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Preparing for the BoJ

Written by A Forex View From Afar on Wednesday, March 18, 2009

Financial markets will be waiting for the Bank of Japan’s (BOJ) press conference during the upcoming Asian session. The press conference follows closely behind the bank’s two day meeting.

The bank’s task will now be to stimulate a falling economy, but without the help of monetary policy. The ultra-low rate of 0.10% stops the BoJ from lowering the interest rate any further, practically putting conventional monetary policy on the sideline. As such, the bank must conceive new ways to stimulate the economy, and help the Japanese financial system. In past meetings, the bank referred to the measures taken as “exceptional for a central bank”

Some of these measures include providing dollar liquidity, intervening in the corporate market, and extending the range of assets accepted as collateral. Additionally, the central bank pledges to buy preferred shares issued by banks, and buying publicly listed shares held on the bank’s balance sheets. However, the last two actions failed because of the Japanese corporate business environment which led to the appearance of zombie banks during Japan’s “lost decade”.

In a new attempt to help the financial system, the BoJ announced that it would provide as much as $10 billion in subordinated debt. Subordinated debt, or junior debt, is among the riskiest forms of lending. In case of a bankruptcy, subordinated debt is the last that gets paid (if funds are still available); on the other hand, senior debt is the first to be paid in case of a bankruptcy.

There have been no further details about the new BoJ plan, but it will most likely be included in the upcoming statement. Chances are that the bank will ask the BoJ staff to analyze the implementation, as has been the case in the past.

The success of the new subordinated lending program is not assured. One reason is that it will hit the same Japanese corporate environment, in which banks refuse any help from the government so as not to affect their reputation. In a time when most of the U.S./European financial systems have survived only by being helped by the government, it is hard to envision any investors actually considering their reputation.
However, past experiences have proved the inflexibility of the Japanese corporate environment, so another failure would not come as a surprise.

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