Market Operations in Fiscal 2022
September 8, 2023
Financial Markets Department
Bank of Japan
The Bank of Japan pursued powerful monetary easing throughout fiscal 2022 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.
Turning to the environment surrounding the Bank's market operations, financial conditions in Japan, including those for small and medium-sized firms, maintained an improving trend throughout fiscal 2022 on the back of a pick-up in economic activity, although weakness in firms' financial positions remained in some segments. Global financial markets remained nervous amid concerns over uncertainties about monetary policy of central banks in the United States and Europe and a slowdown in the global economy. Under these circumstances, yields on Japanese government bonds (JGBs) remained under strong upward pressure throughout the fiscal year, mainly due to a rise in overseas interest rates and speculation over the Bank's monetary policy. Taking account of the changes in the environment surrounding financial markets -- mainly those mentioned above -- 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.
The following were the key points in the conduct of the Bank's operations throughout fiscal 2022.
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. Until the MPM held in December 2022, the Bank continued to indicate the purchase size per auction in a specific amount in the quarterly schedule of outright purchases of JGBs. Meanwhile, it 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. At the December 2022 MPM, the Bank decided to significantly increase the amount of JGB purchases while expanding the range of 10-year JGB yield fluctuations from the target level: from between around plus and minus 0.25 percentage points to between around plus and minus 0.5 percentage points. Following this decision, it increased the amount of scheduled JGB purchases from January through March 2023 and conducted large-scale purchases. Furthermore, instead of indicating the specific purchase size, it started to announce the amount of purchases in a range form and adjust the purchase size per auction in a flexible manner. In addition to these scheduled purchases, it nimbly conducted additional outright purchases of JGBs and increased the amount of purchases even more, taking account of interest rate developments.
With regard to outright purchases of JGBs through the fixed-rate method, the Bank nimbly conducted fixed-rate purchase operations of three on-the-run issues of 10-year JGBs and fixed-rate purchase operations of these issues for consecutive days until the MPM held in April 2022. At the April 2022 MPM, the Bank clarified that it would offer to purchase 10-year JGBs at 0.25 percent through fixed-rate purchase operations every business day, in principle. Thereafter, it conducted fixed-rate purchase operations of three on-the-run issues of 10-year JGBs every business day from May 2. In addition, it conducted fixed-rate purchase operations of the cheapest-to-deliver (CTD) issue of JGB futures at 0.25 percent in June. Thereafter, it continued to conduct fixed-rate purchase operations of the CTD issue for consecutive days, while adding and changing the CTD issues applicable to the operations given the rollover of JGB futures contracts. After deciding to expand the range of 10-year JGB yield fluctuations from the target level at the MPM held in December 2022, the Bank conducted fixed-rate purchase operations of three on-the-run issues of 10-year JGBs and the CTD issue every business day, while changing the fixed rate applied in the auctions from 0.25 percent to 0.5 percent. Also, it nimbly conducted fixed-rate purchase operations of 2-year, 5-year, and 20-year JGBs as necessary to encourage the formation of a yield curve consistent with the guidelines for market operations.
The Bank continued to offer the Funds-Supplying Operations against Pooled Collateral with a fixed interest rate of 0 percent and 2-week terms at a pace of roughly once every two weeks, in principle, throughout the fiscal year. From September 27, 2022, it conducted these operations without setting an upper limit on the amount of fund-provisioning, in light of the decision made at the MPM held in the month. After the start of 2023, the volatility in the JGB market remained elevated, mainly due to the rise in overseas interest rates and heightened speculation over the Bank's monetary policy. Against this background, the Bank conducted the operations with a loan duration of 2 years at a fixed interest rate of 0 percent to stabilize longer-term interest rates not only in the cash JGB market but also in other markets at a lower level without directly affecting supply and demand conditions of cash JGBs. At the MPM held in January 2023, it also decided to enhance the Funds-Supplying Operations against Pooled Collateral, including the extension of the duration of loans disbursed through the variable-rate method, in which interest rates on the loans were determined by multiple-rate competitive auctions, to within 10 years. Thereafter, it conducted the operations with a loan duration of 5 years through the variable-rate method.
With such conduct of JGB purchases and the Funds-Supplying Operations against Pooled Collateral, long-term interest rates mostly stayed at a level close to the upper bound of the fluctuations throughout the fiscal year, while fluctuating mainly in response to developments in overseas interest rates, economic and price conditions in Japan, and speculation over the Bank's monetary policy.
With regard to outright purchases of treasury discount bills (T-Bills), 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 1 trillion yen per auction. As a result of these operations, the yields on T-Bills stayed below the level of the short-term policy interest rate (minus 0.1 percent), albeit with fluctuations.
The Bank conducted outright purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (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.
Outright purchases of CP and corporate bonds were conducted in accordance with the Bank's guidelines for asset purchases that it would purchase these assets at about the same pace as prior to the COVID-19 pandemic, so that their amounts outstanding would gradually return to pre-pandemic levels, namely about 2 trillion yen for CP and about 3 trillion yen for corporate bonds. At the MPM held in December 2022, the Bank decided that, in adjusting the amount outstanding of corporate bonds, it would give due consideration to their issuance conditions. Furthermore, it decided on the guidelines for asset purchases that it would maintain the amount outstanding of CP at about 2 trillion yen at the MPM held in March 2023. As a result of these operations, issuance rates for CP stayed at a low level. The yield spreads between corporate bonds and JGBs widened as investors' risk sentiment became cautious, but leveled off after the start of 2023.
As for 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"), the Bank decided at the MPM held in September 2022 to complete the fund-provisioning against loans that financial institutions make on the back of government support ("government-supported loans"), mainly to small and medium-sized firms, at the end of December 2022. It was also decided at the meeting to complete the fund-provisioning against loans that financial institutions make on their own ("non-government-supported loans"), mainly to small and medium-sized firms, at the end of March 2023. The amount outstanding of loans provided through the operations decreased significantly throughout the fiscal year to 6.0 trillion yen at the end of March 2023, since fund-provisioning against private debt pledged as collateral, which was completed at the end of fiscal 2021, gradually reached maturity.
With respect to the provision of foreign currency funds, the Bank offered 1-week operations under the U.S. Dollar Funds-Supplying Operations on a weekly basis in principle until March 17, 2023, based on the U.S. Dollar-Yen Swap Agreement with the Federal Reserve Bank of New York. From March 20, it offered the 1-week operations every business day, based on the agreement with the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve System (Fed), and the Swiss National Bank to increase the frequency of the operations from weekly to daily as a coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements. U.S. dollar funding costs increased throughout the fiscal year, mainly due to a rise in the U.S. dollar overnight index swap (OIS) rate that reflected interest rate hikes by the Fed. The costs went up temporarily after mid-March 2023. This was due to an increase in the U.S. dollar funding premium that reflected the deterioration in risk sentiment in response to the failures of some U.S. financial institutions and concern over the business conditions of a financial institution in Europe. Nevertheless, there was no use of the operations, as Japanese banks had no particular problems in their funding.
With regard to the Securities Lending Facility, the Bank continued with measures to increase the number of Japanese government security (JGS) issues offered and raise the upper limit on the number of issues allowed for the submission of bids by a counterparty per auction, while conducting large-scale JGB purchases. In this situation, the amount of successful bids had been at a high level. In addition, the Bank relaxed the terms and conditions for the Securities Lending Facility of the CTD issues from June 17, 2022, by increasing the upper limit on consecutive purchases of the same issue and extending the issues to be applicable for the relaxed conditions for the delivery of the CTD issues. The purpose of the relaxation was to ensure stability in the market by easing excessive tightening in supply and demand of JGSs in the repo market. Conversely, from February 27, 2023, the Bank changed the minimum fee rate and lowered the upper limit on the amount of sales per issue if necessary for three on-the-run issues of 10-year JGBs of which supply and demand conditions in the repo market could be deemed excessively tightened over the long term. This was to ensure the appropriate use of the Securities Lending Facility in line with its purpose as a means to provide a temporary and secondary source of JGSs, and to facilitate the Bank's market operations.
Under these circumstances, current account balances at the Bank decreased mainly due to the phasing out of the Special Operations in Response to COVID-19. The Benchmark Ratio was adjusted significantly upward in many reserve maintenance periods, reflecting a decline in macro add-on balances in line with the phasing out of the Special Operations in Response to COVID-19 and fund-provisioning through the Bank's large-scale purchases of JGBs. Amounts outstanding in the repo market and the uncollateralized call market were at high levels throughout the fiscal year. This was because (1) transaction needs in money markets continued on both the borrowing side and the lending side while the effects on the upper bound on macro add-on balances of the dissipation of the addition to macro add-on balances and the rise in the Benchmark Ratio 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 active. The call rate and the GC repo rate generally stayed at levels slightly above the short-term policy interest rate.
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Financial Markets Department, Bank of Japan
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