Japan announces dollar-yen swap deal with Fed

Japan's central bank agreed with the U.S. Federal Reserve Thursday to work together to swap dollars and yen as the Bank of Japan pumped more cash into financial markets amid worries about the collapse of Lehman Brothers.

Japan's central bank said it reached a dollar-yen swap agreement with the Federal Reserve until Jan. 30, 2009, for a maximum amount of $60 billion, which will make it easier to exchange dollars with yen, ensuring the smooth operations of the money market.

'The move is aimed at maintaining stability in the market,' said Yuji Kameoka, senior economist at the Daiwa Institute of Research.

The move was part of a larger effort by the European Central Bank and other central banks to coordinate their actions and inject more dollars in to global markets to stem a possible global financial crisis.

The European Central Bank says in a statement that it is joining with the Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan and the Swiss National Bank 'to address continued elevated pressures in short-term U.S. dollar funding markets.'

Earlier in the day, the Bank of Japan injected another 2.5 trillion yen ($23.8 billion) in money markets _ its third day of cash infusions. The Bank of Japan has added a total of 8 trillion yen ($76.1 billion) since Tuesday, when markets plunged on news of the demise of Wall Street giants Lehman Brothers and Merrill Lynch.

The central bank has worked closely with U.S. and European counterparts, who have also flooded money markets with cash to ensure smooth lending among banks.

Hong Kong's de facto central bank also stepped in Thursday, injecting HK$1.56 billion ($200 million) into the market, said spokesman Wong Hing-fung of Hong Kong Monetary Authority.

While the Bank of Japan has been quick to provide extra liquidity, it decided Wednesday to stay put on monetary policy and kept its key interest rate unchanged at 0.5 percent.

In a statement, the bank stuck with its description of economic growth as 'sluggish against the backdrop of high energy and materials prices and weaker growth in exports.'

Bank of Japan Gov. Masaaki Shirakawa reiterated that the lethargy will persist for the time being but the economy is likely to 'return onto a sustainable growth path with price stability.'

He also downplayed the impact of the recent turmoil on Japan's financial system and praised the Federal Reserve's $85 billion bailout of troubled U.S. insurer American International Group Inc.

The Fed's rescue of AIG was the 'right decision' and would help restore investor confidence after recent shake-ups on Wall Street.

Shirakawa acknowledged that Lehman's collapse would hurt Japanese banks, among the U.S. investment firm's biggest creditors. He added, however, that affected institutions should have ample funds to cover losses.

'I am not concerned that the recent events will destabilize the financial system in Japan,' he said