Market Operations in Fiscal 2023
August 9, 2024
Financial Markets Department
Bank of Japan
Summary
For most of fiscal 2023, the Bank of Japan continued with Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control, with a view to achieving the price stability target of 2 percent in a sustainable and stable manner. Specifically, for the short-term policy interest rate, the Bank applied a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank. With regard to the long-term interest rate, it purchased a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields would remain at around zero percent. Meanwhile, in July 2023, the Bank decided to conduct yield curve control with greater flexibility. Specifically, while continuing to allow 10-year JGB yields to fluctuate in the range of around plus and minus 0.5 percentage points from the target level, the Bank decided to offer purchases of 10-year JGBs at 1.0 percent, instead of the previous 0.5 percent, through fixed-rate purchase operations, regarding the upper and lower bounds of the range as references, not as rigid limits. Then, in October, it decided to further increase the flexibility in the conduct of yield curve control. Specifically, it decided to conduct yield curve control with the upper bound of 1.0 percent for 10-year JGBs as a reference. In line with this decision, strict control over 10-year JGBs through fixed-rate purchase operations conducted every business day was eliminated.
The following were the key points in the conduct of the Bank's operations under the aforementioned guidelines for market operations.
For short-term interest rates, under the three-tier system during the negative interest rate policy, the uncollateralized call rate generally stayed between minus 0.08 percent and minus 0.01 percent. The GC repo rate stayed at around minus 0.10 percent on the whole. However, the rate temporarily increased somewhat significantly in July 2023 and February 2024, with an imbalance between cash borrowing and lending. Under these circumstances, the Bank provided ample funds to the financial markets by offering purchases of Japanese government securities (JGSs) with repurchase agreements in a flexible and timely manner, with a view to maintaining short-term interest rates in negative territory in a stable manner.
With regard to outright purchases of JGBs, the Bank continued with large-scale JGB purchases and conducted nimble market operations, such as unscheduled purchases of JGBs, to encourage the formation of a yield curve consistent with the guideline for market operations. After the Bank decided to conduct yield curve control with greater flexibility in July 2023, from summer to autumn, there was significant upward pressure on Japanese interest rates because of higher U.S. interest rates and higher expectations for interest rate increases in Japan (long-term interest rates temporarily hit 0.97 percent at the beginning of November). In response to these rate hikes, the Bank conducted (1) unscheduled outright purchases of JGBs a total of seven times (including additions to the purchase schedule) and (2) the Funds-Supplying Operations against Pooled Collateral with a loan duration of 5 years a total of three times, based on its stance that it would adjust the speed of rate increases. From November, the Bank gradually reduced the amount of outright purchases of JGBs, taking into account, for example, a tightening of supply-demand conditions for bonds. As a result of such conduct of outright purchases, the amount of monthly outright purchases of JGBs increased from approximately 7 trillion yen in the April-June quarter to approximately 9 trillion yen in October and stayed at around 6 trillion yen after the turn of 2024.
As for outright purchases of assets other than JGBs, the Bank made one purchase of exchange-traded funds (ETFs) amounting to 70.1 billion yen in October 2023, in accordance with the guideline for asset purchases in which it would purchase ETFs as necessary with an upper limit of about 12 trillion yen on the annual pace of increase in the amount outstanding. Meanwhile, the amount of new outright purchases of Japan real estate investment trusts (J-REITs) was zero under the guideline for asset purchases in which the Bank would purchase J-REITs as necessary with an upper limit of about 180 billion yen on the annual pace of increase in the amount outstanding.
Meanwhile, the Bank offered twice a month to purchase CP amounting to 400 billion yen, for a total of 800 billion yen per month, in accordance with the guideline for asset purchases in which it would maintain the amount outstanding of CP at about 2 trillion yen. It also offered once a month to purchase corporate bonds amounting to 100 billion yen, in line with the guideline for asset purchases in which it would purchase corporate bonds at about the same pace as prior to the COVID-19 pandemic, so that their amount outstanding would gradually return to the pre-pandemic level of about 3 trillion yen.
At the Monetary Policy Meeting (MPM) held on March 18 and 19, 2024, the Bank judged it was now within sight that the price stability target of 2 percent would be achieved in a sustainable and stable manner. Specifically, the Bank considered that the policy framework of QQE with Yield Curve Control and the negative interest rate policy to date had fulfilled their roles. With the price stability target of 2 percent, it decided to conduct monetary policy as appropriate, guiding the short-term interest rate as a primary policy tool, in response to developments in economic activity and prices as well as financial conditions from the perspective of sustainable and stable achievement of the target. On this basis, the Bank decided on the following: (1) for the guideline for market operations, it would encourage the uncollateralized overnight call rate to remain at around 0 to 0.1 percent; (2) it would continue its JGB purchases at broadly the same amount as before; (3) with regard to asset purchases other than JGB purchases, it would discontinue purchases of ETFs and J-REITs and gradually reduce the amount of purchases of CP and corporate bonds to discontinue the purchases in about one year; and (4) it would provide loans with an interest rate of 0.1 percent and a duration of one year under the Fund-Provisioning Measure to Stimulate Bank Lending, the Funds-Supplying Operation to Support Financial Institutions in Disaster Areas, and the Funds-Supplying Operations to Support Financing for Climate Change Responses.
Looking at developments in short-term interest rates just after the changes in the monetary policy framework, as the Bank started applying an interest rate of 0.1 percent to the entire part of current account balances held by financial institutions at the Bank on March 21, excluding required reserve balances ("excess reserves"), the uncollateralized call rate jumped from minus 0.001 percent the previous day to plus 0.074 percent and stayed stable at around that level through the fiscal year-end of March 2024. The GC repo rate rose from minus 0.10 percent into positive territory and remained slightly positive until the end of March. Meanwhile, the Bank continued JGB purchases at broadly the same amount as before, in line with the new guideline.
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