MNI INSIGHT: JGB Buy Limit End Shows BOJ Ready To Act On NPLs

--Growing BOJ Policymaker Concern Over Bank NPLs 

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan's removal of the upper limit on its

potential JGB purchases was to future-proof itself against the possibility the

Japanese government will look to issue increasing amounts of bonds if there is a

need to inject public funds into an ailing banking system, MNI understands.

     Although there are no immediate concerns for the banks, there is a growing

concern at the BOJ that the longer the current virus-driven crisis persists, the

greater the drain will be on company finances across the country, which will

inevitably lead to some corporate failures and an increase in non-performing

loans for Japan's banking sector.

     Nor are companies set for cash shortages any time soon, as record profits

in recent years have helped firms build their cash reserves, but more than a few

months of the economy operating at the current reduced levels will impact their

financial position.

     --FUNDING ISSUES

     Recognizing this, the BOJ has increased its purchases of commercial paper

and corporate bonds to ease funding problems for major companies attempting to

boost liquidity levels and the central bank continues looking for ways to boost

the flow of credit to the real economy.

     If the current situation doesn't improve significantly over next two

quarters, many firms will face more serious funding challenges and commercial

banks would face growing concern over bad debt and calls for government bailouts

would grow louder.

     There is no government policy yet in place to push such bailouts through,

but the BOJ thinks it is getting in a place where it would be able to react to

easing pressures across financial markets if funding needs increase sharply.

     --SENTIMENT SHIFT

     The BOJ has long wanted to remove the pledge to buy up JPY80 trillion

annually from its policy statement seeing it as redundant with annual purchases

running at less that JPY20 trillion, but it short of doing so fearing such a

move could be misread as a pull back on its easy policy.

     However, it has now decided it can be removed, as pandemic-driven market

sentiment would no longer consider such a move a shift to a tighter policy bias.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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