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BOJ says markets overreacted

BOJ says markets overreacted

A Bank of Japan policy maker tried to soothe investors' nerves yesterday, saying some market moves had been overdone, amid a new bout of tightness in short-term credit markets due to banks' growing risk aversion.
Comments by U.S. Federal Reserve Chairman Ben Bernanke raised hopes of a U.S. interest rate cut, which helped Asian stock markets settle down.
In a letter released on Wednesday, Bernanke reiterated the Fed was "prepared to act as needed" to ensure credit market troubles did not hurt the economy, fuelling expectations that the central bank would follow up a cut in its discount rate on August 17 with one to the benchmark fed funds rate.
Bank of Japan policy board member Atsushi Mizuno, the lone advocate of a BOJ rate rise at the last two policy meetings, said a cut in U.S. rates would change the basis of discussion in Japan, although he later said any Fed cut on September 18 would not necessarily rule out a BOJ rate rise the following day.
Calming the panic in financial markets was the most immediate task, Mizuno said in a speech to business leaders in central Japan, adding that the U.S. Federal Reserve's cut in its discount rate earlier this month was an example of such action.
"To my eyes, there is market confusion that went beyond rational repricing (of risk)," Mizuno, a former bond strategist, said.
Ratings agencies have been criticized for contributing to the market confusion by being too slow to warn about the problems in the U.S. subprime mortgage sector.
Greater transparency
That view was underlined by German Chancellor Angela Merkel, who called yesterday for greater transparency in financial markets and hedge funds.
"There is also little transparency at the ratings agencies that rate certain companies. If we look at how the mortgage crisis happened, we have often experienced that what was rated highly in the end turned out to be much more unstable," she said in a speech in Japan.
The BOJ wants to raise its benchmark rate from 0.5 percent to more normal levels, but has held off in the face of a global credit squeeze that has shaken markets.
The unexpectedly cautious tone of Mizuno, the central bank's most hawkish board member, came as Japanese retail sales figures showed their biggest annual fall in more than two years, putting another hurdle in the way of Bank of Japan plans to raise rates.
The comments from Bernanke attracted most attention on Asian markets.
"Investor concerns are primarily concentrating on U.S. recession risks and the Fed stepping in. As long as there is a sense that the Fed will not let the U.S. slide to recession, then, given the fundamentals out here, we should be able to put risk back on the table slowly," said David Fernandez, an economist at JPMorgan in Singapore.
Tightening credit market conditions were evident in Australia where the central bank injected extra cash into the banking system yesterday due to upward pressure on bank bill rates.
The Reserve Bank of Australia added $3.157 billion Australian dollars (US$2.6 billion), five times Wednesday's $630 million Australian dollars.
U.S. dollar money market rates rose in Asia, with some banks nervous and unwilling to lend. Rates on tomorrow/next deposits - maturing on Monday - jumped 13 basis points to 5.81 percent at one stage, back towards their August 10 peaks above 6 percent when problems in the asset-backed commercial paper market surfaced, prompting cash injections by the European Central Bank and the Fed.
"Money markets are not functioning," said a currency forwards trader at a big Japanese bank in Tokyo.


Updated : 2021-05-12 16:07 GMT+08:00