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[Suresh]

Reuters: BOJ cuts rates and pumps funds to fight credit crunch

The Bank of Japan cut its key policy rate to 0.10 percent on Friday, the lowest since 2006....

[BOJ Governor Masaaki Shirakawa] said the decision to cut rates and buy more assets did not mark a return to a quantitative easing policy, the final option of any central bank in which the financial system is awash with cheap funds to try to revive lending.

"No one on the BOJ board seems to think that boosting base money would stimulate the economy," Shirakawa said.
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Besides cutting the overnight call rate, the BOJ sliced its Lombard rate, at which banks can borrow directly from the central bank, to 0.3 percent from 0.5 percent.
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To smooth fund supply, the BOJ decided to raise the amount of Japanese government bonds it buys each month to 1.4 trillion yen from 1.2 trillion yen, and purchase a wider type of bonds.

It also decided to temporarily buy commercial paper outright, following in the footsteps of the U.S. Federal Reserve, despite strong reservations expressed by BOJ officials in the past about accepting such assets with credit risk.

Commercial paper is a form of short-term unsecured borrowing often used by companies to fund day-to-day operations.
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Suresh

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[Suresh]

Financial Times: BoJ to buy Y1,000bn of corporate bonds
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In a sign of its alarm over the economic outlook, the BoJ said it would buy corporate bonds rated A and higher from next month. It will extend its programmes to buy commercial paper and provide unlimited collateral-backed loans to financial institutions.
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Critics note that the high single A rating required to qualify for the corporate bond-buying programme will not help the lower-rated companies that have the most difficulty borrowing.

The BoJ had set plans to buy up to Y3,000bn in commercial paper through to March 31, increase its purchases of government bonds and accept corporate bonds issued by real estate investment trusts as collateral for loans to financial institutions. It has also re-introduced a stock purchase programme.
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Suresh

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[Suresh]

Reuters: BOJ to buy $10.2 bln in subordinated bank loans

The Bank of Japan offered up to $10.2 billion in subordinated loans to Japanese banks to bolster their depleted capital, seeking to prevent a drying up of lending to companies and households in need of cash.
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"It's certainly going to help the banks looking to issue subordinated debt, and that's going to boost their Tier-2 capital," said Ismael Pili, a bank analyst at Macquarie Capital Securities.

"The thing about Tier-2 capital is, of course, a lot of people seem to be fixated more on the Tier-1 issuance, especially the core capital."
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The BOJ unveiled a scheme last month to buy up to 1 trillion yen ($10.2 billion) in shares held by banks, dusting off a scheme it ran from 2002 to 2004 amid a domestic banking crisis.

But so far banks have been reluctant to use the scheme as they do not want to sell their stakes at a loss.
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Suresh

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[Suresh]

Bloomberg: Bank of Japan Expands Government Bond Buying to Stem Recession
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The central bank will buy 1.8 trillion yen ($18.3 billion) of government debt each month, up from 1.4 trillion yen, it said in Tokyo today. Last night, the BOJ outlined plans to offer banks as much as 1 trillion yen in subordinated loans.

The purchases may help to contain bond yields and enable the world’s most indebted government to pay for Prime Minister Taro Aso’s third stimulus package.
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Aso last week said he’d draft a new spending package to add to the 10 trillion yen pledged since he became Japan’s leader six months ago.
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[Governor Masaaki Shirakawa ] stressed that the bank increased the debt purchases to shore up financial markets and not to fund fiscal expansion. “It would be dangerous to use the government bond- buying operations as a financing tool,” he said.

“Whatever the Bank of Japan argues officially, there’s no doubt that the bond purchase increase is aimed at easing strong concern in the bond market that the government will have to sell more debt,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo.

The Bank of Japan has been buying government bonds since 1989 and increased the purchases in December to 1.4 trillion yen a month from 1.2 trillion yen.
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Suresh

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[Suresh]

Reuters: Japan to Unveil $100 Billion Stimulus on Friday
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The package, which adds to 12 trillion yen ($119 billion) in spending planned under previously announced stimulus measures, comes as Bank of Japan policymakers debate the need for additional steps to support the flagging economy at a two-day rate review ending on Tuesday.
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Among the steps to be included are the creation of a safety net for workers who do not have the status of "permanent" staff, measures to help corporate financing, and increased spending on solar power systems, he said.

Yosano did not explain how the new spending will be funded, saying there was no discussion on issuance of new bonds in his meeting with Prime Minister Taro Aso on Monday.
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Tokyo already plans to issue 33 trillion yen in new bonds to fund its biggest-ever budget for the fiscal year that began on April 1, which does not include the new stimulus.

Japan's public debt is the worst among industrial nations at 158 percent of gross domestic product.
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Suresh

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[Suresh]

New York Times: Central Banks in Japan and Australia Take New Steps to Revive Economy
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To spur commercial banks to lend, the Bank of Japan said Tuesday that it would accept loans on deeds to municipal governments as collateral from lenders.

It also voted unanimously to leave its benchmark interest rate unchanged at 0.1 percent at the end of a two-day policy meeting.

Left with little leeway after lowering interest rates to near-zero levels, the Bank of Japan has been taking unconventional steps to get credit flowing again. Last month, it said it would boost its purchase of long-term government debt to inject more liquidity into the financial system.
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The picture is looking less grave in Australia, where the central bank’s governor, Glenn Stevens, said that although there were signs of continued weakness in the global economy, considerable injections of fiscal spending “should help contain the downturn” over the rest of the year.

Mr. Stevens’s comments accompanied the central bank’s decision on Tuesday to cut its benchmark cash rate by 25 basis points to 3 percent, its lowest level since March 1960.
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Suresh

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[Suresh]

Japan, the U.K., and the U.S. are racing to see which country will suffer a sovereign debt default or investor strike first, owing from looming exploding debt dynamics. For awhile, I thought that the U.K. would win this race, perhaps as soon as 2010. However, Japan still has a chance to win apparently.
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FT Alphaville: Japan’s godzillion-yen bond and stimulus spree, but will it work?

Japan is moving into an orgy of public spending, as the government announced plans on Tuesday to issue extra bonds worth ¥10,820bn ($110bn) to fund its planned ¥15,400bn ($155bn) stimulus package, announced earlier this month.
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As Reuters notes, the extra bonds, while expected, will raise new issuance by at least a third this fiscal year to a record ¥44,000bn ($448bn), raising concerns among investors about how the market will cope with the additional supply and helping push up bond yield spreads. In fact, total new issuance may eventually reach ¥16,9oo ($172bn) worth of bonds, according to a government draft plan obtained by Reuters.

That is a lot for an economy that is already running a debt to GDP ratio skirting 200 per cent (even though it does boast one of the biggest pools of savings in the world). And it will get bigger, as Lex notes:

[Suresh]

Zero Hedge: Upcoming Government Funding Crises: Japan Edition

One of our favorite strategists, SocGen's Dylan Grice is out with a masterful in its simplicity analysis, looking at the possibility of a funding crisis enveloping the governments of the developed world, and originating in the place where ever more people see brewing trouble: Japan. The full presentation can be found here, and while we recommend a full read, for those strapped on time, here are the cliff notes.

Risk is back: in fact, it is as if nothing ever happened. Junk spreads and the VIX are practically at the levels where we were before the first cracks in the housing bubble appeared. Is the economy really sufficiently stable to merit such risk metrics?

In answering the last question, one needs to look no further than the governments of the developed countries. In one word: insolvency. The ratio of total net liabilities, including off balance sheet, to GDP is at 400%. Greece is at 875%....

Such insolvency typically can end in only one way: hyperinflation. The chart below captures the budget deficits a few years before hyperinflationary episodes in five countries during the 20th century.
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[The chart compares budget deficits in France, Bolivia, Germany, Brazil, and Germany in years prior to their respective hyperinflations and then considers the budget deficits in Japan and the U.S.]

Why are budgets so inflated: one word - stimulus. Or taking from the future (and funding it handsomely) to avoid political, financial and social unrest (as well as maintaining even a slim hope of a second term). The entire world now runs on one ongoing stimulus: from the US, to the UK, to the EU, to China - the spigot has been turned on. And where do look to make sure that this is a viable structure? Where else - Japan. After 20 years of off again, on again stimulus after stimulus and quantitative easing episode, the country still has deflation. Where is this alleged hyperinflation. It may very well be coming. Japan's budget deficit has been funded over the past decades with internal source of capital. Prudent Japanese savers had been buying up JGBs hand over fist due to their perceived safety. Yet something is changing - demographics (and not only in Japan, but in the US as well, as an aging baby boomer population hits retirement). The Japanese demographic decline is in full swing, with the working age population now dropping materially.



And as more and more of the domestic population enters asset run-down mode, savings decline, and existing assets are sold.



Indeed, the demographic shift is already having an impact on Japanese holdings of JGBs.

[Chart showing that Japanese demand for sovereign debt is plateauing and a chart showing that Japanese household wealth is being consumed not increasing].

The biggest problem for Japan, however, is that it can not afford to ween itself off bond issuance. Japan's current debt service amounts to 35% of pre-bond issuance revenues, while the ratio of revenues from bond issuance to that from tax collection is expected to rise over 100% in 2010: "tax revenues will be less important than borrowing as a source of income."
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And if wholesale selling of assets does in fact occur, this will mean very bad things for America: