//quote.bloomberg.com// Tokyo, Oct. 30 (Bloomberg) -- The Bank of Japan said it will increase the amount of bonds it buys from lenders to pump more money into the economy and ease the pain of bankruptcies likely to be triggered by a planned government crackdown on bad loans. The bank said it will increase government bond purchases by one fifth to 1.2 trillion yen ($9.7 billion) each month. It also raised its target for reserves it makes available to lenders to between 15 trillion yen and 20 trillion yen from between 10 trillion yen and 15 trillion yen.
``The Japanese economy has stabilized on the whole, however no clear recovery is in sight,'' the central bank said in a statement. ``The uncertainty of the economic outlook is increasing because global growth has become unclear and the impact of the disposal of bad loans is anticipated.'' The central bank said a decline in Japanese and overseas stock prices has also prompted its decision. Bank of Japan Governor Masaru Hayami has goaded the government into action on bad loans by saying the central bank would buy stocks from lenders. Now the central bank is offering its support for the government's plan, which may drive up unemployment as banks cut off delinquent borrowers.
``By providing more money, the central bank has suggested it's trying to coordinate with the government,'' said Seiji Shiraishi, chief market economist at Daiwa Securities SMBC Co. The government today is due to announce top banking regulator Heizo Takenaka's bad-loan plan along with measures to help companies and workers weather the fallout. Parties in the ruling coalition have ``reached basic agreement'' on the plan, Prime Minister Junichiro Koizumi said yesterday.
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. Hayami will speak at a press conference at 4 p.m. Japan time. The central bank also said that it will extend the period of commercial bills purchased to one year from the current six months.
Opposition
The Bank of Japan's decision will probably make it easier for Takenaka to carry out his bad-loan plan, which investors said has probably has been watered down after opposition from banks and politicians. Mizuho Holdings Inc. and other lenders have objected that the plan, which calls for stricter accounting of bad loans, might threaten to put them under state control by reducing their capital below international requirements.
Members of Koizumi's Liberal Democratic Party have also objected, saying the plan is too harsh for an economy that's struggling to shake off its third recession in a decade. Today's move by the Bank of Japan may also calm financial markets, analysts said. Banks stocks rallied today on expectations Takenaka's plan would be watered down. Since he was appointed on Sept. 30, the Topix Banks Index has fallen 15 percent, compared with a 6.4 percent decline in the broader Topix Index.
Koizumi appointed Takenaka, a 51-year-old former professor, after Hayami announced his plan to buy shares from lenders, a step that suggested the Japanese banking industry was in worse shape than previously thought. The central bank's plan is aimed at limiting losses to lenders on their stock holdings.
Deadbeat Borrowers
Takenaka has said he wants banks to assess loans based on the likelihood of repayment rather than a borrower's past record, a move that would likely boost bad-loan totals. He also proposes reducing the amount of tax credits banks can count toward their capital. Aggressive write-offs of bad loans at major banks could cut Japan's economic growth by 3.4 percentage points and throw 1.5 million people out of work over the next two years, Nikko Salomon Smith Barney Ltd. estimates.
Some members of the ruling Liberal Democratic Party are calling for extra government spending to cushion the blow. Koizumi, who's seeking to rein in the national debt, has said he has no plans to submit an extra budget in the parliament session that ends Dec. 13. The Bank of Japan's decision to increase the amount of bonds it buys will help Japanese lenders by boosting the value of their portfolios. It will also bolster business confidence, analysts said, and keep credit flowing to some companies that might otherwise be cut off.
Still, throwing more money at banks may not 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. 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 today 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 today's meeting will be published on Dec. 20.