BoJ dollar operation draws strong demand on Europe worries

The Bank of Japan on Tuesday supplied more dollars than it has done since it reinstated its dollar-funding operation in 2010, in a sign of persistent concerns about Europe's debt crisis. The central bank supplied $12.556 billion in an operation expiring in three months, triple the $4.756 billion in three-month funds it supplied last month.
It also supplied $2.961 billion in an operation maturing in a week. "The number of banks participating and placing bids has apparently increased as they want to prepare for emergency situations," said Tomohiko Katsu, deputy general manager of Shinsei Bank's asset liability division. Some Japanese banks could have secured funds for the crucial fiscal year-end period in March but the relatively subdued amount suggests that banks are not having any real funding shortages, he added.
The amount was still less than the tens of billions of dollars that the BoJ supplied in operations after the collapse of Lehman Brothers in 2008. Dollar-funding costs remain near a 2-1/2 year high as investors stay on edge over the outcome of Europe's sovereign debt crisis. The three-month dollar London Interbank Offered Rates (LIBOR) was at 0.5805 percent on Monday.
The BoJ's dollar-funding operation, under which it offers unlimited amounts against collateral, had been untapped for more than a year until November because it typically used to be more expensive than borrowing the greenback in the open market. But strains in financial markets prompted the world's top central banks in late November to reduce the cost of existing dollar swap lines by 50 basis points and extend the size and timing of the lines.
The BoJ first offered dollar funds in September 2008 as it joined other central banks in opening the dollar liquidity swap lines with the Federal Reserve 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 top central banks re-established temporary dollar liquidity swap facilities in May 2010 on heightening strains in European financial markets stemming from the Greek debt crisis.