Business and Finance

The Bank of Japan is considering buying subordinated debt issued by banks, a move designed to spur lending by helping the nation’s financial institutions meet capital requirements, Nikkei English News said, citing unidentified central bank officials.

The purchases may help the banks offset losses caused by writedowns on shareholdings and bolster their capital, the report said. The details of the plan may be decided within the month, the Nikkei said.

The bank’s policy board will start a two-day board meeting tomorrow and announce its decisions by early afternoon the following day. Policy makers have made no decisions on whether to purchase subordinated debt, said Hitoshi Iwabuchi, a central bank press officer.

Japanese banks have traditionally had large equity holdings, making them vulnerable to the 38 percent drop in the Nikkei 225 Stock Average over the past year. That has made it more difficult for them to meet capital-adequacy ratios.

The plan to buy subordinated debt is being considered after government and central bank efforts to help maintain capital ratios failed to work, the Nikkei reported. Subordinated debt provides investors with higher yields than other bonds because they are given less priority in the case of a bankruptcy.

Boosting Capital

The government in December created a 12 trillion yen ($122 billion) program through which it could buy preferred stakes in banks in order to boost capital after stock prices plunged. Only three regional banks have applied for the funds. Lenders are reluctant to participate because of the perception that taking government money would damage credit ratings, according to Credit Suisse Group AG payday loans guaranteed no fax.

Bank of Japan efforts to shore up balance sheets have also come up short. The central bank on Feb. 23 said it would purchase up to 1 trillion yen ($10.2 billion) in stocks held by lenders. As of March 12, the central bank had bought only 112 million yen in those equities, about 0.01 percent of its target.

The central bank may also decide to increase purchases of long-term government bonds at its policy board meeting this week, the Nikkei reported. The central bank currently buys 1.4 trillion yen a month in government bonds from lenders as a means of injecting cash into the economy.

The Bank of Japan started buying commercial paper and corporate bonds this year. In December it began accepting lower- grade securities as collateral for loans to banks.

There are signs some of the bank’s programs have helped ease credit conditions. The spread on three-month commercial paper issued by companies rated A1 against government financing bills of the same maturity was unchanged at 29 basis points today from 141 before the bank’s Dec. 19 announcement that it would buy the debt.

The spread is still higher than the 12.5 basis points in September before the bankruptcy of Lehman Brothers Holdings Inc. In the U.S. a comparable spread is 152.25 basis points.

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