policy board will discuss expanding the range of corporate debt it accepts from lenders to encourage banks to increase funding for businesses, the central bank said on its Web site today. The meeting will start at 1 p.m. in Tokyo and Governor Masaaki Shirakawa will brief the press at 3:30 p.m., the statement said.
Shirakawa said today that companies’ access to funding is deteriorating “at an accelerating pace” and likened an increase in borrowing costs to the country’s credit crunch 10 years ago. Japanese banks are once again becoming less willing to lend on concern that businesses won’t repay debt.
The credit squeeze “may have already depressed capital spending as smaller firms hoarded cash in order to meet year-end obligations,” said Naomi Fink, Japan strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo. “A shock to small and midsize companies who dominate the services sector could prove the straw that broke the camel’s back for the Japanese economy.”
Public broadcaster NHK reported earlier today that the policy board will discuss allowing banks to use corporate bonds with lower credit ratings as collateral for obtaining cash from the central bank. The program would stay in place until April, NHK reported, without saying where it got the information.
Year-End Funding
The central bank is working on ways to help companies obtain funds to settle accounts “during the run-up to the calendar and fiscal year-ends,” Shirakawa said in a speech today. Diminishing access to credit may “depress economic activity from the financial side,” he said.
“Success in supplying greater liquidity could mean the difference between an uneventful year-end and an acute corporate funding squeeze,” said Fink at Tokyo-Mitsubishi.
Shirakawa said that while yields on corporate debt are “somewhat lower” than they were during Japan’s credit crunch a decade ago, they are rising at a pace “comparable to that in 1998 and 1999.”
Corporate bond sales in Japan plunged 45 percent in November from a year ago, data compiled by Bloomberg show. NTT DoCoMo Inc. and Nippon Steel Corp. paid higher yield premiums last week when they sold the first bonds outside the public works sector since Oct. 15. The shortage of credit drove bankruptcies among publicly traded companies to a record 30 this year, after property developer Morimoto Co need cash. collapsed last week.
Rate Cut
Lending between banks has tightened even after the central bank’s Oct. 31 decision to cut its overnight lending rate to 0.3 percent from 0.5 percent. The three-month Tokyo interbank offering rate, or Tibor, rose for the 16th straight day to 0.883 percent, 583 basis points higher than the target for overnight lending. Three-month Tibor was 388 basis points higher on Oct. 30.
Future policy decisions depend on developments in the economy and financial system, Shirakawa said. The governor acknowledged last month that the rate cut has done little to lower other borrowing costs.
“It’s still doubtful whether the central bank’s additional measures to help corporate financing alone will be enough to counter the economy’s rapid deterioration,” said Kiichi Murashima, chief economist at Nikko Citigroup Ltd. in Tokyo. “The central bank may be forced to lower the key rate further.”
Collateral Accepted
The Bank of Japan currently accepts the top seven of 10 investment-grade corporate bonds that are publicly placed. It also takes AAA-rated asset-backed securities and some higher grades of asset-backed commercial paper.
The balance of commercial paper, which companies use for short-term funding, fell to 12.8 trillion yen ($134 billion) in October, the lowest since March 2002.
Shirakawa repeated that he’s reluctant to lower the benchmark rate again and revive a 2001-2006 policy of keeping borrowing costs near zero percent. Further reductions could impede the flow of funds in the money market by making returns so low that investors have little incentive to trade, he said.
The central bank is also watching the risk that prices will fall as oil and commodity costs drop, the governor said. Gains in consumer prices excluding fresh food will ease “at a rapid pace,” he said, adding that the key gauge of inflation may turn negative in the year starting April, he said.
Core inflation slowed for a second month to 1.9 percent in October, the government said last week, and the central bank forecasts the index will slow to zero next fiscal year.
The global economy won’t show clear signs of a recovery until mid-2009 at the earliest, Shirakawa said.