10 October 2002, 09:28  Bank of Japan Seen Keeping Policy Steady Tomorrow

/www.bloomberg.com/ By Mayumi Otsuma
Tokyo, Oct. 10 (Bloomberg) -- The Bank of Japan will probably leave its monetary policy unchanged this week as it waits for the government to spell out plans to clear an estimated $423 billion in bad loans that have paralyzed lenders, economists and investors said.
Fourteen of 18 economists, fund managers and currency traders surveyed by Bloomberg News expect Governor Masaru Hayami and his eight board colleagues to stand pat at a two-day meeting starting today. The bank's decision will be announced after the meeting ends tomorrow, probably in the early afternoon.
The bank left policy unchanged last month -- then announced an unprecedented plan to buy shares from commercial lenders to help them cut losses from plunging share prices. Now it's up to Prime Minister Junichiro Koizumi to start clearing banks' bad loans, which have starved the world's second-largest economy of the credit it needs to expand.
``It's the government's turn to detail what it can do to tackle the mountain of bad loans,'' said Takuji Aida, a fixed income strategist at Merrill Lynch Japan Inc. ``There is still some room for the bank to back up the government, but only after it can confirm details of government plans.''
Hayami has urged the government to tackle the bad-loan problem, saying there's little more he can do to pull Japan out of a decade-long slump. The central bank cut interest rates almost to zero 19 months ago and has pumped trillions of yen into the banking system, trying to halt a six-year slide in lending.
Central bank pressure probably prodded Koizumi to sack his top banking regulator, who opposed using public money to bail out banks, and replacing him with Heizo Takenaka last week. Takenaka sent share prices into a tailspin this week when he said unviable companies should be allowed to fail.
`Hand Grenade'
U.S. hedge-fund adviser Richard Medley called the central bank stock-buying plan the ``Hayami hand grenade, meaning an explosive device he threw right into the center of Japanese political debate.''
``Without Hayami's move and the BOJ's move, we probably wouldn't be at this point right now,'' said Medley, chairman of Medley Global Advisors.
The central bank is pressing the government in other ways. It's expected to release a report this week calling for a more accurate count of bad loans, a step that could increase the figure beyond the Financial Service Agency's estimate of 52.4 trillion yen. Standard & Poor's has said Japanese banks have another 103 trillion yen of loans at ``a high risk of default.''
The central bank isn't immune to pressure, either. Takenaka has urged it to inject more money since last year, and more recently he has called on the bank to deliberately create inflation to stop a slide in prices that's eroding corporate profits and increasing the value of debt. Hayami opposes setting a so-called inflation target.
``It may be getting increasingly difficult for the central bank to ignore Takenaka's calls,'' said Masaaki Kanno, a former Bank of Japan official who is now chief economist at J.P. Morgan Securities Asia.
Japanese government bonds may get a lift if the Bank of Japan leaves policy unchanged, investors said. Japanese bonds rose for a third day as the country's stocks slumped, fueling demand for the safety of government securities.
``The Bank of Japan is likely to hold off making any radical moves such as introducing an inflation target,'' said Yuzo Nakajima, a fund manager who oversees 30 billion yen at Deutsche Asset Management (Japan). ``That will be good for bonds.''
Falling Stocks
Falling shares -- which threaten to cut banks' earnings and capital -- are adding to the pressure. The Nikkei 225 Stock Average has fallen 22 percent this year -- and 13 percent since Hayami announced the share-purchase plan on Sept. 18.
``The lower stocks go, the more pressure the BOJ faces'' to shore up the economy, said Tomoko Fujii, a senior economist at Nikko Salomon Smith Barney Ltd.
The Nikkei was down 3.1 percent at 11:02 a.m. in Tokyo to 8273.67, the lowest since March 1983, as bank shares tumbled on speculation that the government is preparing a bailout that would dilute the stakes of existing shareholders.
Japan's economy is already showing signs of slipping back into recession after expanding 0.6 percent in the second quarter - -the first growth in more than a year.
Half of that growth was powered by exports, which have since slumped. Overseas shipments fell for a third month in August as demand in the U.S., Japan's biggest market, slowed.
More Pain
Machinery orders, an early indicator of business investment, fell 13.6 percent in August, more than expected, as slowing exports discouraged companies from ordering new equipment.
Clearing bad loans will add to the pain before the economy starts to recover. More companies will go bust as banks cut off deadbeat borrowers, pushing up an unemployment rate that's already hovering just below a record 5.5 percent.
Easing monetary policy would soften the blow, economists say.
``Markets would react much more favorably to an expansionary move by the Bank of Japan in concert with what minister Takenaka is doing,'' R. Glenn Hubbard, chairman of the White House Council of Economic Advisers, said Tuesday. ``Deflationary pressures in Japan alone make it very hard for any non-performing loan resolution to happen.''
Minutes of the policy board meeting will be released Nov. 22.

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