BOJ Focusing on Easing Corporate Borrowing Costs, Minutes Show

Jan. 27 (Bloomberg) -- Bank of Japan policy board members said they should focus on lowering longer-term borrowing costs for companies after cutting the overnight rate to 0.l percent in December, meeting minutes show.

Interest rates on corporate debt remained high, so the bank should consider taking steps “that would have stronger downward impact on these rates,” some members said, according to minutes of the Dec. 18-19 meeting released in Tokyo today.

As well as cutting the benchmark rate from 0.3 percent at the gathering, the bank decided to buy commercial paper for the first time to counter the deepening credit squeeze. The board last week forecast the sharpest economic contraction in the postwar era as the global recession hammers Japan’s exporters.

“Today’s minutes reveal that, after this, they’re going to move more to longer-term rates,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo, who used to work at the central bank. “Banks are less willing to lend to each other, therefore rates are going up.”

The central bank last week said it will buy 3 trillion yen ($33.7 billion) in A1 rated commercial paper, including asset- backed debt, from lenders through March 31. It also said it may start buying corporate bonds of up to one year in maturity.

Board members agreed that corporate financing conditions have “deteriorated sharply” as businesses find it more expensive to sell commercial paper and corporate bonds or borrow directly from banks.

Costlier to Borrow

The spread on three-month commercial paper issued by companies rated A1 against government financing bills of the same maturity has widened to 83 basis points from 12.5 basis points before the collapse of Lehman Brothers Holdings Inc. on Sept. 15.

A few members said large companies are seeking loans from banks because they are struggling to raise finance by selling debt, and that’s making it more difficult for smaller businesses to borrow. Bank lending climbed 4.1 percent in December, the fastest pace in 16 years, as the global financial crisis forced companies out of the corporate debt market.

“The Bank of Japan will probably continue to adopt steps to shore up companies’ borrowing and lenders’ balance sheets because the economy is in freefall,” said Tomoko Fujii, head of Japan economics and strategy at Bank of America Corp. in Tokyo.

Exports plunged a record 35 percent in December from a year earlier as people around the world stopped buying cars and electronics. The decline in demand probably caused Japanese companies to cut factory production at a record pace last month, economists predict a report will show on Jan. 30.

Shrinking Economy

Gross domestic product will shrink 1.8 percent in the year ending March 31 and 2 percent next year, the board members said. Both projections would exceed a 1.5 percent decline in the year ended March 1999, the worst since 1945. The economy will recover to expand 1.5 percent in the year ending March 2011, they said.

The central bank cut the key overnight lending rate at the meeting because the economy’s deterioration was an “emergency” and the policy board needed to take all practicable steps immediately, the minutes said.

One member said a further reduction shouldn’t be ruled out because the economy was “very likely to deteriorate further.” Some said 0.1 percent was the “lowest possible level that would not impair the proper functioning of the market mechanism.”

Board member Tadao Noda, a former executive of Mizuho Holdings Inc., opposed the cut, saying it would have a “marginal stimulative effect on the economy.” Noda, the only dissenter, also said a reduction would make it unprofitable for investors to trade in the money market.

Another member, Atsushi Mizuno, said the bank should lower the interest rate it pays on the reserves lenders deposit at the central bank to zero percent. The board kept that rate at 0.1 percent at the meeting, removing any difference, or spread, between what it pays on the reserves and the key lending rate.