• The Official Discount Rate
• Market Operations
• The "Banks' Bank"--Accounts held at the Bank of Japan
• BOJ-NET
• On-site Examination
• The Central Bank as the Lender of Last Resort
• Tankan

The Official Discount Rate

The official discount rate is the interest rate charged by the Bank of Japan when extending loans to private financial institutions which have accounts at the Bank. Loans by the Bank take such forms as "discount of bills" and "loans on bills."

In "discount of bills," the Bank rediscounts qualified commercial bills submitted by the financial institutions, such bills having already been discounted by the institutions for their clients. (In other words, the Bank purchases each bill at face value less the amount of interest to be paid by the date of maturity, extending loans equivalent to the total value of bills.)

In "loans on bills," the loans extended to the financial institutions are collateralized by qualified bills or securities.

Changes in the official discount rate are publicly posted and are interpreted, both by financial institutions and by the corporate and household sectors, as reflecting changes in the Bank's basic stance on monetary policy. It is for this reason that the official discount rate is said to have an "announcement effect" on the economy.

Market Operations

In managing monetary policy, the Bank of Japan conducts operations in two areas. Firstly, in the interbank money market, where financial institutions borrow and lend funds among themselves, through the supply or withdrawal of funds. Secondly, in the open markets, where comercial companies can also partcipate in transactions, through the buying and selling of bills and bonds. Through such operations, the Bank encourages changes in market interest rates by cntrolling the reserve positions of financial institutions.

The importance of encouraging money market rate changes through such operations has increased in the course of interest rate deregulation and the recent developments in the financial markets. In recognition of this, the Bank has, since 1995, started to announce changes in its stance regarding money market rates immediately after decisions are made regarding money market rates.

Another monetary policy instrument, the official discount rate, continues to play an important role, as it too reveals the Bank's basic policy stance (see the Official Discount Rate).

The "Banks' Bank"--Accounts held at the Bank of Japan

Financial institutions hold current accounts at the Bank of Japan. The accounts are non-interest bearing and may be deposited or withdrawn with no advance notice.

These accounts play a major role in the transfer of funds between the financial institutions or between the Bank of Japan and the institutions. As with cash, the Bank's current accounts are a payment instrument with finality, which means that financial institutions are able to complete payment of transactions through the transfer of funds. Furthermore, when cash is needed, funds may be withdrawn from these current accounts and cash obtained from the Bank of Japan.

Current accounts are convenient for large-sum payments as they avoid the inconvenience and various risks involved with physically moving cash around.

BOJ-NET

The Bank of Japan Financial Network System (BOJ-NET) is an on-line computer network system which processes settlements of funds and government bonds arising from transactions between the Bank and financial institutions which hold accounts with the Bank. The Bank started operation of the BOJ-NET in 1988, and has managed and developed the system since then. BOJ-NET links the Bank's head office and its branches and all participant institutions with the Bank's computer processing center, where data are processed on-line. Participant institutions and the Bank's offices originate instructions to the center using BOJ-NET terminals, except for foreign exchange yen settlement services for which, in order to handle the large volume of settlements smoothly, participant institutions can directly connect their host computers with computers at the center.

BOJ-NET offers three types of services using participants' accounts held at the Bank: (1) funds transfer services, (2) foreign exchange yen settlement services, and (3) Japanese government securities services. The outline of each of these services is as follows: (1) funds transfer via participants' current accounts held at the Bank, (2) yen settlement resulting from foreign exchange transactions, and (3) sales and purchases of treasury bills (discount treasury bonds and financing bills), issuance and registration of government securities, and use of the government securities book-entry system.1 Now, the service through the delivery-versus-payment system (DVP), a system by which delivery of government securities is executed simultaneously with the corresponding funds transfer, is available.

Footnote 1.As of March 1997, the number of participants in the BOJ-NET totals 426 for funds transfers, 266 for yen settlements of foreign exchange transactions, and 443 for JGS services.

On-site Examination

The Bank of Japan sends its staff on direct visits to ("on-site examinations") and receives financial reports from client financial institutions having current accounts with the Bank. The Bank then provides guidance and advice based on the findings of the financial and management conditions to thereby ensure the soundness of the financial institutions. This procedure is called "on-site examination." The early detection and solution of problems affecting individual financial institutions is essential to maintaining the overall stability of the financial system. Such examinations of financial institutions may therefore be likened to a "medical checkup."

It is of great importance also from the perspective of conducting monetary policy for the Bank of Japan to understand and to estimate how the Bank's policy changes will affect the market behavior of financial institutions and how these policy changes will be transmitted through the economy.

Specifically, examinations involve checking the quality of loans and other assets; the management of risks associated with borrowers' credit standing and with fluctuations in interest rates, foreign exchange rates, and stock prices; and the reliability and accuracy of operations. Through these examinations, the Bank identifies problems at an early stage and gives corrective guidance where necessary.

The Central Bank as the Lender of Last Resort

Why is the central bank called the "lender of last resort"?

The central bank may provide funds to financial institutions typically in cases where they are experiencing temporary difficulties in raising funds, when it is judged necessary to maintain the stable function of the overall financial system including that of payment and settlement system. The central bank is in a position to make such judgment as it follows the financial and management conditions of financial institutions and the overall functioning of the financial system, through on-site examinations and daily monitoring activities.

As the only institution authorized to provide the payment means with finality--or in other words, able to complete a settlement at the time of payment, namely through the banknotes and current accounts held at the central bank--the central bank is uniquely placed to act as the "lender of last resort."

Tankan

Tankan, which is an abbreviation of "TANKI KEIZAI KANSOKU CHOUSA" (the Short-term Economic Survey of Enterprises in Japan), is a nationwide business survey carried out by the Bank of Japan. Conducted at intervals of three months, the surveys question companies on their view of business conditions (whether they think conditions are "favorable," "not so favorable," or "unfavorable"), and about their sales and profits. The replies provide a picture of how business managements perceive the state of the economy, and the results are extensively covered by the press and other media.