09 Apr 2003, Nick Sawyer, Risk magazine
While the BOJ has pumped trillions of yen into the banking sector as part of its ultra-easy monetary policy over the last two years, this liquidity has not filtered down to the corporate sector, with banks instead cutting back their lending activities to reduce the emergence of new non-performing loans. This has hit the corporate sector hard, with few alternatives open to companies to obtain funding.
“The monetary base has doubled over the last two years, with no discernible effects on the economy,EUeda said. “One of the major reasons for this has been the inability of the banking system to respond to the massive liquidity injection and low interest rates by expanding lending. We seem to be at a point where major liquidity injections seem to have only minor effects on the economy.Ep>Issuing asset-backed commercial paper (ABCP) referenced to the higher quality receivables on their balance sheets will allow small and medium sized companies to reduce their reliance on banks for funding. By directly buying this ABCP from companies, the Bank of Japan hopes to stimulate the growth of the market, and take the impetus away from the country’s banks and institutional investors, many of whom may not have the risk appetite to invest in these securities in the near term.
“Both borrowers and lenders are both suffering from serious balance sheet problems,Esaid Ueda. “Financial institutions and institutional investors have now taken as much risk as they would like to on healthy asset tranches. The financial system’s ability to carry out financial intermediation is seriously damaged.Ep>The BOJ purchases of ABCP will allow the banks to free capital, which in turn could be used for lending to new businesses. At the same time, banks could earn fee income by arranging and distributing the securities.
“Buying outright corporate debt instruments is a very unusual thing for a central bank to do,Eacknowledged Ueda. “We think however, it will serve to mitigate the problems faced by banks and strengthen the ability of the financial system to carry out intermediation. As a result, the effectiveness of monetary policy will also rise.Ep>Ueda stressed that the measures would only be temporary, and added that the final mechanism for the ABCP purchases will be announced at a future monetary policy meeting, following a month of consultation with the financial industry.
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