The Bank of Japan said today it would buy corporate bonds to ease an increasingly severe funding squeeze and warned that deflation was returning to the world's second largest economy for the second time this decade.
The central bank said core consumer prices and gross domestic product would both fall for two years, as plunging exports and corporate investment, on top of record lows in business confidence, send Japan into a deepening recession.
The BOJ left interest rates on hold at 0.1 per cent but warned the economy was worsening sharply, and delivered a similar warning about deteriorating access to credit.
The BOJ said it would buy corporate bonds as well as commercial paper and support the hard-pressed property market by accepting real estate investment trust debt as collateral, agreeing to take on new credit risks to help firms raise cash in gummed up financial markets.
"The fact that the BOJ is going to take credit risk is significant. It is a serious announcement," said Jun Miyata, a senior fund manager at T&D Asset Management Co, but he said bonds of up to three years should be in the central bank's sights.
Japanese exports plunged a record 35 percent in December from a year earlier as Asian consumers buckled under the global financial crisis and a US recession crushed demand for electronics and autos.
The collapse in exports pushed Japan deeper in to recession in the fourth quarter, analysts said, and with the global economy crumbling and the yen at 13-year highs against the dollar, there was no light at the end of the tunnel. The central bank was similarly bleak in its outlook.
"Exports are falling sharply on slowing overseas economic growth. Domestic demand is also weakening as corporate revenues as well as household's job and income environment worsens," the central bank said in a statement.
"Japan's economy is worsening sharply and is expected to continue worsening in the near term."
It saw consumer prices falling 1.1 per cent in the year to March 2010 and a 0.4 per cent fall the following year, along with two years of economic contraction up till early 2010.
The central bank said it saw the economy turning up by early next year but warned uncertainty was high and analysts said this was pretty optimistic.
"I'd like to hear from the governor how he sees Japan's economy returning to a recovery path, namely what he expects regarding economic developments in the second half of fiscal 2009 and the first half of the following year," said Kyohei Morita, chief economist at Barclays Capital.
Reuters