BOJ's Market Operations and the Call Rate etc.(in Japanese)

I. Purposes This paper tries to quantify the effects on call rates of the money market operations by the Bank of Japan. Specifically, it tackles the following questions. i. How much does the supply of reserve affect the overnight call rate? ii. With the overnight call rate zero, is it possible to expand the quantity of reserve? iii. How effective is the target of the call rate set by the Bank of Japan? iv. Are the effects of the supply of reserve different depending on the "excess reserve in the morning", which is interpreted by the market as a signal sent by the Bank of Japan, and on the means of money market operations such as outright purchases of government bonds? v. Are money market operations able to affect not only overnight call rate but also term rates including one week or one month call rates? II. Method We estimate demand functions for reserve, which represents the relationship between the call rate and the demand for reserve, thereby investigate the effects of the supply of reserve by the Bank of Japan on call rates. III. Results i. From August 1994 to December 1999, a 1% increase in the supply of reserve (around 35 billion yen) decreases the overnight call rate by 0.09 basis points. ii. When the period is divided into subperiods, liquidity effects are observed only from November 1997 to February 1999, a period in which Japan experienced financial crisis. iii. The demand for reserve expands greatly only when the overnight rate decreases to less than 0.01%. When the overnight rate is higher than this level, the increase in reserve demand is quite moderate. iv. when we look at the effects of other factors than the supply of reserve on the overnight call rate, we obtained the following findings. a. The target rate set by the Bank of Japan directly affects the overnight rate. b. The "excess reserve in the morning" has influence on the overnight rate only during the financial crisis. c. As for the effects of individual operations on overnight rate, outright purchase of government bonds and Bank of Japan lending have special influences independent of the quantity of reserve. However, other means of operations do not have significant effects. v. As for the effects on term rates including the one week and one month call rates, a. The quantity of reserve does not affect term rates. b. The target rate set by the Bank of Japan exhibits significant influences on term rates. c. The "excess reserve in the morning" had statistically significant influences on the one-week call rate only during the financial crisis. d. As for the effects of individual operations on the one-weak call rate, outright purchase of government bonds and Bank of Japan lending have special influences independent of the quantity of reserve. e. Neither "excess reserve in the morning" nor outright purchase of government bonds affects one month call rate. IV. Implications i. During the period in which the demand for liquidity is high due to, for example, financial crisis, the Bank of Japan is able to affect the overnight call rate through the supply of reserve. ii. However, in the period other than financial crisis, the supply of reserve has little influence on the overnight call rate. The Bank of Japan affects the overnight call rate only through the target rate. Behind this effectiveness of target rates lies confidence of market participants that the Bank of Japan will provide sufficient reserves to peg call rates to the target rate. iii. Even when the overnight call rate goes to a level near zero, the expansion of the supply of reserve is limited. iv. Daily supply of reserve does not have significant effects on term rates. The target rate affects term rates significantly. It is important to make clear the target rate (or other medium term policy stance) in order to affect term rates. v. Both the "excess reserve in the morning" and outright purchase of government bonds affect only term rates at the short end. They do not affect term rates at the long end.