The Bank of Japan yesterday moved to withdraw all of the emergency funds that it had pumped into the banking system over the past two working days, reflecting easing fears of a global credit crunch.
In two separate moves, the BOJ said it would drain a total of ?1.6 trillion (US$13.6 billion) from the money market, siphoning off all the funds it had injected since Friday in concert with other top central banks.
The BOJ move would be taken by markets "as a message that there is no need to panic, that the short-term money market in Japan is stable," said Masamichi Adachi, a senior economist at JP Morgan.
"I believe the financial situation will continue to calm down and will not have a significant effect on the real economy," Adachi said.
"However, we have to wait for a few more days to see what happens," he said.
In tandem with the US and eurozone central banks, the BOJ had pumped funds into the banking system for two business days -- including ?1 trillion on Friday -- to ensure commercial banks had ample liquidity to do business.
That move pushed the central bank's unsecured overnight call rate well below its target of 0.5 percent, suggesting there was ample liquidity.
The liquidity squeeze has been felt most in dollar money markets and not the Japanese banking system so the BOJ had decided that it would be appropriate to take out some of the funds, Adachi said.
Asia's other central banks were back to business as usual on Tuesday as the regional fallout from the global credit squeeze abated, at least for the moment.
In South Korea, top economic policy makers, including the finance minister and central bank chief, met early yesterday to discuss the US subprime mortgage crisis and its potential consequences.
In Australia, the central bank's money-market operations were almost back to normal yesterday, although bad news from a mortgage lender kept the mood tense.
The Reserve Bank of Australia (RBA) added A$2.6 billion (US$2.2 billion) in its regular operation, which was a little higher than average but modest compared with Friday's A$4.9 billion injection.
Investors in Tokyo reacted calmly to the central bank's decision to withdraw funds, with the benchmark Nikkei-225 index of leading shares gaining 44.56 points, or 0.27 percent, to end at 16,844.61.
South Korean shares closed lower yesterday The KOSPI index ended down 31.37 points, or 1.7 percent, at 1,817.89.
Australian share prices closed down 0.80 percent, with the benchmark S&P/ASX 200 down 46.8 points at 5,964.8, while New Zealand's benchmark NZSX-50 index fell 4.48 points or 0.11 percent to 4,065.68.
Lingering concerns over subprime loans kept investors cautious about buying battered stocks, analysts said.
"The market has begun to regain its composure against the background of the concerted moves by central banks, while investors, haunted by the memory of recent falls, remain reluctant to go beyond bargain-hunting," said Katsuhiko Hiroshige, a market analyst at Traders and Co.
Investors fear hedge funds may be forced to dump shares to cover losses on securities backed by US mortgages.
Experts, however, said that leading Japanese banks have relatively little risk of getting badly hit by defaults on loans in the US subprime mortgage market.
Major Japanese banks have a total exposure to US subprime loans of about ?1 trillion, with losses likely to total slightly more than ?100 billion, which should not pose a major risk, UBS Securities estimated last month.