BoJ Governor, Masaaki Shirakawa has given an insightful speech on Japan’s woes and the recent monetary policy moves. Apart from the monetary policy easing, there are 2 other moves.
One, to infuse dollar liquidity to support markets. And tow, which is more interesting is taking on corporate credit risk on its balance sheet.
The Bank has already been conducting purchases of CP under repurchase agreements, and these have been significantly increased in terms of frequency and size to support the better functioning of the CP market. In addition, with a view to facilitating corporate financing during the run-up to the calendar and fiscal year-ends, the range of corporate bonds and loans on deeds accepted as eligible collateral has been expanded and, as a temporary measure, BBB-rated corporate bonds and loans on deeds have been included in eligible collateral.
Furthermore, a decision was made to introduce a special operation to facilitate corporate financing, which will be implemented in early January. This special operation will enable financial institutions to obtain funds over the fiscal year-end with no explicit ceiling on the total funds available, although the maximum loans available to individual financial institutions will not exceed the value of the corporate debt pledged as collateral. Also, the interest rate on these funds will be set lower than corresponding market interest rates.
This is interesting stuff. BBB rated corporate debt and loans on deeds as well. In the end Shirakawa says not to create another crisis by taking decisions in haste:
Considering the background to these experiences, it seems necessary to remember that responding to crises with excessive policy actions may lead to larger crises later on. In the current crisis, many issues have surfaced in central banking circles in areas such as the basic ideas behind the conduct of monetary policy and the regulation and supervision of financial institutions. I am sure that various issues are also being reconsidered in the field of corporate management, given the progress of globalization in economic and financial activities.
I actually feel bad for Japan. When would its lost decade end? Would the lost decade become lost 20-30 years? In context of Japan I also came across this summary of visit of Japan and Korea by San Francisco Fed President. She says:
Finally, analysts universally concluded that the government needs to help banks get toxic assets off their balance sheets. Otherwise, banks will remain focused on the potential for further deterioration of these loans at the expense of looking forward and making new loans. Thus, new capital will be hoarded to protect against potential new losses. Equally important is price discovery. In Japan, the government took severe haircuts in purchasing assets from banks (in 2000). This policy reduced uncertainty by establishing a floor price for future asset sales. Everyone we met with urged the U.S. to move forward with an asset disposition program, as originally envisioned for the Troubled Asset Relief Program (TARP).
Nice way to push the TARP argument. The problem was never with the intention of TARP but the execution. It has been a mess so far and has set in a bad standard.