Japan central bank aids utility, rebuilding

April 10, 2011 - 0:0

The Bank of Japan announced steps to get $11.73 billion in funds to the country’s earthquake-ravaged areas but remained opposed to buying bonds directly from the government to assist reconstruction.

Separately, analysts said the central bank appeared to purchase ¥100 billion in corporate bonds of troubled Tokyo Electric Power Co. at an auction Wednesday. The BOJ wouldn’t confirm the purchase, but analysts cited a spike in the auction’s average yield—to 1.277% from 0.138% in February—as an indication the bank bought Tepco bonds, which have plunged in value since the crisis at its Fukushima Daiichi nuclear power plant.
The central bank voted unanimously to keep its overnight interest-rate target at 0.0%-0.1%, as expected. But it cut its economic assessment, given expectations that the impact of the March 11 earthquake and tsunami and subsequent nuclear crisis will be widespread.
“Japan’s economy is under strong downward pressure, mainly on the production side,” the bank said in the statement. “The earthquake has sharply dampened production in some areas by damaging production facilities, disrupting the supply chain and restricting electric power supply; exports and domestic private demand have been affected accordingly.”
Ending a two-day meeting, the BOJ said it will offer ¥1 trillion ($11.73 billion) in one-year loans at 0.1% to financial firms with branches in affected areas, to facilitate a smooth flow of cash to the quake-hit northeast. The central bank will also consider broadening the range of financial assets it accepts as collateral in a bid to secure “sufficient financing capacity of financial institutions in disaster areas.”
Gov. Masaaki Shirakawa said he hopes to start the special lending facility next month. Details of the two measures will be decided by the next monetary policy board meeting, on April 28, when the BOJ will also release its semiannual outlook on the economy and prices.
Days after the quake, the BOJ doubled its asset-purchase program to Y10 trillion to bolster sentiment in the world’s third-largest economy. It has also been aggressively providing liquidity into the money market to meet any surge in funding demand.
Analysts said Wednesday’s apparent purchase ¥100 billion in Tepco corporate bonds—the maximum amount of debt in a single company that the central bank allows itself to buy under its own program—was still small compared with an outstanding balance of around ¥5 trillion in Tepco corporate debt, most of which is held by Japanese institutional investors.
Before the quake, Tepco bonds were considered a virtual derivative of Japanese government bonds, being as the company had a solid revenue stream as the utility for the entire Tokyo area.
The central bank chief on Thursday reiterated the BOJ’s opposition to underwriting Japanese government bonds, in the face of suggestions that the bank could buy reconstruction bonds straight from the government.
“I believe it is extremely important to maintain trust in the currency, both internationally and domestically,” especially given the huge impact of the earthquake and Japan’s severe fiscal condition, Mr. Shirakawa told a news conference. He said direct bond purchases could push up long-term interest rates, which in turn would increase the cost of bond issuance.
Debt underwriting is generally a taboo among central banks on concerns that it would appear to give governments a blank check for uncontrolled spending. Still, the idea has surfaced intermittently as Japan has lurched from crisis to crisis over the past 20 years. It is banned by law under normal circumstances but possible if approved by Parliament.
Some members of the ruling Democratic Party of Japan have floated the idea of the central bank underwriting government bonds as debate heats up over how to pay for reconstruction.
Many analysts expect additional monetary easing eventually as the economic impact of the disasters and the government’s rescue plans becomes clearer in the months ahead.
The special lending facility is “just a very small amount,” said Christian Carrillo, senior rates strategist at Société Générale. “It’s not something that’s really expanding purchases of JGBs so the government could directly spend more money in the economy, and it’s not clear that it can be used very quickly.”
While it appears the government’s first supplementary budget of the new fiscal year may not require additional JGB issuance, this could change later in the year.
“The BOJ may want to keep its powder dry until there is more need for additional JGB issuance, particularly amid the talk of possibly trying to make them underwrite JGBs,” Carrillo said.
Although the central bank lowered its economic outlook in the wake of the disasters that have left more than 27,000 dead or missing, it maintained a positive outlook for the longer term. It said the economy is likely to return to “a moderate recovery path” as exports and domestic demand are expected to pick up on the back of improvement in overseas economies and post-quake reconstruction.
“I’m convinced that the nation’s economy will return to a sustainable recovery and achieve high growth after overcoming problems,” such as supply limitations and loss of capital stocks, Shirakawa said.
Mr. Shirakawa expects supply chains to be restored by June or July, though he said he isn’t sure when supply shortages caused by unstable electricity supply and damages at production sites will improve.
(Source: The WSJ)