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.

In a situation where financial institutions hold a large amount of excess reserves (an amount exceeding the legal reserve requirements) as a result of the Bank's ample provision of funds, the Bank utilizes the Complementary Deposit Facility, which was introduced in 2008. Under the facility, the Bank applies a certain level of interest rate to financial institutions' excess reserves, and thereby encourages the uncollateralized overnight call rate to remain at an appropriate level through arbitrage transactions by financial institutions.