UPDATE 5-BOJ pushed to act vs share falls; Noda sees risks

Thu Feb 26, 2009 8:42am EST

(For more stories on the Japanese economy, click [ID:nECONJP]) (Adds finance minister comments, paragraphs 3-4)

By Leika Kihara

NAHA, Japan Feb 26 (Reuters) - Japan may push its central bank to buy exchange-traded funds to prop up Tokyo's ailing stock market, a newspaper said on Thursday, but a BOJ policy maker warned too much asset buying by the Bank of Japan could distort the market.

Policymakers are scrambling for ways to support a market now plumbing near 26-year lows, triggering alarm that sliding shares are decimating the balance sheets of banks and raising the risk of a deeper recession in the world's second-biggest economy.

Finance Minister Kaoru Yosano said it was important to protect the economy from the repercussions of a sliding share market but that there was no consensus about how to do so.

"It's important to support share prices for the economy but views are split over what steps to take," Yosano told reporters.

The Bank of Japan already buys shares from banks, but the Yomiuri newspaper said the government was considering asking it to go further and buy ETFs, while it would guarantee any losses.

BOJ board member Tadao Noda, while declining to comment directly ETF purchases, said state intervention had to be carefully calibrated.

"Too much intervention could backfire, with the functioning of markets that are working after a fashion crippled by the central bank's buying," Noda said about an existing BOJ programme to buy corporate debt such as commercial paper and bonds.

"I don't think the lower the interest rates and the bigger the amount of asset buying, the better," Noda said in a speech to business executives in Naha, Okinawa.

STRAINS

Noda, seen as a hawk on BOJ monetary policy, said there was increasing stress in the banking sector and further actions to ease credit strains could not be ruled out, but added it was time to analyse the effect of policy measures taken so far.

The Nikkei share average .N225 has fallen about 15 percent this year after diving a record 42 percent in 2008, straining the balance sheet of Japanese banks as they have large stock holdings.

Policymakers fear that banks under strain will cut their lending, adding to the pressure on businesses already hard hit by plunging exports in Japan's worst recession since World War Two.

Government stimulus efforts have been stalled in parliament by rampant opposition parties eyeing a looming election, even as economists warn the country faces a record 4.0 percent contraction in the coming year. [ID:nLJ571289]

Noda's remarks underscore the dilemma the BOJ faces. Large BOJ intervention could distort markets as commercial banks flock to the central bank instead of lending money to each other. The BOJ may also suffer losses if it accepts riskier assets.

"The BOJ is in a difficult position, because, like all central banks in industrialised economies, it's expanding its balance sheet to underpin financial markets," said Akira Maekawa, senior economist at UBS Securities in Tokyo.

"The BOJ has exposed itself to potential losses on the commercial paper and corporate bonds that it's buying. This could harm the financial standing of the central bank."

BLEAK OUTLOOK

Japan's economy shrank 3.3 percent in the last quarter, its biggest quarterly contraction in 35 years, as global demand for its autos, technology and other exports slumps.

The current quarter is also looking bleak with January exports nearly half those of a year earlier. [ID:nLP582349]

Noda said the Japanese economy may worsen more than the BOJ's most recent forecasts in January, with a strong yen also hurting.

"Falling exports to emerging nations are hurting developed nations. We're seeing negative feedback between developed and emerging economies," he said.

The BOJ forecast in January that the economy would contract 2 percent on the year to March 2010.

Having cut interest rates to near zero, the BOJ has pledged to buy commercial paper, corporate bonds and shares held by banks to ease the funding squeeze.

Yosano said earlier this week the government was considering steps to support stocks, with officials studying setting up a stock-buying agency as Japan did in the mid-1960s.

A top ruling party official said the government could launch a 20 trillion yen ($205 billion) ETF buying scheme, the Yomiuri newspaper said.

The government already aims to buy up to 20 trillion yen in shares from banks to help stabilise their balance sheets and maintain lending. But related bills are stalled in parliament, where the opposition is trying to force an early election.

Analysts say the government is worried about the end of March, when Japanese banks finish their financial year.

The BOJ this week started a 1 trillion yen scheme to buy shares from banks, but this is aimed at reducing their exposure to market volatility, not boosting stock prices. ($1=97.40 Yen) (Additional reporting by Hideyuki Sano in Tokyo; Editing by Rodney Joyce and Patrick Graham)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.