TOKYO (AFX-ASIA) - The Bank of Japan said it is considering buying shares held by banks in an effort to ensure they are not exposed to the impact of equity market volatility. Among analysts, the move was seen variously as supportive of the government's attempts to stabilise the financial system, a direct order from the government, a backdoor means of injecting capital into the banks, and a "stupid" idea.
Mizuho Securities chief market analyst Yasunari Ueno said the move was in keeping with government attempts to stabilise Japan's financial system, while JP Morgan chief economist Masaaki Kanno went a step further and said the government appeared to have forced the BoJ to act. BoJ governor Masaru Hayami told a briefing that the move is not intended to boost stock prices nor increase liquidity in the markets and would effectively be limited to only the biggest banks.
"The BoJ will likely buy shareholdings (from) banks whose holdings exceed their Tier-1 capital, which will be the major 13 banks including a few regional banks, from an undecided time period, to avoid the risks of stock price vulnerability for Japanese banks," Hayami said.
"This measure is not meant to boost stock prices and does not aim to increase liquidity in the markets," he said. Hayami said the financial health of banks is weakening considerably as they try to sort out their bad loans. "In the meantime, the sharp fluctuation of stock prices is affecting the banks so the government is also considering a new policy to stabilise the financial markets," he said.
"On that occasion (we) should work out countermeasures to the risk of stock price declines for the banks," he said. Mizuho Securities' Ueno said the central bank appears to have decided that increasing bond purchases so as to provide additional liquidity is not the most practical option at this point. "It is difficult for the BoJ to justify increased bond purchases" so the central bank opted for this measure in order to support government efforts to stabilise the financial system. BoJ director Takahiro Mitani said the BoJ will soon consult with the Finance Ministry and hear from financial institutions to decide the details of the scheme, including the period and target ceiling for the purchases, which would be at market prices. The BoJ Law prohibits the central bank from buying stocks directly without government permission, Mitani said.
The Finance Ministry declined to comment on whether it was involved in asking the BoJ to introduce the measures announced today. But JP Morgan's Kanno, a former central banker, said today's action marked the death of the BoJ's independence.
"I don't think (Hayami) was pleased to make the announcement today. The stock purchase (plan) is not a decision by the BoJ itself. It indicates the death of the independence of the Bank of Japan," said Kanno. "This is a decision by the government; it is an order from the government to do this, after the meeting the BoJ outlined what it could do," he said.
"The BoJ said there was nothing it could do. Prime Minister (Junichiro) Koizumi himself made the decision and ordered the BoJ to buy shares," Kanno said. Kanno said the government had apparently pushed the BoJ to act in the face of pressure from the US administration of President George W Bush. "It should be taken in the context of the Bush-Koizumi meeting; there was a strong message from the US government to put the highest priorty to stabilise the Japanese market," he said.
The BoJ's Hayami said large banks hold around 25 trln yen in shareholdings, while their Tier-1 capital totals around 17 trln yen. Mitani said the BoJ will not be committing to buy out that difference, commenting: "We should keep an eye on the health of the BoJ." He said the bank's thinking was that the share purchase scheme may be launched "within this fiscal year, or into the next fiscal year," but it would not be a regular activity. "We are not doing this as part of our daily market operations. If losses occur, the BoJ will have to draw out reserves to cover the loss. That will mean tax payments by the BoJ to the government will also be reduced," Mitani said. //www.afxpress.com