BOJ injects record funds to calm FY-end jump in rates

TOKYO (Reuters) - The Bank of Japan injected a record amount for same-day funding operations on Monday to cool overnight call rates, as they jumped well above the central bank's policy target due to strong fiscal year-end funding demand.

The BOJ supplied 3.0 trillion yen ($30 billion) against pooled collateral on a same-day basis in two tranches of 1.5 trillion yen each, a record for such an operation, as seasonal funding tightness in Japan coincided with the first-quarter end for foreign institutions hit hard by the credit market strains.

Japan's money markets have remained relatively calm compared with the strains gripping those in the United States and Europe, and foreign banks were forced to take cash at sharply higher rates as Japanese banks became particularly cautious on the last day of the business year, traders said.

"Banks are generally reluctant to lend as they tend to get conservative on the last day of the fiscal year, while trying to secure cash as early as possible," a dealer at a big Japanese bank said.

Traders said that earlier in the session, Japanese banks were seen tapping overnight funds as high as around 0.62 percent while foreign banks were seen raising money as high as near the BOJ's 0.75 percent Lombard rate for direct lending to banks.

Reflecting the market tightness, the pro-rata rate at the BOJ's second same-day funding operation eased only marginally to 0.730 percent from 0.740 percent at its first funding operation.

After the second BOJ operation, overnight call rates briefly dipped below 0.60 percent, but persistent demand from foreign banks pushed the overnight call rate back up to 0.65 percent TANSHI, well above the BOJ's 0.5 percent policy target, a dealer at another big Japanese bank said.

"The BOJ's generous operation may be targeted at encouraging players to tap cash from the market rather than rely on the Lombard lending, which could be seen negatively," said a dealer at a foreign bank.

"Dollar funding remains extremely tight and is likely to stay this way beyond the quarter-end," he said, adding that overnight dollar Libor LIBOR was dealt as high as 3.5-3.6 percent recently, well above the Federal Reserve's benchmark lending rate of 2.25 percent.

Since last August, banks have become increasingly reluctant to lend cash as their balance sheets have become increasingly burdened by calls on bank lines and assets from structured investment vehicles, as well as the hit from credit-related losses.

U.S. and European money market rates continued to reflect sharp reluctance to lend between banks despite periodic injections of massive liquidity by the world's major central banks, including the Fed and the European Central Bank.

At the end of Japan's fiscal year last year, the overnight call rate's weighted average rose to 0.715 percent, its highest since March 31, 1997.

The weighted average was 0.498 percent on Friday.

(Editing by Chris Gallagher)