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Market Operations in Fiscal 2021

September 28, 2022
Financial Markets Department
Bank of Japan


The Bank of Japan pursued powerful monetary easing throughout fiscal 2021 under the framework of Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control, with a view to achieving the price stability target of 2 percent. It conducted (1) the Special Program to Support Financing in Response to the Novel Coronavirus (COVID-19); (2) an ample and flexible provision of funds both in yen and foreign currencies without setting upper limits, mainly through outright purchases of Japanese government bonds (JGBs) and the U.S. dollar funds-supplying operations; and (3) outright purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) with upper limits of about 12 trillion yen and about 180 billion yen, respectively, on annual paces of increase in their amounts outstanding, in line with its stance on monetary easing and taking into consideration the impact of COVID-19 on the economy.

Turning to the environment surrounding the Bank's market operations, weakness in firms' financial positions has remained in some segments due to the impact of COVID-19, although financial conditions in Japan were on an improving trend on the whole throughout fiscal 2021. Global financial markets saw large fluctuations due to the fact that both positive and negative factors were being taken into account, including favorable corporate results and moves to reduce monetary easing in the United States and Europe from the start of 2022, in addition to the situation with COVID-19. The Bank conducted various market operations, based on guidelines for market operations and for asset purchases decided at each Monetary Policy Meeting (MPM), and continued to (1) support financing mainly of firms, (2) maintain stability in financial markets, and (3) maintain accommodative financial conditions through supporting such financing and maintaining stability while taking account of various changes in the environment surrounding financial markets -- mainly those mentioned above.

The following were the key points in the conduct of the Bank's operations throughout fiscal 2021.

With respect to (1) the Special Program to Support Financing in Response to the Novel Coronavirus (COVID-19), the Bank continued to make outright purchases of CP and corporate bonds as it did in fiscal 2020 in line with guidelines for asset purchases with an upper limit on the amount outstanding of about 20 trillion yen in total. As a result of these operations, issuance rates for CP and the yield spreads between corporate bonds and JGBs continued to be stable at low levels.

With regard to the Special Funds-Supplying Operations to Facilitate Financing in Response to the Novel Coronavirus (COVID-19) (hereinafter referred to as the "Special Operations in Response to COVID-19"), loans were utilized by a wide range of sectors including regional banks I and II (hereinafter referred to as "regional banks"), mainly against the backdrop of an increase in the amount outstanding of submission of private debts as collateral. The amount outstanding of the loans increased significantly throughout the fiscal year and it stood at 86.8 trillion yen at the end of March 2022.

As for (2) an ample and flexible provision of yen and foreign currency funds without setting upper limits, the Bank conducted outright purchases of JGBs flexibly so that long-term interest rates (10-year JGB yields) would remain at around 0 percent under QQE with Yield Curve Control, and the yield curve would be formed in a manner consistent with its guidelines for market operations. Starting from the purchases in April 2021, the Bank decided to announce specific amounts of JGB purchases through the competitive auction method, instead of showing them in a conventional range format, for each of the purchases in the following month, to promote a further enhancement of market functioning. The decision was made in light of the results of the Assessment for Further Effective and Sustainable Monetary Easing conducted at the Monetary Policy Meeting in March 2021 (hereinafter referred to as "Assessment"). Moreover, starting from the purchases in July 2021, the Bank decided to announce a quarterly schedule for the JGB purchases. The Bank then adjusted the quarterly purchase size and the purchase frequency per month in a flexible manner, mainly based on the supply and demand conditions of JGBs in each zone and the bidding for the operations. Amid a rise in overseas interest rates from February 2022, mainly due to the stance on the reduction of monetary easing in the United States, upward pressure on interest rates increased in Japan and gave rise to the risk of long-term interest rates surpassing about 0.25 percent, the upper limit of the range of fluctuations. In response, the Bank conducted fixed-rate purchase operations in February. Moreover, it conducted fixed-rate purchase operations for consecutive days for the first time while making additions to the schedule and increasing the amounts of offers for the purchases of JGBs in March, thereby constraining an excessive rise in long-term interest rates. As a result of these operations, long-term interest rates remained at around 0 percent throughout the fiscal year, while fluctuating in response to economic and price conditions, as well as trends in overseas interest rates.

With regard to outright purchases of treasury discount bills (T-Bills), the Bank deleted the description regarding the offer amounts, about 500 billion to 3.0 trillion yen per auction, from the "Outline of Outright Purchases of Japanese Government Securities" released in June 2021, with a view to adjusting its offer amounts flexibly in light of favorable supply-demand conditions stemming from the reduction in the issuance amount by the government. The Bank flexibly adjusted the purchase amounts, taking into consideration developments in supply and demand conditions in the market, and offered purchases between 100 billion and 2.0 trillion yen each time. As a result of these operations, the yields on T-Bills generally remained stable at around the level of the short-term policy interest rate (minus 0.1 percent).

With respect to the provision of foreign currency funds, the Bank offered 1-week operations of U.S. Dollar Funds-Supplying Operations on a weekly basis in principle, based on the U.S. Dollar-Yen Swap Agreement with the Federal Reserve Bank of New York. The Bank discontinued offering 3-month operations from July 1, 2021, in view of improvements in the U.S. dollar funding conditions and low demand. U.S. dollar funding premiums have risen only slightly as U.S. Dollar Funds-Supplying Operations by the central bank of each jurisdiction served as a backstop, although the premiums temporarily increased when the situation surrounding Ukraine worsened.

The Bank conducted (3) outright purchases of ETFs and J-REITs as necessary in line with its guidelines for asset purchases so that their amounts outstanding would increase at annual paces with upper limits of about 12 trillion yen and about 180 billion yen, respectively.

Meanwhile, current account deposits at the Bank continued to increase mainly against the background of the government's fiscal expenditures amid the COVID-19 crisis, in addition to the Bank's further ample supply of funds. The increase was largely attributable to greater use of the Special Operations in Response to COVID-19 and the associated measures to add to macro add-on balances, as was the case in fiscal 2020. Under these circumstances, the Benchmark Ratio was adjusted downward in many reserve maintenance periods. Amounts outstanding in the repo market and the uncollateralized call market were at high levels throughout the fiscal year as (1) potential transaction needs grew in the short-term money market on both the borrowing side and the lending side while the effects of the measures to add to macro add-on balances and the reduction of the Benchmark Ratio on the upper limit on macro add-on balances differed from one sector to another; and (2) arbitrage trading using the three-tier system of current accounts at the Bank and arbitrage between the repo market rate and the call market rate were both increasingly active. In this situation, the Bank provided ample funds to financial markets by offering purchases of Japanese Government Securities (JGSs) with repurchase agreements in a flexible and timely manner, mainly in light of developments in the money market, with a view to maintaining short-term interest rates in negative territory in a stable manner under its current guidelines for market operations. Moreover, the GC repo rate generally remained stable at a level slightly above the short-term policy interest rate under the three-tier system of current accounts at the Bank and the conduct of market operations described above.


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Financial Markets Department, Bank of Japan
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Market Operations Division, Financial Markets Department

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