BOJ Can Resume Collateralized Lending, Minutes Show (Update1)

By Mayumi Otsuma


Nov. 26 (Bloomberg) -- Bank of Japan board members said last month they could reinstate an emergency-lending program for banks after it expires in March, minutes show.

All members agreed “the bank should employ appropriate measures -- including reutilization of the special funds- supplying operations -- to facilitate corporate financing in a flexible and timely manner,” if necessary, according to minutes of the bank’s Oct. 30 meeting published in Tokyo today.

Governor Masaaki Shirakawa and his colleagues decided at the meeting to stop buying corporate debt at the end of the year and terminate its special program of providing unlimited collateral-backed loans to banks on March 31. It also indicated it would keep its benchmark overnight rate at 0.1 percent to cement the nation’s recovery from its deepest postwar recession.

“Members agreed that the bank should maintain the extremely accommodative financial environment by holding interest rates at their current low levels,” the minutes said, adding the bank would provide “ample funds sufficient to meet demand in financial markets.”

A Cabinet Office official who attended the meeting urged the central bank to monitor the risk of falling prices taking hold of a recovery that has yet to show signs of sustainability, the minutes showed. Concerns about prices grew after the meeting, prompting the government to declare that the economy is in deflation on Nov. 20.

Deflation Risk

Keisuke Tsumura, a parliamentary secretary at the Cabinet Office, told the central bank it needs to be aware of the risk of deflation given that the economic recovery isn’t “autonomous,” the minutes showed.

“With the government’s declaration of deflation, political pressure on the central bank may intensify,” said Mari Iwashita, chief market economist at Nikko Cordial Securities in Tokyo. “The government is finding it difficult to secure funds for spending, so they’ll probably turn to monetary policy to stimulate the economy.”

For its part, the government has limited room to spur demand, with tax revenue declining and the public debt approaching twice the size of the economy.

Finance Minister Hirohisa Fujii, who has called on the central bank to work with the government to fight falling prices, has pledged to ensure bond sales next fiscal year don’t exceed the record 44 trillion yen ($504 billion) budgeted for the current period.

The bank’s board last week kept interest rates unchanged by a unanimous vote. All except two of 17 economists surveyed by Bloomberg News this month said they expect borrowing costs to stay on hold at least through 2010.