Japan call market learning to live with kinks

By Chikako Mogi - Analysis

TOKYO (Reuters) - If the past couple of weeks are any indication, Japan's money dealers are learning to live with occasional market glitches that can send overnight call rates shooting well above the Bank of Japan's target.

Money market players wrapped up the fiscal year that ends this month with positive short-term rates for the first time since 1998, as the BOJ scrapped its zero interest rate policy in July and raised rates again to a decade-high 0.5 percent last month.

Overnight call rates surged to around 0.80 percent on Friday, compared with a weighted average of 0.506 percent on Thursday.

But dealers said the rise was not as sharp as previously feared, as players have become more adept at dealings under positive rates after undergoing a few monthly reserve maintenance periods, a fiscal half-year-end and a calendar year-end.

"There has been a shift in market sentiment over the past few weeks, with the impression that offerers have become more eager to lend even in days leading up to the fiscal year-end, when players tend to get cautious," said a manager at a regional bank.

"Fund flows have become more balanced at last and we feel the market mechanism is working in the right direction," he said.

Traders said a wider range of financial institutions were participating in the market, including Japan Post JP.UL, which had rarely been seen offering funds, despite holding huge surplus funds, when call rates were at 0.25 percent.

Insurers and regional banks also began offering in the market more actively last week, dealers said.

Overnight call rates and repo rates began to ease over the past week and a rise in rates on BOJ tenders settling in the new fiscal year was moderate, suggesting that banks were planning cash positions well in advance to avoid last-minute funding.

The lowest accepted rate on the BOJ's funding operation from Friday to Tuesday was a surprisingly low 0.67 percent, traders said.

"There was no sense of panic about funding among borrowers who cannot directly raise cash from the BOJ," said a managing director at a U.S. investment bank. "Dealings were pretty calm, with bid/offer rates sticking around 0.75 percent," he said.

The 0.75 percent level is the rate on the BOJ's Lombard lending facility, which serves as the ceiling for call rates and other interbank lending rates.

FOREIGN FUND DEMAND

Friday's market tightness was due to some foreign banks scrambling for a small amount of funds as Japanese offers thinned, traders said.

"The jump in overnight rates is an appropriate reflection of a market tightness typical of a fiscal year-end and offers a healthy insight into what rates players must anticipate if they don't plan cash positions well in advance," said a senior trader at a big Japanese bank.