The Bank of Japan offered dollars to banks in market operations on Wednesday for the first time since July last year, a sign that market strains from Europe's sovereign debt crisis may be broadening.
The central bank offered dollars in two operations, one maturing in a week that drew $2 million worth of bids and another maturing in three months drawing $100 million in bids. All the bids were accepted.
This is probably a foreign bank trying to secure funds for the end of the year, said Tomohiko Katsu, deputy general manager of the asset liability management division at Shinsei Bank.
Europe's debt woes are behind a widening in money market rates. Some banks will have to rely on funding from central banks.
Japan's money market has remained stable despite heightening strains in European markets hit by the sovereign debt crisis.
But with dollar funding becoming increasingly difficult for some European banks, the BOJ will offer ample dollars to the market in a move aimed at ensuring the fallout does not spread to Japan.
The BOJ's fixed-rate dollar operation, in which it offers unlimited amounts of dollars against collateral, rarely draws bids because financial institutions need to pay higher costs to procure dollars under the operation than via markets.
But it likely drew bids on Wednesday as dollar funding costs have risen in Japan reflecting market jitters over Europe's debt crisis, making it cheaper for banks to raise dollars under the BOJ's operation.
Markets showed other signs of an increase in demand for dollars. The cost of dollars for the next three months was fixed at 43.3 basis points in Singapore on Wednesday, the highest since August 2010.
One-year dollar/yen cross currency swaps also rose to 54 basis points on Tuesday, the most since wild swings in financial markets in August.
The BOJ does not disclose the bidders of the dollar funding operation, which targets not only Japanese banks but overseas banks operating in Japan.
The central bank adopted the dollar-funding operation immediately after the global financial crisis triggered by the collapse of Lehman Brothers in 2008. It once terminated the program but resumed it last year in the wake of the Greek debt crisis and has been offering dollars regularly since the.
(Editing by Edmund Klamann and Michael Watson)