(For more stories on the Japanese economy, click) *BOJ expected to make decision this month - Nikkei *Likely to keep extending loans backed by corporate debt-Nikkei *Investors expect BOJ to keep rates near zero until 2011 (Changes dateline; adds analyst comments, details)
TOKYO, Oct 6 (Reuters) - The Bank of Japan is considering ending its outright purchases of commercial paper and corporate bonds at the end of this year as credit markets have begun to function more smoothly, the Nikkei business daily reported.
A decision is expected before Oct. 30, although depending on the behaviour of markets, the discussions could continue into November, the Nikkei said without citing sources.
The central bank began buying commercial paper and corporate bonds early this year to help businesses survive a credit crunch and global economic slump, and expectations were growing that it would let the schemes expire in the months ahead.
The purchases were part of global central banks' emergency measures to combat the global financial crisis.
In the United States and elsewhere, central banks are also starting to wind down their purchases of fixed-income securities as private investors flock back to credit markets and strains in short-term and longer-term lending markets ease.
"The BOJ extended these steps in July partly because of tight financial conditions at small firms," said Naomi Hasegawa, a senior fixed-income strategist at Mitsubishi UFJ Securities.
"But the bank may be judging there's little need for these steps now given that they won't have much impact on small firms as they are aimed at backing companies with high credit ratings."
The BOJ's closely watched tankan corporate survey showed last week that the financial conditions index for large companies marked the second quarter of improvement in the three months to September, while funding remained much tighter for smaller firms.
In July, the BOJ decided to extend the timeframe for outright purchases of commercial paper and corporate bonds for three months beyond the previous specified Sept. 30 ending date.
The BOJ is likely to continue to allow financial institutions to obtain low-interest loans backed by corporate debt as collateral, the Nikkei reported.
The Nikkei said because of brisk demand for such loans and their success in keeping rates low, some BOJ officials believe this step should be extended beyond its deadline at the year-end.
The BOJ has kept interest rates at 0.1 percent since cutting them twice late last year as the financial meltdown pushed the world economy into recession. Investors expect the bank to keep rates steady at least until 2011.
During a Group of Seven meeting of finance ministers and central bankers over the weekend, BOJ Governor Masaaki Shirakawa signalled an exit to the unconventional steps may be near, telling reporters on Saturday that corporate finance was in less need of policy support with credit market conditions improving significantly. (Reporting by Tetsushi Kajimoto in Tokyo and John Parry in New York; Editing by Chris Gallagher)