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August 29, 2008
Financial Markets Department
Bank of Japan
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Throughout fiscal 2007, the Bank of Japan conducted money market operations with the uncollateralized overnight call rate as the operating target. The target level for the uncollateralized overnight call rate remained at "around 0.5 percent" throughout all of fiscal 2007. During this period, the basic loan rate applied to the complementary lending facility was 0.75 percent.
Beginning in August 2007, the U.S. and European money markets experienced turmoil arising from the subprime mortgage loan problems. The Japanese money market also showed tension mainly around the end of the calendar and fiscal years. Consequently, in the money market operations undertaken, more attention was paid than usual to ensuring the stability of the money market.
Specifically, the Bank maintained close contact with foreign central banks to gain an accurate grasp of developments in overseas markets, strengthened its monitoring of the domestic money market, and implemented flexible and finely tuned operations. For instance, to facilitate fund-raising by financial institutions, funds-supplying operations with maturities over the end of the calendar and fiscal years were started earlier than in the previous year. The Bank also used a variety of operational tools to flexibly supply funds in response to market conditions. Active funds-supplying operations and flexible funds-absorbing operations were implemented to respond to interest rate fluctuations observed on days such as ends of fiscal and semi-fiscal years and the last days of reserve maintenance periods.
Under these money market operations, the uncollateralized overnight call rate moved steadily around the target level throughout fiscal 2007, and relatively stable conditions were maintained in the domestic money market. During this period, current account balances at the Bank fluctuated mainly in the range of 7 - 10 trillion yen and excess reserves continued to decrease.
A number of revisions were made in the conduct of money market operations during fiscal 2007. In addition to the periodic review of collateral value of eligible collateral, the timing of the release of projections of daily reserve balances was moved up as part of an effort to improve the functioning of the money market.
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 and features in money market operations as well as the developments in the money market and 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 the conduct of money market operations.
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Financial Markets Department, Bank of Japan
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