Asian shares fell and the euro struggled on Thursday as doubts remained over how much of the funds that banks raised from an inaugural long-term European Central Bank tender will actually flow into struggling euro zone economies and help restore confidence.
MSCI's broadest index of Asia Pacific shares outside Japan fell 0.7 percent, after climbing to a one-week high on Wednesday, while Tokyo's Nikkei stock average ended down 0.8 percent.
Despite the drop, Japanese equities have been least affected by the volatility stemming from the euro zone debt woes, with daily swings in the benchmark exceeding 2.5 percent for only 16 trading sessions this year, compared with 88 such days for the Euro STOXX 50 and 41 for the S&P 500.
The euro was virtually unchanged around $1.3043, with traders seeing major support around $1.3000, the December 14 low, above 2011's trough of $1.2860. The euro reached a one-week high near $1.32 on Wednesday.
European shares were likely to inch up, with financial spreadbetters expecting London's FTSE to open up 0.2 percent, Frankfurt's DAX up 0.2 percent, and Paris' CAC-40 to begin 0.3 percent higher.
At the ECB's first ever three-year lending operation on Wednesday, 523 banks borrowed a record 489 billion euros, well above the 310 billion euro take-up forecast.
The tender eased concerns about an immediate credit crunch, but it does not directly lead to resolving the huge indebtedness of some euro zone countries, which has discouraged investors from lending to euro zone banks because of their large exposure to sovereign debt.
The ECB's funding operation is not a fundamental fix to the euro zone's debt problems and is only a way to buying time, so flight-to-safety bids remain firmly in place, said Shinsuke Kanabu, general manager at Central Tanshi, a Japanese money brokerage.
In further evidence that Japan has become a preferred destination for global funds, government data on Thursday showed non-Japanese investors bought a net 2.6615 trillion yen in short-term Japanese government securities in the week to December 17, the second largest after a record 2.9752 trillion yen net purchase in the week to August 13.
It was the third straight week of such net buying of bills. Non-Japanese investors also were net buyers of Japanese government bonds (JGBs) in the same week.
Foreign investors have helped drive down yields on Japanese short-term securities in recent months as Europe's debt crisis deepened, suggesting they see Japanese treasury bills as a safe-haven and put priority on safety over returns, Kanabu said.
Despite Japan's huge public debts and a domestic rating agency cutting its top credit rating on Wednesday, JGB markets remain unfazed. More than 90 percent of JGB holders are Japanese, giving the country a solid financing backing, unlike countries such as Italy, where foreigners account for some 40 percent of sovereign debt holdings.
DOLLAR FUNDING STRAINED
Analysts have said the ECB loans would lower the cost for euro zone banks to borrow euros in the open market, but would not reduce their dollar funding costs, and banks were likely to use the funds to repay their own debts as they strive to get rid of bad assets and improve their balance sheets, rather than lend.
With bank balance sheets under stress and the system still required to raise capital ratios under Basel III, the temptation will surely be for banks to sit on this additional liquidity, rather than recycle it back through the economy, wrote BNP Paribas in a daily note.
Italy alone faces about 150 billion euros of debt refinancing between April and March.
Italian and Spanish government bond yields rose on Wednesday, snapping an eight-session downtrend, and the spread between the Italian and German 10-year government bond yields widened by some 20 basis points to 488 bps on Wednesday from the day before.
Dollar funding strains reached their worst level since July 2009 when the London interbank offered rate for three-month dollars rose further to 0.57125 percent on Wednesday from 0.56975 percent.
Asian credit markets weakened as yields of highly indebted Italy and Spain inched higher despite strong demand at the ECB's long-term funding operation, with spreads on the iTraxx Asia ex-Japan investment grade index widening by several basis points.
Commodities markets were muted in thinning pre-holiday trade, with London Metal Exchange copper unchanged at $7,455 a tonne and Brent crude oil edging down 0.2 percent to around $107.50 a barrel.