The BoJ has decided to proceed with its plan for buying asset-backed securities (ABS's) in particular by buying securities from small and medium-sized enterprises, and to conduct this activity as a routine part of its monetary operations - even if only on a temporary basis - over the next few years. This was decided at the 7, 9 April meeting by a majority vote of 8 to 1. This initiative aims to provide smoother financing to Small and Medium Enterprises (SME's) by purchasing securities based on sales receivables and other assets. According to the bank, the objective is to strengthen the effects of monetary easing by nurturing the development of tan assett backed security market, thereby making available investment funds to smaller enterprises. The big questions, of course, concern whether this will really have any impact, either in facilitating the growth of newer, more dynamic enterprises, or in the more general area of increasing liquidity to provoke inflation. Morgan Stanley's Takehiro Sato has plenty of doubts:
The bank�fs decision to purchase private-sector debt, rather than government debt, itself appears to be a major policy shift. Governor Toshihiko Fukui is pursuing involvement in corporate financing to enhance the quality of liquidity supply after seeing the limited effect of quantity expansion promoted by former Governor Masaru Hayami. A key premise for purchase operations of such risk assets to be effective, however, is a market with sufficient size and liquidity. Yet the ABS market is still in its infancy and lacks adequate outstanding value and liquidity, particularly for SME securities, and transaction price transparency. Furthermore, the bank intends to purchase ABS backed by the assets of SMEs with credit standing comparable to �gnormal�h in bank self-assessments. This requirement can be expected to limit the scope of ABS eligible for BoJ purchase operations and may make the policy initiative effectively meaningless.........
It is likely to be confirmed that these operations will not make a quick contribution to SME financing. However, the BoJ decision to move beyond the eligible collateral level and involve itself in corporate credit has created the possibility of more direct financing to corporations over the medium term. For example, the Bank is already considering purchase operations for not only senior securities but also the mezzanine segment. If this happens, credit standing for eligible collateral and purchased assets may be reversed in some cases, similar to the situation with bank equity holding standards. Future policy developments might therefore lead to a relaxation of eligible collateral criteria in order to maintain policy coherence. Easier eligible collateral criteria could enable banks to underwrite corporate CP and improve funding. Yet this is likely to reduce the chance of corporate liquidity failures in the same way as recent quantitative easing measures. In other words, reinforcement of the safety net for non-financial corporations, in addition to banks, could postpone the shakeout and reorganization process and allow financial socialism to make further inroads.
Source: Morgan Stanley Global Economic Forum
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