Bank of Japan Expands Government Bond Buying

The Bank of Japan will increase its purchases of government bonds from banks in addition to extending subordinated loans to lenders as it widens efforts to counter the deepening recession., Bloomberg 3/18/2009 5:49:28 AM

The central bank will buy 1.8 trillion yen ($18.3 billion) of government debt each month, up from 1.4 trillion yen, it said in Tokyo today. Last night, the BOJ outlined plans to offer banks as much as 1 trillion yen in subordinated loans.

The purchases may help to contain bond yields and enable the world’s most indebted government to pay for Prime Minister Taro Aso’s third stimulus package. The Bank of England last week started buying U.K. government bonds and the Federal Reserve may unveil a similar program later today.

The yield on Japan’s 10-year bond was unchanged at 1.3 percent at 5:47 p.m. in Tokyo, and earlier touched 1.285 percent, the lowest in more than a week. It’s still higher than the 1.165 percent at the start of the year. The yen traded at 98.65 per dollar from 98.48.

Governor Masaaki Shirakawa said expanding the central bank’s supply of longer-term funds to the economy will help to keep financial markets stable beyond the fiscal year end.”

Aso last week said he’d draft a new spending package to add to the 10 trillion yen pledged since he became Japan’s leader six months ago. The world’s second-largest economy shrank at an annual 12.1 percent pace last quarter as Toyota Motor Corp. and Sony Corp. cut output and fired workers after an unprecedented drop in exports.

Shirakawa stressed that the bank increased the debt purchases to shore up financial markets and not to fund fiscal expansion. It would be dangerous to use the government bond- buying operations as a financing tool,” he said.

The Bank of Japan has been buying government bonds since 1989 and increased the purchases in December to 1.4 trillion yen a month from 1.2 trillion yen. Shirakawa said the central bank has very limited room” to expand them further.

Japan’s public debt is more than 170 percent of gross domestic product, the Organization for Economic Cooperation and Development estimates, the highest in the industrialized world. By comparison, the U.S.’s debt will rise to 78 percent of GDP this year and Italy’s will reach 114 percent, the OECD says.

The Bank of Japan kept its benchmark overnight lending rate at 0.1 percent at today’s meeting. Since cutting the rate in December, the central bank has turned to buying assets from financial institutions in an effort to encourage lending.

Shirakawa said the central bank won’t seek government guarantees of losses it might incur should financial institutions be unable to repay the subordinated loans. The central bank would be have to line up behind other creditors should a lender go bankrupt.

In January, the BOJ started buying commercial paper to improve companies’ access to short-term funding. Last month it extended the asset-purchase program to one-year corporate bonds as well as stocks owned by banks.

The Bank of Japan avoids describing the steps as quantitative easing, which in the past referred to its 2001- 2006 policy of setting a target for reserves that commercial banks hold at the bank.

Bank of Japan Expands Government Bond Buying