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July 31, 2007
Financial Markets Department
Bank of Japan
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Throughout fiscal 2006, the Bank of Japan conducted money market operations with the uncollateralized overnight call rate as the operating target. Between March 2001 and March 2006, the Bank adopted the so-called "quantitative easing policy" whereby it conducted money market operations with the main target being the outstanding balance of current accounts at the Bank. Thus, this marked the first time in five years that the Bank used uncollateralized overnight call rates as its operating target.
At the Monetary Policy Meeting (MPM) of July 13 and 14, 2006, the target level for the uncollateralized overnight call rate was raised from "effectively zero percent" to "around 0.25 percent." The target was later raised to "around 0.5 percent" at the MPM of February 20 and 21, 2007.
Parallel to the increase in the target level of the uncollateralized overnight call rate, the basic loan rate applied to the complementary lending facility was raised from 0.1 percent to 0.4 percent at the MPM of July 2006, and was further raised from 0.4 percent to 0.75 percent at the MPM of February 2007. As a result, the differential between the basic loan rate and the target level widened from 0.1 percentage points to 0.15 percentage points and finally to 0.25 percentage points.
Under these changes, although the uncollateralized overnight call rate tended to move up at ends of semi-fiscal years and on expectations of an increase in the uncollateralized overnight call rate target level, it remained within the target range throughout fiscal 2006. During this time, the money market steadily regained its function. The outstanding balance of current accounts at the Bank stood at approximately 30 trillion yen at the beginning of April 2006 shortly after the end of quantitative easing policy, but decreased to about 10 trillion by mid-June as the outstanding balance of current accounts at the Bank were steadily reduced. After the target level of the uncollateralized overnight call rate was raised at the July MPM, the outstanding balance of current accounts moved in the range of around 6 - 13 trillion yen.
Various revisions were made in the conduct of money market operations during fiscal 2006. In June 2006, bill purchasing operations were replaced by funds-supplying operations against pooled collateral to further improve efficiency in the practical implementation of money market operations. Improvements were also made in operational procedures, including the announcement of projected reserve balances for the day in the morning of each business day.
The first section of this paper focuses on the sources of changes in current account balances at the Bank, which are preconditions for money market operations. This is followed by a review of the developments in money markets including trends in the uncollateralized overnight call rate. The latter part of the paper is given to a review of developments in operations by type of operational tool and explanations of the main revisions made in operational tools and procedures.
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Financial Markets Department, Bank of Japan
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