TOKYO, Feb 14 (Reuters) - The Bank of Japan's lent a record amount of five-year Japanese government bonds at a regular operation on Tuesday, having induced a severe shortage that has crimped activity in the debt market.
The central bank lent a record 936 billion yen ($8.25 billion), the largest on record, of so-called current issues of five-year JGBs on Tuesday through a repurchase agreement.
The BOJ regularly lends JGBs of various maturities through these operations, in order to keep the market liquid and stable.
Recently, however, liquidity has dried up due to the BOJ's massive debt-buying operations, which are part of its extensive easing scheme.
For example, according to BOJ data the central bank held about 60 percent of the current issues of five-year JGBs as of the end of January.
Consequently, bond dealers and other market players are unable to borrow JGBs from other participants, forcing many of them to borrow from the BOJ.
"If we cannot find JGBs in the market to cover such short positions, we have to rely on the BOJ's lending operations," said a bond dealer at a domestic brokerage.
In theory, a simple solution for the BOJ to improve liquidity might be for the central bank to reduce the amount of JGBs it buys through its regular debt-purchasing operations.
But when it tried that in January, by skipping a five-year bond buying operation, it sent a severe shock through the JGB market, however, causing the yield curve to steepen sharply and forcing the BOJ to conduct a special buying operation last week to calm frayed investor nerves.
$1 = 113.4500 yen Reporting by the Tokyo markets team; Editing by Simon Cameron-Moore