BOJ under pressure as Japan money market tightens

* BOJ injects same-day funds, then drains to keep 0.3% target

* Traders say more funding needed to ease corp financing

* Talk of emergency BOJ meeting next week on liquidity steps

By Chikako Mogi

TOKYO, Nov 28 (Reuters) - The Bank of Japan is coming under pressure to take more aggressive funding steps as money market rates inch up due to mounting concerns about market tightness.

The BOJ on Friday supplied cash through a same-day funding operation for the first time in a month, as the overnight call rate rose above the central bank's 0.3 percent policy target.

The BOJ also offered the largest amount in a single-day Japanese government bond buying operation via repurchase agreements since it lifted its super-easy policy in March 2006.

Rates on the JGB repo market have been edging back up near the 0.5 percent Lombard lending rate after falling as low as 0.4 percent in the wake of the BOJ's rate cuts on Oct. 31.

The credit crisis has made investors shun credit products, forcing companies to turn to bank loans as rates on the commercial paper they issue rose steadily due to a lack of investor demand.

The BOJ said last week it would buy commercial paper under repurchase agreements more flexibly and also examine enhancing flexibility in fund operations that are collateralised with corporate debt.

There is market speculation the BOJ could hold an emergency meeting and announce details of the enhanced liquidity measures as early as next week.

Money market players say these options may help ease funding tightness with a time lag, but they don't really fit with the current severity of financing difficulties companies are facing.

"The reality in the eyes of banks is very severe but the BOJ's view may not have reached that stage yet," said a director at a European bank.

"The BOJ has to decide whether it wants markets to keep functioning on their own even under the extreme circumstances, or take over lending capacity completely," he said.

Fear of counterparty risk has frozen liquidity especially in the unsecured overnight call market, prompting borrowers to turn to the BOJ for funds. But collateral is needed to borrow from the BOJ through its operations.

Some money market players say there may not be enough commercial paper that can be held as collateral for cash as firms have become reluctant to issue paper because of the high rates.