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Purchase of SME-related ABS by the Bank of Japan (Updated): Monetary Policy and SME financing in Japan*1

February 2004
Hideaki Hirataa
Tokiko Shimizub

Note: the unit of the amount purchased in Appendix 1 was corrected from the previously released No.04-E-1.

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  • *1 The opinions expressed do not necessarily reflect those of the Bank of Japan. The authors thank Kenji Nishizaki (Bank of Japan), Yasunari Inamura (Bank of Japan), and Ken Taniguchi (Bank of Japan) for helpful comments and suggestions. This paper is the updated version of Bank of Japan Working Paper Series, No.03-E-3, reflecting the Monetary Policy Meeting's announcement of decisions on January 20, 2004.
  • a Financial Markets Department, Bank of Japan. e-mail: hideaki.hirata@boj.or.jp .
  • b Financial Markets Department, Bank of Japan. e-mail: tokiko.shimizu@boj.or.jp .

Introduction

The malfunction of the monetary transmission mechanism in Japan has been cited as one of the main reasons why the quantitative easing of monetary policy undertaken by the Bank of Japan (BOJ) has been insufficient in achieving the objective of an early escape from deflation and the economic slump. The BOJ has quantitatively eased monetary policy, promising to provide as much money as the market needs, and as a result, short term interest rates have fallen to very low levels.1 However, the growth rate of bank lending particularly to small and medium-sized enterprises (SMEs), has been drawing a secular downtrend for years (Chart 1), thus leading to considerable debate over the effectiveness of the monetary policy.

The factors underlying the malfunction of the monetary transmission channel lurk both in the financial and non- financial sectors. Of all the underlying factors, there is broad consensus that the "health" of the Japanese financial sector should be considered as the problem of most concern.2 The financial sector has played a central role in providing external finance to the non- financial sectors through financial intermediation, accumulating credit risks within the financial sector itself. Associated with the non-performing loan problem, the excess accumulation of credit risks in the banking sector lowers the financial intermediation ability. Thus, it impairs the smooth propagation of monetary policy through the credit channel. On the side of non- financial enterprises, SMEs as a driving force in the Japanese economy, in particular, have been struggling with their fundraising. Limited availability of reliable information on SMEs, in other words, the asymmetric information problem of SMEs is pivotal as is often mentioned. Furthermore, it is important to bear in mind that the shortage of collateral is an obstacle to credit availability for SMEs. SMEs with lower credit status seek alternative sources of funding that strengthen the effects of monetary easing.

The BOJ announced its intention to purchase asset backed securities (ABS) whose underlying assets are closely related to SME economic activities.3 One important motivation for this policy arises from the idea that utilizing modern financial tools, i.e., securitization, can be a possible way to solve the overconcentration or excess accumulation of credit risks in the banking sector, albeit it would be a rare move for central banks to buy private debt. The outright purchase is expected to restore the monetary transmission mechanism by helping diversify credit risks in the financial sector among other economic agents including the BOJ.

The other motivation of the new policy is to increase fundraising options for SMEs. For example, the BOJ will purchase ABS backed by accounts receivable. The use of accounts receivable as collateral is not a popular fundraising method for SMEs in Japan. SMEs can take advantage of the BOJ's policy to utilize quality assets which have not been effectively used as collateral in the past. SME external financial sources can be multi-tracked, thereby reducing their heavy reliance upon traditional financial intermediation. Thus, through the implementation of "traditional" monetary policy tools to purchase "untraditional" financial assets, the policy is expected to strengthen the monetary transmission mechanism.

The spirit of this policy is to effectively improve SME access to financing through accelerating the development of ABS markets, without causing distortions in the ABS markets. The scheme is carefully designed to avoid any moral hazards and to contribute to the removal of obstacles to SME financing through enhancing financial disintermediation.

From a macroprudential perspective, the outright purchase scheme is designed to reinvigorate Japanese economic activities by encouraging functional interactions among the financial markets, the banking sector, and the real economy. The frontier of systemic risk research, the so-called "triangle view," emphasizes that the feedback effects of stress are multiplied when the banking sector is under difficult conditions (See Hosoya and Shimizu (2002)). Although the movement toward securitization at present is a trickle, it could well become a torrent by the development of the market through the purchases of ABS. Murray (2001) states that the proliferation of securitization would strengthen the financial system in times of stress, since banks are forced to demand the repayment of loans from the borrowers whose loans are not securitized. This interaction would channel more funds into the corporate sector, contributing to the real economy. Such a positive repercussion effect is the goal of the new policy.4

Japan's prolonged economic malaise (often referred to as Japan's "lost decade") is considered to have incurred a serious impact on the world economy as well as on the Japanese economy. Although the near term prospect of an economic upturn remains bleak, "another lost decade" should be avoided at all costs. In order to maximize the effects of monetary easing, the BOJ must continue to provide rigorous prescription for the revitalization of the Japanese economy through the enhancement of financial disintermediation channels.

The remainder of this paper is organized as follows: Section two explains the importance of SMEs in Japan and their current fundraising difficulties; Section three explains securitization and its expected role from various aspects; Section four describes the spirit and framework of outright ABS purchase by the BOJ; Section five offers conclusions.

  1. The target balance of current accounts held at the BOJ is around 27 to 30 trillion yen.
  2. See Dell'Ariccia (2003).
  3. Hereafter, we use ABS as both asset backed securities and asset backed commercial papers, unless otherwise mentioned.
  4. Moreover, recent studies show that ongoing financial globalization makes the stability of the Japanese financial system much more vital to the world economy than ever. The more integrated and interconnected financial systems around the globe become, the more synchronization among financial markets will take place. See Rouwenhorst, Goetzmann, and Li (1999), and Forbes and Menzie (2003) for the recent synchronization of world financial markets; Hausler (2002) and Johnson (1998) explain the impact of securitization in the global economy; Kose and Yi (2002) and Hirata (2003) discuss the macroeconomic influence of financial globalization on business cycles.