BOJ unveils $11 billion stock buying scheme

The Bank of Japan on Tuesday pledged to spend $11 billion to buy shares held by Japanese banks to ease the pain from the global financial crisis, reviving a scheme launched earlier this decade to head off a domestic banking crisis.
The move came as a Japanese newspaper report said Mitsubishi UFJ Financial Group, Japan's biggest bank, would post a loss for April to December and slash its annual forecasts, reflecting both stock losses and a rise in bad debts.
The Nikkei stock average rose after the BOJ decision, while the yen fell broadly on hopes the central bank buying would ease risk aversion.
But some analysts questioned if the central bank stock buying would do much to help an economy already slipping deep into recession.
"If anything it is a positive. But it remains to be seen how much of an impact it will have on stabilising the broader financial system," said Jason Rogers, credit analyst at Barclays Capital in Singapore.
Under the scheme, the BOJ will buy up to 1 trillion yen ($11 billion) worth of listed shares held by Japanese banks up until April 2010 to reduce their exposure to the stock market.
To protect its own balance sheet, the central bank will buy shares in companies that have credit ratings of at least BBB-minus, the lowest rank in investment grade debt.
The BOJ's measure follows a government plan to buy up to 20 trillion yen in shares from banks and would revive a similar scheme it ran earlier this decade when authorities were trying to stave off a domestic banking crisis.
Back then, the central bank bought 2 trillion yen in stocks under a two-year scheme until 2004 to help many commercial banks staggering under a huge pile of bad loans and valuation losses on stockholdings.
Japanese banks have been hit hard by the fall in the value of their shareholdings and an increase in costs to cope with non-performing loans as the global financial storm has tightened its grip.
Slumping stock markets are a global problem for banks. A South Korean regulator reported on Tuesday that the country's banks posted its first combined loss in eight years in the final quarter of 2008.
RISKS FOR BANKS
The BOJ's plan is the latest in a string of measures designed to support the country's financial system as the world's second-largest economy struggles alongside most of the developed world with recession. Analysts estimate Japan suffered its biggest contraction since 1974 in the final quarter of 2008.
The central bank has cut interest rates to 0.1 percent and decided to buy corporate debt to smooth corporate funding, but markets have remained jittery as traders worry about the global economic problems.
Japanese firms have complained of tightening financial conditions, and there are growing fears that otherwise healthy firms are being driven to the wall as they cannot obtain working capital — especially smaller firms that are key suppliers to major corporates and employ 70 percent of Japan's workers.
Banks are caught between companies seeking more loans, because the credit market has frozen up, and falling values for their large stock portfolios, which have reduced the capital base of the banks themselves.
Japan's benchmark Topix index has fallen 35 percent since the end of last March. That would represent a loss of nearly 9 trillion yen for the country's banks, which held 25.6 trillion yen worth of stocks at the end of March on a parent-only basis.
Analysts said the BOJ's step could help ease tightening funding conditions ahead of the March fiscal year-end, when demand for money tends to rise as companies finalise their annual accounts.
"I don't know how much need financial institutions may have to sell shares to the BOJ, but at least having the system for the central bank to purchase shares will give a sense of relief," said Izuru Kato, chief economist at Totan Research.
But some questioned the timing of the BOJ's move.
"It raises questions about the underlying factor, the condition of banks' balance sheets," said Tomoko Fujii, head of economics and strategy for Japan at Bank of America in Tokyo.
"If you think about why it came out at this particular time, it does leave some significant concern."
OVERTIME PAY DOWN
Prime Minister Taro Aso reiterated that Japan was not immune to the global economic downturn, which he said was unprecedented in the sense that recession was spreading simultaneously around the world and was accompanied by signs of deflation.
"Japan's economy is worsening rapidly, led by exports," Aso told a lower house budget committee. "The degree of downturn is extremely severe compared with the past."
Data showed on Tuesday Japanese overtime pay in December marked the biggest annual fall in nearly 16 years, while overtime pay, a barometer of strength in corporate activity, saw the largest drop since April 1993, wage data from the labour ministry showed.