BOJ mulls Fed-style interest on reserves

BOJ says it is mulling offering interest on excess reserves banks park at cbank as part of its efforts to further beef up generous money market funding operations to cope with the credit crisis.

Offering interest on excess reserves puts floor under BOJ's 0.5% policy target and limits daily drops resulting from hefty funding operations, analysts say.

BOJ currently drains cash from market by selling bills, but the operation doesn't guarantee call rates will rise back near 0.5%.

"As BOJ plans to beef up funding operations, it may eventually mull such an option to keep call rates from plunging," says Izuru Kato, chief economist at Totan Research.

"But doing it at a time when interbank lending is frozen by heightened counterparty risks, it could further exacerbate market liquidity as banks will prefer interest income on reserves at BOJ than interbank lending," he says.

"There are merits and demerits and it shows how BOJ is struggling to find ways to join the global cooperation when it is difficult for it to cut rates," he adds.