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BOJ, Japan govt mull scheme to buy bad loans - paper

TOKYO (Reuters) - Japan’s government and central bank are considering a $110 billion scheme to buy bad loans and other financial assets from banks to ease a credit crunch gripping the country’s businesses, daily Sankei Shimbun said on Tuesday.

A pedestrian passes the Bank of Japan (BOJ) building in Tokyo December 19, 2008. REUTERS/Yuriko Nakao

Such a scheme would come on top of Tokyo’s efforts to keep the world’s second-largest economy from sliding deeper into recession as the global credit crisis hurts exports and corporate funding conditions tighten.

The government and the central bank are hoping to implement the scheme by the end of March, buying various types of assets from banks including bad loans, corporate debt, stocks, commercial paper and derivatives products, the newspaper said without quoting sources.

They may buy up to 10 trillion yen ($110.3 billion) of these assets under the scheme, said Sankei, the smallest among Japan’s five major newspapers with nationwide circulation.

Japan, like the United States, is already in recession, with companies such as carmakers Toyota and Honda slashing output as customers close their wallets worldwide.

Any new asset buying scheme would probably be an expanded version of a rescue plan during Japan’s financial crisis in the late 1990s, when the government bought bad loans from banks through the Deposit Insurance Corporation, a government-affiliated institution, until 2005.

An official at the Deposit Insurance Corporation told Reuters that they had no knowledge about the matter and the Bank of Japan was not immediately available for comment.

The authorities have already unveiled a series of measures to ease credit strains and rev up the economy as the fallout from the global financial turmoil spread.

The government has announced extra spending plans and its biggest ever budget for the next fiscal year, while the central bank cut interest rates to near zero and offered to temporarily buy commercial paper outright earlier this month, echoing some of the emergency steps taken by the U.S. Federal Reserve.


Analysts, however, doubt whether buying bad debt would be as effective today as it was in the late 1990s, when Japanese banks were saddled with a huge pile of bad loans as a weak economy hurt companies, while tumbling stock prices eroded banks’ balance sheets.

“I do not see this would be particularly effective as the amount of bad loans is smaller than those banks were saddled with in late 1990s,” said Hironari Nozaki, bank analyst at Nikko Citigroup.

Japan cleaned up its banking system in the 1990s and government officials say Japanese banks are in much better shape than their U.S. and European peers, although analysts say they too are feeling the pinch from the global credit crisis, falling share prices and an economy in recession.

Large institutions have also fared better than smaller, regional banks that lend to small firms, which have been hit the hardest by the recession.

Bad loans held by Japanese banks totalled 11.4 trillion yen in March this year, well below the 33.9 trillion yen in March 1999, according to government statistics.

The global credit crisis has frozen the commercial paper market, forcing many Japanese companies to turn to banks to borrow at a record pace as they set aside cash at the year-end, when demand for funds tightens.

Japanese banks, however, are reluctant to lend particularly to smaller firms as falling stock prices erode the value of their stockholdings and hurt their balance sheet.

Some analysts said purchases of bad loans and other assets may have little impact unless the authorities buy assets such as equities from overseas investors and financial institutions, as they have been the main sellers of Tokyo shares recently.

“The last time around, Japanese banks were holding a significant amount of bad loans and stocks and were selling them, so there was a need for such assets to be bought,” said Hidenori Suezawa, chief strategist for Daiwa Securities SMBC.

“But this time foreign financial institutions and investors are at the centre, so the issue is whether the framework will be expanded to include them.”

The Bank of Japan bought shares held by commercial banks from 2002 to 2004 to help ease the impact of falling stock prices on banks amid an economic downturn.

Additional reporting by Masayuki Kitano, Junko Fujita and Taiga Uranaka