Japanese central bank likely to unveil new commercial-paper purchasing facility Friday HONG KONG (MarketWatch) -- The probability the Bank of Japan will cut interest rates for the second time this year rose Wednesday, indicating nearly even odds of such a move, as the central bank sizes up a historic plunge in business confidence and increasing pressure from the government to do more to help the economy. The market Wednesday assigned a 48% chance the central bank would trim the overnight call rate by a quarter-point, according to calculations by Credit Suisse, based on the implied interest-rate pricing reflected in interest-rate swaps, up from a 36% chance on Tuesday. Japan's overnight call rate is set at 0.3%. The BoJ abandoned its goal of normalizing interest rates in late October when it slashed its key rate 0.2-percentage point, its first cut in seven years and seven months. Speculation circulated midweek the BoJ would take steps to ease monetary conditions at the conclusion of its two day meeting Friday. Economists said the central bank would likely seek more time to evaluate the effects of its recent interest rate reduction before cutting again, likely opting instead to unveil new measures aimed at easing the credit crunch at the corporate level. "They will look at providing liquidity to the corporate sector [by] purchasing corporate bonds and purchasing corporate commercial paper," said Glenn Maguire, chief Asia economist with SocGen in Hong Kong. "I don't think they'll cut interest rates." Japan's Finance Minister Shoichi Nakagawa said Wednesday the government would take all necessary steps to support the economy, including moves to address rapid changes in foreign exchange markets. He added that the Bank of Japan was in charge of monetary policy. Governor Masaaki Shirakawa and other BoJ board members, at the conclusion of their November meeting, directed the central bank's research department to examine the merits of commercial-paper purchases. Maguire said the moves would enable companies to bypass the frozen credit markets and raises funds directly from the BoJ. They go beyond conventional policy tools, he said, but fall short of quantitative easing, or targeting the amount of excess reserves within the banking system. The BoJ currently accepts commercial paper as collateral in providing loans to financial institutions, but does not own it, meaning that any default on that paper reverts back to the financial institution. The Japanese central bank officially ended quantitative easing in March 2006. Purchases of Japanese government bonds have gone on mostly unchanged since abandoning the policy, with the BoJ acquiring about 1.2 trillion yen worth every month. On Tuesday, the U.S. Federal Reserve cut the federal funds target rate to just above zero, a record low, and said it "will employ all available tools to promote the resumption of sustainable economic growth." See full story. In recent times, Gov. Shirakawa has said he's reluctant to cut interest rates from already low levels, fearing further reductions could impair the normal functioning of money markets. The central bank's December takan survey, released Monday, showed business confidence among large manufacturers plunged at its fastest rate since the mid-1970s oil shock. The sentiment survey also showed firms were getting more pessimistic about the future, with outlooks indicating confidence likely to deteriorate in coming quarters. Japan's slowdown has been felt mostly throughout the manufacturing sector, but looks set to spread into the broader economy as both manufacturers and non-manufacturers indicate they intend to cut staff as profits decline. "We are now starting to see considerable pressure on the domestic front, which could result in a wave of corporate downsizing along with further cuts to capital investment," wrote Credit Suisse economists headed by Hiromichi Shirakawa in Tokyo.

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