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BOJ looks to buy bank debts

THE Bank of Japan said yesterday that it may buy subordinated loans from banks for the first time to revive lending and replenish capital depleted by falling stock prices.

The central bank is considering the purchase of up to 1 trillion yen (US$10 billion) of the debt in an "exceptional" step, it said in Tokyo yesterday. The bank ends a two-day policy meeting today.

The 48-percent drop in the Nikkei 225 Stock Average since the beginning of 2008 decimated the value of equities held by banks, making it harder for them to maintain capital ratios and limiting their ability to lend. Earlier efforts to buoy bank balance sheets have so far failed to arrest Japan's descent into what may be the worst recession since World War II.

"Authorities are showing that they won't let a vicious spiral take hold between the financial system and economy," said Toru Kitani, who manages the equivalent of US$2.9 billion at Sompo Japan Asset Management Co in Tokyo.

Holders of subordinated bonds get paid after investors in senior debt in the event of a bankruptcy, so the BOJ's action means that institutional investors will still have an incentive to subscribe to bonds sold by the banks, Bloomberg News said.

The BOJ may today announce an increase in the amount of government bonds it buys from lenders as Prime Minister Taro Aso prepares a third stimulus package to ease the nation's recession, according to economists.

BOE purchases bonds

The Bank of England last week started buying United Kingdom government bonds to expand reserves in the financial system and the Federal Reserve may unveil a similar program this week.

More purchases of Japan's government bonds would help avert a jump in bond yields, which have risen on concern that the government will have to sell more debt to pay for the stimulus. The yield on the benchmark 10-year bond rose to 1.295 percent at Monday's close from 1.165 percent.

Over two days bank stocks surged on talk the central bank was considering the subordinated debt purchases. Mitsubishi UFJ Financial Group Inc rose 13.8 percent. Mizuho Financial Group Inc gained 12 percent.


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