Download Japanese Monetary Policy: Uncollateralized Overnight Call Rate

Japanese Monetary Policy: Uncollateralized Overnight Call Rate
According to Article 2 of the Bank of Japan Act, the aim of monetary policy is “achieving price
stability, thereby contributing to the sound development of the national economy.”
Towards that purpose, the central bank sets the basic discount rate which is the equivalent of
the discount rate of the Federal Reserve in the United States. Through the basic discount
facility, the Bank of Japan extends loans to commercial. These loans are subject to the basic
discount loan rate and are repayable on the following business day.
Uncollateralized Overnight Call Rate
In Japan, the Uncollateralized Overnight Call Rate is the lending rate charged for short-term
loans (usually just on an overnight basis) between banks in the banking system. This is a very
high impact rate as it affects the rate charged by banks on commercial loans.
The overnight uncollateralized call market is the main market for banks that need to increase
their account balances (in other words, the funds they hold as reserves) with the central bank.
This market is equivalent to the federal funds market in the United States. The interbank
interest rate is called the call rate because banks would traditionally make phone calls to each
other to obtain funds, and it is still the preferred communications method for many
institutions.
Changes in the account balance of banks can result from anything from deposit withdrawals by
individuals, to payments and receipts from other firms and the government. Although banks
can borrow from the central bank itself (at the discount rate), this is often costlier, and
borrowing in the interbank market at a rate lower than the overnight call rate is the usual way
for ensuring that banks are able to meet their obligations.
Commercial banks in Japan often require additional funds (reserves) at the close of a business
day, and rather than liquidating assets (government securities), banks turn to the
Uncollateralized Overnight Call to borrow the required funds. As the name implies, these
overnight loans do not require collateral and must be repaid the following day by 10:00 AM.
The basic discount rate establishes an upper limit on the uncollateralized overnight call rate,
since banks can always turn to the central bank at basic discount rate in case that they are
unable to acquire cheaper funding in the interbank market. The basic discount rate was called
the official discount rate before 2006.
Open Market Operations
Page | 1
The Bank of Japan (BOJ) conducts open market operations for ensuring market stability and
keeping the overnight call rate close to its basic discount rate. In order to absorb liquidity from
the interbank market, the BOJ either sells Japanese government Securities (JGS), or bills (JGBs)
outright, or conducts various repurchasing agreement transactions on them. Similarly, to
increase the amount of liquidity, the Bank can buy JGBs or JGS. The Bank of Japan uses the
Uncollateralized Overnight Call Rate as the Bank’s
Japan’s Basic Discount Rate and the Uncollateralized Overnight Call Rate
Basic Discount Rate: 0.3% since December 19, 2008
Uncollateralized Overnight Call Rate Target: 0.1% since December 19, 2008 (October 2008 to
December 2008, 0.3% and prior to October 2008, 0.5%)
Japan Readies ‘Massive’ Liquidity as BOJ Gauges Risk to Post-Quake Economy
Bloomberg.com March 13, 2011
Bank of Japan Governor Masaaki Shirakawa told reporters late yesterday he’s ready to unleash
“massive” liquidity starting this morning in Tokyo, as the BOJ seeks to assure financial stability.
“Monetary policy will be unchanged, but they will probably pledge to provide ample liquidity,”
said Takehiro Sato, chief Japan economist at Morgan Stanley MUFG Securities Co. in Tokyo.
Page | 2
Policy makers may also “establish an emergency lending facility to help financial institutions in
Tohoku,” the northern region most damaged by the catastrophe, he said.
The central bank set up a task force after the temblor, and pledged in a statement March 11 to
ensure financial stability and said it will do everything it can to provide ample liquidity. The BOJ
extended 55 billion yen to lenders over the past two days to ensure cash was on hand for
withdrawals by survivors.
The money went to 13 financial institutions operating outside regular business hours in
disaster-struck areas, the bank said in a statement yesterday, adding that it was checking on the
scale of damage to lenders.
Economic Damage
The economic hit from the March 11 quake will depend on how long it shuts down factories
and the distribution of goods and services, with the potential meltdown at a nuclear power
facility clouding the outlook. For now, the central bank is likely to ensure lenders have enough
cash to settle transactions, and aim any additional steps at providing credit in the areas of
northeastern Japan devastated by the temblor, analysts said.
Companies from Sony Corp. to Toyota Motor Corp. halted production after the quake struck
2:46 p.m. local time 130 kilometers (81 miles) off the coast of Sendai, north of Tokyo. Nissan
Motor Co. said 2,300 new vehicles were damaged by tsunami surges. Tokyo Electric Power Co.
yesterday was battling to avoid a meltdown at its Fukushima nuclear plant, and warned it will
today begin rolling, periodic blackouts of Tokyo.
Declines in stocks may shake consumer confidence, which slid to a 10-month low in December
as the government started to unwind economic stimulus measures. The economy had
contracted in the fourth quarter as consumer spending and exports slumped, a decline
economists had said would be temporary as a rebound in global growth fuels overseas demand.
“The earthquake has increased the risk the economy won’t be able to emerge from its lull,
which many believed would happen this quarter” said Takahide Kiuchi, chief economist at
Nomura Securities Co. in Tokyo. He added that the government is likely to spend about 5 trillion
yen for recovery efforts.
In the days following the 1995 Kobe earthquake, the BOJ boosted liquidity injections to the
money market and pumped 500 billion yen in excess funds to restrain the uncollateralized
overnight lending rate, which was around 2 percent. It lowered its benchmark official discount
rate in April and September, bringing it to 0.5 percent, a record low at the time, as the economy
Page | 3
deteriorated and the yen rose. The currency surged about 21 percent in the three months after
the quake.
In the Kobe case, demand for cash in the money market surged because commercial lenders
had to meet withdrawals from businesses and individuals who wanted cash on hand.
Japan Adds $183 Billion to Economy, Doubles Asset Purchases
Bloomberg.com March 14, 2011
On Monday, the Bank of Japan poured a record amount of cash into the financial system and
doubled the size of its asset-purchase plan to shield the economy from the effects of the
nation’s strongest earthquake on record.
The central bank pumped 15 trillion yen ($183 billion) into money markets today to assure
financial stability amid a plunge in stocks and surge in credit risk. Policy makers said they were
concerned corporate and household sentiment will worsen, with production set to decline in
the aftermath of the temblor and an ensuing tsunami. The March 11 catastrophe killed an
estimated number of more than 10,000 people, shut down factories, prompted rolling power
cuts and sparked the risk of a meltdown at a nuclear power plant.
“The disaster will push down gross domestic product in the short run, and the BOJ wants to
mitigate the deflationary impact through liquidity injections,” said Tomo Kinoshita, a Hong
Kong-based economist at Nomura Holdings Inc.
Japan’s currency, which initially climbed against the dollar then retreated in the wake of the
central bank’s cash injections, stayed lower after the policy decision. It traded at 81.95 as of
6:04 p.m. in Tokyo. Stocks stayed lower, with the Nikkei 225 Stock Average closing down 6.2
percent minutes following the announcement.
The BOJ chief told reporters cash injections will continue as needed and it is “crucial” the
central bank stabilizes money markets, an indication it will take further steps in coming days.
Officials kept the benchmark interest rate at a range of zero to 0.1 percent and maintained
their monthly target for regular government-bond purchases, which are separate from the
asset-purchase program, at 1.8 trillion yen. Borrowing costs were already cut near zero last year
as officials sought to revive growth and end deflation.
Page | 4
Stocks Plunge in Japan After Earthquake
Bloomberg.com March 14, 2011
Stocks in Tokyo slid the most since 2008, leading a global drop in equities, and oil fell after
Japan’s biggest earthquake on record. The Nikkei 225 Stock Average plunged 6.2 percent, the
largest drop since December 2008. Crude lost as much as 2.7 percent to dip below $99 a barrel.
“People are selling stocks in Japan because nobody knows the extent of the damage at the
moment, and the rebuilding costs are likely to be huge,” said Charles Diebel, head of market
strategy at Lloyds Bank Corporate Markets in London.
Nuclear Stocks
The slump in the Nikkei 225 pushed the index to the lowest level in four months as the official
death toll from the quake reached 1,823, with 2,369 more missing. Tokyo Electric Power Co.,
which is battling to avoid a meltdown at its Fukushima nuclear plant following a hydrogen
explosion, tumbled 24 percent. Toshiba Corp., a maker of nuclear reactors, slid 16 percent.
Default swaps on Tokyo Electric Power Co. soared more than 220 percent to a record 133 basis
points, while contracts on Japan jumped 11 to 94, that highest since July, according to CMA.
The S&P 500, the benchmark gauge for U.S. equities, dropped for the third time in four days.
General Electric Co. lost 2 percent. The incidents at the Japanese nuclear plants have compelled
China and India to review plans for atomic energy that were set to provide a boon for suppliers
including Areva SA and GE. E.ON AG and RWE AG, Germany’s largest nuclear power plant
operators, fell more than 4.9 percent on concern the Japanese reactor explosions may
persuade the German government to backtrack on extending the life of atomic plants. The
French company, Areva SA, the biggest provider of nuclear equipment and services, sank 7.7
percent.
Producers of uranium for nuclear plants also slumped, with Bethesda, Maryland-based USEC
Inc. dropping 16 percent, while Canada’s Cameco Corp. tumbled 22 percent and Denison Mines
Corp. sank 29 percent in Toronto.
Page | 5
Global Stocks Slide After Japan Earthquake; U.S. Treasuries Advance
Bloomberg.com March 14, 2011
Global stocks slid, following the biggest drop in Tokyo since 2008, and U.S. Treasuries gained
amid concern Japan’s biggest earthquake on record will hurt economic growth. The Standard &
Poor’s 500 Index declined 0.9 percent to 1,292.06, below its lowest close since Jan. 31, as of
2:20 p.m. in New York after the Nikkei 225 Stock Average plunged 6.2 percent, with about $285
billion in equity value erased from the Japanese market. Ten-year Treasury yields lost 4 basis
points to 3.37 percent. Crude pared losses after dipping below $99 a barrel. Companies that
operate nuclear power plants or supply the fuel helped lead stocks lower, with Entergy Corp.
down 4.8 percent in New York and Cameco Corp. tumbling 14 percent in Toronto, while natural
gas rallied amid speculation that the atomic-energy industry will suffer as Japan works to
contain radiation at damaged reactors. Tiffany & Co. and Coach Inc. lost more than 4.7 percent
each on concern sales in Japan will slow.
“There’s a whole world of worries now,” said Mike Ryan, the New York-based head of wealth
management research for the Americas at UBS Financial Services Inc., which oversees about
$741 billion. “But the markets are actually being pretty orderly considering we got the aftereffects of the Japanese earthquake, including the risk of a nuclear accident, which would be a
game-changing event.”
Utility companies in the S&P 500 lost 1.5 percent as a group. Exelon Corp., owner of the largest
group of U.S. nuclear power plants, lost 1.9 percent. Fifteen U.S. reactors use a similar design to
the General Electric unit at Tokyo Electric’s Daiichi No. 1, Hugh Wynne, a New York-based
analyst for Sanford C. Bernstein & Co., wrote in a note to clients today. “Exelon in particular has
relied heavily on this design.”
S&P 500 financial shares tumbled 1.3 percent collectively. Hartford Financial Group Inc., which
booked about 15 percent of its revenue in Japan in 2009, lost 3 percent. Aflac Inc., the provider
of supplemental disability insurance which had 76 percent of sales in Japan in 2010, lost 3.6
percent.
Four stocks fell for every two that gained in the Stoxx Europe 600 Index, which slid 1.1 percent
to the lowest level since Dec. 6. Swiss Reinsurance Co. and Munich Re, the world’s biggest
reinsurers, lost more than 3.3 percent. Burberry Group Plc (BRBY) sank 4.3 percent in London,
leading luxury-goods companies lower amid speculation sales in Japan may suffer.
E.ON AG and RWE AG, Germany’s largest nuclear power plant operators, fell more than 4.7
percent. Areva SA, the biggest provider of nuclear equipment and services, sank 9.6 percent,
the most since November 2008.
Page | 6