MNI POLICY: BOJ Eyes Fresh Collateral; Small Firm Debt Option

By Hiroshi Inoue

     TOKYO (MNI) - Although there is no imminent need to boost the reservoir of

eligible collateral the Bank of Japan accepts against loans, it is studying ways

to expand the pool so if needed, it can bring in items such as smaller firms

debt, MNI understands.

     At present, the Bank estimates that around 30% of eligible collateral is

unused, leaving financial institutions plenty of room for manoeuvre, at least

for now

     JGBs remain the most convenient eligible collateral but balances held by

financial institutions has fallen as the BOJ buying spree under the yield curve

control policy has accelerated.

     --JGB HOLDINGS DROP

     The outstanding balance of government bonds held by financial institutions

stood at JPY151 trillion at the end of December 2019, down 6.4% y/y, the BOJ

data showed.

     Government bonds held by the institutions accounted for 13.32% of the total

balance at the end of December, down from 21.09% at the end of June 2016, before

the BOJ introduced its yield curve control in September 2016.

     Certain banks are having difficulty offering additional eligible

collateral, despite being able to manufacture certain types, refraining from

doing so due to high costs and paperwork involved.

     BOJ officials are considering possible options that will enable banks to

offer additional eligible collateral without further cost to themselves.

     --COLLATERAL LOANS NOT PACKAGED

     Banks' needs for collateral will continue to grow as the BOJ launched the

new JPY30 trillion lending program with exceptional terms on May 22 to

facilitate smaller firms' financing.

     If usage of the facility is strong, demand for collateral will increase

further, increasing pressure on the BOJ to ease current eligibility terms of

extend the accepted pool.

     The BOJ has established systems that it accepts housing loan debt as

collateral, even at the individual mortgage level, making it easy for regional

banks to offer additional eligible collateral.

     Single individual loans to smaller firms are normally larger than that of a

housing loan, which would prompt the BOJ to consider accepting them as eligible

collateral.

--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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