Unlimited dollars available to Japanese banks

Bank of Japan Offers Unlimited Dollars to Banks

By Mayumi Otsuma
Bloomberg News
Wednesday, October 15, 2008

http://www.bloomberg.com/apps/news?pid=20601080&sid=adK4MaqnHpnU&refer=asia

TOKYO -- The Bank of Japan said it will offer lenders as many dollars as they want, joining European counterparts in attempting to lower borrowing costs in money markets and freeing up credit worldwide.

The central bank will provide dollars at fixed interest rates for an "unlimited amount against pooled collateral," it said in a statement late yesterday. It also announced measures to improve companies' access to cash, expanded the range of Japanese government bonds it accepts from lenders, and suspended a program of selling shares it bought from banks between 2002 and 2004.

The Bank of Japan's supply of dollars comes from a swap agreement with the U.S. Federal Reserve. Last month the two central banks agreed to swap as much as $120 billion for yen. The increase to unlimited dollar supply came a day after the Fed removed caps on swap lines with the European Central Bank, Bank of England, and Swiss National Bank. The Fed confirmed in a statement the same move for Japan today.

Flooding the global financial system with the world's reserve currency helped stock markets rebound after last week's 20 percent slide in the MSCI World Index. Japan's Nikkei 225 Stock Average surged 14.2 percent yesterday, its biggest-ever gain, also aided by government measures to boost the stock market.

"Tensions in global financial markets have been rising, and that's starting to affect Japan's money markets," Bank of Japan Governor Masaaki Shirakawa told reporters after the meeting. "We're seeing some strains in fund-raising conditions."

... Libor Rates

The rates that banks charge each other for dollar loans have surged since the collapse of Lehman Brothers Holdings Inc. last month caused credit to dry up. The London interbank offered rate, or Libor, for three-month dollar loans dropped to 4.64 percent, the British Bankers' Association said. The rate is still more than three times the Fed's target of 1.5 percent.

The BOJ board held the key overnight lending rate at 0.5 percent in a unanimous vote. The bank didn't participate in last week's joint rate cut by central banks in North America and Europe, saying Japan's borrowing costs are already "very low."

"We maintain the stance that increases and reductions of interest rates will be decided based on the state of the economy," Shirakawa said. Japan's financial system is relatively stable so there's no need to fully guarantee bank deposits and interbank loans, the governor said.

The central bank said it will increase the frequency and size of commercial paper purchases to improve companies' access to funding, according to the statement. It will also broaden the range of asset-backed commercial paper the bank accepts as collateral until the end of April.

... Commercial Paper

Shirakawa said the cost of selling commercial paper, or short-term corporate debt, is increasing. Companies issue commercial paper to get cash for day-to-day activities such as payroll and rent.

The central bank also said it will add floating-rate, inflation-indexed and 30-year government bonds to the list of securities for its repurchase operations.

The bank's decision to halt the sale of shares it owns came after the Nikkei 225 had the worst-ever weekly decline last week.

The Bank of Japan bought 2 trillion yen ($19.6 billion) in shares from Japanese banks between 2002 and 2004 to protect their capital from being eroded by equity values that slumped to a two- decade low. It began selling the shares in the year ended March 2007, and held 1.4 trillion yen as of the end of March, according to the bank's most recent financial statement.

The central bank said when to resume selling the shares requires the approval of the policy board. Shirakawa said the timing depends on the condition of the stock market.

Finance Minister Shoichi Nakagawa said yesterday that the government will halt the sale of state-owned shares it bought since 2002, ease restrictions on company buybacks and urge greater disclosure of short selling. Japan is also considering reviving a law allowing it to purchase stakes in regional banks.

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