MNI PREVIEW: BOJ To Up Asset Buys; Eyes Temporary SME Funds

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan will consider increasing purchases of

commercial paper and corporate bonds when it meets next week, as financing for

small and large firms continues to tighten.

     The BOJ may also consider expanding eligible collateral to be used for

daily open market operations.

     The BOJ has focused all its efforts on boosting corporate finance and

stabilizing financial markets in order to prevent Japan's economy from falling

into a vicious cycle.

     The BOJ's policy-setting meeting is set for April 27, after the Board

agreed to meet for one day only, to reduce virus risks, with a decision expected

around noon Tokyo time.

     Despite the measures put in place by the central bank on March 16, both CP

and bond issuance have increased, pushing up the cost of corporate funding and

prompting some firms to postpone bond issuance.

     --FINANCING TIGHTENS

     Financing demand by Japanese corporates via bank loans rose in the three

months to April over the previous period, according to the BOJ's latest

quarterly survey of senior loan officers at 50 banks.

     The index for demand from large companies rose to +6 from +1. The index for

small businesses rose to +13 from +1, with demand for the next three months seen

at +46, sharply up from -1 in the previous survey.

     The BOJ doesn't currently have tools to directly facilitate smaller firms'

financing but may consider the establishment of a temporary fund for such, as

ensuring funding for the wider economy remains a priority.

     However, if policymakers look to introduce new tools not in the scope the

BOJ Act that increase the risk of losses for the central bank, permission will

be needed from the finance minister or the wider government.

     Speed is of the essence for the BOJ, as the longer the coronavirus outbreak

runs, the greater the hit on corporate cash flow, drying up liquidity for

smaller firms.

     --LIQUIDITY OVER PRICES

     The BOJ may have quietly stepped back from its hope of hitting its 2% price

target as there is no way of predicting when the target will be hit. Momentum

toward achieving the 2% price target appears lost, but the near-term focus for

policymakers is to maintain the stability in financial markets and to provide

ample liquidity into financial markets.

     A main concern for the BOJ is that the economy deteriorates sharply,

increasing bankruptcies that quickly transform into non-performing loans for

banks and lead to a drying up of credit provision, impacting the transmission

effects of its monetary policy efforts.

     --SHIFTING RISKS

     BOJ officials admit to a growing concern that the economy would deteriorate

rapidly if the virus lingered for an extended period, undermining the Board's

outlook, particularly for the labour market. If such a deterioration comes, and

the scale may be apparent by the time of the July quarterly outlook report, the

BOJ would then consider additional easy policy.

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

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

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