23 Jan 2009, Georgina Lee, Risk magazine
The BoJ said it would make outright purchase of any commercial paper (CP), including asset-backed commercial paper (ABCP), which is eligible as BoJ collateral. This would mean A-1 rated CPs with a residual maturity of up to three months. At the same time, the central bank is investigating ways to extend such purchases to include corporate bonds with a residual tenor of up to one year. The central bank has also set various limitations on such purchases, for example by placing a ¥100 billion ceiling on the purchase of any single issuer's CP to avoid concentration of credit risks.
A total of 10 purchases are scheduled, with the first competitive auction programme of ¥300 billion scheduled for January 30.
The BoJ's change in policy follows a similar move by the Bank of England, which this month unveiled plans to buy corporate bonds to unblock capital markets and free banks' balance sheets to help them to start lending again.
The BoJ said the move followed a "significant decline in market functioning of corporate financing instruments".
Japanese corporates have faced difficulties funding in the CP market. This has resulted in total outstanding CP, including ABCP, underwritten by banks falling 15% year-on-year to ¥13.5 trillion in the last quarter of 2008. The quarter-on-quarter figure fell 9% from ¥14.9 trillion recorded in the third quarter.
A Tokyo-based rating agency analyst said the global financial crisis has made it very difficult for highly rated entities to get cheaper funding, and in many cases companies with medium-rated credit couldn't access the CP market at all. Japanese corporates turned to banks for loans, resulting in a 4% rise in bank lending volume for last year. "But the Japanese banks' balance sheet is not unlimited, so the central bank is taking a more pro-active stance in its bid to avoid a credit crunch," he said.
The Australian prime minister, Kevin Rudd, has also pledged to plug corporate funding shortfalls due to the drying up of loans extended by foreign banks in Australia. According to Merrill Lynch estimates, foreign banks accounted for more than half the syndicated loans issued to corporates since 2006.