The Bank of Japan moved on Tuesday to withdraw billions of dollars of emergency funds from the banking system after a degree of calm returned to jittery global markets. With global stock markets showing signs of stabilising after their recent rollercoaster ride, Japan's central bank said it would drain the 1.6 trillion yen (13.6 billion dollars) it had injected into the money market since Friday.
Japanese share prices closed slightly higher Tuesday as investors took the news in their stride, while bourses elsewhere in Asia saw mixed performances after Wall Street ended steady overnight. The BoJ move would be taken by markets "as a message that there is no need to panic, that the short-term money market in Japan is stable," said Masamichi Adachi, senior economist at J.P. Morgan.
"I believe the financial situation will continue to calm down and will not have a significant effect on the real economy. However, we have to wait for a few more days to see what happens," he said. In tandem with the US and eurozone central banks, the BoJ had pumped funds into the banking system for two business days - including one trillion yen on Friday - to ensure commercial banks had ample liquidity to do business.
That move pushed the central bank's unsecured overnight call rate well below its target of 0.5 percent, suggesting there was ample liquidity. The liquidity squeeze has been felt most in dollar money markets and not the Japanese banking system so the BoJ had decided that it would be appropriate to take out some of the funds, said Adachi.
The European Central Bank (ECB) injected another 47.66 billion euros (65.06 billion dollars) into the eurozone banking system on Monday while the US Federal Reserve pumped in two billion dollars. Investors in Tokyo reacted calmly to the central bank's decision to withdraw funds.
The Tokyo Stock Exchange's benchmark Nikkei-225 index of leading shares gained 44.56 points or 0.27 percent to end at 16,844.61. Lingering concerns over subprime loans kept investors cautious about buying battered stocks, analysts said. "The market will continue to trade in a jittery manner, but Japanese stocks are not on the verge of collapse," said Hideo Mizutani, chief strategist at Sieg Securities.
Investors fear hedge funds may be forced to dump shares to cover losses on securities backed by US mortgages. Wall Street bank Goldman Sachs on Monday announced it had teamed up with a group of investors to lead a three-billion-dollar bailout of a hedge fund it manages. Top Japanese banks have relatively little risk of getting badly hit by defaults on loans in the US subprime mortgage market, experts added.
Major Japanese banks have a total exposure to US subprime loans of about one trillion yen, with losses likely to total slightly over 100 billion yen, which should not pose a major risk, UBS Securities estimated last month. The BoJ's earlier injections of funds were "more a symbolic move to show it is co-operating with the Fed and the ECB," said Shigeru Nakane, senior client manager at Resona Bank.
He said Japan's central bank may also have removed the funds to prepare for another hike in interest rates later this month. BoJ governor Toshihiko Fukui has made clear he wants to gradually raise borrowing costs, which 0.5 percent are by far the lowest of the world's major economies, but recent market turmoil has made it harder to justify a rate hike.
Analysts said it was uncertain whether the BoJ would opt for a rate rise next week, particularly in light of some soft recent economic data. "It is not impossible for the BoJ to go ahead with a rate increase, but I think the market's consensus is for no hike," J.P. Morgan's Adachi said.
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