Bloomberg News

BOJ’s Unlimited Loan Program Seen Open to Use by Hedge Funds

December 12, 2012

Bank of Japan’s Unlimited Loans Seen Open to Use by Hedge Funds

Bank of Japan Governor Masaaki Shirakawa. Photographer: Haruyoshi Yamaguchi/Bloomberg

The Bank of Japan (8301) plans to avoid restricting where money ultimately flows from its program of unlimited lending to banks, meaning cash could go to companies including hedge funds, people familiar with the central bank’s discussions said.

The BOJ doesn’t want to see credit extended to the public sector, such as through funding purchases of government securities, the people said. In October, the BOJ said inter-bank lending wouldn’t be available for use through the facility. Aside from the exceptions, the bank wants to avoid limits so the program is most effective, they said on condition of anonymity because the discussions are private.

The board meets next week, and Governor Masaaki Shirakawa said he aimed to decide the details by year-end.

With a shrinking economy, declining population and entrenched deflation, Japan’s central bank has struggled to stoke private demand for credit, even with borrowing costs near zero. The program, outlined in October, follows measures from a venture-capital style lending facility to including real estate investment trusts in the BOJ’s main asset-purchase facility.

“The impact of this program on Japan’s economy will be limited,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo and a former BOJ official. “We have to have companies take risks and that will take a visible recovery in the global economy.”

Weaker Yen

The program could also have the side-effect of weakening the yen as it will include lending in dollars, the people said.

While the yen has fallen almost 5 percent against the dollar in the past month, it’s still stronger than the 100 yen per dollar that Nissan Motor Co. Chief Executive Carlos Ghosn said is the currency’s “neutral range.”

The currency fell 0.4 percent to 83.56 per dollar as of 1:19 p.m. in Tokyo, its lowest since March, after the Federal Reserve yesterday said it would buy an extra $45 billion a month of Treasury securities to spur the economy.

The U.S. central bank provided low-cost loans to investors to buy AAA-rated asset-backed securities under an emergency lending program during the global financial crisis. The Fed’s Term Asset-Backed Securities Loan Facility was tapped by borrowers from banks to hedge funds and a fast-food company.

The BOJ said in October that loans under its program will be provided “against pooled collateral,” placing the underlying credit risk with the borrowing financial institution.

Deposit-taking institutions with accounts at the BOJ, including branches of foreign banks, will be eligible to borrow, the people said. The central bank aims to begin lending early next year, they said.

Credit Demand

“The program’s viability may be low given that loan demand in Japan remains sluggish and banks are able to secure cheap funding from depositors,” said Shinichi Ina, a Tokyo-based analyst at UBS AG. “Demand for the program is likely to be very incremental due largely to ample supply.”

Customer deposits held by Japan’s banks exceeded loans by 171 trillion yen ($2 trillion) in November, close to a record 174.1 trillion yen in June, according to data compiled by Bloomberg based on central bank figures. The country’s banks held 162.8 trillion yen of Japanese government bonds as of Oct. 31, down from a record 171 trillion yen in March, Bank of Japan data show.

Bank lending in Japan has risen less than 1.5 percent from a year earlier in every month since October 2009, BOJ figures show.

The BOJ’s Tankan survey will probably show tomorrow that large manufacturers are the most pessimistic since the aftermath of the global recession, according to the median forecast in a Bloomberg News survey of analysts.

The reading may have declined to minus 10 in December, from minus 3 in September. That would be the lowest since the first quarter of 2010. A negative figure means pessimists outnumber optimists.

To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net; Masahiro Hidaka in Tokyo at mhidaka@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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