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August 19, 2005
Financial Markets Department
Bank of Japan
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In fiscal 2004, the Bank of Japan did not change the target level for current account balances held at the Bank from the "30-35 trillion yen range" decided at the Monetary Policy Meeting (MPM) on January 19 and 20, 2004 (Chart 1). This target level significantly exceeds the required reserves to be held by financial institutions at the Bank (approximately 6 trillion yen).
Liquidity demand gradually decreased in fiscal 2004, as concerns over the financial system receded. Interest rates in the money market generally remained at low levels. Interest rates on term instruments declined further and stayed at nearly zero during the second half of the fiscal year. In this situation, frequent "undersubscription" (aggregate bids falling short of offers) was observed in funds-supplying operations during the second half of the fiscal year (Chart 2). To respond to the frequent occurrence of undersubscription, the Bank adopted various measures to achieve the target level for current account balances. These included the extension and diversification of the maturity of funds-supplying operations, and flexible use of operational tools for which higher levels of bidding could be expected.