Bank of Japan to Provide Subordinated Loans to Banks

The Bank of Japan said it may provide as much as 1 trillion yen ($10 billion) of subordinated loans to banks to replenish capital depleted by falling stock prices and revive lending., Bloomberg 3/17/2009 6:07:24 AM

The central bank will provide details of the extremely extraordinary” measure, the length of the loans and the interest rate it will charge as soon as possible,” Governor Masaaki Shirakawa told reporters in Tokyo today.

The 48 percent drop in the Nikkei 225 Stock Average since the beginning of 2008 decimated the value of equities held by banks, making it harder for them to maintain capital ratios and limiting their ability to lend. Earlier efforts to buy bank balance sheets have so far failed to arrest Japan’s descent into what may be the worst recession since World War II.

Central banks globally are looking at myriad measures aimed at unfreezing credit markets to encourage lending and ease recessions sparked by the collapse of the U.S. mortgage market.

In the past two days Japanese bank stocks surged on speculation the central bank was considering the subordinated loan program. The Nikkei has advanced 5 percent this week.

The Bank of Japan concludes a two-day policy meeting tomorrow. Policy makers may then announce an increase in the amount of government bonds it buys from lenders as Prime Minister Taro Aso prepares a third stimulus package to ease the nation’s recession, according to economists.

More purchases of Japan’s government bonds would help avert a jump in bond yields, which have risen on concern that the government will have to sell more debt to pay for the stimulus. The yield on the benchmark 10-year bond rose to 1.295 percent at yesterday’s close from 1.165 percent.

The government started its attempts to shore up bank capital in December last year by offering to buy as much as 12 trillion yen of preferred shares.

Lenders have been reluctant to participate in that program because of concern a government-sponsored injection of funds could damage their reputations. The preferred shares may also convert into common stock if the lenders fail to pay dividends or if they are unable to repay the funds by a set date. Only three regional banks applied for the funds.

A separate proposal last month by the Bank of Japan to buy stock held by the banks was met by reluctance because the lenders didn’t want to sell their holdings, after which they’d be obliged to book further losses.

Mitsubishi UFJ Financial Group Inc., Japan’s largest bank by market value, rose 13.8 percent in the past two days. Mizuho Financial Group Inc. climbed 12 percent and Sumitomo Mitsui Financial Group Inc. added 14 percent.

Bank of Japan to Provide Subordinated Loans to Banks