BOJ plans capital boost to provision against losses

Reuters

By Leika Kihara

TOKYO (Reuters) - The Bank of Japan plans to bolster its capital to provision against potential losses from an asset-buying scheme, a source familiar with the central bank's thinking said, in a move that would give it room to further ease monetary policy if needed to support the economy.

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The central bank now buys a range of assets including government bonds, corporate bonds and real estate investment trusts via a pool of funds that was doubled to 10 trillion yen ($124 billion) after the March 11 earthquake and tsunami.

The BOJ <8301.OS> plans to ask for government approval to set aside more of its profits as reserves as a pre-emptive measure given that the asset purchases put it at greater risk of losses on its asset holdings, the source said.

But any increase in capital will be relatively small in size because the central bank is thought to have barely eked out a profit in the financial year that ended in March, according to the source, who declined to be identified due to the sensitivity of the matter.

That means the move would not likely be a sign that the BOJ is gearing up to ease monetary policy immediately.

BOJ Governor Masaaki Shirakawa has said that for the time being he hopes to examine the effect of the central bank's monetary easing in March, but that the BOJ was ready to take action as needed.

That remark signals that the BOJ plans to stand pat on monetary policy until there is fresh evidence that the quake's damage to the economy is much worse than expected, or that sharp gains in the yen and stock price falls persist and severely hurt business sentiment, BOJ officials say.

The BOJ's capital adequacy ratio stood at 7.43 percent at the end of September, down from 7.47 percent in March 2010.

That is below its target of eight to 12 percent, which is not legally binding but regarded by the central bank as an appropriate level. The only way to boost the ratio is to set aside more of its profits as reserves, instead of paying them to the government.

The central bank's capital adequacy was at 5.7 trillion yen at the end of September, with legal reserves accounting for nearly half of that.

The BOJ is likely to set aside as legal reserves 15 percent of its profits from the past fiscal year, three times the usual level, according to the Nikkei newspaper, which first reported the planned capital adequacy boost earlier on Sunday.

The BOJ will seek approval from Finance Minister Yoshihiko Noda as early as Monday for the move, which would decrease the amount of money the central bank pays to the government, the Nikkei said.

Any further loosening of monetary policy would likely involve the bank expanding its asset purchases again, a move that would further expose it to the risk of losses.

In the first half of the fiscal year that ended in March, the BOJ incurred a recurring loss of 158.8 billion yen.

($=80.63 Japanese yen)

(Additional reporting by Yoko Kubota; Editing by Ron Popeski and Nathan Layne)