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Sat, Aug 25, 2007 - Page 10 News List

Bank of Japan moves to mop up liquidity


Japan's central bank said yesterday it was draining funds from the banking system for the first time in seven days in the wake of recent market turmoil.

The Bank of Japan (BOJ) move contrasts with the US Federal Reserve, which injected US$17.25 billion into the financial system on Thursday -- one factor cited by dealers in driving Wall Street lower overnight.

The Bank of Japan said it was siphoning off ¥300 billion (US$2.6 billion), a relatively small amount for a central bank, to mop up excess liquidity. Analysts had expected the bank to skip market operations yesterday.

Overnight call rates "were hovering lower and we decided on the fund drainage to make them close to our target" of 0.5 percent, said a bank official who declined to be named.

Some US dealers had said the Fed's three actions on Thursday had renewed fears of a global credit squeeze because of problems in US housing loans to high-risk borrowers.

The BOJ's fund withdrawal came a day after the bank left its super-low interest rates unchanged for a sixth straight month.

Meanwhile, US banks borrowed US$8.4 billion from the Fed discount window this week as the central bank moved to pump more liquidity into gridlocked financial markets, the Fed said on Thursday.

The lending amounted to US$1.2 billion per day since the half-point cut in the Fed discount rate Friday last week. In the prior week, the total was just US$11 million.

The discount window is usuallylseen as an emergency measure for distressed banks, but four of the largest US banks said on Wednesday they had each borrowed US$500 million to ease liquidity.

The discount rate was cut last week to 5.75 percent, compared with 5.25 percent for the federal funds rates used for bank-to-bank loans. The Fed also decided to extend these credits for 30 days instead of just one day.

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