Japan and Australia Join Central Bank Efforts to Calm Markets

By Shamim Adam and Mayumi Otsuma

Sept. 16 (Bloomberg) -- Japan and Australia pumped cash into their financial systems as Asian central banks attempted to calm markets after Lehman Brothers Holdings Inc. filed for bankruptcy.

The Bank of Japan added 2.5 trillion yen ($24 billion) into the financial system, its biggest money-market operation since March, and the Reserve Bank of Australia injected A$1.85 billion ($1.5 billion), for a two-day total of nearly A$4 billion. South Korea said it's ready to provide liquidity if needed.

Japanese bonds jumped, sending the yield on the benchmark 10-year bond to the lowest in more than a week on concern the credit crisis will worsen. Financial institutions worldwide have reported more than $510 billion in losses and writedowns and the credit-market collapse has erased $11 trillion from global stocks in the past year.

``Central banks have to show they are ready to take action to ensure stability,'' said Thomas Lam, an economist at United Overseas Bank Ltd. in Singapore. ``Precautionary steps are high on their list to prevent any significant impact and support their markets.''

The Federal Reserve yesterday added $70 billion in reserves to the banking system, the most since the September 2001 terrorist attacks, and may cut its benchmark lending rate today. China lowered its key rate for the first time in six years late yesterday.

Bank of Japan

Japan's overnight call loan rates was at 0.545 percent at 3.35 p.m. in Tokyo after the Bank of Japan made two injections of cash. It rose as high as 0.57 percent, according to Tokyo Tanshi Co. The central bank's target rate is 0.5 percent.

Today's increase in funds was the first since June 30 and the biggest since March 31, when the central bank added 3 trillion yen.

Australian one-month money market rates dropped 3 basis points to 7.21 percent today, the first decline in five days.

The European Central Bank, the Bank of England and the Swiss central bank also added liquidity yesterday. Three-month money market rates in Europe fell 4 basis points to 4.25 percent yesterday, the lowest level since Aug. 27.

Yesterday, the federal funds rate soared as high as 6 percent, triple the Fed's target, as banks hoarded cash. That spurred the Fed to pump $70 billion into money markets through repurchase operations, the most since September 2001.

Financial-Market Stability

``The Bank of Japan will carefully monitor the recent developments among U.S. financial institutions and continue to try to secure smooth fund settlements and financial-market stability by implementing appropriate money-market operations,'' Governor Masaaki Shirakawa said. The central bank started a two- day policy meeting in Tokyo today.

South Korea will provide liquidity ``through open-market operations,'' Vice Finance Minister Kim Dong Soo said. He held an emergency meeting today with his counterparts from the central bank and the financial regulator in Seoul.

``The government and the Bank of Korea expect local and overseas financial markets will recover their stability considering key nations' efforts to stabilize the markets,'' Kim said after the meeting.

The Bank of Korea said in a separate statement today it will provide foreign currency liquidity through the swap market when necessary to ``help calm market players.''

Indonesian Liquidity

Bank Indonesia cut its overnight rate, used to lend to commercial banks, by 2 percentage points and raised the rate on deposits placed by the lenders to ensure liquidity. The benchmark BI Rate was kept unchanged at 9.25 percent.

The People's Bank of China reduced the one-year lending rate to 7.20 percent from 7.47 percent, effective today. It lowered the reserve-requirement ratio for smaller banks to 16.5 percent from 17.5 percent.

``The authorities are afraid of a chain reaction and a further tightening of financial conditions, which would ultimately have a negative impact on the economy,'' said Tomoko Fujii, head of economics and strategy at Bank of America Corp. in Tokyo. ``They have no choice but to try to calm the markets.''

Borrowing costs may be reduced further as Chinese officials seek to spur economic growth, analysts say.

``Policy makers will consider further interest-rate cuts in the coming month, in conjunction with a more proactive fiscal policy,'' said Jing Ulrich, chairwoman of China equities at JPMorgan Chase & Co. in Hong Kong.

Taiwan's government instructed its four major funds and state-owned banks to buy shares to help reverse the stock market's slump. The Taiex index, which fell as much as 5.4 percent today, closed 4.9 percent lower.

Fed Meeting

Fed policy makers will meet today to decide on its key interest rate. The central bank hasn't reduced rates since April 30, when it made the seventh cut since September 2007, bringing the target rate for overnight loans between banks to 2 percent.

Futures show traders boosted odds to 68 percent that the Fed will cut rates at the meeting.

``Cutting interest rates may not be the most appropriate way to solve the crisis,'' said Lam. ``It's better for them to continue or enlarge their liquidity and collateral program.''

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net; Mayumi Otsuma in Tokyo at motsuma@bloomberg.net