BoJ pumps $13b into yen market

Tokyo: Japan's central bank injected $13.96 billion in yen into the money market on Monday via its same-day funding operation, making for a total of $116 billion over five straight working days to help alleviate cash tightness.

The BoJ supplied 1.5 trillion yen ($13.96 billion) via same-day settlement through the usual morning slot but, unlike last week, did not follow through with another funding operation in the afternoon.

Some Japanese banks raised money in the overnight call market with rates as low as 0.2 per cent while foreign institutions were tapping the market at 0.60-0.65 per cent earlier in the day, traders said.

The number of foreign players appeared to be falling, an indication they were further shedding yen-denominated assets, helping to slightly ease upward pressure on call rates, traders said.

But the repurchase market for Japanese government bonds (JGBs), in which players swap bonds with each other for cash, remained extremely tight, traders said.

"The yen money market is clearly divided into three sectors: overnight call for Japanese, overnight call for foreigners and the repo market, and funds are not flowing into each other," said a dealer at a big Japan-ese bank.

"Those who are fearful of the risk contracts not being delivered have no option but to continue getting funds from the call market, and rely on the BoJ's same-day operations," he said.

The pro-rata rate at the BoJ's same-day funding operation inched up on Monday to 0.71 per cent from 0.58 per cent and 0.65 per cent at Friday's two similar operations.

The BoJ yesterday said it will supply 1.6 trillion yen via its JGB purchases to start from September 25 to October 6. Reflecting strong demand for longer-term funds, the pro-rata rate at the BoJ's JGB buying operation was 0.73 per cent. It also supplied 900 billion yen from September 25 to October 10.

Repo rates have been pinned near 0.75 per cent , the rate for the BoJ's Lombard lending facility which serves as a cap for the call rate and other interbank lending rates.

Counterparties of failed investment bank Lehman Brothers have been scrambling for JGBs or cash to replace those they did not receive from Lehman, and the heightened risk of contracts not being delivered has prompted investors to keep cash at hand and not lend. Yesterday is a big bond settlement day.

The BoJ on Friday also said it will extend a temporary easing of terms on its JGB lending operation to October 3, two weeks longer than initially planned.

While lenders' heightened concerns about counterparty risks kept money from flowing around evenly, the BoJ's aggressive injections have flooded the banking system with cash, causing sharp volatility in overnight call rates.