BOJ's commercial paper holdings jump nearly 30% as pandemic pain deepens

TOKYO (Reuters) - The Bank of Japan’s holdings of commercial paper jumped nearly 30% in April, data showed on Thursday, a sign the central bank intervened heavily in the market to help ease funding strains for companies hit by the coronavirus pandemic.

FILE PHOTO: A sign board of Bank of Japan is displayed at the headquarters in Tokyo, Japan January 23, 2019. REUTERS/Issei Kato

The health crisis is heightening the chance Japan will suffer a deep recession as the government extended a state of emergency on Monday through the end of the month, pressuring companies to shut down factories and stores longer than expected.

The BOJ eased monetary policy two months in a row in April, including by expanding the amount of commercial paper and corporate bonds it can buy as it seeks to keep borrowing costs low for cash-strapped firms.

Its holdings of commercial paper stood at 3.26 trillion yen ($30.7 billion) as of April 30, up 27.8% from a month ago, the bank’s data showed. That was much faster than the 16.9% rise in March. The BOJ’s corporate bond holdings rose 5.27% to 3.39 trillion yen.

Many Japanese companies traditionally rely heavily on bank lending, but big firms also raise funds by issuing commercial paper and corporate bonds.

Issuance of such instruments, and the cost of doing so, have risen in recent months as firms hoard cash as a precaution against the risk of a prolonged slump in sales from the virus.

Analysts expect the BOJ to keep ramping up asset buying to prevent credit markets from freezing up.

Mari Iwashita, chief market economist at Daiwa Securities, said the BOJ’s programme will face a key test in coming months when big companies readjust their production and sales plans for the second half of the year, based on how the pandemic unfolds.

“If the pandemic takes longer than expected to contain, it would heighten funding strains not just for small firms but big companies,” Iwashita said.

“The steps the BOJ has taken so far are aimed at preventing a worsening economy from triggering a financial crisis. We’ll know around late June through July whether their plan will work.”

In an emergency meeting in March, the BOJ decided to set aside an additional 2 trillion yen to increase purchases of commercial paper and corporate bonds, among its measures to cushion the economic blow from the health crisis.

The central bank eased policy again in April, tripling the amount of commercial paper and corporate bonds it can buy to a combined 20 trillion yen.

($1 = 106.1900 yen)

Reporting by Leika Kihara; Editing by William Mallard