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BOJ FOCUS-BOJ may mull more bond buying, markets unsure

Published 03/16/2009, 06:44 AM
Updated 03/16/2009, 06:48 AM
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* Markets mull if BOJ will increase govt debt buying

* BOJ policy board 2-day meeting ends on Wednesday

* BOJ seen keeping rates on hold at 0.10 pct

By Hideyuki Sano

TOKYO, March 16 (Reuters) - The Bank of Japan is expected to discuss whether to raise its purchases of government debt but market players are unsure if the central bank will make such a move at this week's board meeting.

The BOJ may be forced to increase purchases of government bonds if the country's economic slump deepens suddenly or banks start to fail, moving closer to a quantitative easing policy it has been trying to avoid.

Such a move could come this week, the Nikkei financial daily reported at the weekend, without citing sources.

The debate at the two-day board meeting ending on Wednesday comes as some of the world's other central banks eye government bond buying as a way to stimulate their economies, with the traditional tool of cutting short-term rates rendered useless with rates already nearing the floor of zero.

The Nikkei report surprised financial markets, which had thought the Bank of Japan would hold back on any new steps this week after a string of moves to ease the corporate credit crunch and rate cuts last October and again in December.

Many analysts said none of the recent comments by BOJ officials, including Governor Masaaki Shirakawa, suggest an intention to put more bond buying on the agenda, leading them to speculate there could be political pressure on the central bank.

"It seems quite out of the blue," said Naomi Hasegawa, a senior strategist at Mitsubishi UFJ Securities. "In the past, an increase in its bond purchases has always come with other measures. It has never just raised bond buying. It seems quite unusual in that sense, too, if the BOJ were to just increase its bond purchases."

The central bank has been worried about the deteriorating Japanese economy, which is sinking at its fastest rate since the 1974 oil crisis.

Gross domestic product contracted 3.2 percent in the final quarter of last year and economists fear a rising pile of unsold goods could signal a similar contraction in January-March.

The central bank is worried that a credit squeeze, on top of sliding sales, could send more Japanese companies to the wall.

JGB BUYING

With scant room left for further cuts in the official target -- the overnight call rate is now just 0.10 percent -- the BOJ's focus has been on ways to help facilitate firms' fund raising.

Boosting its outright buying of government bonds has been considered another important tool as it would be likely to support bond prices, pushing down yields and overall long-term interest rates.

The Bank of England started buying gilts last week, pledging to buy 75 billion pounds ($105 billion) in bonds to get the recession-hit British economy growing again after it cut interest rates to a new record low.

The Federal Reserve also said it was prepared to buy long-term Treasuries in January, although the U.S. central bank appears to have cooled on the idea recently on worries it could distort markets and stoke investor concerns over how the U.S. fiscal deficit will be financed.

The BOJ, which started buying JGBs more than four decades ago as a part of its market operations, expanded its buying in the early 2000s, when Japan experimented with quantitative easing, in which the banking system is flooded with cash to encourage lending and get the economy moving.

In December, along with the rate cut, it increased the size of its outright JGB buying by 14 percent to 16.8 trillion yen ($171 billion) a year.

Market players are still unconvinced the BOJ would raise it again in such a short time.

Many economists have been expecting the BOJ to do so when the government unveils another stimulus package and an increase in debt issuance to finance it.

"I don't think the BOJ will come up with any additional steps at this week's policy meeting," said Kyohei Morita, chief economist Japan, Barclays Capital

"It makes no sense to me why the BOJ would start boosting its outright buying of long-term JGBs before the government comes up with a spending plan on additional economic steps. Any increase ... would not help shore up the real economy without the government showing a clear direction for additional spending."

Prime Minister Taro Aso is seeking to compile a stimulus package on top of packages including 12 trillion yen of spending compiled last year.

Finance Minister Kaoru Yosano said on Friday the size of Japanese fiscal stimulus measures will exceed the International Monetary Fund's target for 2 percent of gross domestic product. ($1=98.26 Yen; $1=.7131 Pound) (Additional reporting by Tetsushi Kajimoto; Editing by Michael Watson)

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