Japan Banks Tap Fed’s Beefed-Up Swap Lines for $32 Billion

(Bloomberg) -- Japanese banks tapped into the Federal Reserve’s revamped swap lines, taking up a total of about $32 billion in the first operation since the U.S. central bank lowered rates on Sunday.

Lenders from the Asian nation borrowed about $30.3 billion for 84 days at 0.370% in the swap coordinated by The Bank of Japan. They borrowed about $2.05 billion in the 7-day tenor operation at 0.410%. Together, that’s the biggest use of the swap lines by Japan since 2008.

Three-month cross-currency basis for dollar-yen -- a proxy for how expensive it is to get the greenback -- steadily tightened in Asia trading following the allotment, suggesting less dollar borrowing pressure going forward.

The large take-up is a sign that the new lower rates are enticing dollar borrowers and should help to serve the Fed’s aim of removing funding strains, which have been permeating borrowing channels such as cross-currency basis and FX swaps. The authority beefed up existing swap lines with major central banks as part of its broad easing package on Sunday, lowering the rate by 25 basis points and adding a new 84-day tenor.

See historical usage of the central bank swap lines with the Fed here

The operation also shows the importance of U.S. dollar funding. While the BOJ too previously announced yen repurchase operations to boost liquidity, they have been met with very limited take-up by banks. For example, an operation that Friday offered as much as 500 billion yen ($4.7 billion) saw a take up of just 0.5 billion yen.

The BOJ on Tuesday conducted repurchase agreements, offering to sell 1.5 trillion yen of Japanese government bonds to banks, which could use the securities as a collateral to borrow dollars.

Settlement for Tuesday’s swap operations is on March 19. Central banks of England and Europe are set to hold 7-day and 84-day U.S. dollar swap auction on Wednesday.

--With assistance from Masaki Kondo.

To contact the reporter on this story: Stephen Spratt in Hong Kong at sspratt3@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Shikhar Balwani

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