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Bank of Japan board member Miyako Suda warned of the risk of propping up corporate finance for too long, signalling she may oppose extending the bank's programmes to buy company debt beyond December. Many other board members appear cautious about letting the BoJ's commercial paper and corporate bond purchasing programmes expire due to lingering doubts over the economic outlook.
But Suda, seen by markets as hawkish on monetary policy, said leaving them in place could also pose problems. "We should not underestimate the drawbacks of the unconventional measures," she said in a speech to business leaders in Nagasaki in southern Japan on Wednesday. In July, the BoJ extended its special measures aimed at dealing with a credit crunch, such as its commercial paper and corporate bond purchases, until December.
But the three-month extension was shorter than the six months markets had expected, as credit market conditions improved after being hit severely by the global financial crisis triggered by the collapse of Lehman Brothers last September.
Suda said that with credit markets on the mend, the drawbacks of the BoJ's special measures may outweigh the benefits if kept in place too long, suggesting that she could call for them to end on schedule in December. However, she later told reporters she wanted to communicate more with corporate executives to see whether they agree that funding conditions are improving before making a final decision.
The BoJ's buying of commercial paper has pushed interest rates on such debt so low that some issuers have been able to borrow funds even more cheaply than the government. Its recent offers to buy CP have attracted few bids, in another sign markets no longer need this support. While Suda's remarks may lay the groundwork for more debate on eventually ending the steps, many market players expect the BoJ to keep at least some of them in place beyond December as a safety net for corporate finance.
They also expect the bank to leave interest rates at 0.1 percent at least until March 2011. "Suda's views on the extraordinary measures aren't likely to gain traction at the BoJ," said Simon Wong, regional economist at Standard Chartered in Hong Kong. "Given deflationary pressures, I think these measures are still necessary. When you look at CPI, things are clearly worse than the BoJ expected."

Copyright Reuters, 2009

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