Latest On The Bo J Hike: It's On

[Realistbear]

Some after glow panic:

http://www.tiscali.co.uk/news/newswire.php...y_template.html

By Chikako Mogi

TOKYO (Reuters) - The Bank of Japan is expected to conduct highly flexible market operations next week to contain any sharp rises in the money market after it raised interest rates for the first time in six years on Friday as expected.

The BOJ’s policy board decided by a unanimous vote to raise the key overnight call money rate to 0.25 percent from zero, and lifted the official discount rate to 0.40 percent from 0.1 percent by a vote of 6-3.

Many in the market had been expecting the discount rate to rise to 0.50 percent.

Both rate increases were effective immediately.

"The new discount rate reflects the BOJ’s concern about money market rates overshooting," said a senior money market dealer at a U.K. bank.

"I expect the BOJ to aggressively try, via its market operations, to contain sharp rises in money market rates, especially repo rates," he said.

Market views were mixed about the smaller-than-expected increase in the discount rate, which serves as the rate the BOJ uses for its Lombard lending facility, under which the central bank lends to financial institutions at their request.

The BOJ said it lent a record 3.2 trillion yen (15 billion pounds) under the facility on Friday due to extraordinarily strong demand by financial institutions which failed to borrow in interbank markets earlier in the session, as lenders were cautious before an expected rate increase.

"The 0.4 percent discount rate may prolong the situation in which financial institutions will continue to rely on the BOJ for funding ... preventing interbank funding being activated," said a senior money market dealer at a European bank.

The Lombard lending facility, introduced in March 2001, serves as a supplement to the overnight call money market for financial institutions that have difficulty borrowing in the call market.

Others said the 0.4 percent discount rate could ease upward pressure on overnight repo rates, which are widely used by securities firms for funding, thereby also helping to prevent yields on financing and treasury bills from rising sharply.

Shortly after the rate decision was announced, the BOJ took some 1.2 trillion yen out of the banking system as the key overnight call rate, its policy target, was still hovering around 0.1 percent, the BOJ’s previous cap.

The weighted average for the unsecured call rate was 0.089 percent, up from 0.058 percent on Thursday.

Money market traders said they expected the overnight call rate to move between 0.25-0.30 percent next week and the overnight repo rate to trade between 0.30-0.35 percent.

Japanese markets will be closed on Monday for a national holiday.

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