Japan, Australia Inject $33 Billion to Soothe Markets

By Shamim Adam and Nate Hosoda

Sept. 17 (Bloomberg) -- Central banks in Japan and Australia injected $33 billion into their financial systems amid ongoing efforts to calm markets roiled by the demise of Lehman Brothers Holdings Inc. and crisis at American International Group Inc.

The Bank of Japan pumped 3 trillion yen ($29.3 billion) into the financial system today, for a total of 5.5 trillion this week. The Reserve Bank of Australia added A$4.285 billion ($3.45 billion). Global central banks from Tokyo to Frankfurt have added more than $200 billion since the beginning of the week.

Policy makers are still trying to soothe concerns that the credit crisis will worsen as lenders push up borrowing costs amid reservations about the solvency of other banks. Financial institutions in Asia are charging each other more for loans, according to interest-rate swaps.

``Banks are concerned about extending credit to each other,'' said Tomo Kinoshita, chief economist for Asia outside Japan at Nomura Holdings Inc. in Hong Kong. ``Central banks want to make sure that liquidity is sufficient.''

Japan's overnight loan rate fell to 0.53 percent at 1 p.m. in Tokyo from 0.65 percent before two money-market operations today. The central bank kept is target overnight lending rate unchanged at 0.5 percent today. The Bank of Japan added 2.5 trillion yen to the banking system yesterday.

The one-year swap rate, the fixed payment in exchange for interbank six-month borrowing, climbed 5 basis points, the biggest increase since June 10, according to data compiled by Bloomberg.

Market Turmoil

The Bank of Japan's cash injection's ``was helpful because market players felt that the BOJ did something to deal with the current market turmoil,'' said Keiko Onogi, a debt strategist at Daiwa Securities SMBC Co. in Tokyo. The central bank's operations over the past two days ``is enough,'' she said.

Japan's banks and insurers, including Mitsubishi UFJ Financial Group Inc., announced a combined 245 billion yen of potential losses tied to the collapse of Lehman.

Australian one-year swap rates climbed 14 basis points, the largest gain since June 10, after the RBA's biggest injection of funds in almost two months failed to ease credit concerns.

``The RBA is flushing the system with money to help financial institutions trying to shore up their balance sheets,'' said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd. ``Things could get worse from here.''

The Fed late yesterday agreed to an $85 billion loan for AIG, the insurer hit by billions of dollars of writedowns on investments in securities tied to mortgages. The government will get a 79.9 percent equity interest in the company as a result.

Avert Collapse

The agreement, backed by U.S. Treasury, would keep New York- based AIG in business, averting a collapse that could have threatened more financial companies and caused $180 billion in losses, according to RBC Capital Markets. AIG needed the loan to stave off a collapse after its credit ratings were cut and shares plunged 79 percent since Sept. 11.

The London interbank offered rate, or Libor, that financial institutions charge each other for loans soared 3.33 percentage points to 6.44 percent yesterday. The increase was the biggest in its history.

The U.S. Federal Reserve yesterday added $50 billion in temporary reserves to the banking system, while the European Central Bank awarded 70 billion euros ($99.8 billion) in a one- day money-market auction. The Bank of England pumped in 20 billion pounds ($36 billion).

Central banks in South Korea and Singapore reiterated that they are ready to provide extra liquidity to their financial markets if necessary. The Bank of Korea will purchase government bonds if needed directly from the market, Governor Lee Seong Tae told parliament in Seoul today.

South Korea

South Korean Deputy Finance Minister Noh Dae Lae said the country can weather the financial shocks emanating from the U.S. and policy makers will take measures to stabilize markets when needed. The nation's one-year swap rate increased 7.5 basis points, the biggest gain since July 14.

In Taiwan, the central bank yesterday said it will cut its required reserve ratios for the first time in eight years in a bid to inject liquidity into the island's financial markets. The central bank added $3.59 billion into the foreign-currency interbank market yesterday.

The Reserve Bank of India also took steps to boost cash in its banking system, reversing its policy to reduce liquidity as it sought to quell inflation. Lenders can get more funds through an additional repurchase auction everyday and a temporary increase in their eligibility to access funds through the repurchase auction, the central bank said.

``The RBI's steps to ease liquidity are a significant change in policy,'' said Tushar Poddar, an economist at Goldman Sachs Group Inc. in Mumbai. ``The RBI has several weapons in its arsenal if it wishes to continue to loosen liquidity.''

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