Japan's central bank kicked off a two-day meeting Tuesday to discuss whether to end emergency measures aimed at keeping credit flowing to cash-strapped companies during the economic slump. The Bank of Japan has been fighting the fallout from the global economic downturn with super-low interest rates and purchases of corporate debt.
Some of its emergency steps are due to expire at the end of the year and markets are waiting to see whether the Bank will extend them. Japan's Financial Services Minister Shizuka Kamei has accused the BoJ of "talking in its sleep" with its remarks suggesting that the emergency measures may be withdrawn.
But analysts expect the Bank to ignore the political pressure, noting that few companies are currently taking advantage of the scheme anyway. The Bank looks likely to end outright purchases of corporate debt at the end of December, though an announcement may not come until its October 30 meeting, said J.P. Morgan Securities economist Masamichi Adachi.
"Regardless of when the decision is made, the BoJ probably will communicate that this is not the first step of tightening, but just the withdrawal of an emergency measure," he wrote in a note. One BoJ board member, Miyako Suda, said last month that the need for the steps to support corporate financing was decreasing as the global financial crisis abated. Analysts agree that the worst of the credit crunch appears to be over.
"Arguably, the crisis point for corporate funding, which is the target of the BoJ's extraordinary measures, has passed," said Naomi Fink, an investment strategist at Bank of Tokyo-Mitsubishi UFJ. The Bank's policy committee is widely expected to leave its key interest rate on hold at 0.1 percent when it announces its decision on Wednesday.
Japan's economy returned to positive growth in April-June, limping out of a year-long recession, but high unemployment, weak consumer spending and stubborn deflation are seen as posing risks to the recovery.
An interest rate rise still looks some way off in Japan, where borrowing costs have been kept very low for years here to support an economy that has never really recovered from its 1990s "lost decade". The BoJ will be anxious not to repeat its blunder of August 2000, when it raised interest rates too soon and was later forced to reverse the decision as the economy hit the skids.
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