BOJ Official: O/N Rate Rise May Be On Subprime Woes

TOKYO -(Dow Jones)- A Bank of Japan official said Friday that the central bank injected Y1 trillion into money markets after the overnight call rate rose from the BOJ's target of 0.50% to 0.54%-0.55%. The Japanese central bank's fund injection followed similar steps overnight by the U.S. Federal Reserve and the European Central Bank, as market worries about the U.S. subprime loan crisis escalated. The BOJ official said it was "possible" that the rise was tied to the subprime crisis, but that the bank didn't know for sure. "We're not certain if that is related (to subprime) or not. It all depends on why the overnight call rate was a little bit high this morning," the official said. "We're not sure why some of the financial institutions were raising funds at a higher rate than on other days.

" The official called the step "an extension of our normal day-to-day operations," but noted that the last time the BOJ made such a large cash injection was June 29 - just as the U.S. subprime crisis flared. The injections follow French banking giant BNP Paribas' decision to freeze three funds that trade in mortgage-backed securities, saying the dramatic absence of liquidity in the market for such products as the subprime crisis spreads has made it impossible to accurately value the funds' holdings. A BOJ official said the bank acted after the overnight call rate rose to 0.54%-0.55%, above the bank's target rate of 0.5%. It is "possible" that the rise in the key rate was related to the subprime chaos, the official said, though he added that the BOJ is "not certain" of the cause. "We're not certain if that is related (to subprime) or not. It all depends on why the overnight call rate was a little bit high this morning," said the BOJ official. "We're not sure why some of the financial institutions were raising funds at a higher rate than on other days." The official described the move as "an extension of our normal day-to-day operations. The rates were a bit high, deviating a little bit away from our target, so we thought it might be necessary to inject some liquidity.

" The ECB took the almost unprecedented step of injecting nearly EUR95 billion into European money markets overnight, and the Fed funneled $24 billion into U.S. credit markets. "Suddenly, central banks have changed their tune from a wait-and-see stance on the subprime issue to a move to stabilize the financial system," Barclays Capital analyst Masuhisa Kobayashi wrote in a research note Friday. He said the start of action could either mean that the credit market and financial system have destabilized to the extent that central banks had to take action, or that the action was meant to prevent such a situation, and things should calm down going forward. He added: "The market seems to have taken the former, more pessimistic view." But the BOJ official suggested that the central banks had not coordinated their moves. "We're all responding to the situation in our domestic markets. It might mean that something common behind our domestic markets is happening, but we're not certain," he said.
-By Michael S. Arnold, Dow Jones Newswires; 81-3-5255-2929; michael.arnold@dowjones.com (END) Dow Jones NewswiresAugust 09, 2007 23:39 ET (03:39 GMT)