Asia central banks try to calm markets with cash, words

By Chikako Mogi and Gde Anugrah Arka

TOKYO/JAKARTA (Reuters) - Japan, Australia and India flooded money markets with cash on Tuesday and Indonesia cut one interest rate as central banks tried to prevent the upheaval on Wall Street from freezing the global financial system.

The region's banks dished out nearly $27 billion, following Monday's $70 billion Federal Reserve injection into the U.S. money market, which seized up after Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz) collapsed to become the latest casualty of the 13-month old credit crisis.

The weekend's dramatic events that also saw crisis-hit Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz) taken over by Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz) and insurer American International Group (AIG.N: Quote, Profile, Research, Stock Buzz) scrambling to raise cash, increased bets on a Fed interest rate cut later on Tuesday.

The Bank of Japan gave the banking system its biggest cash injection in almost six months as the prime minister met top financial policy makers to discuss the fallout of the latest act in the credit turmoil that pushed Lehman into bankruptcy.

The rates at which banks lend to each other jumped in South Korea and the financial hubs of Hong Kong and Singapore, while Asian stock markets, many of them closed for a holiday on Monday, tumbled and currencies whipsawed.

"I expect the BOJ to keep a generous funding stance for a while until market jitters subside," said Shinsuke Kanabu, joint general manager at money broker Central Tanshi.

Authorities across Asia said they were ready to act and Japan's central bank backed that up by injecting billions of dollars into the banking system.

"The Bank of Japan will carefully monitor the recent situation surrounding U.S. financial institutions and its impact," Governor Masaaki Shirakawa said in a statement.

The central bank, which begins a two-day rate review on Tuesday, pumped 2.5 trillion yen ($23.67 billion) into the money market in two injections, the biggest since March 31, pushing the overnight call rate slightly lower to 0.52 percent.

FED CUT?

Indonesia reduced its overnight repo rate, at which commercial banks can borrow overnight funds from the central bank by 200 basis points to 10.25 percent to boost liquidity, while it kept its benchmark BI target rate at 9.25 percent.

The Bank of Japan is expected to leave its benchmark interest rate unchanged at 0.5 percent on Wednesday, with its banking system largely unscathed by the global credit squeeze triggered by U.S. mortgage defaults.

In contrast, markets are pricing in an 88 percent chance of a 25 basis point cut in the U.S. benchmark rate to 1.75 percent.

Economists, however, expect the central bank to express its readiness to cut rates swiftly if needed, but to stop short of lowering borrowing costs just yet.

U.S. markets appeared poised for another selloff on Tuesday after ratings agencies downgraded AIG's debt, complicating its battle for survival.

Shockwaves from the Wall Street crisis prompted the Reserve Bank of Australia to pump nearly A$1.8 billion ($1.5 billion) into the banking system, nearly three times as much as the market's estimated requirement, in its second injection in two days.

The Reserve Bank of India added almost 60 billion rupees ($1.32 billion) through a refinance operation, its biggest injection in at least a month.

And China surprised markets on Monday with its first interest rate cut since 2002, seen partly as support the jittery stock and property markets

Hong Kong, South Korea, Taiwan and New Zealand all offered verbal reassurances.

"We will take appropriate steps if we see fluctuations in the foreign exchange market," South Korean Vice Finance Minister Kim Dong-soo said.

The presidential Blue House has called a meeting of ministers to discuss the impact of the latest turmoil on the economy, a South Korean government source said, speaking on the customary condition of anonymity.

While the region's officials sought to calm markets and said their banking systems were robust enough to withstand the turbulence, they made clear there was more pain to come.

"As events in the United States demonstrated in the past 24 hours, regrettably, it has a long way to run yet," Australian Prime Minister Kevin Rudd told parliament.

($1=105.62 Yen)

($1=1.243 Australian Dollar)

($1=45.62 Indian Rupee)

(Additional reporting by Yoko Nishikawa in Tokyo, Wayne Cole in Sydney, Vidya Ranganathan and Kevin Yao in Singapore, Umesh Desai and Susan Fenton in Hong Kong and Lee Shin-Hyung in Seoul, Writing by Tomasz Janowski; Editing by Dayan Candappa)