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Friday, August 10, 2007

Japan injects 1 trillion yen into market

Japan injects 1 trillion yen into market

BW Exclusives


Japan's central bank injected 1 trillion yen ($8.4 billion) into money markets Friday amid a Tokyo stock plunge and growing global worries about dubious U.S. mortgages.

The Bank of Japan joined similar overnight moves by the U.S. and European counterparts -- the first time the central banks took such action together since the Sept. 11, 2001, terrorist attacks. The Australian central bank also followed suit.

But Japanese Economy Minister Hiroko Ota tried to allay fears about a fallout on the Japanese financial system, calling the damage from U.S. subprime mortgages here "limited."

"It's hard to tell how the subprime issue will affect the Japanese economy right now," she told reporters. "Its impact on the country's real economy is limited, but I will closely monitor its effects."

The Bank of Japan's move, designed to curb an overnight jump in a key interest rate, came as the Nikkei 225 index plunged more than 2 percent in early trading, following a sharp decline on Wall Street overnight. The benchmark for the Tokyo Stock Exchange lost 2.4 percent, while the broader Topix dropped nearly 3 percent by the end of session.

The impact in Japan from the credit market problems in the U.S. was more widespread than initially thought, said Takahiro Tazaki, head of structured credit and securitization research, Japan, at Barclays Capital.

"This is a very serious problem," he said, adding that the exact extent of the problem in Japan was still unclear.

"The exposure to hedge funds and others has never been totally clear in Japan. But when you take in regional banks, life insurers and so on, then there's got to be a great deal of exposure," Tazaki said.

The Reserve Bank of Australia injected A$4.95 billion ($4.19 billion) into the money market, more than double the daily average.

Singapore's central bank said it was prepared to intervene if needed.

"We will stand ready to inject liquidity," Ong Chong Tee, Deputy Managing Director at the Monetary Authority of Singapore said. "At this stage market conditions remain relatively stable."

On Friday, Aozora Bank Ltd. said it had about 21 billion yen ($178.2 million) worth of exposure to debt obligations related to U.S. subprime loans as of the end of June. Aozora wrote off 4.48 billion yen ($38 million) of these assets in its earnings for its first quarter that ended in June.

The Bank of Japan's injection followed similar moves by the central bank's European and U.S. counterparts overnight.

To calm such jitters, the European Central Bank provided more than $130 billion to money markets, the bank's biggest infusion ever. The U.S. Federal Reserve added a larger-than-normal $24 billion in temporary reserves to the U.S. banking system.

Overnight, the Dow Jones industrial average slid 2.8 percent, continuing a jittery pattern of triple-digit gain or loss since July 19.

A Bank of Japan official said the bank was not certain whether the climb in the overnight call rate, the key interest rate, to above its target of 0.50 percent, was related to the recent turmoil over subprime mortgages.

Tohru Sasaki, J.P. Morgan Chase Bank strategist, said so far the market turbulence is unlikely to affect the Bank of Japan's likely decision to raise interest rates in the next few weeks -- a move that has been expected because of recent signs of a robust recovery in the overall Japanese economy.

"But if this panic gets worse, we may need to change that outlook," he told Dow Jones Newswires.

Market expectation lately has been for the Bank of Japan to raise the benchmark rate to 0.75 percent from 0.5 percent at its two-day policy board meeting ending Aug. 23.

The government spokesman expressed confidence in the central bank.

"The financial authorities are always working closely internationally. I think they will make the right decisions," said Chief Cabinet Secretary Yasuhisa Shiozaki.

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