Tokyo: The Bank of Japan injected $19.23 billion in yen into the money market via a same-day funding operation on Tuesday, but overnight call rates stayed high as the end of the fiscal first half made banks even more cautious.
The BOJ injected $19.2 billion into the money market through a same-day operation at the usual morning time, the 10th straight day of similar spot funding.
Call rates rose on strong demand from foreign players who were scrambling to find lenders. Japanese lenders have become extremely reluctant to lend to foreign financial institutions due to increased counterparty risks after the sudden failure of US investment bank Lehman Brothers earlier this month.
On top of that, Tuesday was the last day of the Japanese fiscal first half when lenders typically stay sidelined, further drying out liquidity in the yen money market. “Japanese are not lending, especially at the fiscal half year-end and as counterparty risks widen,” said a money market trader at a big Japanese bank.
US lawmakers on Monday refused to pass a $700 billion bank bailout plan. The unexpected development sparked fears of an even harsher credit crunch ahead, further chilling market sentiment, traders said.
The credit crisis was taking a toll on European institutions as well, with Belgian-Dutch financial group Fortis rescued in a state buyout while British mortgage lender Bradford & Bingley was brought under the government’s wing.
“The divergence in the money market will continue, with concerns remaining for European and U.S. financial institutions,” said Shinsuke Kanabu, joint general manager at money broker Central Tanshi, adding that the rejection of the US plan only delayed the recovery in market sentiment.
The pro-rata rate at the BOJ’s spot-funding operation stayed high at 0.75%, the rate for the central bank’s Lombard lending facility which serves as a cap for call rates and other interbank lending rates.
Traders said some foreign institutions tapped overnight call funds at 0.9-1.0% earlier in the day, while Japanese players were able to get cash below the BOJ’s 0.5 % policy target, near 0.4%.
About 80% of players get money in the overnight call market below 0.5% indicating that rates were pushed up by foreign banks, the trader at the Japanese bank said.
Market players said the BOJ was likely to conduct a second same-day funding operation in the afternoon to ease the tightness of cash available.
Tension remained in the repurchase market for Japanese government bonds, in which players swap bonds with each other for cash, traders said.
One-week repo rates rise to around 0.65% when rates hover below 0.6% under normal circumstances, they said.
To ease the tightness in the repo market, the BOJ supplied 1.2 trillion yen through JGB purchases from 2-21 October.