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BOJ's Kuroda channels Draghi with 'whatever it takes' vow

Japan's central bank follows Fed playbook with bond buys and small-business aid

BOJ Kuroda
The Bank of Japan seeks to help small businesses squeezed by the coronavirus outbreak.   © Reuters

TOKYO -- On Monday, Bank of Japan Gov. Haruhiko Kuroda pledged to do "whatever it takes" to prevent an economic crisis.

This line echoed a famous 2012 speech by Mario Draghi, then president of the European Central Bank, at the height of the European Union's sovereign debt crisis. His promise to do everything in the central bank's power to save the euro -- followed by bold monetary policy measures -- came to be seen as a turning point, calming jittery markets and ultimately helping to preserve the common currency.

Whether the three-part policy salvo announced by Japan's central bank after Monday's policy board meeting will prove similarly decisive for a coronavirus-stricken economy remains to be seen, but it has at least exceeded investors' expectations.

"They gave us everything we wanted," said a senior fund manager at Sumitomo Mitsui DS Asset Management. "This should bring down corporate debt yields significantly."

The plan raises the BOJ's per-issuer cap on corporate bond purchases to 300 billion yen ($2.79 billion) or 30% of outstanding debt -- up from 100 billion yen and 25% -- while also allowing for buying of longer-dated bonds. The move, which comes amid a rise in yields that has hit high-risk businesses especially hard, is expected to benefit a range of companies including Nissan Motor and ANA Holdings.

The central bank plans to triple its maximum total holdings of corporate debt to 20 trillion yen. Just over half will be allotted to bonds -- equivalent to 15% of the outstanding total -- and the rest to commercial paper. This is similar in scale to a plan by the U.S. Federal Reserve that covers 13% of American corporate bonds.

One notable difference is that the BOJ program covers only investment-grade debt. The Fed said this month it would buy some bonds issued by "fallen angels" -- companies that carried investment-grade ratings as of March 22 but were later downgraded to junk.

The economic turmoil from the coronavirus may send more Japanese companies into junk territory, at which point questions will likely arise about whether to leave bailouts to the government or have the central bank play a role.

The BOJ also expanded a framework introduced in March for providing zero-interest funding to financial institutions for lending to small and midsize enterprises. It eased collateral requirements, broadened eligibility to include institutions such as financial cooperatives that lend mainly to small businesses, and began essentially offering to pay 0.1% interest on these loans.

The Fed, by comparison, has taken a different approach with the $600 billion Main Street Lending Program announced this month. It will purchase new and expanded loans to midsize businesses from private-sector banks -- in effect handling 95% of the financing and the risk -- through a fund set up in conjunction with the U.S. Treasury.

The BOJ's final move was to eliminate its roughly 80 billion yen annual "target" -- essentially a cap -- for purchases of Japanese government bonds.

Given that the central bank had scaled back its actual purchases to less than 20 trillion yen a year as interest rates stabilized, this seems intended less to remove an actual constraint than to send a message.

The BOJ aims to improve bond market liquidity that dried up as coronavirus-induced turmoil drove investors away. It also looks to mitigate side effects from the government's massive fiscal stimulus, which is expected to put upward pressure on interest rates by flooding markets with newly issued debt.

"Coupling this with the government's aggressive fiscal measures will heighten the effect of the policy mix," Kuroda said.

Other developed economies are using fiscal and monetary policy in tandem. The Fed said in late March it would buy Treasury securities "in the amounts needed to support smooth market functioning and effective transmission of monetary policy," scrapping its original $500 billion figure. The European Central Bank has also stepped up purchases of sovereign debt in response to rising long-term yields in Italy, for example.

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