by Calculated Risk on 2/04/2005 08:48:00 PM

In yesterday's FT was this interesting article.

Excerpt:

"The Bank of Japan on Wednesday failed to attract enough offers in a bill-buying operation for the first time in nearly two and a half years, raising speculation that the central bank may struggle to meet its ultra-loose liquidity targets.

The BoJ conducts money market operations aimed at keeping the balance of current accounts deposited at the central bank between Y30,000bn and Y35,000bn. Because interest rates have long been at zero, the bank has flooded the markets with liquidity in an effort to head off systemic risk and rid the economy of deflation, which has dogged the economy since the mid-1990s.

On Wednesday, the BoJ sought to buy Y1,000bn of discount bills, but offers from financial institutions - already flush with cash - fell below Y700bn. The shortfall was even more shocking given that the BoJ was conducting a powerful "all offices" transaction in which its regional branches also participated."

Since the US has received most of the financing of its current account deficit from foreign central banks, if the BoJ struggles with its liquidity operations in Japan, would they have difficulty increasing their dollar reserves?

Brad Setser and Nouriel Roubini have been writing some excellent articles on the current account deficit and foreign dollar reserves.