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BOJ softens stress

on bad loan problem

TOKYO: The Bank of Japan (BOJ) appears to be slightly decreasing its emphasis on the nation's bad loan problems in determining monetary policy, but this does not imply an immediate tightening of its credit grip, economists said on Thursday.

"Usually people assume low interest rates are necessary to help overcome the bad loan problem and to an extent that is true," said Robert Feldman, director of economic research at Salomon Brothers Asia Ltd. However, he said, the speed of writing off the bad loans was the issue now.

Bank of Japan governor Yasuo Matsushita on Thursday reiterated his remarks that financial institutions should further accelerate their bad loan write-offs.

A modest rise in interest rates, if not a discount rate rise, is a helpful way to put pressure on the banking system to come to grips with its problems, and get the financial write-offs going a little bit faster, he added.

Yorinobu Hara, manager of Asahi Securities Co Ltd's trading and sales department, said: "The central bank has clearly detached the bad loan problems of individual banks from its credit policy decisions."

The BOJ, in fact, did little to fight the upward pressure on rates on Monday in the first Tokyo market session after the weekend announcement of plans to liquidate Taiheiyo Bank.

The BOJ's lack of interest came even though the overnight call rate -- a key rate reflecting the BOJ's credit stance -- rose to 0.51 percent on Monday, the highest since October.

In the U.S. market, the yen weakened and the dollar was bought on the Taiheiyo news, as traders assumed that the BOJ would not allow rates to go up because of the banking problems.

"The logic (behind the assumption) is 180 degrees misleading on how the situation is working," said Feldman.

If Japanese authorities were not confident that they could handle the financial-sector problems, they would have never chosen that time for the Taiheiyo Bank announcement, he added.

Matsushita said: "Japanese banks will be able to cope with the bad-loan problems judging from their operating profits and internal reserves."

Feldman said that if authorities believed they had things under control, the determining factor for the BOJ's credit policy would return to being macro-economic fundamentals.

But others said sufficient operating profits and internal reserves to tackle the problem were in part brought on by the BOJ and a hasty tightening would kill the economic recovery.

"The BOJ will remain interested in maintaining a certain yield spread between short- and long-term rates," Hara said.

This was because the problem of the debt-ridden mortgage loan companies was just the tip of the iceberg of the nation's huge bad-loan problem, he said.

A positive yield curve with short-term rates at historic low levels has been the major factor behind banks' record high operating profits, economists said.

"Though an imminent tightening is quite unlikely, the BOJ is likely to gradually abandon its 'extremely generous' policy even if the bad-loan problem still exists," Hara said.

If Tokyo stocks rose to 24,000-25,000 in line with the recovery, banks' muscle to write-off bad debts would be stronger as their book profits on stock holding would be boosted, Hara said. "It would be a good opportunity for the central bank to nudge up rates," he said.

Mamoru Yamazaki, an economist at Paribas Capital Markets Ltd said: "The basic pace of a short-term rate increase will be set by fundamental variables, not by the bad-loan problem."

But, he added that in deciding on the timing, the BOJ would also pay attention to asset prices, such as stocks and land, which affect banks' capability to write-off bad loans.-Reuter