Finance counsels

Bank of Japan Deputy Governor Hirohide Yamaguchi said the central bank will end its unprecedented credit programs in a way that is least disruptive to investors.

“The bank will, without any predetermined view, carefully assess developments in corporate financing and financial markets,” Yamaguchi said in a speech today in Hakodate, northern Japan. “It is important to plan an exit in a way that market participants can anticipate and not bring about unnecessary market disturbances.”

The central bank last week decided to extend the credit- support programs of buying corporate debt from banks and providing them with unlimited loans to Dec. 31 from Sept. 30, citing “severe” borrowing conditions amid the worst postwar recession. Yamaguchi said that keeping the “exceptional” measures for too long could distort credit markets.

“Corporate financing conditions, especially for small companies, are still tight,” said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo. “The decision indicates the bank will continue to stick to an accommodative monetary policy.”

We “will decide, at an appropriate timing, whether the support offered by the current measures is still necessary,” Yamaguchi said. He said prolonging the programs may hurt the central bank’s balance sheet and such “excessive” intervention could create large swings in the economy and prices.

‘Warrant Attention’

Yamaguchi said the central bank needs to pay attention to the risk that the economy may not improve as much as it forecast. The sustainability of Japan’s recovery depends on the strength of capital spending and consumption, which are heavily reliant on overseas demand, and these “downside” risks “warrant particular attention,” he said.

“If the recovery in overseas economies is delayed or overseas economic conditions deteriorate unexpectedly, firms may become more cautious about the future economic outlook” and cut investment and wages, further weakening consumption, Yamaguchi said.

“The recovery path of Japan’s economy depends greatly on whether private final demand — exports, consumption, and business fixed investment — recovers strongly in a sustainable manner without any help from fiscal and other policy measures after the completion of current inventory adjustments,” he said cash loans.

Extend Programs

The central bank last week raised its economic assessment for a third month, citing an increase in government spending and rebounds in factory output and exports. The economy has “stopped worsening,” the bank said in a monthly report.

Shirakawa last week said it has become easier for major and high-rated companies to sell debt and get loans from commercial banks while small and lower-rated companies continue to struggle to borrow. He also said there has been “excessive moves” in the credit market, pointing to instances where interest rates on corporate debt fell below yields on government securities.

“Even if the economic outlook darkens once more and financial strains re-emerge over coming months, the most we expect would be a further three-month extension of the BOJ measures,” said Ben Eldred, a senior economist at Daiwa Securities SMBC Co. in London.

Japan’s gross domestic product will probably contract 3.4 percent in the year ending March 2010, the bank said last week, compared with its April forecast of 3.1 percent. The world’s second-largest economy will grow 1 percent in the following fiscal year, less than the 1.2 percent predicted three months ago, the bank said.

Deflation

Yamaguchi reiterated that the economy will start recovering in the second half of this fiscal year and that deflation won’t take hold even though prices are falling.

“We must pay close attention to the risk that price declines and the recession will worsen in a spiraling manner,” Yamaguchi told reporters after the speech. “We consider this risk low and therefore don’t need further policy easing now.”

Consumer prices excluding fresh food, the central bank’s preferred gauge of inflation, fell 1.1 percent in May from a year earlier, the sharpest decrease since comparable figures were first compiled in 1971. Yamaguchi said that the decline in consumer prices will start to ease later this year.

It’s “unlikely at present that prices will continue to decline and thereby lead Japan’s economy into a deflationary spiral,” Yamaguchi said.

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