Bank of Japan Governor Masaaki Shirakawa warned of mounting problems for the world's No 2 economy, saying slumping exports and weak share prices were taking a toll on growth and the nation's banking system. He acknowledged the central bank was adopting unconventional policies to support an economy falling deeper into recession, but said it was already giving serious thought to how to eventually exit them.
"Exports fell sharply in the fourth quarter and corporate finance has been tight, which is putting downward pressure on the economy in various ways. That has happened not only in Japan but other parts of the world," Shirakawa told the lower house budget committee on Friday. "The worsening of economic activity in the past three months has been very severe."
A global economic slump since late last year has slowed Japanese exports and production of cars and electronics, and the economy is seen headed for its longest recession of modern times. Toyota Motor Corp, the world's top automaker, said on Friday it now expects its loss for the year to March 31 to be three times what it flagged just six weeks ago as it struggles to cut production fast enough to match sliding sales.
The deepening recession world-wide prompted the Bank of England to cut interest rates to a historical low on Thursday, while the European Central Bank also signalled that more rate cuts could come. While Japan's financial system is in relatively good shape compared with those of the United States and Europe, the nation's banks have been hit hard by falls in the value of their shareholdings and rising costs to cope with non-performing loans amid the global financial storm.
Shirakawa reiterated that the biggest risk for Japanese banks was the falling value of their shareholdings, which he said was behind the BoJ's decision to buy shares from banks. This week the central bank dusted off a scheme it implemented in 2002-2004 to head off a domestic banking crisis, pledging to buy up to 1 trillion yen ($10.97 billion) in shares held by banks to help reduce their exposure to stock market fluctuations.
That follows the BoJ's moves in the last few months to temporarily buy commercial paper and consider purchasing corporate bonds to ease a severe funding squeeze that threatens to deepen the recession. Shirakawa said that while such unconventional steps were needed in times of crisis, the central bank has its mind set on how to exit these policies once conditions improve.
"The BoJ has decided to buy commercial paper and shares. But we will guide policy with a firm eye on how to exit from these steps," he said. BoJ officials, including board member Atsushi Mizuno, have suggested the bank is ready to take further steps to ease credit strains. As the economy is quickly deteriorating, investors and banks have been nervous about lending to each other, keeping the benchmark three-month interbank rate above 0.70 percent, well above the BoJ's overnight call rate target of 0.1 percent.
Japanese companies have complained of tightening financial conditions, and there are growing fears that otherwise healthy companies are being driven to the wall because they cannot obtain working capital - especially smaller firms that are key suppliers to major corporations and collectively employ 70 percent of Japanese workers. Banks are caught between companies seeking more loans, because the credit market has frozen up, and falling values of large stock portfolios that have reduced their capital base.
Japan's economy is expected to have suffered its biggest contraction since 1974 in the last three months of 2008, according to a Reuters poll. Preliminary fourth-quarter gross domestic product data is due on February 16. The index of coincident economic indicators, which measures the current state of the economy and is compiled using data such as output figures, fell for the fifth straight month in December to mark its lowest level since 2003, government data showed on Friday.