Bank of Japan sees signs of recovery

       The Bank of Japan said yesterday it was slightly more optimistic about economic and financial conditions, likely bringing it a step closer towards phasing out some of its measures to support corporate funding.
       BoJ governor Masaaki Shirakawa told a news conference that improvements in Japan's corporate finance were spreading although financing conditions at small firms remained severe.
       He said that the downside risks for the economy were lessening somewhat but that he remained cautious about the outlook.
       Record deflation, rising job losses and weak capital spending all look set to cloud the debate on the timing for exiting its special measures, which include buying commercial paper (CP)and corporate bonds from banks.
       "Shirakawa's comments on improving corporate finance suggest the BoJ may end some of its corporate fundingsupport measures as they expire in December. But there's a chance it will keep them intact to avoid sending any negative message to markets," said Masamichi Adachi, senior economist at JPMorgan Securities.
       The central bank's policy board voted unanimously to keep interest rates on hold at 0.1%, as widely expected.
       The bank is widely expected to keep rates at 0.1% until at least March 2011.
       "The BoJ is understandably cautious about the remaining uncertainties to the economic outlook, but interest rates are as low as they can go and will likely stay there for some time," said David Cohen, director of Asian economic forecasting at Action Economics in Singapore.
       The recent strength of the yen may also pose a problem for prices. Shirakawa said a stronger yen pushes prices down in the near term though it may support the economy in the long run.
       BoJ officials will scrutinise the bank's closely-watched tankan business confidence survey due on Oct 1 for clues on whether corporate sentiment and spending are improving at small firms as well as larger ones to help it decide when to phase out its unconventional steps.
       The Reuters Tankan, a leading indicator for the BoJ's survey, showed yesterday that manufacturers were at their least pessimistic in a year in September and expect conditions to improve further in the next three months.
       The central bank may also be concerned about fiscal spending under the new administration of Prime Minister Yukio Hatoyama.
       "The BoJ is likely to err on the side of caution as it is unclear what policies the new government will undertake,"said Naomi Hasegawa, a senior fixedincome strategist at Mitsubishi UFJ Securities.
       Central banks around the world have begun debating how and when to phase out their emergency steps to contain the damage wrought by the worst global financial crisis in decades, but most are not expected to do so until well into next year.
       The BoJ said exports and output were increasing thanks to a recovery in overseas markets, especially in emerging economies.
       It maintained its view on prices,saying annual core consumer price falls would narrow in the latter half of the year to March 2010.
       The BoJ has extended its support measures for corporate funding, including buying commercial paper (CP)and corporate bonds from banks, to the end of December.
       But the average issue rate for onemonth CP fell to 0.21% in August from a peak of 1.34% last December, and there is a growing feeling at the BoJ that it could let some of its special steps expire in December without disrupting markets.