29 October 2002, 09:21  BOJ Likely to Boost Bond Buying to Back Bad-Loan Plan

/www.bloomberg.com/ By Mayumi Otsuma
Tokyo, Oct. 29 (Bloomberg) -- The Bank of Japan may increase the amount of money it adds to the economy through bond purchases by as much as half, to 1.5 trillion yen ($12 billion), to ease the pain of bankruptcies from a planned crackdown on bad loans, analysts said.
Bank of Japan Governor Masaru Hayami already goaded the government into action by saying the central bank would buy stocks from banks. Now the bank may offer a reward by increasing the amount of bonds it buys from banks for the fourth time in 14 months, said 12 of 15 economists, strategists and currency traders surveyed by Bloomberg News.
``The central bank will try to signal it's committed to pushing through Japan's bad-loan cleanup,'' said Kazuhiko Ogata, a senior economist at HSBC Securities Japan Ltd. Japanese lenders have at least $420 billion of dud credits on their books.
At its monthly policy board meeting tomorrow, the central bank will probably raise its monthly bond purchases to between 1.2 trillion yen and 1.5 trillion yen, the analysts said. The bank may also increase reserves available to lenders from between 10 trillion yen and 15 trillion yen, they said.
Japanese government bonds have been gaining on expectations that the central bank would step up monthly purchases. Yields on benchmark 10-year bonds fell 1.5 basis points to 1.070 percent last week. A basis point is 0.01 percentage point. Ten-year bond futures for December delivery rose 0.03 to 141.40 in the week.
The No. 243 bond, which carries a 1.1 percent coupon and matures in 2012, was unchanged as of 10:11 a.m. Tokyo time, leaving its yield at 1.040 percent.
The Bank of Japan's decision will probably make it easier for Heizo Takenaka, the government's top banking regulator, to get approval for a bad-loan plan that has met resistance from the nation's seven largest banks and members of the ruling Liberal Democratic Party.
Prime Minister Junichiro Koizumi said Sunday he will back Takenaka's plan, which Mizuho Holdings Inc. and other lenders oppose because they are concerned it might put them under state control. Lawmakers blocked a draft version of the plan, which calls for a stricter accounting of bad loans, last week.
Koizumi appointed Takenaka last month after Hayami announced his plan to buy shares from lenders, a step that suggested the banks were in worse shape than previously thought. The central bank's plan is aimed at limiting losses caused by this year's 17 percent slide in the Nikkei 225 Stock Average.
Deadbeat Borrowers
Hayami ``has shown support for Takenaka's plan, and everyone knows it's going to be hard on the economy,'' said Michael Jansen, a currency strategist at National Australia Bank in Sydney, who expects the central bank to increase monthly purchases to 1.2 trillion yen.
The bad-loan package may hurt the world's second-largest economy before bringing it back to health. It may trigger a wave of bankruptcies as lenders cut off deadbeat borrowers, driving up an unemployment rate that's already near a record high.
Koizumi got a boost Sunday when his ruling Liberal Democratic Party won contests for five of seven seats in Parliament that had been left vacant by lawmakers who resigned or died. The elections, the first since Takenaka became top banking regulator, were seen as a test of support for Koizumi's policies.
Buying more bonds will help Japanese lenders by increasing the value of their portfolios. It would also bolster business confidence, analysts said, and keep credit flowing to some companies that might otherwise be cut off.
`Political Reasons'
Still, making more money available won't reverse a six-year slide in lending unless banks also clear their bad loans, economists said. Many banks simply use the money they get from selling bonds to the central bank to buy more bonds, rather than lend to companies and risk having the loans turn sour.
``Providing more liquidity to the money market, which is already flooded with extra cash, would be just meaningless,'' said Takehiro Sato, an economist at Morgan Stanley Japan Ltd. ``Still, I think the bank will offer to buy more bonds at its next board meeting for political reasons.''
Throwing money at banks hasn't done much to help the economy so far. The central bank raised its outright bond purchases to 600 billion yen from 400 billion yen in August 2001. It boosted bond- buying to 800 billion yen in December and to 1 trillion yen on Feb. 28.
The central bank tomorrow will also release its twice-yearly forecast for Japan's gross domestic product, consumer prices and wholesale prices for the fiscal year ending March 31 and the following year.
Minutes of tomorrow's Bank of Japan policy meeting will be published on Dec. 20.

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