BOJ beefs up yen funding, credit worry keeps rates up

* BOJ conducts rare same-day funding ops for one week

* BOJ aims to ease daily cash concerns with long-term ops

* Funding tightness remains as focus shifts to year-end

By Chikako Mogi

TOKYO, Oct 1 (Reuters) - The Bank of Japan supplied funds through same-day operations on Wednesday, but for a week rather than the usual overnight supply, as it beefs up efforts to ease credit worries that pin money market rates high.

The rare operations, which start the same day but expire a week later, reflected the central bank's desire to help relieve borrowers from having to scramble for cash every day and to roll it over daily, money market traders said.

The pro-rata rates in the BOJ's operations remained at 0.75 percent, the rate for the central bank's Lombard lending facility which serves as a cap for call rates and other interbank lending rates, underscoring the difficulty foreign players face in tapping cash in the interbank market.

The BOJ added 800 billion yen ($7.56 billion) on a same-day basis to Oct. 8 in a morning auction at its headquarters, followed by an 800 billion yen injection via a same-day operation to Oct. 7 in an afternoon auction held at all its offices.

"The operations give assurances for longer-term funds to those who have had to seek funds daily at the BOJ," said Shinsuke Kanabu, joint general manager at money broker Central Tanshi.

"The operation held at all offices shows the BOJ is trying to reach wider borrowers to help spread fund flows," he said.

Participants at auctions held at the BOJ's headquarters are limited to some 40 institutions while about 150 institutions can participate in tenders at its all offices, traders said. Despite some optimistic expectations, premiums for the end of Japan's fiscal half year and the end of the quarter for overseas institutions retreated only marginally, as the focus shifted to the year-end, a far more crucial time for securing funds.

Divisions in the money market show no sign of correcting, with foreign financial institutions not finding overnight cash below 0.7 percent, while Japanese banks generally get money at or below the BOJ's 0.5 percent policy target, traders said.

"Funding pressure related to a quarter-end just pales in the face of the severe credit crunch, which shows no signs of improving," said a treasury manager at a Japanese bank.

"Market conditions will only get tighter with players eyeing longer-term funding as the year-end approaches, and the BOJ's operations already reflect such concerns," he said.

Japanese lenders have become extremely reluctant to lend to foreign financial institutions due to increased counterparty risks after the abrupt collapse of investment bank Lehman Brothers last month.

Signs of the credit crisis spreading to European institutions only aggravated the already fragile mood. The BOJ faces an increasingly delicate task of maintaining ample funds in the money market while mopping up extra cash in order to keep rates from falling sharply, traders said.

The BOJ on Wednesday absorbed 400 billion yen via a same-day operation expiring the next day. The overnight call rate fell to a low of 0.33 percent on Wednesday TANSHI.

Traders said extreme wariness over counterparty risks had curtailed dealings between banks, leaving foreign players to turn to the BOJ as their only source of funding.

"Interbank dealings are simply dead," said a general manager in the treasury department at a Japanese trading firm. "There is only one-on-one funding from the BOJ. All the BOJ supplies goes to foreign players, so the BOJ has to meet all their needs."

The repurchase market for Japanese government bonds, in which players swap bonds with each other for cash, remained tight, with key rates hovering around 0.7 percent, well above the usual rates below 0.6 percent, traders said.

($1=105.82 Yen)