19 January 2001, 13:50  BOJ Keeps Key Rate Steady, Considers Extra Measures

Tokyo, Jan. 19 (Bloomberg) -- Bank of Japan policymakers said they mayexpand the supply of money to damp investors' concern the country's bankswill be hit with crippling losses by a nine-month slide in the stock market. The decision shows that while BOJ Governor Masaru Hayami isn't yet readyto cut rates -- the bank's board voted to keep rates on hold at a meetingtoday -- he is worried about the effect of the stock slump on confidenceamong businesses and consumers. ``Markets have shown greater volatility against the background of recentdevelopments in overseas economies as well as markets, as the end of thefiscal year draws nearer,'' Hayami said in a statement issued at the end ofthe meeting. The value of stocks held by Japan's 133 commercial banks fell almost 16trillion yen ($135 billion) in value last year, according to UBS Warburg LLC --enough for the BOJ to fret that some banks could be driven into insolvencyand starve the economy of loans. Banks will be forced to report these lossesfor the first time when the financial year ends March 31. ``The bank perceived it must act to avoid a financial crisis, which couldhappen in February or March,'' said Masuhisa Kobayashi, fixed incomestrategist at Merrill Lynch Japan Inc. Hayami, who has repeatedly rebuffed government calls in the past toincrease the money supply, asked BOJ staff to report on policy options bythe next board meeting on Feb. 9. Bonds rose to a 19-month high after his statement raised expectations thebank may lower interest rates or buy more bonds from the government. Theyield on the most recently sold 10-year bond fell 6.5 basis points to 1.465percent.
Banks, Stocks
The yen pared losses after Hayami's statement was distributed by the BOJ.The currency was recently traded at 117.93 per dollar, down from about117.62 before the statement was released. The yen fell as low as 118.30immediately after Hayami's statement. The benchmark Nikkei 225 stock average has shed one-third of its value thepast nine months. The index has gained 6 percent the past six days amidexpectations authorities will try to stem the slide. A change in accounting rules means banks, which often own stock in theirbiggest borrowers and accept shares as collateral against loans, will for thefirst time have to value that stock at market prices at the end of this fiscalyear. That will force banks to write off bad loans and the value of stocks they hold,and the fear is they'll be reluctant to extend new loans, or worse, becomeinsolvent. Total loans outstanding at Japanese banks in December were 3.8 percentlower than a year earlier. Lending has fallen for more than four years -- one ofthe main drags on Japan's economy. ``The bank is ready to take action in case of an emergency,'' said MasaakiKanno, chief economist at J.P. Morgan Securities (Asia) Ltd. The statement``was a contingency plan. With this, they hope to give the market a sense ofsecurity,'' he said.
Political Rumbles
A panel of the ruling Liberal Democratic Party legislators met yesterday andtoday and agreed to consider relaxing rules that block companies frombuying and holding their own shares, as a way to help share prices. Two members of the panel, chairman Hideyuki Aizawa and Ichizo Ohara, asenior LDP legislator and both long time critics of Hayami, didn't miss thechance to urge the BOJ to change tack. By expanding the supply of money,the bank can steer extra funds toward the stock market, they argued. The bank's nine-member policy committee voted to hold the interbankovernight loan rate, its equivalent to the U.S. Federal Reserve's federal fundsrate, at 0.25 percent. All bar one of the 11 economists surveyed byBloomberg News predicted the BOJ would stand pat. A BOJ official assigned to brief reporters on Hayami's statement said thegovernor's comments don't guarantee an increase in the supply of money. Minutes of today's meeting will be published March 5.
Signals for Slowdown
A string of economic indicators suggests Japan's growth is flagging.Business confidence among large manufacturers stalled last quarter after twoyears of improvement and may slide in the first three months of this year,according to the latest Tankan survey by the central bank published inDecember. ``The BOJ is clearly looking at a scenario where the U.S. economy sinks inthe January to March quarter and the risk that stocks may decline further,''said Kanno of J.P. Morgan. Japan's coincident index of economic indicators fell short of the boom-or-bust50 percent mark for the first time in 19 months in November, the governmentsaid last week, signaling the recovery may be stalling. Industrial production fell more than expected in November as manufacturersscaled back production as demand from the U.S. and Europe slowed,according to figures released Dec. 27. That's bad news for companies thathave invested in factories and equipment to fill overseas orders.

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