BOJ keeps ample longer-term funding, repo rates ease

* BOJ continues to supply longer-term funds, repo rates ease

* Fund demand for new requirement period keeps call rate firm

* Traders expect BOJ to keep 0.3% target under new scheme

By Chikako Mogi

TOKYO, Nov 17 (Reuters) - The Bank of Japan continued to supply ample longer-term funds on Monday, aiming to ease tightness in the bond repurchase market, where lenders remain cautious about counterparty risks.

The BOJ has stepped up its Japanese government bond buying operations in repo agreements to start this week, offering funds overnight and for one week, while also supplying three-month funds to cover a seasonal rise in cash demand over the year-end.

The BOJ began last Thursday to pump in trillions of yen through JGB repo operations to start this week, and such operations have gradually brought repo rates lower, traders said.

Monday is the first working day of the new monthly reserves maintenance period, which began on Nov. 16, and a temporary scheme in which a 0.1 percent interest is paid on excess reserves at the central bank took effect.

The BOJ offered a total of 3 trillion yen ($31.12 billion) in JGB repo buying operations to start on Wednesday.

It offered 2 trillion yen for one day at 0.4 percent, down from 0.41 percent at a similar auction to start on Tuesday. The rate at the BOJ's 1 trillion yen of one-week JGB repo auction also eased to 0.43 from 0.45 percent at a similar offer starting on Tuesday.

"The BOJ has been concerned about repo rates staying high, and its aggressive repo operations are starting to show effects as rates are inching lower," said a senior treasury manager at a big Japanese bank.

"The stepped-up repo operations to start this week are largely symbolic as the new interest payment scheme is introduced in theory to prepare for situations when market rates may fall sharply due to ample funding," he said.

Traders said repo rates have come down to around 0.40-0.43 percent from around 0.45 percent late last week and near 0.5 percent a week ago.

They said the repo market could start to thaw and help ease upward pressures on rates on commercial paper and treasury bills, as the BOJ was expected to continue with such ample funding.

Traders said the operations appear aggressive in size but part of the funds are aimed at rolling over previous operations that start to settle this week. The BOJ is likely to keep a flexible stance, conducting overnight and one-week repo operations to meet market needs, traders said.

The overnight call rate was stable around the BOJ's 0.3 percent policy target TANSHI, as demand for cash is typically stronger in the early phase of a monthly reserve maintenance period and keeps call rates firm, traders said.

The BOJ drained cash on a spot basis on Monday, as ample funds left in the overall banking system could push call rates below 0.3 percent later in the day, traders said.

The BOJ also supplied 800 billion of funds for three months.

The decision to pay interest on excess reserves stems from volatility in global credit markets, which has prompted global central banks, including the BOJ, to inject cash into money markets to ensure liquidity.

By offering to pay 0.1 percent on excess reserves, the BOJ is creating a floor to better control call rates by preventing lending rates from falling much beyond the target should a future injection of liquidity drive rates down sharply, analysts said.

The BOJ holds a two-day meeting from Thursday and money market traders said the central bank was expected to keep its stance of guiding overnight call rates near its policy target. ($1=96.41 Yen) (Editing by Michael Watson)