Japan, China, Korea Join Central Bank Attempts to Calm Markets

By Shamim Adam and Mayumi Otsuma

Sept. 16 (Bloomberg) -- The Bank of Japan added 1.5 trillion yen ($14.4 billion) to the financial system and China cut interest rates as Asian central banks attempted to calm markets after Lehman Brothers Holdings Inc. filed for bankruptcy.

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 benchmark rate for the first time in six years late yesterday and may act again.

Japanese bonds jumped, sending the yield on the benchmark 10-year bond to its biggest drop in five years 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 yield on Japan's benchmark 10-year bond dropped 15 basis points to 1.38 percent, the biggest decline since Sept. 23, 2003.

The cost to protect Japanese and Australian company debt from default rose to the highest in more than five months, credit-default swaps showed today. The Markit iTraxx Australia Series 9 Index was quoted 20 basis points higher at 205 as of 9:39 a.m. in Sydney, extending yesterday's record increase.

Stocks fell, sending the MSCI Asia Pacific Index 3 percent lower. Mizuho Financial Group Inc., a creditor to Lehman, tumbled 8.3 percent.

Money-Market Operations

``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 starts a two- day policy meeting in Tokyo today.

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

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.''

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.

`Chain Reaction'

``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 N.A. in Tokyo. ``They have no choice but to try to calm the markets.''

The Reserve Bank of Australia yesterday added A$2.1 billion ($1.7 billion) to the financial system, as did the European Central Bank, the Bank of England and the Swiss central bank.

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