The Bank of Japan said it will increase its monthly government bond purchases from banks to spur lending and prevent the recession from deepening. The central bank will buy 1.8 trillion yen ($18.3 billion) of government debt each month, up from 1.4 trillion yen now, it said in a statement in Tokyo today. The BOJ has purchased the bonds since 1989 and last increased them in December. Bond yields fell on speculation the purchases will help the world’s most indebted government pay for Prime Minister Taro Aso’s third economic stimulus package. Bank of Japan Governor Masaaki Shirakawa last week signaled he would endorse plans for more government spending, saying the country needed “appropriate fiscal measures.” “At a time when the country’s economy is shrinking at a double-digit pace, fiscal spending is the remedy, and the central bank can contribute by buying government bonds,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “The bank can’t avoid entering the field of fiscal policy.” The yield on Japan’s benchmark 10-year bond fell 1.5 basis points to 1.285 percent as of 12:56 p.m. in Tokyo, after being unchanged immediately before the announcement. It’s still higher than the 1.165 percent at the start of the year. The yen was little changed, trading at 98.46 per dollar from 98.48. The move came after the Bank of England last week started buying U.K. government bonds to expand reserves in the financial system. The Federal Reserve may unveil a similar program later today. ‘Remain Under Stress’ “It is likely that the markets will remain under stress in the new fiscal year given the severe financial and economic conditions,” the Bank of Japan said. “Continued provision of substantial liquidity is required to ensure stability in financial markets.” Aso last week said he’d draft a new spending package to add to the 10 trillion yen pledged since he became prime minister six months ago. The world’s second-largest economy shrank at an annual 12.1 percent pace last quarter as Toyota Motor Corp. and Sony Corp. cut output and fired workers after an unprecedented drop in exports. Shirakawa told lawmakers last week that the central bank buys government bonds to add money to the financial system rather than to fund fiscal expansion. Economists say the policy board doesn’t want to give the impression that the purchases will help Aso increase spending. Helping Government “The bank says the increases are aimed at smoothening money-market operations, though market participants interpret them as being aimed at helping the government’s fiscal spending,” said Masaaki Kanno, chief economist at JPMorgan Chase & Co. in Tokyo and a former central bank official. Japan’s public debt is more than 170 percent of gross domestic product, the Organization for Economic Cooperation and Development estimates, the highest in the industrialized world. The Bank of Japan kept its benchmark overnight lending rate at 0.1 percent at today’s meeting. Since cutting the rate in December, the central bank has turned to buying assets from financial institutions in an effort to encourage lending. Yesterday it outlined plans to provide as much as 1 trillion yen in subordinated loans to banks to shore up their capital, which has been depleted by falling stock prices. Japanese banks traditionally have large equity holdings, making them vulnerable to the 31 percent drop in the Nikkei 225 Stock Average over the past six months and reducing their capital-adequacy ratios. Asset Buying The central bank would be repaid after other creditors should a commercial bank go bankrupt, meaning institutional investors would still have an incentive to buy debt issued by the commercial bank. In January, the bank started buying commercial paper to improve companies’ access to short-term funding. Last month it extended the asset-purchase program to one-year corporate bonds as well as stocks owned by banks. The asset-buying policy has expanded the amount of money in the economy and therefore amounts to “quantitative easing,” according to Julian Jessop, chief international economist at Capital Economics Ltd. in London. The Bank of Japan avoids describing the measures using the term, which in the past referred to its 2001-2006 policy of setting a target for reserves that commercial banks hold at the bank. Japan’s monetary base rose 6.4 percent in February from a year earlier to 93.7 trillion yen, the highest since May 2006.

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