BOJ to offer dollar funds as central banks launch coordinated action+

TOKYO, Sept. 18 Kyodo - The Bank of Japan said Thursday it will provide Japan's money markets with U.S.
dollar funds in its first such operation as six major central banks, also
including the U.S. Federal Reserve and the European Central Bank, announced a
fresh coordinated action in their battle to ease strains in the global
financial market.
The move came amid tighter credit conditions especially on short-term money
markets, as banks are increasingly cautious about making fresh lending given
uncertainty stimulated by a series of upheavals involving major U.S. financial
institutions.
''Pressures on the short-term money markets have been on the rise. If we do
nothing, the elevated tension on the international financial markets will
remain over the long term,'' BOJ Governor Masaaki Shirakawa said in a press
conference. ''We have to avoid economic confusion stemming from the liquidity
problems.''
But he also suggested that improving liquidity is only a symptomatic treatment,
saying, ''The problem would not be completely solved unless financial
institutions make efforts to boost their capital.''
For its part, the BOJ enters a $60 billion currency swap agreement with the
Federal Reserve Bank of New York, under which the New York Fed will provide the
BOJ with dollars in exchange for yen until Jan. 30 next year.
The deal will allow the Japanese central bank to obtain necessary funds to
directly supply the U.S. currency to financial institutions participating in
Japan's short-term money markets, including foreign banks, against certain
collateral.
The recent trend was that more U.S. and European banks have tapped Tokyo money
markets, seeking relatively lower interest rates. But they needed to exchange
the yen funds they raised into dollars on the currency market.
It will be the first time for the BOJ to supply dollar funds, Shirakawa said.
The BOJ intends to begin the dollar-supplying operation within September and
thereafter conduct each operation in line with the schedule of the Fed's credit
auction facility.
The bank is considering offering a total of about $30 billion in one-month
instruments and $10 billion in those for three months. The governor added that
the BOJ eyes supplying up to $50 billion by the end of this year.
The ECB, the Bank of Canada, the Bank of England and the Swiss National Bank
are also each entering into a similar deal with the Fed or expanding the scope
of existing agreements.
The latest scheme by the six central banks could supply up to $180 billion to
global money markets. This is the first time the BOJ has joined such a
coordinated action.
Financial institutions in Europe and the United States have been facing
difficulties in raising funds amid the market turmoil in the aftermath of the
bankruptcy of major U.S. brokerage Lehman Brothers Holdings Inc.
Shirakawa also said the coordinated action is sure to ''help calm tension on
the global financial market.''
Japanese Finance Minister Bunmei Ibuki hailed the swap deal, saying the scheme
will prevent a credit crunch among companies, which can be caused by the
shortage of short-term dollar funds.
He separately told reporters that the arrangement is ''not meant to enable
currency interventions.''
The minister added that central banks across the world have set ''a kind of
defense measure for the U.S. dollar, which is an international currency.''
The dollar funds also will be made available to Japanese financial
institutions. But that does not mean they face immediate need of dollar funds,
both Ibuki and Shirakawa stressed, indicating that the Japanese financial
system remains relatively stable with damage inflicted on domestic banks
limited, compared with their U.S. and European rivals.
The BOJ's Policy Board, which left the bank's key interest rate unchanged
Wednesday, met again Thursday for an extraordinary meeting to approve the swap
scheme.
The decision-making body also decided anew to leave the target rate for
unsecured overnight call money unchanged during the meeting.