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Changes Regarding Money Market Operations Data

February 14, 2000
Bank of Japan
Financial Markets Department

The Bank of Japan has decided to change the formula for the "Supply and Demand of Funds and Market Operations" table (hereafter, the funds-table), and also for the "projection of the reserve balance that exceeds (or falls below) remaining required reserves1" (hereafter, the projected reserve excess/shortfall), both of which are disclosed daily by the Financial Markets Department.These changes are aimed at enhancing accountability in money market operations by providing relevant information in a more appropriate and easier way to understand.

  1. Remaining required reserves are the average daily reserves that should be deposited in the remaining days of the reserve maintenance period.The reserve maintenance period commences from the 16th of one month to the 15th of the next.

1. Background

(1) Calculation of the funds-table and the projected reserve excess/shortfall assumes that the provision of funds through money market operations is reflected in changes in remaining required reserves.Despite the Bank of Japan's ample provision of liquidity under its zero interest rate policy, most such liquidity has been held as excess reserves by deposit-taking financial institutions that are subject to reserve requirements (hereafter, reserve holders), and/or as current account balances by institutions not subject to reserve requirements (hereafter, non-reserve holders).As a result, the following differences have been observed, which have been discussed at Monetary Policy Meetings of the Bank's Policy Board (see Attachment 1):

  1. A. Continuing large differences between the projected fund surplus/shortageand actual results in the funds-table.
  2. B. Continuing large differences between the projected reserve excess/shortfall in the daily announcement and actual results.

These differences are due to the following assumption in the current formula for the funds-table.At the time of projecting the fund surplus/shortage, the total of excess reserves held by reserve holders and current account balances held by non-reserve holders on the previous day is factored in as funds surplus under "treasury and other factors" in the funds-table of the day, assuming that it will be used for reserve requirements for that day.In fact, at the end of the day, we continue to observe excess reserves held by reserve holders as well as current account balances held by non-reserve holders.Thus, the difference arises between the projection and actual result.

(2) Such differences widened toward end-1999, when the Bank injected an extremely large amount of liquidity to accommodate increased precautionary demand for funds in the face of possible Y2K problems.

Difference between Projection and Actual Results

Difference between Projection and Actual Results(Daily average for the reserve maintenance period; billion yen)
    November 1999 December 1999
Fund surplus/shortage
  Projection (a) 580 8,110
  Actual result(b) -320 -360
  Difference(a-b) 900 8,470
Reserve excess/shortfall
  Projection (c) 1,020 10,700
  Actual result(d) -10 860
  Difference(c-d) 1,030 9,840

Note: Minus denotes shortage/shortfall.

(3) These observations and the forthcoming introduction of RTGS prompt a need for constructing a new formula that can more accurately describe the activities of market participants and developments in the financial market as a whole.

2. Changes

(1) Funds-table calculation

The funds-table will be changed in the following way:

Old:Fund surplus/shortage + Money market operations = Changes in both the required and excess reserves of reserve holders (see Attachment 2)

New:Fund surplus/shortage + Money market operations = Changes in current account balances2 (see Attachment 3)

  1. 2Current account balances = Outstanding amount of both required and excess reserves held by reserve holders + Outstanding amount of current account balances held by non-reserve holders.

By changing the formula for the funds-table as above, we can avoid the problem of continuing large differences between projections and actual results with regard to the fund surplus/shortage since current account balances include those held by non-reserve holders as well as reserves held by reserve holders.

Actual outstanding of excess reserves held by reserve holders and current account balances held by non-reserve holders, currently disclosed monthly, will be disclosed daily as components of the current account balances in the funds-table.Actual remaining required reserves will continue to be disclosed for reference.

With regard to the actual fund surplus/shortage in the funds-table, the Bank will cease disclosing the final report (as shown by the shaded column in Attachment 2), which is currently announced in the morning of the following day since the only way in which it differs from the preliminary report announced in the evening of the same day is in the denomination (in the preliminary report, ten billion yen, while in the final report, a hundred million yen).

(2) Announcement of projected reserve excess/shortfall

The Bank will cease the announcement of the projected reserve excess/shortfall, which is usually made at 9:20 in the morning, when money market operations for the day are announced.Instead, it will start announcing the projection of the daily increase/decrease in current account balances as a result of money market operations for the day.

An example of the new announcement:"The Bank will provide (absorb) XX billion yen through purchases (sales) of TBs and FBs under repurchase agreements today.As a result, it is projected that current account balances will increase (decrease) by YY billion yen compared to those on the previous day."

It should be noted that the guideline for money market operations is decided at Monetary Policy Meetings of the Bank's Policy Board, and that daily money market operations are implemented accordingly.For example, the guideline decided on February 10 continues to encourage the uncollateralized overnight call rate to move as low as possible by providing ample liquidity.Both the "old" projected reserve excess/shortfall and the "new" projection of daily increase/decrease in current account balances are disclosed for reference in measuring the size of funds provision through money market operations.

3. Effective Date

These changes will become effective from March 16.

For further information, contactOpen Market Operations Division, Financial Markets DepartmentMr. Atsushi Miyanoya (+81-3-3277-1234)or Mr. Jun Iwasaki (+81-3-3277-1284)


(Appendix 1)

Discussions at the Monetary Policy Meetings on the current "Supply and Demand of Funds" table

(Excerpts from the minutes of the Monetary Policy Meetings)

(April 22, 1999)

……some members pointed out that the relationship between the daily interest rate level and the daily supply-demand balance of funds and that between the daily interest rate level and the Bank's morning projection of reserves at the end of the day-- the projection announced each morning of the amount of reserves that would exceed the "remaining required reserves" (the daily average of reserves that should be deposited in the remaining days of the reserve maintenance period) at the end of the day-- had become quite obscure. ……

The few members who claimed that the relationship between interest rates and the supply-demand balance of funds was blurred presented the view that the most influential factor in the determination of the overnight call rate at present was neither the total amount of money in the Bank's current accounts nor the total excess reserves held by financial institutions subject to reserve requirements, but was the Bank's morning projection of the amount of reserves that would exceed the "remaining required reserves."Having said so, they acknowledged that large divergences had been observed between the Bank's morning projection and the actual amount of funds exceeding the "remaining required reserves" at 5 p.m., when the reserves of individual banks are officially calculated, due to the large leakage of funds to tanshi companies.They expressed concern as to whether the Bank, in this situation, would be able to successfully convey its message to the market and exert adequate influence as it had always done.Since insufficient communication between the Bank and the market could impair the transparency of money market operations, some members suggested the Bank's staff to consider releasing not only the daily amount outstanding of reserves, but also such figures as the daily amount outstanding of funds in the Bank's current accounts, including those of financial institutions not subject to reserve requirements.

(August 13, 1999)

The member also noted that the gap between the amount of projected and actual "daily excess of reserves" had widened since the introduction of the zero interest rate policy.The member warned that such a situation, if it continued, could impair the credibility of the Bank.Further, this member expressed the opinion that the gap had originated from a framework of projection that could not exclude the effects of current accounts at the Bank held by tanshi companies, and that the framework did not suit the current financial environment and market operations.The member advocated a revision of such a framework as a whole, including how to project the "daily excess of reserves" and supply and demand of funds in the money market.


(Appendix 2)

Supply and Demand of Funds and Market Operations for Jan.17 (mon)

Financial Markets Dept.
Bank of Japan
- 100 million yen

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(Notes)

  1. Figures of "forecast" and "preliminary" are rounded off to 10 billions.
    As for figures of reserve balances and current account deposits, final results are also
    rounded numbers.
  2. Forecasts for Market Operations include only those offered prior to the compilation of
    this report.
  3. Same-day-settled operations are marked with a "S".
  4. Operations are settled at 3:00 pm unless otherwise indicated (such as "1:00pm" or "5:00pm").
  5. "Current account deposits (outstanding) " is the total of the current account
    deposits with the BOJ held by financial institutions (excluding accounts held by
    governmental financial institutions). Reserves are included in this.

(Appendix 3)

Supply and Demand of Funds and Market Operations for Jan.17 (Mon)

Financial Markets Dept.
Bank of Japan
(100 million yen)

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(Notes)

  1. Figures are rounded off to 10 billion yen.
  2. Projections of market operations are the amount offered prior to the compilation of this report.
  3. Same-day-settled operations are marked with an "S."
  4. Operations are settled at 3:00 pm unless otherwise indicated (such as "1:00 pm" or "5:00 pm").
  5. "Current account deposits (outstanding) " is the total current account deposits held with the BOJ by financial institutions. Reserves are included in this.