Financial Regulatory Forum

Japan central bank delays credit-market exit after government pressure

October 14, 2009

Japan's Finance Minister Hirohisa Fujii speaks during a news conference in Tokyo October 14, 2009. Japan's economy may be in a more severe condition than the Bank of Japan thinks, Fujii said on Wednesday, though adding that the central bank's decision to keep monetary policy on hold was appropriate. REUTERS/Yuriko Nakao (JAPAN POLITICS BUSINESS EMPLOYMENT) By Hideyuki Sano
TOKYO, Oct 14 (Reuters) – The Bank of Japan deferred a decision on Wednesday on withdrawing support for corporate finance after the government pressed the central bank to consider the economic cost of its retreat from credit markets.

Finance Minister Hirohisa Fujii kept up the pressure after the BOJ announcement, saying the central bank’s view of the economy was too rosy.

The BOJ had been tipped to announce it would end corporate bond purchases and other measures used to cushion the shock of the financial crisis, joining other central banks in rolling back their emergency response to the turmoil of the past two years.

Governor Masaaki Shirakawa said the decision could be taken at the next meeting on Oct. 30 or even later, and suggested the debate was more about the timing of the exit.

“What to do about various emergency measures in place now is a technical issue,” Shirakawa told reporters after the BOJ’s two-day policy review at which it kept interest rates on hold at 0.1 percent.

The decision is largely inconsequential for the corporate finance market which has mostly recovered from the crisis.

But the political pressure on the central bank meant the outcome may define its relationship with a new government, still fumbling with the levers of power in the world’s second largest economy.

Although Japan’s economy crawled out of its worst ever recession in the second quarter, the government is worried about rising unemployment, particularly among small firms that employ about 70 percent of the country’s workforce.

“It is not a matter of whether the temporary measures are having their intended effect but whether the BOJ’s possible exit will give the impression to markets that the bank is moving towards tightening,” said Seiji Adachi, senior economist at Deutsche Securities.

Shirakawa appeared to acknowledge those concerns.
“There’s no change in our stance of keeping interest rates very low and providing ample liquidity to markets,” he said.

RECOVERY
The BOJ upgraded its view on the economy, saying it was recovering and maintained its assessment that financial conditions were increasingly showing signs of improvement.

Fujii disagreed.
“The BOJ is looking at financial and other conditions in its own way, but it would be right to judge the situation as more severe overall than it thinks,” he told a news conference.

The overt pressure raises questions about how the government, formed six weeks ago after an election ended half a century of almost uninterrupted Liberal Democrat rule, would deal with the BOJ which formally became independent a decade ago.

“I think the BOJ yielded to the pressure and thought it wasn’t the time to send a signal that they will withdraw stimulus,” said Dariusz Kowalczyk, chief investment strategist at SJS Markets in Hong Kong.

The perception that a central bank is bowing to political pressure could make it difficult to manage market expectations and eventually undermine confidence in the currency.

Shirakawa dismissed any suggestion the central bank had yielded to the government, which sends finance ministry representatives to BOJ board meetings.

“They said the government will respect the BOJ’s independence based on rules stated in the BOJ Law, and said it hopes to closely communicate with the central bank,” he said.

Shirakawa had signalled an exit strategy was being worked out, telling reporters at a Group of Seven meeting of financial leaders on Oct. 3 that corporate finance needed less policy support as credit markets had improved significantly.

The Nikkei business daily reported on Oct. 6 that the BOJ was considering ending its outright buying of commercial paper and corporate bonds at the end of this year and was likely to decide by Oct. 30, the date of its next review.

The central bank came under pressure from government officials not to move too soon.

Fujii said last week he was concerned that the economy was still unstable. National Strategy Minister Naoto Kan and Banking Minister Shizuka Kamei also urged the central bank to consider the economic cost of its decision after Nikkei report.

“Japan’s economy has only just begun showing signs of picking up. What we need to do is to patiently maintain easy monetary conditions to achieve sustained economic growth,” Shirakawa said.

“On the other hand, there is a general understanding that what to do about measures in place to deal with the post-Lehman crisis is a different issue from debates about an exit strategy,” he said.

“We will review these steps in line with improvements in financial markets.”

Debt issuance has come back to life and credit spreads have shrunk considerably since the BOJ stepped into the corporate finance markets.

The cost of insuring a basket of Japanese companies’ debt with credit default swaps has shrunk to around 115 basis points from its peak of 550 basis points in March.
For a graphic on credit conditions, click on: http://r.reuters.com/sew63f

($1=89.64 Yen)

(Additional reporting by Stanley White; Editing by Dayan Candappa and Rodney Joyce) ((hideyuki.sano@thomsonreuters.com; +81 3 6441 1827; Reuters Messaging: hideyuki.sano.reuters.com@reuters.net))

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