The Bank of Japan should consider channeling funds directly to companies to counter the credit squeeze, departing from its practice of trading only with lenders, a government economist said. “Even though it has adopted some unconventional tools, the central bank is still only delivering money to financial institutions and letting them decide where to lend,” Yasushi Okada, a Cabinet Office economist, said in an interview on Feb. 5. “It’s just not enough to support the overall economy.” With interest rates lowered to 0.1 percent in December, the central bank has started purchasing commercial paper from lenders and offered to buy corporate bonds and stocks from them in steps policy board members call “exceptional.” Banks are reluctant to meet an increase in demand for lending as falling stock values deplete their capital and the worsening recession spurs concern that loans won’t be repaid. The bank should consider buying exchange-traded funds directly from the market to support companies, said Okada, 53, a former chief economist at Credit Suisse Group AG in Tokyo. ETFs are products that track a stock index, allowing investors to hold a wide range of shares in a single, traded security. “If the central bank buys ETFs, it would boost the overall stock market,” Okada said. “If the bank announces its determination to try tools it has never used, that would have a positive impact.” Deepening Recession Japan’s recession intensified last quarter as demand from abroad plunged. Industrial production and exports both dropped by a record in December. The Nikkei 225 Stock Average has tumbled 33 percent since Lehman Brothers Holdings Inc. went bankrupt in September. “Economic growth is collapsing worldwide, and there’s nowhere Japan can turn to” to spark a recovery, Okada said. Still, there are signs that the Bank of Japan’s purchases of corporate debt are reviving credit markets, reducing larger companies’ reliance on loans. Bank lending slowed for the first time in four months in January, climbing 4 percent from a year earlier, a central bank report showed today. The balance of Japanese commercial paper outstanding rose to 14.2 trillion yen ($155 billion) in January from October’s six-year low of 12.8 trillion yen. “It looks as though the steady trickle of policy moves by the BOJ is helping to reassure capital markets,” said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. Zero Rates Okada, a Gakushuin University professor who joined the Cabinet Office in 2006, said the bank should cut the key interest rate to zero percent and adopt a so-called quantitative easing policy of flooding the banking system with reserves. The bank also needs to increase its monthly government bond purchases from lenders to 3 trillion yen ($33 billion) from 1.6 trillion yen, he added. The policy board last month increased the amount from 1.4 trillion yen. Deflation has resurfaced in Japan, Okada said, while adding that it has yet to exacerbate the economy’s decline. Capping the jobless rate at 5 percent is key to averting a deflationary spiral, he said. Once unemployment exceeds 5 percent, wages start to drop at a “significant” pace, weakening consumer spending and forcing companies to cut prices, he said. “Policy makers should exhaust every possible policy measure now to preempt this risk.” The unemployment rate jumped to 4.4 percent in December from 3.9 percent a month earlier, the biggest increase in 41 years. Wages fell 1.4 percent from a year earlier, the biggest drop in a year. The Bank of Japan forecasts consumer prices excluding fresh food will fall 1.1 percent in the year starting April 1 and 0.4 percent in the following year. Core prices, which rose 0.2 percent in December, may have begun declining as early as January, some economists say. The central bank should target consumer inflation of between 2 percent and 4 percent to prevent deflation, Okada said. Bank of Japan policy makers have said they consider prices to be stable between zero percent and 2 percent.

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