Japan banks borrow record $89.3 billion from Bank of Japan as dollar shortage lingers

By Hideyuki Sano

TOKYO (Reuters) - Japanese banks borrowed a record $89.3 billion (76.69 billion pounds) in two Bank of Japan funding operations on Tuesday, suggesting strong demand for the dollar from the country's financial institutions.

The take-up in the BOJ operations - one for one-week and the other for three-month - was well beyond its previous record of $50.2 billion, hit on October 21, 2008, during the global financial crisis.

Liquidity demand is particularly tight ahead of March 31, the end of the financial year for many Japanese companies.

Even after the BOJ's operations, the three-month dollar/yen currency basis swap spread, seen as the market premium demanded for swapping yen for dollar, stood at 80 basis points, or 0.80% <JPYCBS3M=TKFX>, down from a peak of around 1.4% last week but still far above normal levels around 0.2%-0.4%.

Were it not for the life-saving ring from Japan's central bank, the dollar/yen premiums would have gone much higher, analysts said.

In contrast, basis swap premiums in other currency pairs such as euro/dollar and sterling/dollar, have shrunk nearly to normal levels this week after similarly spiking last week.

As fears of the coronavirus pandemic knocked down global asset markets starting from late February, demand for safe-haven dollars has soared globally.

Leveraged investors needed U.S. dollars to deal with margin calls, while some companies started hoarding them, anticipating a sharp slowdown in economies as governments around the world imposed lockdowns to stop the highly contagious pathogen.

"History shows that once you have a liquidity crunch, it takes some time for central banks to end it," said Masao Muraki, global financial strategist at SMBC Nikko Securities.

"For each player, cutting risk assets and piling up dollar cash is a right response to protect themselves."

The U.S. Federal Reserve on Monday rolled out an extraordinary array of programs, offering unlimited quantitative easing and programmes to support credit markets.

Many market players are hopeful the tight conditions are slowly starting to ease after the world's central banks took a raft of unprecedented measures to calm the financial markets.

"We may also be seeing the beginning of the impact of the Fed and other central banks’ actions in the market," said Marshall Gittler, head of investment research at BDSwiss Group.

(Reporting by Hideyuki Sano, additional reporting by Saikat Chatterjee in London; Editing by Muralikumar Anantharaman and Tom Hogue)