(Short Note 2) Q&A: New Procedures for Money Market Operations

March 19, 2001
Bank of Japan

Q1:Please explain the new procedures in which the outstanding balance of the current accounts at the BOJ is set as a main target for money market operations.

A1:The Bank has conducted money market operations based on the guidelines set by the Monetary Policy Meeting of the Policy Board in terms of the uncollateralized overnight call rate.In the new procedures, the Monetary Policy Meeting will decide the guidelines in terms of the "outstanding balance" of the current accounts at the BOJ and operations will be conducted to meet the target balance.

Q2:What is its impact on interest rates?

A2:So far, the overnight call rate has stayed around 0.15% with around 4 trillion yen of the current account balance.As the outstanding balance of the current accounts will be raised to 5 trillion yen for the time being, the overnight call rate is expected to decline to stay around zero percent under normal circumstances.Furthermore, as market participants expect the procedures to last until "the CPI (excluding perishables) registers stably a zero percent or an increase year on year," we can also expect a decline in interest rates across the yield curve (commitment effect).

Q3:Is this a return to the "Zero Interest Rate Policy"?

A3:Under the "Zero Interest Rate Policy," the Bank adjusted the amount of fund provision to guide a call rate close to zero.In the new procedures, the Bank sets the amount of fund provision as a main target and let market forces decide a call rate.Although interest rates are expected to stay around zero under normal circumstances with 5 trillion yen of the current account balance, they could somewhat rise when the market tightens and could reflect a certain difference in a credit risk.As such, the new procedures intend to achieve the same monetary easing effect of the "Zero Interest Rate Policy" while preserving a market mechanism as much as possible.

Q4:More fluctuation in call rates is expected?

A4:No. Thanks to the "Lombard-Type" lending facility introduced in this February, the official discount rate (0.25%) will set a ceiling, beyond which a call rate will not rise.

Q5:Why was monetary base not chosen as a target?

A5:Monetary base consists of the "current account balance at the BOJ" and "cash in circulation". In a short run, it is difficult for the Bank to effectively control the amount of cash, which accounts for 90 percent of monetary base, because it is determined by the demand from households and companies.In the case of the current account balance at the BOJ, the Bank has better control through daily market operations.If we assume a recent growth rate of bank notes (6% annually), it is expected that, by increasing the current account balance to 5 trillion yen, the growth rate of monetary base will rise from the current level (around 3% in February) to 7% within six months.

Q6:The Bank has long opposed to the idea of increasing the outright purchase of the long-term government bonds.Has the policy changed?

A6:No.In the new procedures, we decided to allow an increase in the outright purchase only in the case when such an increase is necessary for providing funds smoothly to meet the target current account balance, e.g. when we repeatedly fail to get enough bids for money market operations.The Bank still has no intentions to increase the amount of outright purchase of the long-term government bonds for the purpose of supporting bond prices or government financing.In order to make this point clear, the Bank continues its policy to control the amount of outright purchase of the long-term government bonds with reference to the bank note issuance by establishing a new ceiling on a stock basis.

Q7:Does it mean that the Bank has adopted inflation targeting?

A7:Inflation targeting is usually defined as a scheme under which 1) a desirable inflation rate from a long-term perspective is set as a target and 2) a central bank adjusts monetary policy in a forward-looking manner when an actual inflation rate is expected to deviate from the target.The Bank's policy on inflation targeting is that we have to further examine its desirability and feasibility because it is difficult to numerically define a desirable inflation rate from a long-term perspective in the current situation in Japan.This time, the Bank committed itself that this unorthodox policy will be continued until the actual CPI registers a zero percent or an increase year on year.Although it is not inflation targeting, it shows the Bank's determination to prevent a continuous price decline and to form a basis for a sustainable growth.