MNI POLICY: BOJ Sees More Govt Step; Ready To Buy More JGBs

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan officials expect the government to extend

measures to both support employment and to prevent businesses going bankruptcy

through any prolonged coronavirus outbreak, MNI understands.

     The government will increase issuance of JGBs to finance additional support

and the BOJ will boost its bond purchases to meet the additional supply --

having already tweaked its policy to allow bond buying in unlimited quantities.

     The BOJ expects any increased JGB supply will fund not only extended

support measures for the economy, but also to ensure the provision of both

capital and liquidity for the banking system.

     This helps in part address concerns of BOJ officials who see the risk that

businesses and banks could see a sharp deterioration in financial conditions

from September onwards.

     Businesses, particularly in the hospitality industries across the service

sector, have been hardest hit by the spread of Covid-19, with little cash of

cash flow or profits returning to normal any time soon. They still rely heavily

on the BOJ and government measures to provide financing and to continuing

covering a large percentage of staff wage costs until September

     --TIGHTER LENDING

     There is the ongoing concern that some companies in the sector are seeing

such low income revenues that it is difficult for them to continue to pay wages

even with the government's subsidy. If the poor profitability leads to greater

bankruptcies, the BOJ worries it risks a flow through into prolonged downward

pressure on financial institutions' profits - and that could force a gradual

pullback in financial intermediation, the BOJ views.

     That, the BOJ warns, risks a rise in credit costs and an increase of

non-performing loans could tighten banks' lending attitudes.

     The Financial Services Agency, Japan's lead regulator, will lay out its

concerns although the BOJ has often warned of the risk of financial imbalances

and of banks' risk management through its Financial System Reports.

     The minutes of the BOJ's June policy meeting underlined the BOJ's concerns,

noting that: "if the effects of Covid-19 are prolonged and led to an increase in

bankruptcies of firms and a rise in credit costs of financial institutions, the

impact would spread to the financial system as a whole and to the functioning of

financial intermediation".

     "A few members expressed the recognition that, given that a basic function

of central banks was to provide liquidity, it was important for the BOJ to

cooperate with the government while clarifying their respective roles," the

minutes added.

--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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