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BOJ looks to boost credit; Korea reassures on debt

The Bank of Japan extended measures aimed at easing a corporate credit crisis, and South Korea insisted its banks could cope with their foreign debt, as policymakers search for ways out of the deepest slump in decades.

President Barack Obama has presented the latest thrust of his master plan to pull the United States out of recession by pledging up to $275 billion to help stem a wave of home foreclosures.

The Federal Reserve has forecast the US economy will shrink between 0.5% and 1.3% this year, while Japanese data earlier this week revealed the deepest quarterly contraction since the oil crisis in the 1970s.

“Everyone is gradually understanding just how serious the economic situation is in both countries,” said Fujio Ando, senior managing director at Chibagin Asset Management in Tokyo.

With the rich world mired in a sharp, synchronized recession, emerging economies such as China, the engine of world growth in recent years, have also slowed sharply.

But a Chinese central bank official said cutting interest rates further would be risky and might not help the economy.

South Korea moved to calm fears its banks might fall under the weight of their foreign debts -- the latest credit worry to rattle emerging markets after euro zone banks were hit by concerns over their exposure to faltering East European economies.

“...People lately are very nervous about what will happen in east Europe and about the implications for the global markets,” said Park Yong-il, senior FX trader at DBS Bank in Seoul.

Obama's highly anticipated plan for the US housing market - the epicenter of the global credit crisis and recession - aims to keep as many as 9 million struggling families in their homes.

But the plan failed the impress financial markets, with US stocks touching a bear market low on Wednesday, after European shares slipped and Asian markets hit a February bottom.

US Treasury debt prices fell at the prospect of more government borrowing to fund the plan, although they edged back up in Asian trading on Thursday.

“The biggest problem in the market ... is a major lack of confidence and disappointment that the current administration really hasn't done anything yet about the toxic assets held by banks,” said Al Goldman, chief market strategist at Wachovia Securities in St. Louis.

Asian share markets edged up on Thursday, while the yen was under pressure due to worries about the Japanese economy.

The Bank of Japan kept its key interest rate unchanged at 0.1% on Thursday, but extended a scheme to buy commercial paper to improve corporate funding and pledged to boost the supply of low cost funds.

The central bank said it would buy ¥1 trillion ($10.6 billion) of corporate bonds and take steps to provide three-month funding at low interest rates as it looks beyond its policy rates for ways to revive the battered economy.

“The significance is also on what the BOJ decided not to do, such as reverting to quantitative easing or boosting outright government bond purchases,” said Hiroyuki Nakai, Executive Director at Tokai Tokyo Research Centre.

“Even after the terrible October-December GDP numbers, the BOJ thinks what it must do is ease corporate funding strains, not recklessly flood markets with money.”

Japan has been hard hit by the crisis that was ignited by the US housing market meltdown, and analysts see more pain ahead for the world's No. 2 economy due to its heavy dependence on exports and because of chronically weak domestic consumption.

The collapse of Japan's main export markets is pushing industrial giants such as Toyota, Sony and Panasonic deep into the red, prompting cuts in jobs and production and setting the economy on course for its longest recession in modern times.

South Korea said on Thursday that local banks' foreign debt burden was small compared with the country's more than $200 billion in currency reserves.

Speculation has been mounting that South Korean borrowers could struggle to pay their debts as early as next month, unable to raise dollars or persuade creditors to roll over the loans.

“We view the $24.5 billion in foreign debt due for the rest of this year as not a big amount when taking into account the foreign exchange reserves and other conditions,” the Bank of Korea said in a statement.

The Finance Ministry also tried to play down concerns over debts, saying external liabilities had declined by about $40 billion in the fourth quarter of 2008, standing at 43% of gross domestic product, lower than levels in advanced economies.

The head of the Chinese central bank's research department, Zhang Jianhua, said in a speech at a financial forum that restructuring the world's third-biggest economy was now more important than cutting interest rates.

“The money would not enter the real economy,” said Zhang. “Of course, there is still room to cut rates, but that option is definitely not the best.”

Zhang's speech was one of the strongest indications so far that the central bank feels it is near or at the end of its monetary easing cycle.

Central European governments on Wednesday considered interest rates, market intervention and bailouts, with Hungary - whose currency slid to a record low against the euro on Tuesday - proposing the former Communist region agree to a joint package to support banks.

France's Societe Generale, Dutch bank ING and Germany's Commerzbank warned about a difficult year as concern grew over their exposure to central and eastern European markets. The German government moved a step closer to taking over mortgage lender Hypo Real Estate, overcoming free market qualms to approve a law allowing it to nationalize banks. Other countries, including Britain and Ireland, have already seized control of banks, justifying their actions by pointing to the nature of the crisis and the need to protect taxpayers. (Reuters)