* BOJ seen announcing details of commercial paper buying
* Buying of corporate bonds could be on agenda
* Interest rates seen on hold at 0.10 percent
* BOJ seen projecting recession, deflation for 2 years
* Detail of its new JGB buying operation expected
(For more stories on the Japanese economy, click [ID:nECONJP])
By Hideyuki Sano
TOKYO, Jan 19 The Bank of Japan, anxious to
grease the clogged up wheels of corporate finance, is set to
unveil details of how it will scoop up commercial paper and may
also study buying corporate bonds at a policy meeting this week.
The central bank is also expected to forecast that Japan's
economy will contract for two full years to March 2010 and there
will soon be a return to deflation in consumer prices.
Because interest rates are already near zero, as in the
United States, leaving little room for more cuts, BOJ board
members will likely focus on how to boost corporate fund raising,
as anxiety that has gummed up financial markets lingers.
The BOJ's policy could increasingly resemble that of the U.S.
Federal Reserve, which has been expanding its balance sheet with
various securities from markets.
But BOJ officials also say their policy does not require the
level of aggressiveness employed by the Fed at this point as
Japanese financial markets are relatively less damaged.
The BOJ cut interest rates to 0.10 percent from 0.30 percent
last month as the global downturn caused exports to dive.
At its policy meeting on Jan. 21-22, the central bank is
expected to follow up on the pledge it made last month that it
will buy commercial paper outright to help companies' financing.
The BOJ is seen limiting the scope to issuers with high
ratings, perhaps to an A1 short-term rating, in tandem with the
criteria the Fed adopts for CP buying, to ensure it limits risk.
Some analysts say, however, the BOJ may extend its CP buying
to lower rated A2 to enable a rolling over of maturing debt
beyond the March 31 fiscal year-end, when fund demand is strong.
Another possible agenda item is whether it should buy not
just short-term corporate debt such as CP but longer-term
corporate debt such as bonds.
Many economists doubt the BOJ would venture into buying
long-dated bonds, as their risk is much larger than CP given that
companies' long-term performance is highly unpredictable.
"I think their priority at the moment is on CP. It's not
clear if they are going to buy corporate bonds," said Susumu
Kato, chief economist at Calyon.
The case for bond buying looks even more diminished for now
as strains in Japanese money markets have eased after the BOJ's
rate cut to 0.10 percent from 0.30 percent and its announcement
of CP buying last month.
Interest charged on commercial paper has fallen to levels
seen before the collapse in September of U.S. investment bank
Lehman Brothers, and corporate bond issuance, almost frozen a few
months ago, is picking up.
Another source of funding for companies, bank lending, is
also now working and has risen at a record pace in recent months.
Although that partly reflected difficulty in raising funds in
capital markets, it suggests better monetary conditions than in
the U.S. and Europe, where banks face mounting losses.
Still, worries about corporate finance are far from receding.
Japan's banks hold a large amount of shares in Japanese
firms, so further falls in the Tokyo stock market could see them
incurring huge losses, making it hard to increase lending.
That could also prompt the BOJ to consider buying shares from
banks to reduce such vulnerability.
The outlook is grim too, with the export-driven economy
losing traction from diminished global growth.
A plunge in global demand has forced many firms to curtail
production lines and cut jobs.
"Right now, the economy is deteriorating because of a drop in
foreign demand. But companies are cutting jobs and domestic
consumption could slump from now on," said Naomi Hasegawa, a
senior strategist at Mitsubishi UFJ Securities.
Economists say the economy looks set to shrink in the
financial year to March 31 and next year. Consumer prices, which
only started to rise in recent years after nearly a decade of
deflation, may relapse into a steady fall.
The BOJ's review of its economic forecast published in
October is likely to lead to a similar conclusion.
Economists say the bank could project a contraction in the
economy of more than 1 percent in both this and next fiscal year.
That would be sharply lower than board members' median
forecast of 0.1 percent growth for the year to March and a 0.6
percent rise next year, in its twice-yearly outlook report.
The BOJ is also likely to forecast a fall in the core
consumer price index in the year from April and the following
year, largely due to falls in oil price
Few economists, within or outside the BOJ, expect lower oil
prices to induce broad-based deflation now. But they say such a
possibility cannot be ruled out if the economy keeps worsening.
The BOJ is also expected to say how it will allocate outright
buying of Japanese government bonds depending on maturity.
Last month it increased its JGB buying to 1.4 trillion yen
($15.39 billion) per month from 1.2 trillion and said it would
introduce a three-way buying window -- those maturing within a
year, those with one to 10 years to maturity and those with more
than 10 years to maturity.
(Editing by Michael Watson)