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July 30, 2010
Financial Markets Department
Bank of Japan
Throughout fiscal 2009, the Bank of Japan conducted money market operations with the uncollateralized overnight call rate as the operating target. During this period, the target level for the uncollateralized overnight call rate was"around 0.1 percent." The basic loan rate applied to the complementary lending facility was 0.3 percent, and the interest rate applied to the complementary deposit facility was 0.1 percent.
During fiscal 2009, as in fiscal 2008, the Bank continued to conduct money market operations in a flexible manner in response to changes in the market situation, with a view to ensuring market stability.
The Bank provided ample funds by, for example, actively purchasing Japanese government securities (JGSs) and CP under repurchase agreements. In particular, toward the year-end and the fiscal year-end when the demand for funds grew, the Bank increased the provision of ample funds and created a situation in which liquidity concerns did not constrain financial institutions' activity. In addition, the Bank conducted outright purchases of CP and corporate bonds, U.S. dollar funds-supplying operations against pooled collateral, and special funds-supplying operations to facilitate corporate financing. These operations were conducted until the end of December 2009, early February 2010, and the end of March 2010, respectively. As market functioning recovered, financial institutions' demand for liquidity declined, and the amounts bid in outright purchases of CP and corporate bonds and in U.S. dollar funds-supplying operations against pooled collateral declined.
In December 2009, to enhance easy monetary conditions further by encouraging a decline in longer-term interest rates, the Bank introduced a fixed-rate funds-supplying operation against pooled collateral. In March 2010, the Bank decided to expand this measure to encourage a decline in longer-term interest rates by substantially increasing the amount of funds to be provided through the fixed-rate funds-supplying operation against pooled collateral. To ensure the functioning of the money market, the Bank left adjustments of the daily funds imbalance among market participants to the market while increasing the amount of longer-term funds provided through funds-supplying operations.
Under these money market operations, the uncollateralized overnight call rate moved steadily around the target level throughout fiscal 2009. Longer-term interest rates were on a moderate declining trend, falling at a faster pace after December 2009. Although longer-term liquidity remained low, conditions in the money market were generally stable. It should be noted, however, that the Bank's money market operations continued to act as a substitute for market transactions. The environment for corporate financing, with some lingering severity, continued to improve. Meanwhile, the outstanding balance of current accounts held at the Bank and excess reserves remained at increasingly high levels.
In fiscal 2009, the Bank also revised the terms and conditions of money market operations. This included an expansion in the range of eligible collateral for loans on deeds to the government and those with government guarantees and an acceptance of loans on deeds to municipal governments and foreign bonds denominated in foreign currencies as eligible collateral.
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 conduct and features of money market operations as well as developments in the money market, including movements in interest rates such as the uncollateralized overnight call rate, in response to these operations. The latter part reviews developments by type of operational tool and explains the main revisions to money market operations.
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Financial Markets Department, Bank of Japan
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