POLICY-SETTING MEETING:THE BANK of Japan has unveiled steps to ease strains in financial markets, including widening the type of collateral it accepts in its market operations, to guard against market turmoil despite a record surge in share prices inspired by a chorus of international measures.

At an extraordinary policysetting meeting yesterday, the bank said it would broaden the range of asset-backed commercial paper eligible for its market operations until the end of April 2009, while it kept its key overnight call rate target unchanged at 0.5 per cent. It also said it would enhance its dollar-fund supply operations so that it could provide an unlimited amount of dollars against pooled collateral at a fixed rate.

The move, along with government steps to stabilise Japan's financial system, came amid increased risk of damage to Japan's banking sector from volatile stock market moves and credit problems in US and European banks.

Bank of Japan governor Masaaki Shirakawa, however, signalled that the central bank would hold off on cutting interest rates even as its counterparts around the world ease their grip on credit.

"Each nation should conduct monetary policy based on its own economic conditions," he said after the meeting.

Tokyo's Nikkei share average surged more than 14 per cent yesterday, the biggest one-day gain in its 58-year history, though far short of last week's 24 per cent loss.

Among the steps the government announced before the stock market opened was a possible injection of public funds into regional banks, which it said would be aimed at enhancing smooth financing for smaller firms facing a possible credit crunch.

Japanese finance minister Shoichi Nakagawa said Japan's financial system was relatively stable, but he would "continue to monitor on a heightened alert the impact of the recent rapid fall in the stock markets on Japan's financial sector and real economy". - (Reuters)