Japan's economy suffers from the discrepancy between banks' liquidity and the availability of liquidity to users. But the Bank of Japan has embarked on an ambitious project to purchase as much as ¥1tr of asset backed debt to help finance sectors of the economy that have been cut off from access to funds.
The Bank of Japan last year set aside ¥1tr for investment in asset backed securities (ABS). The Bank's market infrastructure development team wants to promote fund flows to the oft-ignored ranks of Japan's smaller companies, and to encourage openness and fair play in the fast growing ABS market.
The remarkable restructuring of the Japanese banking system in recent years and rationalisation has had many positive effects. But a big problem has been that Japan's small and medium sized companies have all too often been overlooked, starved of funding as banks and other lenders take flight to size and quality.
Enter the Bank of Japan, which in June 2003 decided to tackle this problem by allocating up to ¥1tr for the purchase of rated and publicly issued securitisation transactions.
The aim was not to compete with the private sector or to add to the national debt burden. ?Our overriding principle was that by developing the market for asset backed securities in Japan, the Bank would be able to encourage lending to SMEs,? says Tetsuya Inoue, director in the BoJ's financial markets department.
More than 99% of all companies in Japan are SMEs.
As part of the overall financial sector and corporate revival effort, the government has been hunting for ways to facilitate the efficient transfer of credit risk within the private sector, especially for the benefit of those suffering a credit squeeze.
?Our main objective was to fund sectors of the economy that have since the 1998 financial crisis been relatively starved of credit,? adds Yuko Kawai, senior researcher in the financial market department.
The Bank's parallel but secondary objective is to encourage a more dynamic, transparent and efficient structured finance market, one in which the BoJ would act as a catalyst for the market's evolution.
When the BoJ announced its intention of examining the possible purchases of ABS after its monetary policy meeting on April 7 2003, the Bank also invited suggestions on any areas of market practice, law, accounting, and tax that could be improved to improve the market.
The result was a securitisation market workshop initiated by the BoJ, which was designed to foster the infrastructure for the asset backed securities market. The first meeting was held in November 2003 and the final workshop took place in April this year.
The BoJ recognised that the ABS market had grown rapidly in the nine or so years since the first deal in 1994, but had much further to go to emulate the more developed markets in the US, UK, or closer to home in Australia.
?We wanted as many ABS industry participants as possible, in order to bring to the surface the many issues of concern that need addressing for Japan to develop a truly efficient and sophisticated ABS market,? explains Hiroyuki Kanno, deputy director in the Bank's financial markets department.
The initiative was warmly received by those committed to the long term development of Japan's securitisation market. A broad range of participants attended the workshops, including originators, arrangers, investors, credit rating agencies, government officials, academics and other observers.
?The workshop had as its ultimate objective the goals of liquidity, disclosure, transparency and the reduction of costs through efficient pricing in the primary and secondary market,? says Kenji Fujita, associate director in the financial market department. Although these are not traditional endeavours for a central bank, the Bank of Japan is bold enough to undertake them expecting that they will help the development of the Japanese ABS market.
As for the purchase of ABS and ABCP, to confirm its role as facilitator and catalyst, the Bank of Japan imposed a three year deadline on its own investment activities, with an end date of March 31, 2006.
But until then the BoJ is committed to its investment and encouragement roles, especially as it recognises that there persists such a large imbalance between the banks' enormous liquidity and the widespread distribution of liquidity through the economy.
This partially dysfunctional financial system in Japan makes a mature ABS market even more vital. ?The ABS market is central to supporting sustained economic growth through the creation of multiple channels of financial intermediation in the country,? says Kawai. ?Improving credit risk transfer mechanisms should help price discovery.?
But the BoJ has not found it easy to put its money to work. ?There simply are not enough public deals out there in which we can become investors,? explains Kawai. ?The situation is the same for the lower rated paper, of which we have not [by September] managed to locate any appropriate investments at all.?
In January, the BoJ made several revisions to its investment criteria to permit the bank to buy more SME related bonds. The changes added a wider realm of SMEs to the underlying originators, and could also open the door for the BoJ to buy ABS secured on sub-performing, or even non-performing loans.
After the revisions, the pace of purchase of ABCP has been increased. Since the beginning of the purchase in July 2003, the BoJ had by the end of August purchased ¥1.1bn public and rated ABS and an aggregate of ¥1.3tr of ABCP.
The Bank's team is positive about the market, but realistic about what can be achieved. ?We do not have any magic formula for the creation of a mature ABS market in Japan,? says Inoue. But the BoJ team is without doubt quietly optimistic.