Bank of Japan drains funds for first time in seven days

TOKYO (AFP) - Japan's central bank said Friday it was draining funds from the banking system for the first time in seven days in the wake of recent market turmoil.

The Bank of Japan move contrasts with the US Federal Reserve, which injected 17.25 billion dollars into the financial system Thursday, one factor cited by dealers in driving Wall Street lower overnight.

The Bank of Japan said it was siphoning off 300 billion yen (2.6 billion dollars), a relatively small amount for a central bank, to mop up excess liquidity.
Analysts had expected the BoJ to skip market operations Friday.

Overnight call rates "were hovering lower and we decided on the fund drainage to make them close to our target" of 0.5 percent, said a BoJ official who declined to be named.

"We inject funds when the rates are high and drain funds when the rates are low. It's as simple as that," he said, declining to comment further on the bank's intentions.

Some US dealers had said the Federal Reserve's three actions Thursday had renewed fears of a global credit squeeze due to problems in the US subprime sector of housing loans to high-risk borrowers.

The BoJ's fund withdrawal came a day after the bank left its super-low interest rates unchanged for a sixth straight month.

Until recently markets had been betting on an August rate hike but plunges in global share prices and a sharp appreciation of the yen prompted analysts to push back their forecasts for when Japanese interest rates will next go up.