Tokyo, Nov 29: The Bank of Japan (BOJ) flooded the money market with liquidity to try to calm market turmoil, but its efforts were to no avail, traders said.

``The fact that (short-term) rates have not fallen even after the Bank of Japan flooded the market with ample funds shows that the market is very jittery right now,'' a city bank trader said.

In a clear bid to bring calm, the central bank gave the money market a massive 900 billion yen ($7.08 billion) in extra liquidity -- the largest surplus left in it by the Bank of Japan since April 4, 1995.

The BOJ's extremely generous fund supply came on the heels of an announcement on Wednesday by debt-laden Tokuyo City Bank that it was giving up its reconstruction efforts and transferring operations to another regional bank.

Despite the Bank of Japan's generous fund supply, Japan's benchmark short-term rate, the key unsecured overnight call rate, jumped to 0.70 per cent on Wednesday from Tuesday's 0.51 per cent.

The unsecured call money market is the largest short-term money market in Japan and is a primary source of daily funding for financial institutions. The head of the finance ministry's banking bureau, Kimio Yamaguchi said he hoped lenders in Japan's short-term money market would react calmly to the Tokuyo bank failure.

But the market appeared unwilling to heed Yamaguchi's remarks.

``Rates have risen because everyone now realises that institutions which have usually been willing to lend funds in the money market are becoming cautious about doing so,'' said chief manager of Bank of Tokyo-Mitsubishi Ltd's treasury and investment division, Shigeyasu Kobayashi.

Financial institutions that were usually lenders in the money market, such as investment trusts, had become cautious about which banks they lent to because of a recent series of failures of banks and brokerages, traders said.

The collapse on Monday of Yamaichi Securities, a ``Big Four'' brokerage, rocked a market already reeling from the failures this month of second-tier Sanyo Securities Co and Hokkaido Takushoku Bank Ltd, one of Japan's 10 city banks.

In a news conference on Tokuyo City Bank's failure, Bank of Japan Governor Yasuo Matsushita said the central bank would take appropriate steps in Japan's short-term money market if needed. The Bank of Japan reiterated its intention to deal with declines in market liquidity by extending collateralised loans to banks at the official discount rate, if necessary.

``As the (Bank of Japan) governor has said before, we will provide ample liquidity to the market through regular lending, which will take the form of accepting suitable collateral,'' a Bank of Japan official said in a telephone interview.

The official said he could not comment on when such lending would take place. The Bank of Japan had no choice but to continue to inject funds into the market until things settled down, Bank of Tokyo-Mitsubishi's Kobayashi said. ``In order for the BOJ to abide by its pledge (on the keycall rate) it will have to keep injecting huge amounts of funds into the market,'' Kobayashi said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.