TOKYO—This week's borrowing from a seldom-used credit line provided by the Bank of Japan has raised questions about whether a looming shortage of dollars could again be hitting the global money markets.
The move surprised market participants as the borrowing came from a dollar lending facility operated by the central bank that hasn't been touched since July 2010.
People familiar with the situation, as well as outside analysts, said that with the loan at a relatively modest $100 million, it most likely represented a "test run," rather than any urgent need for dollar funds. Major banks will typically need funding of this type in the billions, not millions, of dollars.
"Our understanding is that the operation was something symbolic, to show that a way to get dollars is there in case of an emergency," said Yuji Saito, director of the foreign-exchange department in Tokyo at Credit Agricole Corporate & Investment Bank.
"We're not sure who borrowed the money, but the amount was small, meaning it cannot represent a serious situation," he said.
The BOJ didn't disclose the identity of the borrower, although it is likely to be a single institution.
With the swap rate and costs for repurchase agreements for banks in Japan recently rising, the central bank's 1.1% rate has become more attractive, according to money market participants. The lowest-cost benchmark for lending, the London interbank offered rate, known as Libor, is at 0.43% for three-month loans.
As the year-end approaches and with the Greek debt crisis continuing, there have been various reports that some European banks were potentially short of dollar funding, pushing up the dollar Libor rate. European institutions active in Tokyo that were contacted about the borrowing all declined to comment on whether they were involved.
The loan could also be intended to help a firm get needed funds through the end of the year since the term runs through Jan. 26, 2012.
Borrowing from central banks can carry a stigma, market participants say, but a person familiar with the BOJ's thinking said the latest lending doesn't mean that an institution is having funding problems.
The person also said Japanese banks "are totally ready" for the end of the year. Industry analysts also said it is unlikely that a Japanese bank would be facing problems in raising dollars.
Katsuhide Takahashi, credit sector specialist at Citigroup Global Markets Japan, noted that Japanese banks have ample liquidity through the high level of domestic deposits in Japan. In addition, their dollar needs are relatively limited.
Times of financial turmoil have in the past been accompanied by a scramble for dollar funds, most notably in the aftermath of the Lehman shock in 2008-09.
As a sign of the latest tightening in the market, figures this week from London showed that the three-month euro/dollar cross currency basis swap, a measure of the cost of swapping euros into dollars, is at its highest level since December 2008.
The swap is at minus 118 basis points, or hundredths of a percentage point, versus minus 102 basis points on Wednesday. That's still shy of the minus-215 level it reached amid the financial turmoil of October 2008, but the indicator is now trading at levels where bankers say it is flashing warning signals about the functioning of money markets.
Kiyoshi Iida, senior market economist at Totan Research, said the borrowing from the BOJ could indicate some tightening in the credit market in Tokyo as well, suggesting that borrowing may increase toward the end of the year.
"Although the sovereign debt problem originated in Europe, some Japanese banks could start to face tighter conditions if counterparties feel uncomfortable about making loans to outsiders," he said.
But he added that the problems this time around "are not as serious as during the Lehman shock."
Traders will be looking to see if the new borrowing is the start of a trend or something of a fluke. The next BOJ dollar auction takes place Tuesday.
