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August 31, 2009
Financial Markets Department
Bank of Japan
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Throughout fiscal 2008, 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 was lowered on two occasions during fiscal 2008. The target level was lowered from "around 0.5 percent" to "around 0.3 percent" at the Monetary Policy Meeting (MPM) held on October 31, 2008, and to "around 0.1 percent" in the MPM of December 18 and 19. The basic loan rate applied to the complementary lending facility was also lowered from 0.75 percent to 0.5 percent in the MPM of October 31, and to 0.3 percent in the MPM of December 18 and 19. As a temporary measure, the Bank introduced the complementary deposit facility on November 16 and started applying an interest rate of 0.1 percent to excess reserve balances.
During fiscal 2008, international financial markets suffered severe strains following the failure of Lehman Brothers in mid-September. In Japan, conditions in financial markets and corporate financing also became increasingly tighter toward the year-end and the fiscal year-end. Under these circumstances, the Bank conducted money market operations with a view to ensuring stability in the financial markets and facilitating corporate financing as much as possible.
The Bank maintained close contact with foreign central banks to gain an accurate grasp of developments in overseas markets, very closely monitored the domestic money market, and implemented flexible and finely tuned operations while lowering the policy interest rate. The Bank also introduced new operational tools, such as U.S. dollar funds-supplying operations, special operations to facilitate corporate financing, outright purchases of CP and outright purchases of corporate bonds. Other new measures included the introduction of the complementary deposit facility and the expansion of eligible collateral. The Bank used these tools to actively supply funds over the year-end and fiscal year-end to maintain stability in the financial markets and to facilitate corporate financing.
Under these money market operations, the uncollateralized overnight call rate moved steadily around the target level throughout fiscal 2008. While the funding conditions for firms and financial institutions showed improvement after the year-end, financial markets and the corporate financing environment on the whole remained under considerable strain.
The first section of this paper focuses on the sources of changes in the current account balances at the Bank, which are preconditions for money market operations. This is followed by a review of developments in the financial markets and features of money market operations. 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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