BoJ dollar operation draws strong bids for year-end funding

The Bank of Japan on Tuesday supplied more dollars than it has done at any point since Europe's debt crisis broke out two years ago, with banks looking to secure funds for the crucial year-end period at a time when dollar funding costs are expected to stay high.
The step marked the BoJ's first three-month dollar liquidity operation since last month's accord by the world's top central banks to cut the cost of the US currency to mitigate the impact of Europe's debt crisis. The Japanese central bank supplied $4.756 billion in an operation expiring on March 8, 2012, much bigger than the $200 million it supplied last month in two operations of a similar duration and the biggest since the BoJ reinstated the dollar facility in May 2010 in the wake of the Greek debt crisis.
It also supplied $13 million in an operation maturing in a week. "Japanese banks likely moved to secure large amounts of long-term funding. They are in a much better position than their European counterparts to procure dollars in the open market but the BoJ auction is more convenient, with large amounts available at once," said Izuru Kato, chief economist at Totan Research. "After the turn of the year, market stress may ease somewhat. But there is the possibility of renewed tension as the EU summit last week failed to bring about epoch-making changes and worries about ratings downgrades persist."
Markets had been keenly awaiting the auction as a gauge of demand for such funds, particularly after the stronger-than-expected outcome of the European Central Bank's dollar auction last week helped ease the "stigma" associated with tapping central bank auctions.
The lending rate dropped to 0.610 percent from 1.120 percent in the previous three-month operation on November 29, but was still above the three-month dollar LIBOR rate of 0.5435 percent on Monday. The amount clinched was still less than tens of billions of dollars that the BoJ supplied in operations after the collapse of Lehman Brothers in 2008, indicating Japanese banks are not suffering from funding strains.
Some experts predict Japanese banks may grow more eager to draw dollars from the central bank to take advantage of reduced costs as they themselves are tapped more in emerging Asian nations due to European banks pulling out of the region. Last week, the BoJ supplied $25 million in an operation maturing in a week as the co-ordinated central bank action encouraged Japanese banks to place bids to test the scheme.
The dollar-funding operation, under which the BoJ offers unlimited amounts against collateral, had been untapped for more than a year until last month because it typically used to be more expensive than borrowing dollars in the open market. The Federal Reserve, European Central Bank and the central banks of Japan, Canada, Britain and Switzerland in late November said they would reduce the cost of existing dollar swap lines by 50 basis points and extend the size and timing of the lines, to ease strains in financial markets.
The BoJ first offered dollar funds in September 2008 as it joined other central banks in opening the dollar liquidity swap lines with the Fed after the Lehman meltdown. As the use of the swaps tailed off in 2009, the BoJ ended the operations along with swap lines in February 2010. But the world's central banks re-established temporary dollar liquidity swap facilities in May 2010 in response to heightening strains in European financial markets stemming from the Greek debt crisis.