QuestionWhat is the uncollateralized overnight call rate? What is the excess and shortage of funds?
Uncollateralized call rates refer to interest rates for uncollateralized transactions in the call markets, where financial institutions lend and borrow short-term funds. The rate at which funds are received and paid on the contract date, and at which repayment is conducted on the next business day -- that is, the maturity date -- is called the uncollateralized overnight call rate.
From the 1990s, the uncollateralized overnight call rate was the main operating target for the Bank's money market operations. From 1998, the Bank began to set the guidelines for money market operations, such as the following: "the Bank of Japan will encourage the uncollateralized overnight call rate to move on average around XX percent." Under such guidelines, the Financial Markets Department, which conducts market operations, encouraged the uncollateralized overnight call rate to remain at an appropriate level through open market operations. Specifically, it controlled interest rates by changing the balance of supply and demand of funds through increasing/decreasing the total amount of funds in financial markets -- that is, the outstanding balance of current accounts held by financial institutions at the Bank.
The total amount of funds in financial markets does not change as long as financial institutions make transactions within their accounts at the Bank. However, when funds in the current accounts at the Bank are converted to banknotes or vice versa to reflect the issuance of banknotes and their withdrawal from circulation (changes in banknotes), or when the receipt and payment of treasury funds are made between financial institutions' accounts at the Bank and the government's account (changes in treasury funds and others), the total amount of funds in financial markets change. When interest rates used to be controlled by daily operations, as explained above, it was especially important to precisely predict the amount of change in funds -- that is, the excess and shortage of funds -- in order to appropriately conduct market operations.
Besides money market operations conducted through open market operations, other mechanisms can also affect the uncollateralized overnight call rate.
For example, the Complementary Lending Facility is a lending facility in which the Bank extends loans -- whose maturity is overnight -- at the request of financial institutions, and the applied loan rate sets a ceiling, beyond which the uncollateralized overnight call rate will not rise.
Moreover, under the Complementary Deposit Facility, the Bank applies interest rates to financial institutions' "excess reserves," and these interest rates are expected to set a lower limit, below which the uncollateralized overnight call rate will not decline. That is because it is known beforehand that, under this facility, financial institutions are able to invest funds at least at the level of interest rates applied on excess reserves even if the uncollateralized overnight call rate temporarily falls lower than the interest rates applied on excess reserves.
After the introduction of the facility in 2008, the Bank had applied a positive interest rate to excess reserves. However, since January 2016, when Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest Rate was introduced, current accounts at the Bank -- including excess reserves -- have been divided into three tiers, to which a positive interest rate, a zero interest rate, and a negative interest rate are applied, respectively. Financial institutions lend/borrow funds based on the levels of interest rates applied to their own accounts, which eventually affects the level of the uncollateralized overnight call rate. With multiple levels of applied interest rates, more complex arbitrage transactions have started to take place, but there is no change in how these interest rates play a role in preventing the further decline of money market interest rates.
Under those guidelines for money market operations after year 2000 that focused on the quantitative side of monetary policy, it was necessary to conduct funds-supplying operations of an appropriate amount in order for the outstanding balance of current accounts at the Bank and the monetary base to be adjusted at their targeted levels. After the introduction of QQE with a Negative Interest Rate in 2016, it had become necessary to appropriately adjust the amount of the Policy-Rate Balances. In either case, it is necessary to fully grasp the total amount of funds in financial markets. Making an accurate estimate of the excess and shortage of funds -- although the purpose changes depending on the time period, as seen above -- is always critical for the Bank in conducting smooth market operations.
Time-series data on uncollateralized overnight call rates (daily and monthly) are available at BOJ Time-Series Data Search.