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KUALA LUMPUR (Thomson Financial) - Major central banks in Asia took action to contain the fallout from the credit crisis in the US, following in yesterday's footsteps of their European and US counterparts by pumping an unusually large amount of funds into the banking system to help shaken lenders.

In moves that deepened the well of negative sentiment that impacted European markets in early trade, the Bank of Japan pumped 1 trln yen into the local money markets Friday as overnight rates shot up amid fears of shrinking liquidity.

"We offered one trillion yen ... as we judged it would be better to offer (ample) funds," a spokesman for the central bank said.

An official in charge of BoJ's market operations, who declined to be named, said he considers the action a "regular operation" and that the central bank injected the funds "to contain overnight call rates because they have moved higher."

The sum compares with the 400 billion yen the bank injected Thursday and is the highest amount since it offered one trillion yen on June 29.

In Australia, the Reserve Bank injected more than twice the average daily amount of funds into the banking system.

The central bank's market data showed it injected 4.95 billion Australian dollars into the system Friday, well above the daily average for the year-to-date of around 1.86 billion dollars.

The RBA had estimated the banking system's cash position to be in deficit by 2.44 billion dollars Friday, slightly below the previous day's deficit of 2.49 billion dollars.

The actions of both the Japanese and Australian central banks follow the European Central Bank's move Thursday to pump an unprecedented 94.84 billion euros into the euro area money markets to meet a liquidity shortage after France's biggest bank BNP Paribas froze three of its funds with exposure to the US subprime market as it could not accurately determine their value.

The ECB announced a further short-term financing operation this morning, setting a 1050 CET (0850 GMT) deadline for bids.

The ECB's loan to banks - equivalent to more than 130 billion dollars -- at a bargain rate of four percent, was intended to placate the markets, but investors thought it confirmed that the credit markets are in need of a bailout.

The Federal Reserve, for its part, added a larger-than-normal 24 billion US dollars in temporary reserves to the US banking system.

The Bank of Canada also took the unusual step to reassure investors that it will help provide stability to financial markets and to Canada's financial system.

"In light of current market conditions, the Bank of Canada would like to assure financial market participants and the public that it will provide liquidity to support the stability of the Canadian financial system and the continued functioning of financial markets," the central bank said in a brief statement.

It affirmed that it is closely monitoring developments and will deal with issues as they arise.

Limited fallout

While some Asian central banks took action, others sought to assure investors that the credit crisis will have limited impact on their respective economies.

South Korea's central bank said the country will be relatively safe from the fallout in the subprime mortgage market in the US because domestic financial companies have a limited amount of exposure to these risky loans.

"I see little direct impact from the US subprime woes on the local market," said Lee Hung-Mo, director of financial markets at the Bank of Korea.

Lee said that unlike their international peers, South Korea's conservative financial institutions have insignificant investments in collateralized debt obligations and risky hedge funds.

But he expressed concern that if the credit squeeze caused an economic slowdown and a slump in private consumption in the US, then it would hurt South Korean exporters.

The BoK said that the fund injections by the major central banks are "part of (their) open market operations" in order to control the short-term market interest rates, which is different from the emergency loans to some specific financial institutions.

The BoK also said that it will closely monitor the developments of the financial markets and "promptly act" by purchasing repurchase agreements in case of a sharp fluctuation in the overnight interbank call rates. The Korean finance ministry said it held an emergency meeting to discuss the global situation.

Elsewhere, the Monetary Authority of Singapore said it was ready to inject liquidity into the banking system although it does not see any need for it at the moment, according to media reports.

In the Philippines, central bank chief Amando Tetangco said domestic liquidity is sufficient and that local banks have no significant exposure to the market for collateralized debt obligations (CDOs).

He believes that any impact of the crisis on the domestic economy "will be largely indirect, mainly in the form of risk aversion."

"It is expected to be limited. Philippine banks are not exposed in any significant way to CDOs.

"There is sufficient liquidity. More fundamentally, the increased availability of longer-term funding in pesos has also reduced the country's vulnerability to adverse external market developments," he said.

Before the news on BNP Paribas and the ECB broke, Malaysia's central bank governor Zeti Akhtar Aziz had said Thursday that the US subprime crisis will have a minimal impact on the country's economic growth.

"We do not see at this stage of it having an impact on the economy. Furthermore in other parts of the world, like Europe, Japan and other parts of Asia, they are still doing well, so all this will mitigate the impact of a slower growth in the US on our economy," Zeti said.

A matter of confidence

"The coordinated policy action by the Japanese, European and US authorities illustrated the increased market wariness about the health of the financial system, although the subprime loan problem, in nature, would not jeopardize the global credit system," Tokai Tokyo Securities chief economist Mitsuru Saito said.

"Although the actions in the US and EU are highly unlikely to lead to monetary policy easing anytime soon, the Bank of Japan may not be able to take action that goes against the move in the US and EU, and have to postpone a widely-expected rate hike this month to make sure that the systemic risk will not emerge," he said.

Still, Frederic Neumann, economist at HSBC, said Asian financial markets are suffering from the contagion effect as confidence has been jolted.

"This reflects the globalization of financial markets. In short, even as Asia has economically decoupled from the US in recent years, financially it has become more exposed, and in fact more exposed than it was 10 years ago at the onset of the Asian crisis.

"The bottom line is that as long as US markets remain volatile, which is likely for the next several months, Asian financial markets will continue to suffer," Neumann said.

Markets across Asia tumbled as investors fretted that the central bank action only confirms that the credit crisis is a threat to the global financial system.

TFN.Asiasubs@thomson.com

-- by Julie Goh --

jg/ms/cl/jms

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