UPDATE 2-BOJ joins dollar swaps, offers same-day funds

* BOJ revives dollar swap facility with Federal Reserve

* Arrangement adds to global c.banks’ moves to calm markets

* BOJ offers 2 trln yen in same-day funds

* BOJ’s Yamaguchi: concerned global liquidity could drop (Adds comments from BOJ Yamaguchi, details)

By Leika Kihara

TOKYO, May 10 (Reuters) - The Bank of Japan joined forces with the world’s major central banks on Monday to re-establish a dollar swap facility with the U.S. Federal Reserve to ease strains in credit markets rattled by Greece’s debt woes.

Concerns about debt burdens in European countries have rattled financial markets globally, and European Union finance ministers, central bankers and the International Monetary Fund agreed an emergency rescue package worth about $1 trillion in marathon talks at the weekend. [ID:nN09270819] [FRX/]

Central banks set up the dollar swap arrangements with the Fed on the understanding that funding strains in Europe may destabilise global financial markets, Bank of Japan Deputy Governor Hirohide Yamaguchi said. [ID:nTKU106003] [ID:nN09173629]

“During the post-Lehman shock period, dollar funding dried up. Compared with that, things are more stable even though dollar liquidity has shrunk in Europe,” Yamaguchi, one of the BOJ’s two deputy governors, told a news conference after an emergency BOJ policy meeting to reinstate the facility.

"But strains from shrinking liquidity that we're already seeing could spread globally and destabilise world financial markets in the future. That's the understanding behind our decision today." <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For an overview of stories on the crisis [nTOPNOW2] Euro zone crisis in graphics ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

The BOJ also said it would introduce dollar fund supply operations.

It offered to supply 2 trillion yen ($21.8 billion) of same-day funds early on Monday after conducting a similar operation on Friday. The operation drew bids for only 694.5 billion yen, however, showing demand for short-term yen funds remains tepid.

It is the first time the BOJ has offered same-day funds for two business days in a row since October 2008, when credit markets froze up in the wake of the collapse of Lehman Brothers.

Masamichi Adachi, senior economist at JPMorgan Securities Japan, said it was not clear to him why the BOJ needed to supply 2 trillion yen in funds for two days in a row.

“The bank may say that it must remain cautious given the current market turmoil, but the offer on Friday did not draw much in bids.”

The BOJ set no limit on the amount of funds that can be drawn in the dollar swap with the Fed and said the duration of loans in the swap facility wouldn’t exceed three months, a statement it issued after an emergency meeting showed.

Japan’s central bank also voted unanimously to keep its benchmark interest rate at 0.1 percent.

The BOJ saw no need to change its economic outlook because of Greece’s fiscal discipline crisis, Yamaguchi said.

BOJ Governor Masaaki Shirakawa wasn’t present at the emergency meeting as he was in Switzerland to attend a Bank of International Settlements meeting.

The euro EUR= rose and Asian stocks jumped on Monday after the EU rescue package was announced. Japanese government bond prices JP10YTN=JBTC also fell as the Nikkei average gained 1.6 percent in a sign worries about Greece's fiscal woes are easing.

Fears of a meltdown in Europe caused global stock markets to tumble in panic selling and sent the euro to a 14-month low last week. The Greek debt crisis drove its bond yields and insurance on its debt to record levels. Financial markets had started to punish other euro zone debt of members with bloated budgets such as Portugal, Spain and Ireland.

The Fed reopened currency swap facilities with other major central banks on Sunday to help ease market strains in Europe, reviving arrangements set up during the 2007-2008 financial crisis with the European Central Bank, the banks of Canada and England and the Swiss National Bank. [ID:nN09173629]

Major central banks took action after interbank rates for euro and dollar loans started to creep higher, reminding many investors and policymakers of the credit crunch that afflicted the global economy after the subprime crisis.

The ECB also said it will buy euro zone government bonds for the first time to help support fractured markets, abandoning its resistance to full-scale asset purchases.

The ECB said the scope of the purchases was yet to be determined, but added they would be offset by liquidity-absorbing operations so that monetary policy is unaffected. (Editing by Charlotte Cooper)