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Bank of Japan
The Bank of Japan released the outline of its Year 2000 contingency plan on April 6, 1999.
The Bank of Japan has been working to ensure its Year 2000 readiness and that of Japan's financial institutions. In December 1998 and February 1999, Japan's major payment and settlement systems, including the BOJ-NET, conducted industry-wide tests for the Year 2000 problem. The test results indicated that payment and settlement systems and financial institutions were adequately addressing the Year 2000 problem. Similar tests will be conducted in May and June this year.
The Bank has also been working on Year 2000 contingency planning. The outline of the Year 2000 contingency plan provides information on the Bank's general approach in dealing with Year 2000 contingencies and the steps it is taking for Year 2000 contingency planning. With respect to Year 2000 contingency planning, the Bank has also released the following documents in English so far:
The Bank established the Year 2000 Steering Group in January 1999 to be prepared for Year 2000 contingencies and establish communication arrangements with the relevant parties, including market participants. The Group is chaired by Deputy Governor Yutaka Yamaguchi and comprises Executive Directors, Directors, and Advisers to the Governor of the relevant departments and offices of the Bank.
These documents are available on the Bank's web site. The Bank's web site also contains various English documents on the Year 2000 problem released by the Bank, including those on the Year 2000 preparedness of the Bank's systems and the results of industry-wide tests.
The Bank of Japan has given Year 2000 preparation top priority and it has been carrying out necessary modifications to its own computer systems and facilities to eliminate possible sources of Year 2000 disruptions. The Bank also continues its efforts to address the Year 2000 problem in payment and settlement systems by conducting industry-wide tests with financial institutions and operators of private-sector payment and settlement systems, as well as external tests with the relevant government agencies.
Even with such measures, however, millennium risk may not be eliminated completely. This means that contingency planning is essential in preparation for the year 2000. The Bank has thus developed its Year 2000 contingency plan, which is outlined in this paper.
The Bank already has contingency plans for emergencies related to natural disasters and power failures. Contingency planning for natural disasters and that for the Year 2000 problem may share similarities. In both cases, contingency arrangements such as fall-back measures for breakdowns of computer systems and facilities, as well as procedures for monitoring and communication with the relevant parties, should be included. 2 Year 2000 contingency planning, however, should take into account the specific nature of the Year 2000 problem. For instance, the Year 2000 problem is different from natural disasters and power failures in (i) predictability of the timing, (ii) simultaneity and multiplicity, and (iii) the spill-over effect of possible disruptions. Further, as the Year 2000 problem can have a cross-border effect, Year 2000 contingency plans need to contain measures for information gathering on the Year 2000 situations in other countries. These unique features give rise to the need for developing new contingency plans focusing on the Year 2000 problem.
The purpose of publishing the outline of the Bank's contingency plan is to share information on its arrangements for addressing Year 2000 contingencies with a wide range of people, including market participants. It should be emphasized that the development of the contingency plan does not necessarily imply that the Bank anticipates large-scale disruptions. In addition, the Bank hopes that this paper will serve as a reference for each financial institution to develop its Year 2000 contingency plan.
The Bank of Japan has made an inventory of possible risk factors related to the Year 2000 problem and carried out an analysis of these factors. The Bank classified Year 2000 risks into two types: (i) risks stemming from the Bank's internal systems and facilities and (ii) risks stemming from public infrastructure.
To mitigate the Year 2000 risks from internal systems and facilities, the Bank, as well as financial institutions, payment and settlement system operators, and government agencies, are working to achieve Year 2000 readiness of their computer systems and facilities by modifying and testing. At the same time, measures need to be determined for each business process dependent on computer systems and facilities in contingencies where they do not operate.
For the Year 2000 risks from public infrastructure (e.g., electricity and water supply utilities and public transportation), the Bank recognizes that Year 2000 readiness of these service providers is making steady progress, according to the information provided by the government. Nonetheless, in developing the contingency plan, the Bank assumes the worst scenario, in which disruptions occur even in public infrastructure, because the Bank, as the central bank in Japan, is responsible for performing its core business functions under any circumstances. The Bank's Year 2000 contingency plan encompasses business continuity measures to be implemented in the event of public infrastructure disruptions.
The Bank analyzed the period from now until the early part of the year 2000 by dividing it into the following three phases. Detailed actions in each phase are explained in Section IV.
During this period, the Bank will refine its contingency plan by conducting test drills and ensure that the Bank's staff are familiar with their tasks in Year 2000 contingencies.
Before the transition to the year 2000, the Bank will take necessary measures, such as making hard copies of critical data and back-up files of important data and securing necessary staff for inspecting computer systems and facilities.
From 0:00 a.m. January 1, 2000 onward, the Bank will immediately start collecting information on any Year 2000 disruption in computer systems and facilities of the Bank and financial institutions, according to predetermined procedures and contact lists. When there is any disruption, the Bank will implement necessary recovery measures.
For the BOJ-NET, the Bank's on-line settlement system for funds and Japanese government bills and bonds, the Bank plans to conduct a last-minute external test between the Bank and financial institutions.
If there is any system of the Bank that cannot resume normal operation by the end of January 3, the Bank will decide on the business continuity measures to be implemented from January 4 onward in the course of January 3.
In the event that Year 2000 disruptions materialize, the Bank will activate the business continuity measures in the contingency plan according to the decision made on January 3, and, at the same time, it will continue implementing recovery measures to restore normal operation of the affected systems. The Bank will also take necessary actions to address possible disruptions that may arise on critical dates after January 4, 2000 (e.g., leap day).
It is important to consider the nature of individual sections' business processes when developing Year 2000 contingency plans. The Bank has categorized its sections into two types: (i) sections that are responsible for smooth operation of computer systems and facilities and (ii) sections that are responsible for performing the Bank's business operations using computer systems and facilities.
For Year 2000 preparations, it is essential to establish communication arrangements in which one center of the Bank swiftly and accurately collects and accumulates information on Year 2000 situations in and outside the Bank and provides the relevant parties with the information. For this purpose, the Bank will establish an Information Center for exchange of information both within the Bank and with external bodies, such as financial institutions, operators of private-sector payment and settlement systems, the government, government agencies, overseas central banks and service providers and vendors.
The Bank of Japan has been taking the following six steps for contingency planning.
The Bank examined the following points for each section's computer systems:
- whether existing contingency plans are in place;
- whether manual procedures are possible for performing business operations usually carried out by such systems; and
- general approach to continuity of business processes.
Although the Bank's existing contingency plans already identify essential business operations in emergencies, these do not premise the Year 2000 problem per se but natural disasters. Each office and department of the Bank identified additional essential business operations in Year 2000 contingencies (e.g., business operations for providing the Bank's services) which are considered equally as important as the essential business operations included in the existing contingency plans. Each office and department of the Bank then defined the "Year 2000 essential business operations" that comprise the essential business operations in the existing contingency plans plus those necessary in Year 2000 contingencies. The Year 2000 essential business operations include those, for example, related to the BOJ-NET.
By the end of March 1999, each office and department of the Bank identified its Year 2000 essential business operations. Based on these, each office and department made its Year 2000 contingency planning sheet, which lists:
Individual contingency plans drawn up by each office and department of the Bank are to be coordinated with those of other offices and departments as well as those of the parties outside the Bank and modified where necessary. In this process, feasibility of the contingency plans, including that of securing the necessary staff members, is also checked in detail. All sections of the Bank share the results of this coordination.
Each section of the Bank develops more detailed "action plans" based on business continuity measures defined in the Year 2000 contingency plan. Each section sets out step by step procedures of business continuity measures and the tasks of each staff member so that the Bank's business operations can be carried out even in Year 2000 contingencies. The action plans cover the period from December 30 (the last business day of 1999) until affected systems resume normal operation in the year 2000. The Bank's staff should be fully informed of the action plans, and should fully understand them.
The Year 2000 contingency plan should be tested to ensure that there is no deficiency in its coverage and to check that it does not prescribe unnecessary or unfeasible actions. Contingency planning without rehearsals may lead to a risk of inability to take necessary actions promptly and smoothly in contingencies. To avoid this, the Bank plans to conduct various drills (described in detail in the next section) and will make any adjustments to the contingency plan on the basis of the outcome of the drills. Through such drills, the Bank will make its staff fully familiar with the contingency plan so that they can take swift and appropriate action in the event of Year 2000 disruptions.
During the latter half of 1999, the Bank of Japan will focus on (i) refining the contingency plan to make it as detailed as possible, (ii) making its staff and the relevant parties familiar with the procedures set out in the plan, and (iii) establishing an Information Center. At the same time, the Bank will also carry out final verification of Year 2000 compliance of its computer systems. Depending on the situation, the Bank may consider whether to suspend making changes to its own systems in the latter half of 1999 so as to avoid affecting the relevant parties outside the Bank.
The Bank is planning various types of drills. In the drill scheduled for this September, the Bank will test whether it can shift the BOJ-NET operation from the primary system in Tokyo to the Osaka back-up center in a simulated year 2000 environment. In other drills, the specific actions to be performed in the period surrounding the transition weekend will be rehearsed and the procedures for manual processing of operations after January 4 will be confirmed.
The focus of the drills in each section of the Bank is on business continuity measures, in particular, manual processing, which may be implemented from January 4, 2000 onward. The drills will check the predetermined procedures in terms of availability of staff and processing arrangements, and they will enhance the staff's familiarity with the business continuity measures.
Communication arrangements will be tested so that timely exchange of information using contact lists can be ensured between each section of the Bank and the Information Center to deal with contingencies after the transition to the year 2000. The drills will use communication equipment that is most likely to be used in the actual contingency events, such as telephones (satellite phones), fax machines and videoconference systems.
In the drills, each section will simulate and check the overall procedures for inspecting systems, reporting to the person in charge, and understanding the situations precisely, according to the detailed action plans.
The Bank will determine the quantity and type of document forms required for carrying out business processes manually on the basis of the outcome of the drills, and it will order the adequate quantity of such forms. During December 1999, the Bank will make a final check of preparation of necessary forms.
After business hours on December 30 (i.e., the last business day of 1999), each section will carry out a last-minute check of the action plans. According to the action plans, each section will make backup files and make hard copies of data that are necessary in the event that business processes are shifted to manual procedures.
The Information Center will collect information on the Year 2000 situation of the public infrastructure through the media and various news providers.
Each section will complete any remaining preparations for the rollover to the year 2000 by the late afternoon. A last-minute check on the action plans will also be made for each business process in the first three days of the year 2000.
Contact lists of the relevant parties will be reconfirmed. Latest information on the preparation for Year 2000 contingencies in these parties will also be collected.
Those who are to lodge at the Bank during the rollover weekend (e.g., the Bank's staff and others including staff from service providers and vendors) will start final preparations.
Measures to address malfunctioning of the Bank's basic facilities (electricity, gas and water supply facilities, telecommunications systems, and cooling and heating systems) will be confirmed.
Immediately after 0:00 a.m., the Bank will check the functioning of the power supply utilities and will subsequently confirm whether or not the Bank's basic facilities function normally. In the event that any Year 2000 disruption is detected in these facilities, the Bank will shift to the pre-arranged continuity measures, such as manual processing.
The Information System Services Department of the Bank will check the Bank's computer systems and facilities, starting with those functioning as the common infrastructure and network systems.
Each section will check computer systems and facilities, starting with those that are most critical to its business operations. Information about any Year 2000 disruption will be passed to the Information Center through the person in charge in each section.
The Information Center will obtain a full grasp of any Year 2000 disruption occurring within the Bank according to the communication arrangements described above. It will also exchange information on the overall Year 2000 situations with the relevant parties using the contact lists. At this stage, it is particularly important that the Information Center collects accurate information swiftly on the Year 2000 status of financial institutions within and outside Japan.
Each section will implement necessary recovery measures on the basis of the information provided by the Information Center. It will also carry out internal running tests on the operations-related systems and prepare for the next day's external test. Changes will be made to the external test plan if they are necessary as the result of Year 2000 disruptions.
The Bank will conduct an external test of the BOJ-NET with financial institutions and operators of private-sector payment and settlement systems to verify that its systems as well as the BOJ-NET-related systems of financial institutions and payment and settlement systems operate properly.
The test will be designed and implemented so that the Bank can make a final check of the functioning of the systems in a sufficient and efficient way without placing heavy burdens on financial institutions and the operators of private-sector payment and settlement systems.
Depending on where Year 2000 disruptions materialize (e.g., in financial institutions and private-sector payment and settlement systems and/or in the Bank's systems), the Bank will activate the appropriate business continuity measures to address the problems.
In the meantime, the Information Center will collect information on the progress of measures for recovery from Year 2000 disruptions within the Bank. The Center will also exchange information with the relevant parties on the progress of their Year 2000 recovery measures.
The Bank will continue to carry out recovery measures for affected systems identified by the day before and repeat testing of its systems to verify their proper functioning. The Bank will monitor and assess the Year 2000 situations both within and outside the Bank and determine whether it should activate the business continuity measures on January 4 according to the predetermined procedures for decision making.
Based on the decision made on January 3, the Bank will actually activate continuity measures for each business process where necessary. It will continue with recovery measures for computer systems and facilities that have not resumed normal operation.
The Bank will also take action to address possible disruptions that may arise on critical dates after January 4, 2000 (e.g., leap day).
As explained above, the Bank has been identifying the business operations that must be continued even in case of Year 2000 contingencies. In this process, the Bank paid particular attention to the following three matters to avoid any potential disturbances to Japan's financial system:
The Bank already has contingency arrangements for natural disasters and power failures in relation to private-sector payment and settlement systems, including Zengin System, Bills and Check Clearing, Tokyo International Financial Futures Exchange, JB Net, and Tokyo Stock Exchange. The existing contingency plans premise that the Bank will in principle complete the daily settlement under any circumstances and that the Bank will activate the Osaka back-up center should the Bank's host computer systems in Tokyo break down.
It is important to recognize, however, that the back-up computer systems have the same technical design as the primary systems currently running and that the back-up facilities cannot be relied on if the Year 2000 problem should materialize in the primary systems. It is therefore necessary to develop contingency plans that can address possible breakdowns of both primary and back-up computer systems.
Regarding the BOJ-NET, the Bank implemented the Year 2000 compliant version of the systems in January 1999. The Bank has been making its best efforts to eliminate the possibility of any problem in the BOJ-NET in the year 2000. Nevertheless, the Bank considers that it must include the possibility of the worst case within the scope of contingency planning.
Year 2000 disruptions materializing in private-sector payment and settlement systems could affect wide areas of the economy. This means that it is of primary importance to gather information from the relevant parties. It is therefore necessary for the Bank to establish communication arrangements to maintain close and continuous contact with the operators of private-sector payment and settlement systems.
As mentioned above, the Bank plans a joint external test on January 2, 2000 with financial institutions and private-sector payment and settlement systems connected to the BOJ-NET, with the simulation date of January 4, 2000.
In addition, the Bank has drafted contingency measures for interfaces with private-sector payment and settlement systems and is currently discussing the details of the measures with the operators in order to clarify operational procedures in the event of Year 2000 disruptions from January 4, 2000 onward. These measures address the following three cases :
The contingency measures for the interfaces with private-sector payment and settlement systems basically take the strategy that the Bank completes settlement through manual procedures whereby payment instructions are submitted to the Bank on a paper basis. This is the case even in the worst case (i.e., case (iii)) where the primary and back-up computer systems both in private-sector payment and settlement systems and in the Bank break down simultaneously.
To prepare for the shift to manual procedures, the Bank will make hard copies or back-up files of necessary data by the end of 1999. A sufficient quantity of document forms will also be prepared in advance.
The Bank provides on-line services to financial institutions via the BOJ-NET and services to government agencies by processing data submitted on magnetic tapes. Accordingly, the Bank needs to ensure business continuity for these services through manual procedures in the event of system failures.
Back-up of important data should be made in the form of hard copies in advance of the year 2000. Document forms for manual processing should be laid in well in advance. The Bank will also prepare personal computers (PCs) applications for aggregating and calculating the data on certain types of businesses by the end of 1999. These applications will be run on the PCs, which are validated as year 2000 compliant on January 1, 2000 and thereafter, although this PC-based solution cannot be a perfect alternative measure by the nature of the Year 2000 problem.
The Bank will request major financial institutions to start up their major accounting systems on January 2, 2000 to check whether there are any problems. The results will be shared with BOJ-NET participants.
In case of the shift to manual procedures for the Year 2000 essential business operations from January 4 onward, the Bank will consider setting priorities for the other business operations and will decide whether to switch to manual procedures or wait for several days until resolution of the system.
For the efficient implementation of manual processing, the Bank is considering requesting financial institutions to submit payment instructions sorted by recipients in order to minimize the processing volume. The Bank expects the cooperation of the related parties on this matter. The Bank also needs to consult in advance with the relevant parties for the types of transactions of which processing cannot be completed on a manual basis because of large volume.
Sources of problems
Market participants should identify and be ready to deal with factors which may give rise to liquidity pressures during the transition to the year 2000, such as increasing uncertainties which might result from insufficient disclosure of market participants on Year 2000 compliance, or cases where the Year 2000 problem does materialize and hinder normal business processing.
The Bank believes that it is individual market participants themselves that should be responsible for preparing for any Year 2000-related liquidity problem. Each financial institution should identify possible causes of liquidity constraints, ensure ready access to sufficient liquidity, and diversify their sources of liquidity in advance.
Meanwhile, the Bank is carefully monitoring the preparedness of individual financial institutions for potential Year 2000-related liquidity problems through on-site examinations focusing on the Year 2000 problem as well as off-site monitoring.
In case of any problem, the Bank will promptly identify how the problem arose and consider what measures should be taken to address it. For this purpose, a contact point will be made available during the bank holidays from January 1 to 3. The Bank plans to distribute a standardized reporting form to BOJ account holders before the transition to the year 2000 in order to examine their liquidity positions particularly on and after January 1 at 0:00 a.m. The form will be used for the initial reporting from financial institutions by fax (or delivery by hand in the worst scenario) regardless of whether there is a problem or not. The Bank will subsequently monitor financial institutions with problems.
In Japan, the demand for banknotes tends to increase significantly around the end of the year, reflecting the real demand at the end of the year and excess cash holdings during the New Year holidays when banks are closed. Accordingly, banknotes outstanding (i.e., the amount of banknotes in circulation) usually peaks at the end of every year.
Given such a pattern of the demand for banknotes, the Bank should be prepared for possible increases in the demand for banknotes that may arise from concerns over the Year 2000 problem as well as actual Year 2000 disruptions.
As the demand for banknotes can fluctuate significantly, the Bank usually has a sufficient stock of banknotes so that it can meet a substantial increase in demand. For example, the Bank held approximately 39 trillion yen of banknotes in reserve at the end of 1998 when the amount of banknotes in circulation was approximately 56 trillion yen, the highest in the past few years. Given the current growth rate in the demand for banknotes, the Bank's holding of banknotes is projected to reach around 40 trillion yen at the end of 1999, which the Bank regards as an adequate amount to meet an increase in demand due to the Year 2000 problem. In addition, the Bank stores banknotes at the head office and branches over the country. This arrangement enables the Bank to supply banknotes smoothly anywhere in Japan.
The contingency plans outlined in this paper contains both items that have been coordinated and those which are still to be coordinated between the Bank and the relevant parties. Further details will be determined through discussion with these parties. Accordingly, it should be noted that the content of contingency plans may be subject to change in the course of further discussion.
A prompt and accurate grasp of Year 2000 problems occurring within and outside the Bank is important as an initial response in Year 2000 disruptions. To this end, accurate lists of contact points should be confirmed and shared by the relevant parties.
The Bank regularly updates the contact lists in the course of normal business operations and the existing contingency planning. To adequately prepare for the Year 2000 problem, the Bank is currently identifying all parties with whom the Bank needs to communicate in Year 2000 contingencies and remaking comprehensive lists of contact points for the types of operation and the related parties as the Year 2000 contact lists. The lists will cover internal sections of the Bank, financial institutions, private-sector payment and settlement system operators, the government, government agencies, overseas central banks, and service providers and vendors.
It is indispensable to secure the necessary number of staff members in order to carry out the Year 2000 contingency plan effectively. The Bank is examining the details of personnel arrangements for the Year 2000 contingency plan, including those for December 31 and the New Year holidays as well as those for implementing business continuity measures in Year 2000 contingencies on January 4 and thereafter. Arrangements for lodging of the staff during the transition weekend are also under review.