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QuestionWhat is Tokuyu (special loans), or the so-called Nichigin Tokuyu?


When financial institutions face a temporary shortage of funds and there is no other lender available, the Bank may provide liquidity to them by acting as the lender of last resort.

The Bank normally provides financial institutions with loans against collateral in the form of negotiable instruments, government securities, and other securities in cases where it is acting as the lender of last resort (Article 33 of the Bank of Japan Act). However, when there is a request from the government -- that is, the Prime Minister and the Minister of Finance -- the Bank may conduct business necessary to maintain stability of the financial system, including the provision of loans under special conditions if deemed necessary by the Policy Board to maintain financial system stability (in accordance with Article 38 of the Act). The so-called Tokuyu (special loans) -- sometimes also referred to as Nichigin Tokuyu -- indicates the provision of loans to financial institutions under such special conditions.

The Four Principles of Tokuyu

When the Bank conducts business necessary to maintain stability of the financial system, including the provision of loans such as Tokuyu, it determines whether or not to provide special loans to financial institutions, in accordance with the request from the government, based on the following four principles:

  • Principle 1: There must be a strong likelihood that systemic risk will materialize.
  • Principle 2: There must be no alternative to the provision of central bank money.
  • Principle 3: All relevant parties are required to take clear responsibility to avoid moral hazard.
  • Principle 4: The financial soundness of the Bank of Japan itself must not be impaired.

Conditions on the Extension of Special Loans

The interest rate and other conditions for the extension of Tokuyu are individually decided by the Policy Board in view of the particular nature of the loan being provided under special conditions for the stability of the financial system.

Examples of the Extension of Tokuyu

Tokuyu -- the provision of special loans -- is a form of safety net in a broad sense. It is a measure taken to prevent a financial crisis from materializing.

Past examples of the Bank's extension of Tokuyu include (1) bridge loans to provide funds to financial institutions for the necessary time that they can continue their business operations on the occasion of bank resolution or public fund injection to prevent financial crises, as well as (2) the provision of subordinated loans.

Today, however, with developments in other safety nets such as the deposit insurance system, Tokuyu is no longer a measure to supply quasi-capital funds such as subordinated loans, but is basically a measure to provide temporary liquidity.

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