Bank of Japan expands collateral to ease cash crunch

By Hideyuki Sano

TOKYO (Reuters) - The Bank of Japan said on Tuesday it would expand lending by about 3 trillion yen ($32 billion) to help companies tide over a year-end credit squeeze and accept lower rated corporate bonds as collateral for loans.

The central bank, which kept rates steady at 0.3 percent at an emergency meeting, said it plans to accept triple B-rated corporate bonds as collateral would make it easier for banks, scarred by the global financial crisis, to lend to companies.

Like the U.S. Federal Reserve and other major central banks the BOJ is reviving bank lending again after a year of bank failures in Europe and the United States. Governor Masaaki Shirakawa said the BOJ hoped to lend around 3 trillion yen under its new scheme.

"These measures alone cannot determine the shape of the economy but they will have an effect in improving corporate finance, which has been worsening," BOJ Governor Masaaki Shirakawa told reporters.

"The severity of financing conditions for small to mid-sized firms is higher than that of big companies. But financing at big companies is becoming more severe as conditions for funding via markets with corporate bonds and commercial paper are deteriorating."

Japanese firms have been caught by both falling demand for their goods, as Europe and the United States slide into recession and growth slows in Asia, and a funding squeeze as banks and investors shun risk and hoard cash.

The Japanese money markets, once shielded from the global crisis, have been rocked in recent months by investors' fear of a global economic recession.

The average rate of new three-month commercial paper jumped to 1.18 percent in October from 0.76 percent in August. The issuance of corporate bonds stopped for almost a month before mid-November and many companies are still having a hard time finding lenders.