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BLBG: Japan, Australia Pump $11 Billion Into Markets as Rates Climb
By Garfield Reynolds

Oct. 7 (Bloomberg) -- Japan and Australia's central banks pumped more than $11 billion into money markets, seeking to ease near-record borrowing costs that threaten to tip regional economies into recession.

The Bank of Japan injected 1 trillion yen ($9.8 billion) and the Reserve Bank of Australia added A$1.815 billion ($1.3 billion). The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans stayed near a nine-month high and the Tokyo interbank rate was unchanged at the steepest this year. The Japan Libor-OIS spread, a gauge of cash scarcity among foreign banks seeking yen, rose to a record.

Interbank rates have jumped as lenders hoard cash, sheltering from bank failures and plunges in stock and commodities markets. The Nikkei 225 Stock Average dipped below 10,000 for the first time since December 2003 as Asian shares slumped for a fourth day, extending an equities rout that erased more than $2 trillion from global equities yesterday.

``There's a massive asset bubble deflating and it just encompasses everything,'' said Adam Carr, senior economist in Sydney at ICAP Australia Ltd., part of the world's largest inter-bank broker. ``We've been living in a dreamland and that dream has ended.''

Banks increased deposits held at the Reserve Bank of Australia by A$92 million to A$9.493 billion yesterday, after those holdings reached a record A$11.04 billion on Sept. 30, the RBA said today on its Web site. Those deposits averaged A$1.7 billion last year.

Money held at the BOJ by banks and other financial institutions rose 1.23 trillion yen to 7.22 trillion yen yesterday.

`Hoarding Cash'

The BOJ has pumped about 23 trillion yen into the system over the past three weeks, the most in at least six years, and Australia's central bank is adding twice the daily average injected last year as banks store cash after governments in Europe and the U.S. acted to prevent the collapse of six financial institutions in the past two weeks.

``Despite central banks pumping liquidity into the system, banks are either hoarding cash or putting it into treasury bills,'' said Ong Hock Ann, a money-market dealer at ING Asia Private Bank Ltd. in Singapore. ``It's a question of confidence and trust. There is money, but money is not flowing to the right channels.''

The world economy is sliding into its first recession since 2001 as the credit crisis hammers consumers and companies, economists at JPMorgan Chase & Co. and UBS AG said yesterday.

Rate Cuts

Economists predict central banks will cut interest rates as growth concerns outweigh inflation worries. Those at UBS predict the Fed will halve its benchmark rate to 1 percent by April and the European Central Bank will cut its main rate to 3 percent from 4.25 percent by the end of next year.

Australia's central bank today slashed its cash target rate to 6 percent from 7 percent, the biggest reduction since 1992 and double the half-point cut forecast by economists in a Bloomberg News survey.

Australian banks' borrowing costs were little changed after today's cash injection, according to a gauge that measures the availability of funds in the market. The difference between the rate banks charge each other for three-month loans and the overnight indexed swap rate stood at 86 basis points, or 0.86 percentage point, from 88.3 before the RBA operation. The gap has averaged 45 points this year.

Banks hold cash in RBA exchange settlement accounts, on- call deposits at the central bank that receive interest at 0.25 percentage point below the central bank's benchmark rate.

Default Risk

The cost of protecting investors from Australian corporate bond defaults increased to a record.

The Markit iTraxx Australia index rose 34 basis points to 245, according to prices from Citigroup Inc. The price of the contracts, tied to the debt of 25 companies including Qantas Airways Ltd. and BHP Billiton Ltd., is the highest since the iTraxx benchmarks started in 2004. Sydney trading desks were closed yesterday for a holiday.

The Markit iTraxx Japan index rose 9 basis points to 207, Morgan Stanley prices show.

``Credit markets remain extremely weak and fragile,'' Gus Medeiros, a credit analyst at Deutsche Bank AG in Sydney, wrote in a research note today. ``We expect the market to remain very volatile and thin in the next few days.''

Damage from the credit crunch accelerated over the past month as Lehman Brothers Holdings Inc. and Washington Mutual Inc. collapsed, the U.S. government took control of Fannie Mae, Freddie Mac and American International Group Inc., and Merrill Lynch & Co. and Wachovia Corp. were purchased by rivals.

Cash Auctions

The U.S. dollar Libor-OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, stood at 287 basis points today, after touching 298 points yesterday. It was at 129 basis points two weeks ago and 81 basis points a month ago. The Japanese Libor-OIS spread widened to a record 61.05 basis points.

Japan's central bank today said it offered $20 billion in three-month loans to 40 financial institutions as part of a currency swap agreement with the Federal Reserve. The operation was held for firms including Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc. and Goldman Sachs Japan Co.

The Federal Reserve will double its auctions of cash to banks to as much as $900 billion and is considering further steps, the central bank said today in a statement. The Fed will increase its auctions under the 28-day and 84-day Term Auction Facility operations to $150 billion each. The two forward TAF auctions in November will be increased to $150 billion each. The central bank will also begin paying interest on bank reserves.

To contact the reporters on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net