June 2012

Money Market Operations in Fiscal 2011

Financial Markets Department
Bank of Japan
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Financial Markets Department, Bank of Japan
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Table of Contents
I. Summary........................................................................................................................................

1

II. Developments in Financial Markets and Conduct of Money Market Operations................

3

A. Developments in Global Financial Markets...........................................................................

3

B. Conduct of Money Market Operations by the Bank.............................................................

5

Box 1: Money Market Operations Conducted by the Federal Reserve andthe European Central Bank.......................................................................................

10

C. Developments in the Domestic Money Markets and Bond Markets.................................... 12
Box 2: Overnight Interest Rates under the Complementary Deposit Facility andLarge Fund Supplies..................................................................................................

14

Box 3: Short-Term Government Bond Yields in Japan and the United States................ 16
Box 4: Foreign Exchange Swap Market and the U.S. Dollar Funds-Supplying
Operations...................................................................................................................

23

D. Developments in the Foreign Exchange Market and the Domestic Stock Market........... 25
III. Money Market Operations and the Bank's Balance Sheet....................................................

27

A. Changes in the Bank's Balance Sheet....................................................................................

27

B. Developments in Current Account Balances at the Bank..................................................... 29
Box 5: Current Account Balances at the Bank by Sector, and Overnight Rates.............. 29
Box 6: Amounts Outstanding in the Call Markets.............................................................. 31
C. Developments in Excess and Shortage of Funds...................................................................

34

Box 7: Effects of Money Market Operations on Excess and Shortage of Funds..............

41

IV. Conduct of Individual Measures in Money Market Operations........................................... 43
A. Asset Purchase Program......................................................................................................... 43
Box 8: Bid-Cover Ratios of Fixed-Rate Funds-Supplying Operations
against Pooled Collateral............................................................................................ 45
Box 9: Outright Purchases of JGBs through the Asset Purchase Program andThose for the Purpose of Supplying Currency Consistent with the Underlying
Steady Development of the Economy......................................................................... 47
Box 10: Outright Purchases of T-Bills through the Asset Purchase Program............. 49
B. Regular Operation Tools......................................................................................................... 54
Box 11: Amounts Outstanding of the Bank's JGB Holdings.............................................. 56iBox 12: Bid-Cover Ratios of Variable-Rate Funds-Supplying Operations
against Pooled Collateral........................................................................................... 61
C. Complementary Lending Facility........................................................................................... 63
D. Growth-Supporting Funding Facility.................................................................................... 63
E. Funds-Supplying Operation to Support Financial Institutions in Disaster Areas............

64

F. U.S. Dollar Funds-Supplying Operations..............................................................................

65

Box 13: Pooled Collateral Accepted by the Bank................................................................ 66
V. Other Matters Related to Money Market Operations............................................................. 69
A. Enhancement of the Growth-Supporting Funding Facility................................................

69

B. Support from the Financial Side to Restore and Rebuild the Disaster Areas
Affected by the Great East Japan Earthquake...................................................................... 70
C. Periodic Review of Collateral Value of Eligible Collateral and Other Related
Matters....................................................................................................................................... 72
D. Establishment of Bilateral Liquidity Swap Arrangements among the Central Banks to
Enable the Provision of Liquidity in Any of Their Currencies............................................ 73
E. Changes to the Operation Timetable for the Shortening of the Payment and Settlement
Period for JGBs......................................................................................................................... 74
List of Data Sources and Referenced Materials............................................................................. 75

ii

I. Summary
This paper explains the money market operations conducted by the Bank of Japan in fiscal
2011.

During fiscal 2011, the Bank pursued powerful monetary easing under "the comprehensive
monetary easing policy." The Bank maintained the virtually zero interest rate policy andrepeatedly increased the maximum amount outstanding of the Asset Purchase Program,
introduced in October 2010, on a significant scale from about 40 trillion yen to about 65
trillion yen. In order to ensure financial market stability, the Bank provided ample funds todomestic markets. With regard to the provision of foreign currency funds, the Bank took
coordinated actions with major central banks, such as a reduction of interest rates on the
U.S. dollar funds-supplying operation. The Bank also made active contributions as thecentral bank, continuing and enhancing support to strengthen the foundations for economic
growth and implementing support for financial institutions in disaster areas affected by theGreat East Japan Earthquake.

Regarding the money market operations conducted under these policies, first, to pursue
powerful monetary easing, the Bank made steady progress in terms of the Program with thefixed-rate funds-supplying operations against pooled collateral and purchases of various
financial assets such as Japanese government bonds (JGBs), treasury discount bills (T-Bills),
CP, corporate bonds, exchange-traded funds (ETFs), and Japan real estate investment trusts(J-REITs). The amount outstanding of the Program increased by 17.1 trillion yen during
fiscal 2011 and reached 48.9 trillion yen at the end of fiscal 2011.

Second, in response to changes in the current account balances at the Bank caused bytreasury accounts and others, the Bank conducted the variable-rate funds-supplying
operations as necessary. Against the backdrop of the Bank's provision of ample funds
including those through the Program, market confidence in funding conditions wasmaintained throughout the year. The uncollateralized overnight call rate remained in linewith the guideline for money market operations, and longer-term interest rates declined to
extremely low levels.

1

Third, to address heightened tensions in global financial markets, the Bank continued tooffer the U.S. dollar funds-supplying operations. In November, in response to significant
rises in U.S. dollar funding costs in global money markets, the Bank, in cooperation withfive other central banks -- namely, the Bank of Canada, the Bank of England, the European
Central Bank, the Federal Reserve, and the Swiss National Bank -- took measures toenhance the capacity to provide liquidity support to the global financial system, by reducing
interest rates on the U.S. dollar funds-supplying operations and establishing bilateralliquidity swap arrangements among the central banks that would enable provision ofliquidity in any of their currencies. As a result, U.S. dollar liquidity funding costs, mainly inforeign exchange swap markets, declined significantly after the beginning of 2012.

This paper first explains developments in financial markets and the conduct of money
market operations. It then discusses changes in the Bank's balance sheet as a result of themoney market operations. Last, the paper describes the conducts of individual measures forthe money market operations.

2II. Developments in Financial Markets and Conduct of Money Market Operations

This section contains an overview of financial market developments and money market
operations in fiscal 2011.

A. Developments in Global Financial Markets

Strains in global financial markets increased during fiscal 2011, primarily because ofincreasing concerns about the European debt crisis since fiscal 2010. These concerns spilledover to euro zone countries including relatively large ones; against the background ofgrowing uncertainties over Greek debt restructuring, yields on government bonds of some
European countries, including Italian and Spanish government bonds, rose sharply in July
2011 (Chart 1). Falling prices of government bonds, broadly seen in European countries, led
to downgrades of ratings of European financial institutions that held large quantities ofthese bonds. This made lenders more cautious about providing funds, mainly in the U.S.
dollar money market and the foreign exchange swap market, with concerns aboutcounterparty risks against European financial institutions. Although steps were taken to
stabilize financial systems by euro zone countries, they failed to eliminate concerns over theprospects among market participants, and thus U.S. dollar funding costs rose significantly
toward the end of 2011 (Chart 2).
Chart 2: U.S. Dollar Funding Pressure in
the FX Swap Markets (3-Month)

Chart 1: Spreads for European Government
Bonds (10-Year)
4,000

3,500
3,000
2,500
2,000
1,500

%

bps

2.0
Greece
1.5

Ireland

FX swap-implied U.S. dollar rate(from EUR) minus U.S. dollar LIBOR

FX swap-implied U.S. dollar rate(from JPY) minus U.S. dollar LIBOR

Portugal
1.0

Spain

Italy

0.5

1,000

0.0

500

-0.5

0

Apr-10Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
Notes: 1. The yield for government bonds issued by European
countries minus those issued by Germany.
2. The spreads for Greek bonds narrowed significantly after
the restructuring of government debt in March 2012.

3

Oct-10

Apr-11

Oct-11

Note: The FX swap-implied U.S. dollar rate from EUR (JPY) isthe total funding cost of raising EUR (JPY) at EUR (JPY)LIBOR and converting the proceeds into U.S. dollars
through an FX swap transaction.

Global investors, under these circumstances, in general adopted a more cautious attitude toinvesting in risk assets toward the end of 2011. Stock prices in the United States and Europe
exhibited increasing nervousness in the form of higher implied volatility of U.S. stock
prices (VIX; Chart 3), which is sometimes called the "investor fear gauge," and experienced
large swings in reaction to developments in the European debt crisis and speculation about
its outcomes (Chart 4). In the United States and Europe, spreads widened between corporatebond yields and government bond yields, mainly those for the financial sector (Chart 5).
Meanwhile, long-term government bond yields in these areas declined significantly against
the backdrop of monetary easing by the Federal Reserve, increasing preferences for safe
assets among investors, and renewed concerns about a possible slowdown of the U.S.
economy, about which investors seemed to have been optimistic before. Long-term
government bond yields were at historically low levels, even below those seen immediately
after the failure of Lehman Brothers in 2008 (Chart 6).

In early 2012, strains in the markets were alleviated somewhat as the Bank and other major
central banks took coordinated measures (described below) and the European Central Bank
supplied ample funds through the 3-year long-term refinancing operations (LTROs) withfull allotment (see Box 1). Pessimistic prospects regarding the U.S. economy recededsomewhat after a series of economic indicators that outperformed market expectations. In
response to these, investors' appetite for risk assets was restored somewhat, as seen insignificantly reduced U.S. dollar funding costs in the markets and in the VIX being at low
levels seen in early fiscal 2011. Stock prices were on a rising trend, with the Dow Jones
industrial stock average in the United States crossing above 13,000 for the first time since
the Lehman Brothers failure. Yield spreads between corporate bonds and government bonds
narrowed in the United States and Europe. Meanwhile, long-term government bond rates
remained low in both areas.

4Chart 4: Stock Prices

Chart 3: Implied Volatility of U.S. Stock Prices
pts (VIX)

pts
350

yen, U.S. dollars

60

14,00050

12,000300

10,000

250

40
30
8,000

United States (NY Dow)
Europe (EuroSTOXX, right scale)Japan (Nikkei 225)

20
6,000

10
Apr-10

Oct-10

Apr-11150

Apr-10

Oct-11200

Oct-10

Apr-11

Oct-11

Note: Implied volatility of the S&P500 index over the next
30-day period.

Chart 5: Yield Spreads between Corporate Bonds
and Government Bonds

Chart 6: 10-Year Government Bond Yields%
3.0
Europe5.0

United States%
United States
Germany
Japan

4.0

2.0

3.0
2.0

1.0

1.0

0.0
Apr-100.0
Oct-10

Apr-11

Oct-11

Apr-08Apr-09Apr-10

Apr-11

Note: Average yield spreads of bonds that are AA-rated
by Fitch, Moody's, or S&P, and with a residual maturity
from three to five years.

B. Conduct of Money Market Operations by the Bank

The Bank made policy decisions described below during fiscal 2011.

The Bank has pursued powerful monetary easing under the comprehensive monetary easing
policy since October 2010. Three specific decisions were made at the Monetary Policy
Meetings (MPMs) in October 2010: first, clarification of the Bank's virtually zero interest
rate policy by changing the policy target rate for the uncollateralized overnight call rate to"around 0 to 0.1 percent"; second, explicit commitment to maintain the virtually zerointerest rate policy until the Bank judges that price stability is in sight; and third,

5

establishment of the Asset Purchase Program, through which the Bank purchases a wide
range of financial assets. The Bank also took actions necessary to ensure stability offinancial markets and strengthen the foundations for economic growth.

In addition to maintaining these measures, the Bank made decisions to further enhancemonetary easing at the MPMs held on August 4, 2011, October 27, 2011, and February 13
and 14, 2012. On August 4, the Bank increased the total size of the Program by about 10
trillion yen to about 50 trillion yen in order to ensure a successful transition from therecovery phase following the earthquake disaster to a sustainable growth path with pricestability. On October 27, the Bank increased it by about 5 trillion yen to about 55 trillion
yen. On February 13 and 14, the Bank clarified its monetary policy stance in order toovercome deflation and achieve sustainable growth with price stability, by publishing "theprice stability goal in the medium to long term." The Bank also increased the total size of
the Program by about 10 trillion yen to about 65 trillion yen (Chart 7), so as to further
support positive developments from the financial side and better ensure the economy's
return to a moderate recovery path, amid continued high uncertainty surrounding economic
developments both at home and abroad. The Bank announced its intention to complete theincreased purchases by around the end of 2012.

On November 30, 2011, the Bank, in cooperation with five other central banks -- namely,
the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve,
and the Swiss National Bank -- reduced the interest rates by 0.5 percentage point on the U.S.
dollar liquidity swap arrangement with the Federal Reserve and the U.S. dollar
funds-supplying operations, in order to enhance their capacity to provide liquidity support
to the global financial system to address heightened pressures in global money markets. The
applicable rate on the operations, which was initially the U.S. dollar overnight index swap
(OIS) rate plus 1 percentage point, was changed to the U.S. dollar OIS rate plus 0.5
percentage point.

Regarding the Fund-Provisioning Measure to Support Strengthening the Foundations for
Economic Growth (hereafter the Growth-Supporting Funding Facility), the Bank
established a new line of credit of 500 billion yen for equity investments and asset-based

6

lending (ABL) at the MPM held on June 13 and 14, 2011, with a view to further
encouraging financial institutions' efforts. The Bank, in addition, enhanced theGrowth-Supporting Funding Facility both in terms of the yen and a foreign currency, andincreased the total amount of loans by 2 trillion yen, from 3.5 trillion yen to 5.5 trillion yen,at the MPM held on March 12 and 13.

To support restoration and rebuilding of the disaster area affected by the Great East Japan
Earthquake from the financial side, the Bank decided at the MPM held on April 28, 2011 to
introduce the funds-supplying operation to support financial institutions in disaster areas.

Chart 7: Increases in Maximum Amount Outstanding of the Asset Purchase Program
trillion yen
Amountoutstanding(as of endMar. 2012)

Maximum amount outstanding
Oct. 2010

Mar. 2011

Aug. 2011

Oct. 2011

Feb. 2012

About 35

About 40

About 50

About 55

About 65

5.0

10.0

↑

15.0

↑

20.0

↑

30.0

↑

14.3

JGBs

1.5

2.0

↑

4.0

↑

9.0

↑

19.0

↑

6.3

T reasury discount bills(T -Bills)

2.0

3.0

↑

4.5

↑

4.5

4.5

3.5

CP

0.5

2.0

↑

2.1

↑

2.1

2.1

1.6

Corporate bonds

0.5

2.0

↑

2.9

↑

2.9

2.9

2.0

0.45

0.9

↑

1.4

↑

1.4

1.4

0.8

0.05

0.1

↑

0.11

↑

0.11

0.11

0.07

30.0

30.0

35.0

↑

35.0

35.0

34.6

3-month term

20.0

20.0

20.0

20.0

20.0

20.0

6-month term

10.0

10.0

15.0

15.0

15.0

14.6

End-Dec.
2011

End-June2012

End-Dec.
2012

End-Dec.
2012

End-Dec.
2012―

T otal size
Asset purchases

Exchange-traded funds(ET Fs)Japan real estate
investment trusts (J-REIT s)
Fixed-rate funds-supplying
operation against pooledcollateral

Intended time
to complete the increase

↑

48.9

Note: In addition to purchases through the Asset Purchase Program, the Bank regularly purchases JGBs at the pace of
21.6 trillion yen per year.

7Based on these decisions, the Bank conducted money market operations as described below.

First, the Bank increased the amount outstanding of the Program as its maximum amountincreased repeatedly. With the fixed-rate funds-supplying operations against pooledcollateral, the Bank provided longer-term financing of 3-month and 6-month durations at
the low interest rate of 0.1 percent. It also carried out purchases of JGBs and other financial
assets. As a result, the amount outstanding of the Program increased from 31.8 trillion yen
at the end of March 2011 to 48.9 trillion yen against its ceiling of 65 trillion yen at the endof March 2012 (Chart 8).

In more detail, regarding the fixed-rate funds-supplying operations against pooled collateral-- whose ceiling was increased from 30 trillion yen to 35 trillion yen in August 2011 -- theBank rolled over the maturing loans with the same amount, and offered new loans toincrease the amount outstanding. As a result, the balance of the operations stood at 34.6
trillion yen at the end of March 2012, a year-on-year increase of 5.8 trillion yen, and almost
reached the increased ceiling. Regarding the purchases of long-term government bonds, theBank increased the maximum amount outstanding from an initial amount of 2 trillion yen,
to 4 trillion yen in August 2011, 9 trillion yen in October, and 19 trillion yen in February
2012. In line with these increases, the Bank accelerated the pace of purchases to a great
degree: once a month with 100 billion yen per operation from April to July 2011, once or
twice a month with 150 billion yen per operation from August to October 2011, twice amonth with 250–300 billion yen per operation from November 2011 to January 2012, andthree times a month with 500 billion yen offered per operation from February 2012. The
amount outstanding was up 5.4 trillion yen year on year to 6.3 trillion yen at the end of
March 2012. The Bank also substantially increased the amounts outstanding purchased of
T-Bills, CP, corporate bonds, and other financial assets in year-on-year terms.

8Chart 8: Amount Outstanding of the Asset Purchase Program
10/10 yen1/10
trillion
70
60
50

4/10

7/10

10/10

J-REITs
ETFs
Corporate bonds
CP
T-Bills
JGBs

1/10

Maximum amountoutstanding

40
30
20

Fixed-rate funds-supplying operation
against pooled collateral10
Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12
Note: The amount outstanding before the establishment of the Asset
Purchase Program is that of the fixed-rate funds-supplying
operation against pooled collateral.

Second, in order to achieve its target rate of around 0 to 0.1 percent for the uncollateralized
overnight call rate and ensure stability of financial markets, the Bank provided ample funds
to the markets, by utilizing the variable-rate funds-supplying operations against pooledcollateral, as the operations mainly addressing short-term surplus or shortage of funds inmoney markets. With the current account balances at the Bank at substantially higher levels
than those in the previous year and perceptions of abundant liquidity stronger among market
participants, "undersubscriptions" -- where total bidding amounts fell short of the offeredamounts -- occurred in some variable-rate funds-supplying operations against pooledcollateral and some operations under the Program mentioned above.

The Bank regularly offered the 1-week and the 3-month U.S. dollar funds-supplying
operations, based on the U.S. dollar liquidity swap arrangements with the Federal Reserve,
to ensure stability of financial markets in response to increasing stress in the U.S. dollar
funding market and foreign exchange swap markets, and associated rises in U.S. dollar
funding costs. No bids had been made until October 2011, but as market stress grew further
and foreign exchange swap implied U.S. dollar rates rose substantially, small amounts ofbids were submitted in November. After the interest rate for the U.S. dollar funds-supplying
operations was lowered on November 30, the amounts of bids for the operations increased
significantly.

9

Meanwhile, the Growth-Supporting Funding Facility was conducted once every threemonths; the funds-supplying operation to support financial institutions in disaster areas,
once per month.

Box 1: Money Market Operations Conducted by the Federal Reserve and theEuropean Central Bank

As the Bank of Japan pursued powerful monetary easing as described above, the Federal
Reserve and the European Central Bank similarly took measures to reduce official interest
rates to extremely low levels, enhance liquidity provisions, and purchase financial assets
after the collapse of Lehman Brothers in the fall of 2008. Likewise, various monetaryeasing measures were adopted in fiscal 2011, which varied across the countries and areas
depending on the impairment of function of financial markets and economic and financial
environment.
In November 2010, the Federal Reserve introduced the Large-Scale Asset Purchase
Program (LSAP2), under which it purchased government bonds until June 2011, resulting
in increases in long-term government bonds among its assets, with corresponding increases
in reserve balances among its liabilities (Chart 9). After the completion of the newpurchases, the Federal Reserve continued to reinvest redemption proceeds from securities
held in medium- and long-term government bonds. On September 21, it decided topurchase government bonds with long maturities while selling the same value ofgovernment bonds with short-term maturities to extend the maturity of its government bondportfolio (the so-called Operation Twist). It also decided to reinvest redemption proceedsfrom agency bonds and agency mortgage-backed securities (MBSs) held in agency MBSs.
The size of the Federal Reserve's assets was more or less unchanged through thesemeasures, since new assets were purchased by selling and redeeming a commensurate
amount of Federal Reserve assets. Meanwhile, after reducing the interest rate on the U.S.
dollar funds-supplying operations on November 30, the Federal Reserve recorded increases
in the balances of U.S. dollars supplied to other central banks as demand for the operations
increased.

10

Chart 9: Federal Reserve Assets and Liabilities
Assets3.5

Liabilities and Net Assets

trillion U.S. dollars

3.5

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

trillion U.S. dollars

0.0

Apr-08Apr-09Apr-10

Apr-11

Apr-08Treasury bonds
Treasury bills
Federal agency debt securities
MBSs
U.S. dollar-supplying operations by foreign central banks
Short-term operations
Other assets

Apr-09Apr-10

Apr-11Banknotes
Reserve balances
Supplementary Financing Program
Reverse repurchase agreements
Other liabilities
CapitalThe European Central Bank, in response to impairment of government bond market
functions resulting from the European debt crisis, resumed purchases of government bonds
and other assets under the Securities Market Programme (SMP) introduced in May 2010.
On October 6, 2011, it restarted the covered bond purchasing program, which had
terminated in June 2010. According to the increase in the purchases of government bonds
and other assets under the SMP, the balance of the deposit facility increased as well in order
to absorb the funds supplied by the purchase (Chart 10).
To further enhance the supply of liquidity, the European Central Bank expanded operations tolend unlimited amounts of longer-term funds at the policy rate, LTROs. Six-month LTROs
that had not been offered since May 2010 were resumed on August 4, 2011; 12-month
LTROs that had not been offered since December 2009 were resumed on October 6, 2011;
and new 3-year LTROs were introduced on December 8, 2011. The 3-year LTROs inparticular attracted a large amount of bidding, 489.2 billion euros on December 21 and 529.5
billion euros on February 29, 2012. These operations resulted in large increases in the amountoutstanding of the LTROs on the asset side, and similarly large increases in deposit facility
balances, which can be regarded as excess reserves in essence, on the liability side. On

11January 18, 2012, as the European Central Bank reduced the reserve requirement ratio from 2
percent to 1 percent, the current account balance decreased accordingly.
Chart 10: European Central Bank Assets and Liabilities
Assets3.5

Liabilities and Net Assets

trillion euros

3.5

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0
Apr-08trillion euros

0.0
Apr-09Apr-10

Apr-11

Apr-08Other assets
Other securities
Securities held for monetary policy purposes
LTROs
MROs/FTOs
Gold and foreign reserves

Apr-09Apr-10

Apr-11

CapitalOther liabilities
Fixed-term deposits
Deposit facility
Current accounts
Banknotes

Notes: 1. The consolidated assets and liabilities of the European Central Bank and the national central banks inthe euro area.
2. MROs, FTOs, and LTROs denote the main refinancing operations, fine-tuning operations,and longer-term refinancing operations, respectively.

C. Developments in the Domestic Money Markets and Bond Markets

Against the background of the aforementioned market operations conducted by the Bank,
the money markets and the bond markets in Japan, the U.S. dollar funding markets, andother markets developed as follows.

1. Overnight Money Market

During fiscal 2011, the uncollateralized overnight call rate remained in line with theguideline for money market operations ("The Bank of Japan will encourage theuncollateralized overnight call rate to remain at around 0 to 0.1 percent."). There was no
day on which the uncollateralized overnight call rate exceeded 0.1 percent (Chart 11).
Immediately after the Great East Japan Earthquake, a large amount of funds was raised for a
precautionary purpose through the Bank’s operations, but as uncertainties over the future12

receded and the money market regained stability, perceptions of abundant liquidity grew
among market participants. Under these circumstances, funding demand in the call market
decreased and the uncollateralized overnight call rate declined temporarily to as low as 0.06
percent. As the funds raised through the Bank’s operations immediately after the earthquake
gradually came due, the interest rate rose modestly, but maintained stably at levels ofaround 0.08 percent through the end of March 2012 under the ample provision of funds by
the Bank.

The general collateral (GC) repo rate (S/N) declined briefly below 0.1 percent in April 2011
when a large volume of precautionary funds was supplied immediately after the Great East
Japan Earthquake, and in November when a large volume of funds flowed into the market
after foreign exchange interventions. The GC repo rate, however, basically remained stable
at 0.1 percent, the interest rate applied to the complementary deposit facility, or slightly
above it throughout the year.
Chart 11: Overnight Interest Rates%
0.20

GC repo rate (S/N)

Uncollateralized overnight call rate
0.15

Interest rate applied tothe complementary deposit facility

0.10

0.05

0.00
Apr-11

Jul-11

Oct-11

Jan-12

Notes: 1. Based on the contract date.
2. Shaded area indicates the Bank’s target policy rate for the uncollateralized
overnight call rate (around 0 to 0.1 percent).

13

Box 2: Overnight Interest Rates under the Complementary Deposit Facility and Large
Fund Supplies

Overnight interest rates were very stable during fiscal 2011, with various short-term interest
rates converging at around 0.1 percent. The convergence was due to the fact that thecomplementary deposit facility kept these rates from falling significantly below 0.1 percent,while ample supplies of funds by the Bank ensured that rates did not rise significantly
above 0.1 percent.

The complementary deposit facility is a monetary operation instrument in which current
account balances at the Bank that exceed the required reserves (the so-called excess
reserves) are remunerated. During fiscal 2011, the rate applied to the facility was 0.1
percent. With the complementary deposit facility in place, when prevailing market interest
rates are below 0.1 percent, market participants raise funds in the market and simply deposit
them in their current accounts at the Bank to earn income from the 0.1 percent yield. Thesetransactions lead a rise in market interest rates up to 0.1 percent. The facility is designed tomaintain the functioning of the money market, by setting a floor under market interest rates
and leaving incentives for market transactions even when the Bank supplies ample funds.

Financial institutions raised funds as a precaution immediately after the Great East Japan
Earthquake, but this demand gradually subsided as uncertainties over future market
conditions receded. As a result, some of these funds became unnecessary, putting strong
downward pressures on market interest rates. In this situation, city banks and others
engaged in arbitrage trading in the uncollateralized call market, raising funds invested byfinancial institutions not eligible for the complementary deposit facility -- including money
market mutual funds at low rates around 0.06 percent -- and depositing them in their current
accounts at the Bank to earn yields of 0.1 percent. Similar transactions were seen in therepo market as well. With such arbitrage trading, the complementary deposit facility
functioned as an instrument to maintain a floor of 0.1 percent for the uncollateralized callrate and GC repo rates even under strong downward pressures on interest rates.

Downward pressures on interest rates subsided gradually as funds raised immediately after

14

the earthquake gradually came due, but market interest rates remained stable without
increasing significantly; the uncollateralized call rate at roughly 0.08 percent, and the GC
repo rate at around 0.10 percent. While the uncollateralized call rate was somewhat lower
than GC repo rates, total funding costs, including intermediary fees, were considered to be
more or less equivalent. Market participants choose the lowest-cost means available whenraising funds, resulting in arbitrage among various funding tools. The Bank continued tosupply sufficient funds to accommodate market demand, and thereby average successful bid
rates in all short-term funds-supplying operations were reduced to 0.10 percent. Under thesecircumstances, the uncollateralized call rate and GC repo rates converged to the funding
cost through the Bank’s operations of 0.10 percent (Chart 12).
Chart 12: GC Repo Rate and Successful Bid Rates of
the Funds-Supplying Operations%
0.16

GC repo rate (S/N)

0.14
0.12
0.10

0.08
0.06

Average successful bid rates in the variable-ratefunds-supplying operations against pooled collateralApr-10

Oct-10

Apr-11

Oct-112. Market for Term Instruments

Against the backdrop that overnight interest rates were stable at low levels with ample
funds provided by the Bank, confidence in future funding conditions increased andexpectations that short-term interest rates would be rising were reduced significantly amongmarket participants. Under the Asset Purchase Program, the Bank offered the fixed-ratefunds-supplying operations against pooled collateral, with which longer-term funds of
3-month and 6-month periods were supplied at 0.1 percent, and some of the funds raised
through these operations were invested in longer-term assets. Outright purchases of T-Bills
through the Program also contributed to a reduction in interest rates on term instruments,

15

mainly those for the longer term where room for further reduction remained. During fiscal
2011, while the amount of each issue of T-Bills (3-month) increased repeatedly fromaround 4.8 trillion yen in April 2011 to around 6.0 trillion yen in March 2012 (Chart 13),demand was strong among investors and the yields continued to decline as a trend (Chart
14). From August 2011 onward, rates for all terms up to one year virtually converged to 0.1
percent, which is equivalent to the applied interest rate of the complementary deposit
facility.
Chart 13: Amount of Each Issue of T-Bills(3-Month)7

trillion yen

Chart 14: T-Bill Rates in the Secondary Market
0.15

6

%

0.14

1-year0.13

6-month3-month

0.12
0.11

5

0.10
0.09
0.08

4
Apr-11

Jul-11

Oct-11

Jan-12

Apr-11

Jul-11

Oct-11

Jan-12

Note: Offering amount at each auction date.

Box 3: Short-Term Government Bond Yields in Japan and the United States

In Japan, yields on short-term government bonds (T-Bills) generally stayed at around 0.1
percent, which is equivalent to the interest rate applied to the complementary deposit
facility. Interest rates on T-Bills temporarily fell below 0.1 percent at auctions for issuance
held in August and September 2011 (Chart 15). Around that period, the European debt
crisis and concerns about the U.S. federal government debt ceiling problem intensified,
which triggered "flight to quality" among investors globally. Under these circumstances,foreign investors, which were not eligible for the complementary deposit facility, increased
their investment in Japan's T-Bills (Chart 16). This seems to have been one reason why thefloor for market interest rates that the facility is supposed to set did not fully function at thattime. However, the downward deviation from the floor of 0.1 percent was mostly temporaryand small. Yields on the GC repo transactions, which are used as a funding tool for dealers'

16holdings of T-Bills and as a short-term investment vehicle essentially equivalent to T-Bills,
remained at around 0.10 percent, the interest rate applied to the complementary deposit
facility (see Box 2).
Chart 15: T-Bill Rates at Issuance Auction(3-Month)
0.12

Chart 16: Net Purchases of Short-Term
Securities by Nonresidents
trillion yen%

Secondary market yields

20

Maximum accepted yields
0.11

16

Average accepted yields
12

0.10

8
4

0.09
0

-4

0.08
Apr-11

Jul-11

Oct-11

Apr-11

Jan-12

Jul-11

Oct-11

Jan-12

Notes: 1. Securities with a residual maturity of up to one year
(T-Bills, etc.).
2. Figures represent cumulative net purchases.(April 3, 2011 = 0).

In the United States, reserve balances (required reserves and excess reserves) of financial
institutions with the central bank are remunerated at 0.25 percent. As in Japan, when theEuropean debt crisis intensified, investors "fled to quality," which exerted strong downward
pressure on yields for T-bills. However, unlike Japan, yields moved down significantly
below 0.25 percent, the remuneration rate on reserve balances, and remained around 0
percent for some time (Chart 17). The GC repo rate was also significantly below 0.25
percent.
Chart 17: GC Repo Rate and Yields on T-Bills in the United States
0.30%

GC repo rate (O/N, 5-day moving average)
Yields on T-bills (3-month)

0.25
Remuneration rate on reservebalances

0.20
0.15

0.10
0.05
0.00

-0.05
Apr-10

Oct-10

Apr-1117

Oct-11

There are many factors behind these differences between Japan and the United States. Someof them are as follows.

First, in Japan, the city banks and other financial institutions that are eligible for thecomplementary deposit facility have a strong presence as lenders or investors in the GC
repo and short-term government bond markets. When these lender/investors became morerisk-averse, they considered their current accounts at the Bank "safe assets," and parked
funds there to earn yields of 0.1 percent. As a result of these trades, the GC repo andshort-term government bond yields were maintained at 0.1 percent or above in most cases.
In addition, some city banks and securities companies (also eligible for the complementarydeposit facility) made arbitrage transactions between the GC repo market and thecomplementary deposit facility, which also prevented the rates from falling below 0.1
percent.

By contrast, in the United States, money market mutual funds (MMMFs) and other market
participants not eligible for remuneration on reserve balances have a strong presence in the
GC repo and short-term government bond markets (Chart 18). This resulted in large
amounts of funds being invested even at rates below the remuneration rate of 0.25 percent.
As market sentiment deteriorated and concerns about counterparty risks associated with
European financial institutions intensified, MMMFs transferred funds that had been
invested in U.S. dollar-denominated CP and certificates of deposit (CDs) issued by
European financial institutions into "safe assets" of GC repos and short-term government
bonds. This further increased the amount of funds available at rates below 0.25 percent in
the GC repo market and T-bill market.

18

Chart 18: U.S. Money Market (End-December 2011)
By Lender

By Borrower
billion U.S. dollars

State and local governments
166.5
GSEs (net)
110.4

REITs
210.0
Brokers anddealers (net)
213.1

MMMFs
484.0

U.S.-charteredcommercial banks (net)273.4

Mutual funds
115.1
Others153.8

Foreign banking offices
in U.S.(net)315.6

Discrepancy
172.6

Others190.3

Note: Figures are for federal funds and security repurchase agreements.

Even under these circumstances, market interest rates would have converged at around 0.25
percent if the U.S. commercial banks and other institutions eligible for remuneration onreserves had engaged in arbitrage by raising funds in the GC repo market at rates below
0.25 percent and depositing them in their reserve at the Federal Reserve to earn yields of
0.25 percent. In fact, during 2010, the GC repo rate, which stayed at around 0.15 percent,
did not significantly deviate from the remuneration rate on reserve balances (0.25 percent).
Following changes in the deposit insurance system in April 2011, however, U.S.
commercial banks needed to pay a premium charged on the short-term borrowing in themoney markets. In other words, U.S. commercial banks incurred additional costs forengaging in the arbitrage described above, making such transactions less common, and GC
repo rates more often deviated from 0.25 percent. In the United States, non-reserve holders
such as brokers and dealers, which are not eligible for the remuneration on reserves, do nottake account of the level of the remuneration rate in their trading. This differs from Japan,
where tanshi companies and securities companies are eligible for the complementarydeposit facility (Chart 19).

In summary, in the United States, a strong market presence of players not eligible for19remuneration on reserves and increasing difficulties in arbitrage by eligible institutions
make it more likely that the GC repo rate and T-bill yields will fall significantly below the
remuneration rate of 0.25 percent.

Chart 19: Eligible Institutions for Complementary Deposit Facility in Japan andThose for Remuneration on Reserve Balances in the United States
Japan

United States✓✓

Tanshi companies and securities companies(brokers and dealers), etc.

✓

✕

MMMFs

✕

✕

Life insurance companies, etc.

✕✕

Nonresidents✕✕

Institutions subject to thereserve requirement (banks, etc.)
Institutions NOT subject to the reserve requirement

3. JGB Market

As the yield curve flattened at 0.1 percent for up to one year, downward pressure on interest
rates spilled over into yields on 2-year JGBs. Under the Bank's comprehensive monetaryeasing policy framework, so-called policy duration effects seemed to have contributed to
the reduction of interest rates and outright purchases of JGBs with maturities of one to two
years through the Asset Purchase Program provided market participants with opportunities
to sell their JGB holdings on a large scale on a regular basis, increasing investors'
confidence in 2-year investments. Yields on 2-year JGBs were around 0.20 percent at the
beginning of fiscal 2011, but decreased further during the year (Chart 20). The yields werein the 0.12–0.13 percent range in most cases after October 2011, when the maximum
amount outstanding of JGB purchases through the Program was raised to 9 trillion yen. The
yields declined further and were very stable at around 0.11 percent after February 2012,
when the maximum amount outstanding was increased to 19 trillion yen.

Yields on 5-year and 10-year JGBs also declined to levels generally lower than those seen
under the quantitative easing policy between 2002 and 2006, with the exception of
immediately prior to the "VaR shock" in 2003. They have remained more or less flat at low

20

levels in 2012, even after share prices turned to begin to increase (Chart 21). Meanwhile,amid growing concerns about the European debt crisis, the large cumulative government
debt of Japan and the consequences of debate on a possible increase in the consumption tax
rate gained increasing attention.
Chart 20: Yields on JGBs (2-Year)
0.25

2.0

%
JGBs (2-year)

T-Bills (1-year)
0.20

1.6

%
10-year5-year

T-Bills (3-month)

1.2

0.15

0.8

0.10

0.4

0.05

0.0

0.00
Apr-11

Chart 21: Yields on JGBs (5-Year and 10-Year)Jul-11

Oct-11

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12

Jan-12

4. CP and Corporate Bond Markets

Yields on credit instruments such as CP issuing rates and corporate bond yields remained
low and stable, with the exception of impacts of rating downgrades on some corporate
issuers (Charts 22 and 23). Although global risk aversion among investors resulted inwidening of credit spreads for corporate bonds in the United States and Europe, the impact
was generally limited in Japan. Meanwhile, the Bank's outright purchases of CP andcorporate bonds through the Asset Purchase Program gave market participants confidence
that it was serving as a regular purchaser, and thereby contributed to low and stable risk
premiums.

21

Chart 23: Yield Spreads between
Corporate Bonds and JGBs

Chart 22: CP Issuance Rates
0.25%
3-month1.5%

A-rated

1-month0.20

AA-rated
1.0

0.15
0.10

0.5

0.05
0.00
Apr-11

0.0
Jul-11

Oct-11

Jan-12

Apr-11

Note: For CP issued by business companies.

Jul-11

Oct-11

Jan-12

Notes: 1. Five-year residual maturity. Yields on corporate bonds are………...based on the expanded pool of issues with maturity of………...three to seven years.
……...2. Fluctuations on April 2011 and October 2011 are due mainly………...to rating downgrades on some issues.

5. U.S. Dollar Funding Market and Foreign Exchange Swap Market

Toward the end of 2011, as concerns about the European debt crisis heightened, U.S. dollar
funding costs rose significantly. The U.S. dollar interbank interest rate (LIBOR) hit a level
unseen since July 2009, and the foreign exchange swap-implied U.S. dollar rate from yenrose to the 1.2 percent level toward the end of November 2011 (Chart 24). On November 30,
six major central banks including the Bank took coordinated measures. Due partly to theseactions, there was no turbulence in money markets around the year-end, although market
participants had been worried about potential deterioration of market conditions. After theturn of the year, the concerns subsided among market participants. Both the U.S. dollar
LIBOR and foreign exchange swap-implied U.S. dollar rate from yen began to decline at a
rapid pace, below the interest rate for the U.S. dollar funds-supplying operations toward theend of March 2012.

22

Chart 24: U.S. Dollar LIBOR and FX Swap-Implied
U.S. Dollar Rates from JPY (3-Month)
1.5%

Interest rates applied to the U.S. dollar funds-supplying operations
FX swap-implied U.S. dollar rate from JPY
U.S. dollar LIBOR

1.2
0.9

0.6
0.3
0.0
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11
Note: For the FX swap-implied U.S. dollar rate from JPY, see the note to Chart 2.

Box 4: Foreign Exchange Swap Market and the U.S. Dollar Funds-Supplying
Operations

As the worsening of the European debt crisis raised concerns about the business conditionsof European financial institutions that held large volumes of government bonds issued by
European countries, caution regarding counterparty risks of European financial institutions
increased in global financial markets. Especially in the U.S. dollar funding market andforeign exchange swap market, lenders became more risk-averse from the summer toward
the end of 2011. U.S. dollar funding costs rose significantly, not only through unsecuredtransactions but also through foreign exchange swaps.

While U.S. dollar funding conditions of Japanese financial institutions were better thanthose of European financial institutions, Japanese financial institutions raised larger
amounts of U.S. dollars than required as a precaution through a variety of measures
including foreign exchange swaps in order to meet their funding requirements for the end of
2011. Toward the end of 2011, as financial institutions became increasingly reluctant tolend U.S. dollars, foreign exchange swap-implied U.S. dollar rates rose substantially, as the
precautionary liquidity demand combined with ordinary funding needs for U.S. dollars.
Partly because the interest rate on U.S. dollar funds-supplying operations was the U.S.
dollar OIS rate plus 1 percentage point -- which was not sufficiently attractive compared toother funding measures -- until November 2011 the demand for the operations was rather

23

small (Chart 25). Many market participants mentioned nonetheless that the operations hadenhanced market confidence as a backstop in the event of emergency.

On November 30, the six central banks announced coordinated actions to reduce the interest
rate applied to the U.S. dollar funds-supplying operations to the U.S. dollar OIS rate plus
0.5 percentage point. Thereafter, the demand for the Bank's U.S. dollar funds-supplying
operations surged, putting downward pressure on foreign exchange swap-implied rates,
which had been stubbornly elevated until then. In early 2012, the operations wereextensively used to raise funds over the fiscal year-end. However, the demand for theoperations decreased rapidly, as U.S. investors resumed investing their U.S. dollar funds
actively in the money markets after 2012 began, and as a result foreign exchange swap
implied rates declined sharply.
Chart 25: Bidding Amounts of the U.S. Dollar
Funds-Supplying Operations

0.6

FX swap-implied U.S.
dollar rate from JPY% minus interest rate on
the U.S. dollar fundssupplying operations

billion U.S. dollars
15

0.3

12

0.0

9

-0.3

6
Biddingamounts (rightscale)

-0.6

3

-0.9
Apr-11

0Jul-11

Oct-11

Jan-12

Notes: 1. For the FX swap-implied U.S. dollar rate from JPY,
see the note to Chart 2.
2. "Bidding amounts" denotes those of the U.S. dollar
funds-supplying operations (3-month).

With the four major central banks conducting the U.S. dollar operations, the European
Central Bank accounted for the majority of the total amount outstanding (Chart 26). As ofthe end of March 2012, the European Central Bank held 33 billion U.S. dollars,
representing more than 70 percent of the total; the Bank of Japan held 13.5 billion dollars,accounting for less than 30 percent.

24

Chart 26: Amount Outstanding of the U.S. Dollar
Funds-Supplying Operations
billion U.S. dollars
120

Swiss National Bank

100
80
60

European

40

Central Bank

20

Bank of Japan0
Aug-11

Oct-11

Dec-11

Feb-12

Note: No bid was submitted to the Bank of England during the period
or to the other three central banks from April to July 2011.

D. Developments in the Foreign Exchange Market and the Domestic Stock Market

During this period, the foreign exchange market and the domestic stock market weresignificantly influenced by developments in global financial markets, given the relatively
strong presence of foreign investors in the two markets.

The yen appreciated against the U.S. dollar in the course of the summer of 2011, when
pessimistic views on the U.S. economy prevailed and the Federal Reserve clarified theduration of the low interest rate policy on condition that economic conditions and inflation
developed as forecasted. Toward the end of 2011, the yen appreciated further, trading
between 75 and 80 yen against the dollar (Chart 27). Responding to this situation, theJapanese government conducted foreign exchange interventions to purchase dollars and sell
yen in August and around the end of October 2011. The amounts of these interventions
were substantial, setting a new historical record for the intervention per day: 4.5 trillion yen
on August 4 and 8.1 trillion yen on October 31.

Stock prices continued on a downtrend toward the end of 2011 against the backdrop ofincreasing risk aversion among investors and concerns about global economic slowdown(Chart 28). Japanese stock prices underperformed U.S. stock prices through the end of 2011,25

reflecting the impacts of the Great East Japan Earthquake and the flooding in Thailand,
together with the yen's trading at historically high levels against the U.S. dollar. The Nikkei
225 Stock Average hit a post-quake bottom (March 15, 2011).

Since the beginning of 2012, as nervousness about the European debt crisis subsided,
investors' risk appetites were gradually restored and views on the U.S. economic outlook
grew less pessimistic. Two-year U.S. Treasury yields rose while 2-year JGB yields
remained low as mentioned, resulting in a moderate widening of the interest rate
differentials between them. In addition, given Japan's trade deficit -- which was monitored
closely by foreign investors -- the yen started depreciating against the U.S. dollar and wasaround 82 to 83 yen at the end of March. The Nikkei 225 Stock Average rose and hit a
post-quake high in March, against the background of rising U.S. stock prices and theweaker yen.
Chart 27: Interest Rate Differential between
Japan and the United States, andthe U.S. Dollar/Yen Exchange Rate

Chart 28: U.S. Dollar/Yen Exchange Rateand Stock Prices

yen

%
1.2

yen

yen
96

12,000

1.0
0.8

84

0.4

80

0.2

76

0.0

72
Oct-10

Apr-11

11,00090

10,000

85

9,000

80

8,000

75

88

0.6

Apr-10USD/JPY (right scale)

92
Interest rate differential between
Japan and the United States (2-year)

95

Nikkei 225

USD/JPY (right scale)Apr-10

Oct-1126

Oct-10

Apr-11

Oct-11

III. Money Market Operations and the Bank's Balance Sheet
A. Changes in the Bank's Balance Sheet
Partly reflecting the results of the money market operations, the size of the Bank's balance
sheet amounted to 139.6 trillion yen as of the end of March 2012 (Chart 29).

Chart 29: The Bank's Balance Sheet (End-March 2012)
trillion yen, figures in parentheses are changes from end-Mar. 2011
AssetsLiabilities and net assets

Long-term JGBs

64.4

Short-term funds-supplying operations

Banknotes

80.8 ( -0.1)

1.2 (-29.9)

Current account balances

34.4 ( -6.3)

Outright purchases of T -Bills

0.4

Others24.4 ( +3.7)

Other short-term funds-supplying
operations

0.8 (-25.0)

T otal liabilities and net assets

139.6 ( -2.7)

Asset Purchase Program( +6.2)( -5.0)48.9 (+17.1)

Funds-supplying operations against
pooled collateral

34.6( +5.8)Outright purchases of JGBs

6.3

( +5.4)Outright purchases of T -Bills

3.5( +2.1)

Outright purchases of CP

1.6( +1.3)Outright purchases of corporate bonds

2.0( +1.8)Outright purchases of ET Fs

0.8( +0.7)

Outright purchases of J-REIT s

0.1( +0.1)

Complementary lending facility

0.0( -0.0)Growth-Supporting Funding Facility

3.1( +0.9)Funds-supplying operations to support
financial institutions in disaster areas

0.5( +0.5)

Others21.6( +2.5)

T otal assets

139.6( -2.7)

Notes: 1. Figures are preliminary.
Notes: 2. "Long-term JGBs" and "outright purchases of T-Bills" do not include those purchased through the Asset Purchase………..Program.
Notes: 3. "Other short-term funds-supplying operations" includes variable-rate funds-supplying operations against pooled………..Collateral, purchases of Japanese government securities (JGSs) with repurchase agreements, and purchases of CP with………..repurchase agreements.

In terms of changes from the end of March 2011, the amount outstanding of long-term
JGBs increased by 6.2 trillion yen. The amount outstanding of the Asset Purchase Program
increased by 17.1 trillion yen, reflecting the pursuit of powerful monetary easing under thecomprehensive

monetaryeasingframework.

27

The

amountoutstanding

of

the

Growth-Supporting Funding Facility and that of the funds-supplying operations to support
financial institutions in disaster areas increased by 0.9 trillion yen and 0.5 trillion yen,respectively.

Meanwhile, the amount outstanding of T-Bills outright purchased as short-term
funds-supplying operations and that of the other short-term funds-supplying operations
decreased by 5.0 trillion yen and 25.0 trillion yen, respectively. While the amountoutstanding of T-Bills purchased through the Program increased, that of T-Bills outrightpurchased as short-term funds-supplying operations decreased. The decrease in the amountoutstanding of the other short-term funds-supplying operations mainly reflected a decreasein that of the variable-rate funds-supplying operations against pooled collateral. This was
because demand for funds was increasingly fulfilled by fund provisions and asset purchases
through the Program, and because an increase was offset in the amount outstanding of thevariable-rate funds-supplying operations at the end of March 2011 -- which was utilizedbased on growing precautionary demand for funds immediately after the Great East Japan
Earthquake -- as uncertainties among market participants about future funding conditions
decreased subsequently (Chart 30).
Chart 30: Amounts Outstanding of Short-Term Funds-Supplying Operations
70

trillion yen
Outright purchases of T-Bills

60
50
40

Variable-rate funds-supplying operations against pooled collateralat the Head Office
Variable-rate funds-supplying operations against pooled collateralat All Offices
Purchases of JGSs with repurchase agreements

30

Purchases of CP with repurchase agreements
20

Special funds-supplying operations to facilitate corporate financing
100

Fixed-rate funds-supplying operations against pooled collateral(Asset Purchase Program)

Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11

Notes: 1. Based on the exercise date.
Notes: 2. "Fixed-rate funds-supplying operations against pooled collateral (Asset Purchase Program)" includes those
before the establishment of the Program (October 28, 2010).

28

B. Developments in Current Account Balances at the Bank
During fiscal 2011, while the asset side of the Bank's balance sheet remained elevated, thecurrent account balances at the Bank, on the liability side, generally were in the range of 25
to 35 trillion yen, albeit with some fluctuations (Chart 31). At the end of March 2012,
current account balances at the Bank stood at 34.4 trillion yen. They decreased by 6.3
trillion yen, compared to the end of March 2011, when a large amount of funds was raisedby many financial institutions as a precaution following the Great East Japan Earthquake. In
fiscal 2011 as a whole, however, current account balances at the Bank remained at asignificantly higher level than those in fiscal 2010.
Chart 31: Current Account Balances at the Bank
45

trillion yen

40

35
30
25
20
15
10

5
0
Apr-10

Oct-10

Apr-11

Oct-11

Box 5: Current Account Balances at the Bank by Sector, and Overnight Rates

Fluctuations in current account balances at the Bank were larger during fiscal 2011 thanduring fiscal 2010, and such swings in individual sectors exhibited some characteristics
described below.

Current account balances at the Bank increased significantly in the June 2011, September,
December, and March 2012 reserve maintenance periods. Large volumes of JGB
redemptions around the 20th of June, September, December, and March as well as
payments of various fiscal funds during the March reserve maintenance period brought suchincreases. By sector, "other institutions subject to the reserve requirement," which received
large JGB redemption proceeds, experienced substantial increases in their current accountbalances at the Bank during the June, September, and December reserve maintenance29

periods (Charts 32 and 33). Throughout the year, changes in the current account balances at
the Bank of such a specific sector contributed significantly to the changes in the total.

The current account balances at the Bank had been at high levels until the October reserve
maintenance period, the breakdown of which indicates that those of other institutions
subject to the reserve requirement declined, but those of city banks and foreign banks
increased substantially. A series of fund flows associated with foreign exchangeinterventions contributed greatly to the difference among sectors. When the government
conducts foreign exchange interventions of buying dollars and selling yen, yen funds arepaid out from the Foreign Exchange Funds Special Account to the market for thesettlements. Market participants engaged in a wide variety of market transactions for in thecourse of their position adjustments. In this process, a substantial amount of yen funds
flowed into the current accounts at the Bank of city banks and foreign banks, which
generally had a large share in foreign exchange trading.
Chart 32: Current Account Balances at the
Bank by Sector
trillion
yen
45
40
35

Chart 33: Changes in Current AccountBalances by Sector

trillion
Other institutions holding current accounts with the BOJ
yen
Other institutions subject to the reserve requirement10
Foreign banks
Trust banks
Regional banks and regional banksⅡCity banks
5

Other institutions subject to the reserve
requirement
Institutions holding current accounts except "otherinstitutions subject to the reserve requirement"
Current account balances

30

25

0

20
15

-5

10
5
0
Apr-11-10

Jul-11

Oct-11

Jan-12

Apr-11

Jul-11

Oct-11

Jan-12

Note: Changes in the average amount outstanding for eachreserve maintenance period. See note 2 to Chart 32.

Notes: 1. Average amount outstanding for each reserve
maintenance period.
2. "Other institutions holding current accounts
with the BOJ" indicates those that are notsubject to the reserve requirement but holdcurrent accounts at the Bank.

Looking at the relationship between the current account balances at the Bank and overnightinterest rates such as the uncollateralized call rate and the GC repo rate, significant
increases in the current account balances at the Bank due to large JGB redemptions did not30necessarily exert strong downward pressure on overnight interest rates (Chart 34). This was
because the JGB redemption proceeds were not immediately invested in the market but
rather retained for some time as excess reserves held by some financial institutions. On theother hand, when foreign exchange interventions caused increases in the current accountbalances at the Bank, city banks and foreign banks -- which received the surplus funds -actively invested them in the GC repo market, for example, and thus downward pressures
on interest rates emerged quickly. As described above, the impact of changes in thecurrent account balances at the Bank on overnight interest rates may vary depending on
what causes the changes and what kind of institutions hold the excess reserves.
Chart 34: Current Account Balances at the Bank and Overnight Interest Rate
trillion yen

%

40
35

Current account balances

0.11

30
25

0.10

GC repo rate (S/N, right scale)

20
15
10
Apr-11

0.12

0.09
0.08

Uncollateralized overnight call rate(right scale)Jul-11

Oct-11

0.07
0.06

Jan-12

Note: Averaged for each reserve maintenance period.

Box 6: Amounts Outstanding in the Call Markets
The amounts outstanding in the call markets, where financial institutions make final
adjustments of their cash positions, remained at a low level (Chart 35). This reflected thefact that market participants held a large amount of excess reserves amid the Bank's
provision of ample funds, and therefore it became less necessary for individual financial
institutions to fine-tune their daily outstanding balances of current accounts held at theBank. This situation was also observed under the quantitative easing policy from 2002 to
2006.

31

Chart 35: Amounts Outstanding in the Call Market
30
25

trillion yen
Collateralized call transactions
Uncollateralized call transactions

20

15
10
5
0
CY 01 02 03 04 05 06 07 08 09 10 11 12
Note: Transactions intermediated by tanshi companies(monthly average balance).

The amounts outstanding of uncollateralized call transactions through tanshi companies(money market brokers) generally remained at around 3-5 trillion yen, with a moderate
downtrend. By sector, as in fiscal 2010, for the lending side a large share was accounted forby trust banks (primarily mutual fund accounts) and life insurance companies, which lent
funds at rates below the interest rate applied to the complementary deposit facility (0.1
percent), as the uncollateralized overnight call rate remained below 0.1 percent. For the
borrowing side, city banks and regional banks accounted for a substantial portion (Chart36). Reflecting the decreased transaction volume in the uncollateralized call market, theweighted average of the uncollateralized overnight call rate (the Bank's target rate) was
susceptible to idiosyncratic factors -- such as borrowing by some financial institutions not
to meet their actual funding demand but to test their funding conditions -- and occasionallydeviated somewhat from interest rate levels of other transactions reflecting real fundingneeds.

32

Chart 36: Amounts Outstanding in the Uncollateralized Call Market by Sector
By Lender

By Borrower
trillion yen
25trillion yen
Others25
Trust banks
Securities companies
20
Foreign banks
Regional banks and regional banks Ⅱ
City banks
15

OthersSecurities companies
Foreign banks
Regional banks and regional banks Ⅱ
City banks

20
15
10

10

5

5
0

0

CY 01 02 03 04 05 06 07 08 09 10 11 12

CY 01 02 03 04 05 06 07 08 09 10 11 12

Notes: 1. Transactions intermediated by tanshi companies (monthly average balance).
2. "City banks" includes city banks, Shinsei Bank, and Aozora Bank. "Securities companies" includes
securities finance companies.

Meanwhile, the amount outstanding in the collateralized call market increased somewhat
from fiscal 2010, albeit with some fluctuations. By sector, the share of regional banks on
the lending side and that of tanshi companies on the borrowing side rose (Chart 37).
Although not many regional banks participate directly in the GC repo market, fund flows
across the two markets were seen in such a way that tanshi companies borrowed funds fromthe regional banks in the collateralized call market and invested them in the GC repo
market (Chart 38).
Chart 37: Amounts Outstanding in the Collateralized Call Market by Sector
By Borrower
25
20
15

By Lender

trillion yen
OthersTanshicompanies
companies
Tanshi
Securities companies
Foreign banks
Regional banks and regional banks Ⅱ
City banks

25
20
15

10

10

5

5

0
CY 01 02 03 04 05 06 07 08 09 10 11 12
Note: See the notes to Chart 36.

33

trillion yen
OthersTrust banks
Securities companies
Foreign banks
Regional banks and regional banks Ⅱ
City banks

0
CY 01 02 03 04 05 06 07 08 09 10 11 12

Chart 38: Fund Flows between the Collateralized Call Market and the GC Repo Market

Regionalbanks
Few regional banks
participate directly in the GC repo
market.

Lending funds in thecollateralized call market

Tanshicompanies

Securities
companies
Lending funds
in the GC repo market

GC repo market

C. Developments in Excess and Shortage of Funds

The current account balances at the Bank increase or decrease in response to receipts andpayments of banknotes and treasury funds between financial institutions and the Bank or thegovernment, -- called excess and shortage of funds -- as well as to the money market
operations of the Bank. Regarding banknotes, (1) withdrawals of banknotes from the Bankby financial institutions (issuance of banknotes) constitute sources of decrease in current
account balances, while (2) deposits of banknotes at the Bank by financial institutions(withdrawal of banknotes from circulation) constitute sources of increase. As for treasury
funds, (1) issuance of Japanese government securities (JGSs) and payments of taxes(treasury fund receipts) result in transfers of funds from current accounts of financial
institutions to the government account and constitute sources of decrease in current accountbalances, while (2) redemptions of JGSs, pension payments, and other fiscal expenditures(treasury fund payments) from the government account to current accounts of financial
institutions at the Bank constitute sources of increase.

34

The Bank conducts money market operations, taking into account day-to-day changes incurrent account balances resulting from receipts and payments of banknotes and treasury
funds, or excess and shortage of funds. Thus, excess and shortage of funds are importantpreconditions for the money market operations conducted by the Bank. The following
relationships hold between changes in current account balances at the Bank and excess andshortage of funds.

Changes in current account balances at the Bank= money market operations + excess and shortage of funds.

Excess and shortage of funds= changes in the factor of banknotes + changes in the factor of treasury funds andothers.

In fiscal 2011, as in fiscal 2010, the money market operations conducted by the Bank
contributed to increasing current account balances at the Bank, while changes in excess andshortage of funds contributed to decreasing current account balances at the Bank, mainly
due to changes in treasury funds and others (Charts 39 and 40). However, the shortage offunds amounted to 25.3 trillion yen, down significantly from 37.9 trillion yen in fiscal 2010
(Chart 41).

Chart 39: Excess and Shortage of Funds, andMarket Operations

Chart 40: Banknotes, and Treasury Funds
and Others

Excess and shortage of funds

Banknotes
Treasury funds and others
Excess and shortage of funds

Market operations
trillion yen
10↑ Excess of funds

Current account balances

10

5

5

0

0

-5

-5

-10

-10

-15

↓ Shortage of funds
Apr-11

Jul-11-15

Oct-11

Jan-12

trillion yen↑ Excess of funds↓ Shortage of funds
Apr-11

35

Jul-11

Oct-11

Jan-12

Chart 41: Breakdown of Excess and Shortage of Funds
trillion yen
Fiscal 2010

Fiscal 2011y/y chg.

Banknotes

-3.6

+0.1

+3.7

T reasury funds and others

-34.3

-25.4

+8.9

Fiscal payments and revenues

+32.3

+34.8

+2.4

JGBs (over one year)

-60.6

-44.3

+16.3

T -Bills

-9.2

-26.4

-17.3

Foreign exchange

+2.5

+9.7

+7.2

OthersExcess and shortage of funds

+0.7

+0.9

+0.3

-37.9

-25.3

+12.6

80.9

80.8

(Reference)
Outstanding balance of banknotes

Notes: 1. Positive figures indicate an increase in the current account balances at the Bank, or excess of funds;
negative figures indicate a decrease in the current account balances at the Bank, or shortage of funds.
2. For banknotes, negative figures indicate net issuance; for treasury funds and others, positive figuresindicate net payment, and negative figures indicate net receipts.
3. Figures for outstanding balance of banknotes are as of the end of the fiscal year.

The following section reviews changes in the factor of banknotes and changes in the factorof treasury funds and others, respectively.

1. Changes in Banknotes

In fiscal 2011, changes in banknotes turned to net redemptions, from net issuance of 3.6
trillion yen resulting from heightened demand for banknotes immediately after the Great
East Japan Earthquake in fiscal 2010. They constituted 0.1 trillion yen of the sources ofincrease in current account balances, or excess of funds.

The cumulative changes in banknotes during fiscal 2011 showed the following
developments. Although net issuance increased significantly toward the end of fiscal 2010,
some banknotes were redeemed in early fiscal 2011 amid declining demand and thereforechanges in banknotes shifted somewhat toward excess of funds compared to fiscal 2010.
Seasonal changes in banknotes after that remained more or less unchanged from theprevious year. The amount of shortage of funds increased sharply toward the end of
December 2011, reaching 3.1 trillion yen, and changes in banknotes turned to excess of36

funds after 2012 began (Chart 42). The outstanding balance of banknotes stood at 84.0
trillion yen at the end of December 2011 and at 80.8 trillion yen at the end of March 2012
(Chart 43). Year on year, these figures represented an increase of 2.0 percent and a decreaseof 0.1 percent, respectively.

Taking a longer-term perspective, the ratio of outstanding balance of banknotes to nominal
GDP, which had remained more or less constant at a certain level previously, continued tofollow a clear uptrend from the mid-1990s (Chart 44). The seasonally adjusted outstandingbalance of banknotes trended up at an almost constant pace in recent years (Chart 45). The
outstanding balance of banknotes increased and deviated considerably from this trend
toward the end of fiscal 2010 due to heightened precautionary demand following the Great
East Japan Earthquake. After fiscal 2011 began, the outstanding balance of banknotes
decreased temporarily reflecting a decline in such demand, but did not return to thepre-disaster trend. It continued to deviate upward from the trend and again started to follow
an uptrend around June 2011. Reflecting such steady developments in the outstandingbalance of banknotes, its ratio to nominal GDP rose further.

Chart 43: Outstanding Balance of Banknotes

Chart 42: Cumulative Changes in Banknotes
in terms of Excess and Shortage ofFunds
4trillion yen↑ Excess of funds
Fiscal 201184

trillion yen

82

2

80
0

78

↓ Shortage of funds

-2

76
74

-4

Fiscal 2010

72

-6

70

Apr

Jul

Oct

Jan

Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11

37

Chart 44: Ratio of Amounts Outstandingof Banknotes in Circulation
to Nominal GDP
20

Chart 45: Seasonally Adjusted Outstanding
Balance of Banknotes%

82

trillion yen

80

15

78
10
76

5

74
72

0
FY1950 1960

Trendline from Jan-06 to Dec-10

1970

1980

1990

2000

Jan-062010

Notes: 1. Figures for the amount outstanding of banknotes incirculation are as of the end of the fiscal year.
2. It is assumed that the nominal GDP for January-March2012 remains unchanged from the previous quarter.

Jan-08Jan-10Jan-12

Note: Monthly average.

2. Changes in Treasury Funds and Others

In fiscal 2011, as in fiscal 2010, net receipts from JGBs and T-Bills (sources of decrease incurrent account balances, or shortage of funds) exceeded net payments of fiscal payments
and revenues and foreign exchange transactions (sources of increase in current accountbalances, or excess of funds). As a result, changes in treasury funds and others registerednet receipts of 25.4 trillion yen, down significantly from net receipts of 34.3 trillion yen in
fiscal 2010.

A review of cumulative changes in treasury funds and others during fiscal 2011 shows thatthe amount of shortage of funds was on upward trend as a whole, although there was excess
of funds due to a large redemption of JGBs, pension payments, and payments of funds forforeign exchange interventions conducted in August and November 2011. The shortage offunds reached 40.6 trillion yen in early March 2012 (Chart 46). Toward the end of March
2012, the shortage of funds resulting from cumulative changes in treasury funds and others
decreased somewhat as a result of a large redemption of JGBs and fiscal payments,
registering 25.4 trillion yen.

38

A breakdown shows that "JGBs (over one year)" contributed to large excess of funds inJune, September, and December 2011 and March 2012, mainly due to a large redemption(Chart 47). Regarding the foreign exchange interventions, while "foreign exchange"
contributed to large excess of funds in August and November 2011 due to payments offunds for the interventions to the private sector, the increased issuance of "T-Bills"
contributed to shortage of funds in the second half of fiscal 2011.
Chart 46: Cumulative Changes in Treasury
Funds and Others in terms ofExcess and Shortage of Funds

Chart 47: Breakdown of Treasury Funds
and Others

trillion yen
1020↑ Excess of funds

0

Fiscal 2011

trillion yen↑ Excess of funds

15

OthersForeign exchange
T-Bills
JGBs (over one year)
Fiscal payments and revenues
Treasury funds and others

10

-10

5

-20

0

-30

-5

Fiscal 2010

-40
-50

-10
-15

↓ Shortage of funds-60↓ Shortage of funds

-20
Apr

Jul

Oct

Jan

Apr-11

Jul-11

Oct-11

Jan-12a. Fiscal Payments and Revenues"Fiscal payments and revenues" is a concept that includes all treasury payments and receipts
except for those related to JGBs (over one year), T-Bills, and foreign exchange. Fiscal
revenues comprise receipts of corporate taxes (at the beginning of every month),withholding income taxes (in the middle of every month), and pension insurance premiums(at the beginning of every month). Fiscal payments include pension payments (in the middleof even-numbered months), allotments of local allocation taxes (in early April, June,
September, and November), and payments on public works (March).

In fiscal 2011, "fiscal payments and revenues" resulted in net payments of 34.8 trillion yen,
up from 32.3 trillion yen in fiscal 2010. The increase in net payments was mainly due toincreased payments related to the Great East Japan Earthquake.

39

b. JGBs (Over One Year)"JGBs (over one year)" includes issuance and redemption of JGBs.

During fiscal 2011, "JGBs (over one year)" amounted to net government receipts of 44.3
trillion yen, marking a very large decrease from 60.6 trillion yen in fiscal 2010, as theannual increase in redemption amount exceeded that in issuance amount. Issuance during
the year amounted to 126.0 trillion yen, up from 121.6 trillion yen during fiscal 2010, while
redemption amounted to 81.7 trillion yen, up considerably from 60.9 trillion yen during
fiscal 2010. The increase in redemption amount was mainly due to the redemption of
ten-year Fiscal Investment and Loan Program (FILP) bonds that started to be issued given
the reform of the FILP in fiscal 2001.
c. T-Bills"T-Bills" includes issuance and redemption of T-Bills.

During fiscal 2011, "T-Bills" amounted to net government receipts of 26.4 trillion yen,marking a very large increase from 9.2 trillion yen during fiscal 2010, as the annual increase
in issuance amount exceeded that in redemption amount. Issuance during this periodamounted to 373.6 trillion yen, up considerably from 347.9 trillion yen during fiscal 2010.
The increase mainly reflected the increased issuance of 3-month T-Bills. Redemption
amounted to 347.1 trillion yen, up from 338.7 trillion yen in fiscal 2010.
d. Foreign Exchange"Foreign exchange" includes receipts of yen funds in foreign exchange interventions and in
the yen/U.S. dollar exchanges via the Foreign Exchange Funds Special Account for U.S.
dollar funding by the Japan Bank for International Cooperation.

During fiscal 2011, "foreign exchange" registered net payments of 9.7 trillion yen, up
considerably from 2.5 trillion yen in fiscal 2010. This was mainly due to the payments of40

yen funds related to yen selling/U.S. dollar purchasing foreign exchange interventions
conducted in August and November 2011.
e. Others"Others" includes receipts and payments of funds between yen deposit accounts held byforeign central banks and international organizations at the Bank (deposits of overseas
account holders) and those held by financial institutions, and the Bank's provision of funds
to maintain stability of the financial system, such as the provision of loans as stipulated
under Article 38 of the Bank of Japan Act, referred to as "Tokuyu (a special loan)," andloans to the Deposit Insurance Corporation of Japan. Together with receipts and paymentsof treasury funds, these are included in "changes in treasury funds and others" (represented
by "others"). For example, an increase in deposits of overseas account holders results in adecrease in current account balances at the Bank; a decrease in deposits of overseas accountholders results in an increase in current account balances at the Bank.

During fiscal 2011, "others" registered net payments of 0.9 trillion yen, more or lessunchanged from 0.7 trillion yen in fiscal 2010.

Box 7: Effects of Money Market Operations on Excess and Shortage of Funds

In principle, "treasury funds and others" in excess and shortage of funds is determined bytreasury payments and receipts. Among "treasury funds and others," however, "JGBs (overone year)" and "T-Bills" are influenced also by the money market operations conducted by
the Bank. This is because, when the Bank purchases JGBs and T-Bills from financial
institutions and holds them to maturity, redemption proceeds that would have been
deposited in current accounts of financial institutions involved are paid to the Bank. Suchtransactions result in declines in treasury payments to current accounts at the Bank.
Although receipts and payments of "treasury funds and others" are supposed to be more orless equal, such treatment of redemption proceeds leads to large net receipts (shortage offunds). In fact, on the assumption that redemption proceeds of JGBs and T-Bills the Bank
purchased outright through operations were paid not to the Bank but to the financial
institutions involved, the shortage of funds (adjusted for the effects of operations)41

throughout fiscal 2011 would be 1.7 trillion yen, decreasing significantly compared with25.3 trillion yen before the adjustment (Chart 48).

In addition, before the adjustment, the shortage of funds in fiscal 2011 (25.3 trillion yen)decreased significantly from that in fiscal 2010 (37.9 trillion yen). Although the shortage offunds (adjusted for operations) in fiscal 2011 was 1.7 trillion yen, down from 5.4 trillion
yen in fiscal 2010, the difference was smaller than that before the adjustment. This suggeststhat the significant decrease in the shortage of funds before the adjustment in fiscal 2011
from fiscal 2010 was partly due to a decline in redemption proceeds of JGBs and T-Bills
held by the Bank and an increase in redemption proceeds paid to the private sector. Such a
decline in redemption proceeds paid to the Bank was caused by a decrease in redemption of
T-Bills held by the Bank that resulted from a decrease in outright purchases of T-Bills
conducted as short-term funds-supplying operations.
Chart 48: Cumulative Excess and Shortage of Funds
Fiscal 2011

Fiscal 2010
Adjusted for effects ofoperations

trillion yen
1010↑ Excess of funds

0

-5.4

-10

-20

-20

-37.9
Before the adjustment

-50

-50
↓ Shortage of funds-60
Apr-10Jul-10

Oct-10Jan-11

-1.7

-25.3

-30
-40

-40

↑ Excess of funds

0

-10

-30

Adjusted for effects ofoperations

trillion yen-60
Apr-1142

Before the adjustment↓ Shortage of funds

Jul-11

Oct-11

Jan-12

IV. Conduct of Individual Measures in Money Market Operations

This chapter explains the individual measures taken in the course of the money market
operations conducted during fiscal 2011.

A. Asset Purchase Program

The Asset Purchase Program was instituted in October 2010 to encourage a decline inlonger-term interest rates and various risk premiums in a situation where there was little
room for a further decline in short-term interest rates. The Bank manages the Program
separately on its balance sheet. During fiscal 2011, its maximum amount outstanding wasincreased to about 65 trillion yen at the MPMs held on August 4 and October 27, 2011 andFebruary 13 and 14, 2012. Under this framework, the Bank conducted the fixed-ratefunds-supplying operation against pooled collateral and the purchase of various financial
assets, increasing the amount outstanding of the Program. The amount outstanding of theProgram rose to 48.9 trillion yen at the end of March 2012 from 31.8 trillion yen at the endof the previous year (Chart 49).

With the progress of these fund supplies and asset purchases, the effects of the Bank's
monetary easing spread into financial markets with longer-term market interest rates
declining significantly, and in this situation, undersubscriptions occurred occasionally.
Chart 49: Amounts Outstanding of the Operations through the Asset Purchase Program
trillion yen

Total

Purchases of various financial assets

Fixed-rate funds-supplying
operation against pooledcollateral

Total

JGBs

T-BillsCP

Corporate
bonds

ETFs

J-REITsEnd-Mar. 2012

48.9

34.6

14.3

6.3

3.5

1.6

2.0

0.8

0.07

End-Mar. 2011

31.8

28.8

2.9

0.9

1.3

0.3

0.2

0.2

0.02

Maximum amountoutstanding(as of end-Mar.
2012)

65

35.0

30.0

19.0

4.5

2.1

2.9

1.4

0.11

43

1. Fixed-Rate Funds-Supplying Operation against Pooled Collateral (Maximum
Amount Outstanding of Loans: About 35.0 Trillion Yen)

The Bank conducted the 3-month operations at a pace of twice a week in general with 800
billion yen offered per operation. The Bank maintained the amount outstanding of theoperations at around 20 trillion yen by offering the same amount as maturing loans. The
Bank also conducted the 6-month operations with 800 billion yen offered per operation.
Until July 2011, the Bank offered the same amount as maturing loans and two new loans,
and at the end of July 2011 the amount outstanding of the 6-month operations stood at 10.4
trillion yen and that of 6-month and 3-month operations in total amounted to 30.4 trillion
yen, reaching the maximum amount outstanding at that time of about 30 trillion yen. Afterthe maximum amount outstanding was increased by 5 trillion yen for the 6-month operation
to about 35 trillion yen in total at the MPM held on August 4, 2011, the Bank not only
continued to offer the same amount as maturing loans but also offered six new 6-monthloans with 800 billion yen per operation. As a result, at the end of March 2012, the amountoutstanding of the 6-month operation increased to 14.6 trillion yen, and that of 6-month and3-month operations in total rose to 34.6 trillion yen, nearly reaching the increased maximum
amount outstanding.

Until July 2011, the bid-cover ratios of 3-month and 6-month operations remained high,generally between two and four times and between three and five times, respectively. From
August 2011, however, the fixed rate of 0.1 percent applied to these longer-term operations
became significantly less advantageous, as the short-term market rates, such as yields on
T-Bills, converged to 0.10 percent. As perceptions about the abundance of liquidity
remained strong and concerns about future funding conditions dissipated, market
participants needed less longer-term funding. Thus, the bid-cover ratios generally trended
lower. In particular, those of the 6-month operations declined considerably, andundersubscriptions occurred in February and March 2012 (Chart 50).

44

Chart 50: Bid-Cover Ratios of Fixed-Rate Funds-Supplying
Operations against Pooled Collateral
times

%
0.15

6

0.14

5

0.13

4

0.12

3

0.11

2

0.10

1
Undersubscription

0.09
Jan-110
Apr-11 Jul-11
Oct-11
Jan-123-month operation (right scale)

6-month operation (right scale)
Secondary market yields on T-Bills (6-month)Box 8: Bid-Cover Ratios of Fixed-Rate Funds-Supplying Operations against Pooled
Collateral

The bid-cover ratios of fixed-rate funds-supplying operations against pooled collateraldeclined as a trend during fiscal 2011 as short-term market interest rates declined.

Until around July 2011 -- when yields on 3-month and 6-month T-Bills were slightly above
0.1 percent with the short-term yield curve sloping upward -- the bid-cover ratios generally
remained at two to four times. The bid-cover ratios of the operations with 6-month duration
tended to be higher than those with 3-month duration, because the former were more
attractive than the latter, since the same interest (0.1 percent) was applied to both. From
August 2011, when yields on T-Bills with durations of up to one year declined to 0.1
percent and the yield curve flattened entirely, the bid-cover ratios declined clearly. In termsof the funding cost, the advantage of the 6-month operations over the 3-month operations
was lost. While there was a certain level of demand for 6-month operations as a stable
funding source, market participants paid more attention to their disadvantage: longer-term
operations were unsuited to temporary fluctuations in funding positions. Against thisbackground, the bid-cover ratios of the operations with 6-month duration declined quickly
to levels below those with 3-month duration, and eventually to the range between one andtwo times and to the level of undersubscription. In other words, the decline in the bid-coverratio reflected the fact that interest rates in money markets for up to six months declined to45

0.1 percent with concerns about funding for the next six months essentially eliminated.

Meanwhile, demand for the operations with 3-month duration was generally steadycompared to those with 6-month duration. This was partly because the former was
sometimes used to adjust funding positions against temporary surpluses and shortages offunds, as an alternative to variable-rate funds-supplying operations against pooledcollateral. The variable-rate operations were offered less frequently, as financial institutions'demand for funds are satisfied to a greater degree by fund provisions through the Asset
Purchase Program. In October 2011 and January 2012, when demand for funds increased in
the market, bid-cover ratios of operations with 3-month duration as well as those ofvariable-rate funds-supplying operations rose moderately (Chart 51).
Chart 51: Bid-Cover Ratios of Funds-Supplying
Operations against Pooled Collateral
5

times

Fixed-rate operations (6-month)
Fixed-rate operations (3-month)
Variable-rate operations

4
3

2
1

0
Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Notes: Figures are monthly average.

2. Outright Purchases of JGBs (Maximum Amount Outstanding to Be Purchased:
About 19.0 Trillion Yen)

At first, among 2-year, 5-year, and 10-year JGBs with a residual maturity of one year or
more and up to two years, the Bank continued to assign two issues with the first and thesecond longest residual maturities of each issuing maturity, six issues in total, for eachpurchase. After the maximum amount outstanding of purchases was increased to about 19.0
trillion yen at the MPM held on February 13 and 14, 2012, the Bank expanded the pool ofissues to be purchased and offered purchases of all 2-year, 5-year, 10-year, and 20-year
JGBs with a residual maturity of one year or more and up to two years.

46

Until July 2011, when the maximum amount outstanding of purchases was set at about 2.0
trillion yen, the Bank conducted outright purchases of JGBs once a month with 100 billion
yen offered per operation. After the maximum amount outstanding of purchases wasincreased to about 4.0 trillion yen, 9.0 trillion yen, and further to 19.0 trillion yen at theMPMs held on August 4 and October 27, 2011 and February 13 and 14, 2012, the Bank
offered outright purchases of JGBs once or twice a month with 150 billion yen offered per
operation, twice a month with 250 or 300 billion yen offered per operation, and three times
a month with 500 billion yen offered per operation, respectively. As a result, at the end of
March 2012, the amount outstanding stood at 6.3 trillion yen out of the maximum amountoutstanding of about 19.0 trillion yen. The Bank manages the amount outstanding of JGBs
purchased through the Asset Purchase Program separately from that of its regular purchases
for the purpose of supplying currency consistent with the underlying steady development of
the economy, which is limited to the amount outstanding of banknotes in circulation.

During fiscal 2011, stable bids were seen, and the bid-cover ratios remained relatively highbetween two and six times.
Box 9: Outright Purchases of JGBs through the Asset Purchase Program and Thosefor the Purpose of Supplying Currency Consistent with the Underlying SteadyDevelopment of the Economy

The Bank purchases JGBs under two different frameworks, that is, outright purchases
through the Asset Purchase Program and those for the purpose of supplying currency
consistent with the underlying steady development of the economy (see Box 11).

Regarding the difference in purchasing methods, outright purchases of JGBs through theProgram are operations in which counterparties bid yield spreads, which are calculated bysubtracting the minimum yield of 0.1 percent from the yield at which counterparties seek tosell JGBs to the Bank (Chart 52, left-hand graph). The purpose of the Program is toencourage a decline in longer-term interest rates, and under this purchasing method, as longas the yield curve for market interest rates is positive (i.e., upward sloping), JGBs withlonger residual maturities are likely to be accepted. This implies downward pressure is
likely to be exerted on interest rates of issues with longer residual maturities. The same47

method is also applicable to outright purchases of T-Bills, CP, and corporate bonds throughthe Program.

Purchases of JGBs for the purpose of supplying currency consistent with the underlying
steady development of the economy (see Chapter IV.B.1) are operations in whichcounterparties bid yield spreads, which are calculated by subtracting the benchmark yields
from the yield at which counterparties seek to sell bonds to the Bank. The "benchmark
yields," which vary among issues, are the yields on the previous business day, reported in"Reference Statistical Prices (Yields) for OTC Bond Transactions" released by the Japan
Securities Dealers Association (Chart 52, right-hand graph). Regarding this, the Bank has
put great emphasis on market neutrality about price formation among issues. In order toprevent the residual maturities of purchased JGBs from shortening or lengthening
excessively, the Bank purchases JGBs from five tranches, namely, "up to one year," "morethan one year and up to ten years," "more than ten years and up to 30 years," "floating-ratebonds," and "inflation-indexed bonds." Thus, the residual maturities of JGBs actuallypurchased by the Bank in each tranche reflect the needs of market participants and fluctuate
accordingly, depending on intraday developments in the interest rates of each issue and theparticular bonds counterparties seek to sell to the Bank on the day of the operation. The
same applies to outright purchases of T-Bills as short-term funds-supplying operations (seeChapter IV.B.2).
Chart 52: Purchasing Methods for Outright Purchases of JGBs
(1)(2) Purchases of JGBs to Supply Currency
Consistent with the Underlying SteadyDevelopment of the Economy

Purchases of JGBs through theAsset Purchase Program

yieldsyieldsBids of issues with higher market
yields are more likely to be accepted

Yield for purchase

Yield curve
Acceptedyield spreads

Yield for purchase
Accepted yield spreads

Yield curve on the previous
business day (the benchmark yield)

Minimum yield of outright purchases(the benchmark yield): 0.1 percent

residual maturities

residual maturities48

3. Outright Purchases of T-Bills (Maximum Amount Outstanding to Be Purchased:
About 4.5 Trillion Yen)

The Bank continued to assign the two latest issues of 6-month T-Bills and the 1-year T-Billswith a residual maturity of six months or more for each purchase. Until July 2011, when the
maximum amount outstanding of purchases was set at about 3.0 trillion yen, the Bank
offered outright purchases of T-Bills of 150 billion yen twice a month. After the maximum
amount outstanding of purchases was increased to about 4.5 trillion yen at the MPM held on
August 4, 2011, the Bank in general offered outright purchases of T-Bills of 200 billion yen
twice a month. When the Bank judged it difficult to purchase T-Bills through the Asset
Purchase Program, under which the minimum purchasing yield is set at 0.1 percent,however, it did not offer outright purchases. Even when purchase was offered on January 20,
2012, undersubscription occurred in which bids of 32.3 billion yen fell short of offers of
200 billion yen.

Under these circumstances, from February 2012, the Bank increased the amount offered per
operation to 300 billion yen and offered the purchasing operations three times in somemonths, while taking into account the actual pace of purchases reflecting undersubscriptionsin the past and the maturity dates of purchased T-Bills. The Bank made efforts to increase
the amount outstanding of purchases by flexibly accelerating the pace of purchases when it
was expected that such purchases were needed among market participants. As a result, atthe end of March 2012, the amount outstanding stood at 3.5 trillion yen out of the maximum
amount outstanding of about 4.5 trillion yen.

Box 10: Outright Purchases of T-Bills through the Asset Purchase Program
Outright purchases of T-Bills through the Asset Purchase Program employed the same
method as outright purchases of JGBs. Specifically, the minimum purchasing yield was set
at 0.1 percent and auctions were based on yield spreads, which are calculated by subtracting
the minimum yield of 0.1 percent from the yield at which counterparties seek to sell T-Bills
to the Bank (see Box 9). As long as the market yield curve is upward sloping, bills withlonger residual maturity, or the most recently issued 1-year T-Bills, are more likely to be49

accepted in an auction.

In fiscal 2011, the Bank did not announce T-Bill purchase operations through the Program
during two periods -- from mid-August to mid-October and from mid-December tomid-January -- when judging it difficult to purchase the bills. These periods corresponded
to phases when yields on 1-year T-Bills converged to 0.1 percent, which was the minimum
yield for the purchase (Chart 53). The demand for the operation depends not only on thelevel of market interest rates but also on counterparties' holdings of eligible assets to bepurchased. Incentives to sell T-Bills to the Bank were reduced, with yields on T-Bills up to
1 year converging to 0.1 percent.
Chart 53: Bid-Cover Ratios of Outright Purchases of T-Bills
Conducted through the Asset Purchase Program
0.15%

Bid-cover ratios (right scale)
No offer
No offer

times
6

0.14

5

0.13

4
Secondary market
yields on T-Bills(1-year)

0.12
0.11
0.10

3
2
1

Undersubscription
0.09
Apr-11

0Jul-11

Oct-11

Jan-12

With 1-year yields converging to 0.1 percent and the yield curve completely flattened, there
was no difference between 6-month T-Bills and 1-year T-Bills in terms of the interest rate.
Under these circumstances, 1-year T-Bills with longer remaining maturities are notnecessarily accepted in an auction. In fact, in operations conducted in August 2011 andfrom December 2011 onward, the shares of bills with shorter residual maturity such as
6-month T-Bills increased (Chart 54).

In light of delays in the progress of purchases due to temporary suspensions or shortening of
maturities of the bills purchased, the Bank increased the amounts per operation or thefrequency of the operations in a flexible manner to ensure that the Bank would not fall behindschedule as originally planned in terms of increasing the amounts outstanding of the Program.

50

Chart 54: T-Bills Purchased through the Asset Purchase Program
1.0

trillion yen

0.8
0.6
0.4
0.2
0.0
Nov-10Mar-11

Jul-11

Nov-11Mar-12

T-Bills (1-year) issued no earlier than the month before
the previous month.
Others

4. Outright Purchases of CP (Maximum Amount Outstanding to Be Purchased: About
2.1 Trillion Yen)In principle, the Bank offered outright purchase of CP of 300 billion yen, two or three times
per month, taking account of market conditions and the Bank's CP holdings. The amountoutstanding fluctuated moderately, depending on the redemption schedules of the issues that
had been purchased. The amount outstanding increased to 1.9 trillion yen at the end of
December 2011 and was 1.6 trillion yen at the end of March 2012, out of the maximum
amount outstanding of 2.1 trillion yen.

The bid-cover ratios temporarily declined to the range of one to 1.5 times in June 2011, they
were stable in the range of 1.5 to three times from July as the amount outstanding of CP
issued was mostly larger than the previous year (Charts 55 and 56). In addition, unlike
corporate bonds, CP is usually held by underwriters (city banks and tanshi companies) forsome period of time after issuance until it is purchased by mutual funds or other investors.
In this process, the outright purchases by the Bank were often used, making the bid-coverratios relatively stable.

51

Chart 55: Amount Outstanding of CP

Chart 56: Bid-Cover Ratios and Lowest
Accepted Bid Yield of Outright
Purchase of CP

y/y % chg.

0.15

15

%

times

6

Lowest accepted bid yield
10

0.14

5

5

0.13

0

0.12

3

-5

0.11

2

-10

0.10

Bid-cover ratios of outrightpurchase of CP (right scale)4

1
Undersubscription

0.09

-15
Oct-10 Jan-11 Apr-11 Jul-11

0

Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12

Oct-11 Jan-12

Note: Lowest accepted bid yield is the sum of thelowest accepted bid yield spread and thebenchmark yield (0.1 percent).

Notes: 1. Figures are as of the end of the month.
2. CP issued by business companies and asset-backed CP…(ABCP).

5. Outright Purchases of Corporate Bonds (Maximum Amount Outstanding to Be
Purchased: About 2.9 Trillion Yen)

The Bank offered the outright purchase of corporate bonds once a month with the amount of
150 billion yen per operation until July 2011, when the maximum amount outstanding wasabout 2.0 trillion yen. After the maximum amount outstanding was raised to about 2.9
trillion yen at the MPM held on August 4, the Bank continued to offer the operation once amonth, while increasing the amount of a purchase to 200 billion yen when deemed
appropriate. Specifically, the Bank purchased 200 billion yen of bonds in December 2011
and March 2012, often taking account of such factors as the redemption schedule of thebonds that had been purchased.

The bid-cover ratios decreased as a trend due to strong demand for corporate bonds byinvestors, and the operations were undersubscribed in November and December 2011.
Although there was no undersubscription from January 2012, the bid-cover ratios remained
low and the lowest rates of the accepted bids stayed close to the minimum purchasing rateof 0.1 percent (Chart 57). Many investors in Japan purchase corporate bonds as a long-term
investment, and trading volumes in the secondary market are limited. In fiscal 2011, the52electric power companies encountered difficulties in issuing corporate bonds after the
nuclear accident that followed the Great East Japan Earthquake, resulting in a supply
shortage of corporate bonds as a whole. Investors became more reluctant to sell theircorporate bond holdings, as reinvestment opportunities were rather limited.

Even under these circumstances, the Bank continued to offer the outright purchases so as tomake investors more confident about investment in corporate bonds. At the end of March
2012, the amount outstanding stood at 2.0 trillion yen out of the maximum of about 2.9
trillion yen.
Chart 57: Bid-Cover Ratios and Lowest Accepted Bid Yield of
Outright Purchase of Corporate Bonds
¥

%
0.4

Lowest accepted bid yield times 4

0.3

Bid-cover ratios of
outright purchase of
corporate bonds(right scale)

0.2

3

2

0.1

1
Undersubscription

0.0

0Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12
Note: Lowest Accepted bid yield is the sum of the lowest accepted bid
yield spread and the benchmark yield (0.1 percent).

6. Outright Purchases of ETFs (Maximum Amount Outstanding to Be Purchased:
About 1.4 Trillion Yen)At the end of March 2012, the amount outstanding stood at 0.8 trillion yen out of the
maximum amount outstanding of about 1.4 trillion yen, increasing from 0.2 trillion yen outof the maximum amount outstanding of about 0.9 trillion yen at the same time last year.

53

7. Outright Purchases of J-REITs (Maximum Amount Outstanding to Be Purchased:
About 0.11 Trillion Yen)At the end of March 2012, the amount outstanding stood at 0.07 trillion yen out of the
maximum amount outstanding of about 0.11 trillion yen, increasing from 0.02 trillion yen
out of the maximum amount outstanding of about 0.1 trillion yen at the same time last year.

B. Regular Operation Tools

1. Funds-Supplying, Long-Term, and Outright Operations

a. Outright Purchases of JGBs

During fiscal 2011, as in fiscal 2010, the Bank continued to purchase JGBs at a pace of 21.6
trillion yen per year (1.8 trillion yen per month). The Bank conducted the purchasing
operations four times a month. In each operation, it offered to purchase JGBs for two out offive tranches classified by bond type and residual maturity, which are "up to one year,""more than one year and up to ten years," "more than ten years and up to 30 years,""floating-rate bonds," and "inflation-indexed bonds."

As the Bank purchased JGBs at a pace of 21.6 trillion yen per year during fiscal 2011, theamount outstanding of JGBs held by the Bank, excluding those purchased through the Asset
Purchase Program, stood at 64.4 trillion yen at the end of March 2012, up 6.2 trillion yen
from 58.2 trillion yen at the same time last year. The Bank limits the amount outstanding of
its holdings of JGBs, excluding those purchased under the Program, within that ofbanknotes in circulation. The amount outstanding of banknotes in circulation at the end of
March 2012 amounted to 80.8 trillion yen, down 0.1 trillion yen from 80.9 trillion yen at thesame time last year. The difference between the amount outstanding of the Bank's JGB
holdings and that of banknotes in circulation continued to narrow as a trend (Chart 58).

54

Chart 58: Amounts Outstanding of the Bank's JGB Holdings
trillion yen
90
80
70

JGBs held by the Bank

60

Banknotes in circulation

50
40
30

20
10
0
Apr-08Apr-09Apr-10

Apr-11

Notes: 1. Figures are as of the end of the month.
2. Those purchased through the Asset Purchase Program
are not included.

The average residual maturity of JGBs purchased by the Bank (flow), excluding thosepurchased through the Program, was a little shorter than four years on average, fromFebruary 2009 onward, during which the Bank purchased JGBs with the tranches classified
by bond type and residual maturity. In fiscal 2011, it was 3.3 years (see Box 9 and Chart 59).
The average residual maturity of JGBs held by the Bank (stock), excluding those purchased
through the Program, was 4.6 years at the end of March 2012.
Chart 59: Average Residual Maturity of the Bank's JGB Holdings
years
Flows during the
fiscal year

Stock at the endof the fiscal year

Fiscal 2008

2.2

5.2

Fiscal 2009

3.9

5.2

Fiscal 2010

3.8

4.9

Fiscal 2011

3.3

4.6

Note: JGBs purchased through the Asset Purchase Program
are excluded.

55

Box 11: Amounts Outstanding of the Bank's JGB Holdings

The Bank conducts outright purchases of JGBs under the two different frameworks
mentioned above (see Box 9).

Although the amount outstanding of banknotes in circulation fluctuates due to seasonal
factors, it increases moderately in line with economic growth in the long run. From theviewpoint of the Bank's balance sheet, it is appropriate that the Bank holds JGBs (long-term
assets of the Bank) in accordance with the amount outstanding of banknotes in circulation(liabilities of the Bank). Thus, the regular outright purchases of JGBs are sometimes called
operations to supply currency consistent with the underlying steady development of theeconomy.

From a somewhat longer-term perspective, the Bank needs to maintain flexibility on theasset side of its balance sheet so as to control the current account balances and conduct
money market operations smoothly in response to economic and financial developments at
different times. From this point of view, the Bank might need, for example, to purchase andsell JGBs frequently in order to control the current account balances flexibly, depending on
the relationship between the amount outstanding of its JGB holdings and that of banknotes
in circulation. Such conduct of money market operations, however, might disturb thefinancial markets as it would increase volatility of market interest rates significantly. The
Bank, therefore, limits the amount outstanding of JGBs outright purchased through theregular operations within that of banknotes in circulation. This rule also demonstrates theintent that the outright purchases of JGBs by the Bank are not for supporting JGB prices orfinancing the government debt.

The amount outstanding of JGBs held is determined by the amount and the residual
maturities of issues purchased. The Bank takes such aspects of the JGB purchasing
operation into account in designing its practical framework, and in January 2009 introduced
the scheme to purchase JGBs with the tranches classified by bond type and residual
maturity.

56

Meanwhile, the outright purchases of JGBs under the Asset Purchase Program are
conducted as a temporary measure to encourage a decline in longer-term interest rates,
differently from the regular JGB outright purchasing operations described above. In view ofthis, the Bank's holdings of JGBs purchased through the Program are treated separatelyfrom the regular purchasing operations and are not subject to the ceiling on the amountoutstanding of banknotes in circulation.

The Bank conducts the regular JGB purchasing operations in accordance with a trend in the
demand for banknotes at a pace of 1.8 trillion yen per month. Regarding the JGB purchases
through the Program, the Bank decided, at the MPM held on April 27, 2012, to add anotherabout 10 trillion yen to their maximum amount outstanding, which was about 19 trillion yen
as of the end of March 2012. In response to this decision, the Bank will conduct the JGB
purchases through the Program at the pace of about 2.1 trillion yen per month until the end of2012 -- when the Bank intends to complete the increase of its JGB holdings to about 24.0
trillion yen -- and at the pace of about 1.0 trillion yen per month from January 2013 to the endof June 2013 -- when the Bank intends to complete the increase to about 29.0 trillion yen. The
purposes and frameworks of these two purchases are different, but in total, the Bank willpurchase JGBs at the pace of about 3.9 trillion yen per month until the end of 2012, and of
about 2.8 trillion yen per month from January to the end of June 2013.

At the end of March 2012, as a total of the two frameworks, the amount outstanding of
JGBs held by the Bank was 70.7 trillion yen, of which 6.3 trillion yen was through theProgram (Chart 60). On condition that the residual maturity of JGBs purchased through theregular operations (not through the Program) until the end of 2012 is the same as that in
fiscal 2011 and that the amount outstanding is constant after the beginning of 2013 at thelevel as of the end of 2012, the total amount outstanding of JGBs held by the Bank at theend of 2012 is expected to be about 92 trillion yen (of which, 24 trillion yen will be throughthe Program) and at the end of June 2013 is expected to be about 97 trillion yen (of which,
29 trillion yen will be through the Program). Regarding the amount outstanding of thebanknotes in circulation, on condition that it grows at the average rate in the latest threemonths (an annual rate of 2.3 percent), it is expected to be about 83 trillion yen in
December 2012 and about 82 trillion yen in June 2013.

57

As mentioned earlier, the size of the JGB purchases under the Program is determined solely
from the perspective of the monetary policy, and thus is not subject to the ceiling on theamount of banknotes in circulation. The Bank, however, needs to pay closer attention toensure that such large holdings of JGBs by the Bank are not regarded as financing thegovernment debt.
Chart 60: Amounts Outstanding of the Bank's JGB Holdings
trillion yen
110
100
90
80
70
60
50
40
30
20
10
0

(Forecast)Amount outstanding ofbanknotes in circulation(monthly average)

92

97

71
59
47

50
43

Mar-08Mar-09Mar-10Mar-11Mar-12 Dec-12 Jun-13

Amount outstanding of JGBs (purchased through the Asset Purchase Program)Amount outstanding of JGBs (excluding those purchased through the Asset Purchase Program)
Notes: 1. Figures for the amount outstanding of JGBs are as of the end of each month.
2. The average annual growth rate for the latest three months used to forecast banknotes incirculation in December 2012 and June 2013 is that for December 2011 to February
2012, excluding the figure for March 2012 significantly affected by the Great East Japan
Earthquake.

2. Funds-Supplying, Short-Term, and Outright Operations

a. Outright Purchases of T-Bills

In fiscal 2011, outright purchases of T-Bills were offered until June 2011, about twice amonth with the amount purchased per operation of 300 billion yen. Given declining demand
among market participants for the operations, however, the Bank did not offer them afterJune 16, 2011. The amount outstanding, which stood at 5.4 trillion yen at the end of March
2011, declined as T-Bills purchased by June 2011 matured gradually, to 0.4 trillion yen at
the end of March 2012.

58

3. Funds-Supplying and Short-Term Operations with Fixed Maturity

a. Variable-Rate Funds-Supplying Operation against Pooled Collateral

During fiscal 2011, the Bank offered variable-rate operations at the Head Office withmaturities of about three weeks and those at All Offices with maturities of about one month,
given that durations of the fixed-rate funds-supplying operations against pooled collateral
under the Asset Purchase Program were about three months or six months. The share ofoperations offered with maturities of about two weeks or less was much smaller than that in
fiscal 2010 (Chart 61).

Chart 61: Number of Short-Term Funds-Supplying Operations by Term of Loans
Fiscal 2009

300

Fiscal 2010

2-month or longer (excluding fixed-rate operations)
3-weekFixed-rate operations
numbernumber300

Fiscal 2011

1-month
2-week or shorter
Fiscal-year average
300

250

250

250

200

200

200

150

150

150

100

100

100

50

50

50

0

0
Apr-Jun Jul-Sep Oct-Dec Jan-Mar

number0
Apr-Jun Jul-Sep Oct-Dec Jan-Mar

Apr-Jun Jul-Sep Oct-Dec Jan-Mar

Notes: 1. Based on the offer date.
2. Figures include those of variable-rate funds-supplying operations against pooled collateral, fixed-ratefunds-supplying operations against pooled collateral (fixed-rate operations), purchases of JGSs with
repurchase agreements, purchases of CP with repurchase agreements, and special funds-supplying
operations to facilitate corporate financing.

The Bank offered almost no funds-supplying operations on a T+4 basis (settled fourbusiness days after the offer date) or on a T+1 basis (settled the next business day after theoffer date), which were offered as necessary during fiscal 2010, but operations in mostcases were on a T+2 basis (settled two business days after the offer date) (Chart 62). Thiswas partly because compared to fiscal 2010 there was considerably less need topreemptively supply liquidity for coping with expected large shortages of funds, or toadditionally supply funds for addressing elevated tensions in financial markets, since the59money markets remained stable amid the Bank's provision of ample funds. Likewise, theBank did not offer a same-day funds-supplying operation, an operation on a T+0 basis(settled on the offer date), or an operation starting on the quarter-end day and ending on thenext-quarter-start day (so-called quarter-end/quarter-start operation) to meet the increased
demand for funds at the quarter-end.
Chart 62: Number of Short-Term Funds-Supplying Operations by Settlement Basis
Fiscal 2009

Fiscal 2010

T+4 or more
T+2 (excluding fixed-rate operations)T+0
Fiscal-year average
300

numberFiscal 2011

T+3
T+1
Fixed-rate operation (T+2)
300

number

300

250

250

250

200

200

200

150

150

150

100

100

100

50

50

50

0

0

0
Apr-Jun Jul-Sep Oct-Dec Jan-Mar

numberApr-Jun Jul-Sep Oct-Dec Jan-Mar

Apr-Jun Jul-Sep Oct-Dec Jan-Mar

Note: See the notes to Chart 61.

As the amount outstanding of the Program increased further in fiscal 2011, funding demand
was met to a greater degree by fixed-rate funds-supplying operations and asset purchases
under the Program. Precautionary finding demand that rose immediately after the Great East
Japan Earthquake declined as uncertainties about future market conditions were resolved.
Under these circumstances, the amount outstanding of the variable-rate funds-supplying
operations against pooled collateral stood at 0.8 trillion yen at the end of March 2012, down
25.0 trillion yen from 25.8 trillion yen at the same time last year.

b. Purchases of JGSs and CP with Repurchase Agreements

During fiscal 2011, the Bank did not offer JGS and CP purchasing operations with
repurchase agreements, since the repo and CP markets remained stable.

60Box 12: Bid-Cover Ratios of Variable-Rate Funds-Supplying Operations against
Pooled Collateral

Regarding variable-rate funds-supplying operations against pooled collateral (so-called
variable-rate operations), as perceptions of abundant liquidity in the market increased,
undersubscriptions occurred frequently in fiscal 2011, as was the case with theJanuary-March 2011 period (Chart 63). For example, during the April-June 2011 period, theBank offered 55 variable-rate operations, of which 48 (87 percent) were undersubscribed.
Chart 63: Undersubscriptions in the Variable-RateFunds-Supplying Operations
50

times

%

100

40

80

30

60

20

40

10

20

0
Jan-100Jul-10Jan-11

Jul-11

Jan-12

Number of undersubscriptions
Ratio of the number of undersubscriptions to the total (right scale)Note: Based on the offer date.

After September 2011, a sharp rise in bid-cover ratios was sometimes seen in operations
that were fully subscribed. For example, the operation at the Head Office offered on
October 12 attracted bids of 4.6 trillion yen against the offered amount of 800 billion yen,
for a bid-cover ratio of 5.72. Even in these cases, however, both the minimum lending rate
and the average lending rate remained at 0.10 percent, with no counterparty bidding up
yields for funds (Charts 64 and 65).

The sharp rise in bid-cover ratios with financial institutions bidding for funds at an interest
rate not higher than 0.1 percent reflected behavior of market participants that can be
described as follows. Counterparties participating in an operation make their own forecastof the bid-cover ratio when they expect the operation will not be undersubscribed. They

61

attempt to secure the amount of funds they require by bidding a larger amount than actuallyneeded, based on their forecast of the bid-cover ratio. If many market participants follow
this bidding strategy, the total amount of bids will increase in a self-fulfilling process. It
should be noted, therefore, that the bid-cover ratios of operations are not necessarily
proportional to the level of funding demand.
Chart 64: Bid-Cover Ratios of the
Variable-Rate Funds-Supplying
Operations

Chart 65: Average Successful Bid Ratesof the Variable-RateFunds-Supplying Operations

times
8

%
0.120

7

0.115

6
5
4

0.110
Undersubscription

0.105

3

2

0.100

1
0

0.095

Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12

Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12

Note: Based on the offer date.

Note: Based on the offer date.

4. Funds-Absorbing Operations

During fiscal 2011, as in fiscal 2010, the Bank did not offer funds-absorbing operations
since it maintained its target rate for the uncollateralized overnight call rate at "around 0 to
0.1 percent" as part of the comprehensive monetary easing policy.

5. Other Operations

a. Securities Lending Facility

During fiscal 2011, the Bank offered securities lending 14 times in total, less than the 17
times in fiscal 2010. The Bank lent inflation-indexed bonds the most frequently. Regarding
inflation-indexed bonds, new issuance paused from August 2008 onward, and buybacks by
the National Debt Consolidation Fund and purchasing operations by the Bank continued.

62

The market size, market liquidity, and functioning of the special collateral (SC) repo marketof the inflation-indexed bonds remained low.

C. Complementary Lending Facility

During fiscal 2011, as in fiscal 2010, the use of the complementary lending facility was
extremely limited, against the background of the supply of ample funds by the Bank.

D. Growth-Supporting Funding Facility

During fiscal 2011, the Bank disbursed loans under the main rules for the
Growth-Supporting Funding Facility introduced in June 2010 once a quarter, four times intotal. From the fifth loan disbursement onward, in relation to the total limit of loans to be
disbursed (3 trillion yen at the time of these disbursements), since the applied amount ofloans exceeded the maximum amount of new loan disbursement, the Bank disbursed loans
on a pro rata basis (Chart 66).

From August 2011, the Bank disbursed three loans under a new line of credit for equity
investments and ABL established in June 2011 (special rules for equity investments andABL, see Chapter V.A) on the same days when it disbursed loans under the main rules.

At the end of March 2012, the outstanding balance of loans under the main rules reached
the ceiling of 3 trillion yen, equal to the total limit of loans to be disbursed at that time, andthat of loans under the special rules for equity investments and ABL stood at 0.09 trillion
yen out of the ceiling of 0.5 trillion yen.

63

Chart 66: Loan Disbursement under the Growth-Supporting Funding Facility(Main Rules)

100 million yen

4th(May 31, 2011)

5th(Aug. 31, 2011)

6th(Nov. 30, 2011)

Outstanding balanceof loans(as of end-Mar.
2012)

7th
(Feb. 29, 2012)

Major banks

2,125

228

305

221

13,002.6

Regional banks

4,551

945

1,050

1,030

13,768.4

Other institutions

1,620

222

274

218

3,226.5

T otal

8,296

1,395

1,629

1,469

29,997.5(Special Rules for Equity Investments and Asset-Based Lending)
1st(Aug. 31, 2011)

2nd(Nov. 30, 2011)

100 million yen

3rd(Feb. 29, 2012)

Outstanding balanceof loans(as of end-Mar.
2012)

Major banks

185

131

213

505.5

Regional banks, etc.

196

44

167

385.6

T otal

381

175

380

891.1

Note: The date in parentheses is that of notification of loan disbursement.

E. Funds-Supplying Operation to Support Financial Institutions in Disaster Areas

Under the funds-supplying operation to support financial institutions in disaster areas
established in April 2011 (see Chapter V.B), the Bank disbursed loans once a month fromMay 2011, eleven times in total (Chart 67).

At the end of March 2012, the outstanding balance of loans stood at 0.5 trillion yen out of
the ceiling of 1.0 trillion yen.
Chart 67: Loan Disbursement under the Funds-Supplying Operation
to Support Financial Institutions in Disaster Areas
100 million yen
1st
2nd
3rd
4th
5th
6th
7th
8th
9th
(May 17, (June 21) (July 20) (Aug. 23) (Sep. 21) (Oct. 18) (Nov. 21) (Dec. 16) (Jan. 17,
2011)
2012)

Outstanding balance
10th
11th
of loans(Feb. 21) (Mar. 22)(as of end-Mar.
2012)

Major banks

86

135

14

10

225

47

12

52

15

3

1

600

Regionalbanks, etc.

655

1,158

1,272

126

808

343

0

0

50

50

0

4,462

T otal

741

1,293

1,286

136

1,033

390

12

52

65

53

1

5,062

Note: The date in parentheses is that of notification of loan disbursement.

64

F. U.S. Dollar Funds-Supplying Operations

During fiscal 2011, in line with the pre-announced auction schedule, the Bank conducted
the 1-week U.S. dollar funds-supplying operations once a week and the 3-month operations
about once every four weeks. In these operations, an unlimited amount of funds wasprovided against eligible collateral submitted to the Bank by individual financial institutions.
Interest rates on the loans were a fixed rate set by the Federal Reserve Bank of New Yorktaking into account the prevailing U.S. dollar OIS market rate that corresponded to theduration of the loan. Specifically, they were set at the U.S. dollar OIS rate plus 1 percentage
point at first, and were lowered to the U.S. dollar OIS rate plus 0.5 percentage point given
the coordinated action taken by the six central banks on November 30, 2011.

As the rates in the Bank's operations continued to exceed those in the market, the bidding
amounts remained at low levels of less than 0.1 billion dollars in all auctions conducted by
November 2011. After the coordinated action to lower interest rates on the loans taken by
the six central banks on November 30, 2011, however, the bidding amounts ballooned.
Specifically, the bidding amount in the 1-week auction offered on December 20 maturing
over the calendar year-end was 9.035 billion dollars. That in the first 3-month auction
offered on December 13 after the lowering of interest rates on loans was 4.756 billion
dollars, with 12.556 billion dollars in the following operation offered on January 10.
Reflecting the gradual improvement in conditions in the U.S. dollar funding market, thebidding amounts in both 1-week and 3-month auctions decreased substantially. No bids
were submitted in the one-week operation offered on February 14 for the first time in threemonths. During fiscal 2011, the amount outstanding peaked at 20.5 billion dollars fromJanuary 12 to 19, 2012, and then decreased to 13.5 billion dollars at the end of March 2012.

65

Box 13: Pooled Collateral Accepted by the Bank

The Bank selects a wide range of corporate debt such as corporate bonds and CP, as well as
government securities and other public debt, as financial assets eligible as collateral for the
Bank's provision of credit (eligible collateral). Financial institutions can obtain credit fromthe Bank within the value of the eligible financial assets submitted ("pooled collateral"),through the funds-supplying operations against pooled collateral, the complementary
lending facility, the intraday overdraft, and other means. Under the pooled collateralscheme, financial institutions can (1) have prompt and certain access to liquidity whennecessary, by pledging a sufficient amount of eligible collateral to the Bank in advance and(2) select types of collateral from their assets and make substitutions among them. As such,the framework of pooled collateral is highly convenient for financial institutions and works
to support the smooth conduct of money market operations.

Looking at developments in pooled collateral accepted by the Bank from fiscal 2007, theamount outstanding had increased as a whole, particularly since the failure of Lehman
Brothers in September 2008. At the end of March 2011, it reached 143.8 trillion yen, up
from 69.7 trillion yen at the end of April 2007, as financial institutions cautiously increased
the amount of collateral in response to the heightening of precautionary demand for funds
immediately after the Great East Japan Earthquake (Chart 68). During fiscal 2011, theamount outstanding remained high at around 125 trillion yen.

Meanwhile, the utilization of pooled collateral (as of the month-end) remained stable ataround 30-40 percent. This seemed to indicate that financial institutions adjusted theamount of collateral they submitted to the Bank by considering their own utilization andexcess amount of collateral, as well as managing their intraday liquidity. During fiscal
2011, the utilization of collateral stayed at around 35 percent.

66

Chart 68: Amount Outstanding of Pooled Collateral Acceptedby the Bank (1)150

trillion yen

%

100

120

80

90

60

60

40

30

20

0

0

Apr-07 Apr-08 Apr-09 Apr-10 Apr-11
Government securities
Other public debt
Corporate debt
Utilization of collateral accepted (right scale)Note: Figures are as of the end of the month.

With regard to the categories of collateral, government securities accounted for the largest
share of about 70 percent in total (Chart 69). The increase in the amount outstanding ofpooled collateral since fiscal 2007 was also driven mainly by government securities.
Financial institutions seemed to adjust their overall collateral levels by controlling theamount of government securities that they submitted to the Bank, given the large volume ofissuance and the high operational efficiency for submission and withdrawal as collateral to
the Bank. Other public debt accounted for more than 20 percent and consisted mostly ofloans on deeds to the government and those with government guarantees. Corporate debt
accounted for less than 10 percent. Their amount outstanding, however, temporarily
increased significantly to more than 11 trillion yen from 3-5 trillion yen, reflecting the
introduction of the special funds-supplying operations to facilitate corporate financing in
December 2008 (collateral of those operations was limited to corporate debt). Even after theoperations expired at the end of March 2010, the amount outstanding of corporate debt
decreased only slightly and stayed at around 8-9 trillion yen.

67

Chart 69: Amount Outstanding of Pooled Collateral Accepted by the Bank (2)trillion yen
As of end-Mar. 2011

Categories of collateral

As of end-Mar. 2012

Collateral value

Share in total

Collateral value

Share in total

143.8

100.0%

126.2

100.0%

107.9

75.0%

88.8

70.4%

JGBs with coupons, etc. 1

81.8

56.9%

76.2

60.4%

T -Bills

26.1

18.2%

12.6

10.0%

Other public debt

27.8

19.3%

29.6

23.5%

Government-guaranteed bonds

2.6

1.8%

2.3

1.8%

Municipal bonds

2.6

1.8%

2.7

2.1%

Fiscal Investment and Loan Program (FILP) agency bonds

0.9

0.6%

1.1

0.9%

Loans on deeds to the government and those with government guarantees

21.6

15.0%

23.4

18.5%

Loans on deeds to municipal governments

0.1

0.1%

0.1

0.1%

8.0

5.6%

7.8

6.2%

Corporate bonds, etc. 3

1.4

1.0%

1.3

1.0%

CP, etc. 4

1.9

1.3%

1.5

1.2%

Bills (excluding CP)

0.3

0.2%

0.3

0.2%

Loans on deeds to companies, etc. 5

4.4

3.1%

4.7

3.7%

T otalGovernment securities

Corporate debt 2

Notes: 1. Including floating-rate bonds, inflation-indexed bonds, and STRIPS.
2. Including foreign government bonds, international financial institution bonds, and foreign bonds denominated inforeign currencies.
3. Consisting of corporate bonds, asset-backed securities, and bonds issued by real estate investment corporations.
4. Consisting of dematerialized CP (including dematerialized CP issued by foreign corporations with guarantees,
dematerialized asset-backed CP and dematerialized CP issued by real estate investment corporations) and CP(including ABCP and CP issued by real estate investment corporations).
5. Consisting of loans on deeds to companies (including entities owned by municipal governments) and those to realestate investment corporations.

68

V. Other Matters Related to Money Market Operations

A. Enhancement of the Growth-Supporting Finding Facility

At the MPM held on June 13 and 14, 2011, the Bank decided to establish a new line ofcredit for equity investments and ABL, or the special rules for equity investments and ABL.
With a view to further encouraging financial institutions' efforts, the Bank deemed it
appropriate to focus on supporting their provision of equity-like funds and loans without
conventional collateral or guarantees.

Under the special rules for equity investments and ABL, the Bank provides loans against
pooled collateral at a fixed rate of 0.1 percent within the amount outstanding of eligible
equity investments and ABL. In order to support financial institutions' long-term initiatives,the duration of each loan was set at two years, twice as long as for loans under the main
rules. Loans can be rolled over once (the maximum duration of four years). The total
amount of loans was set at 500 billion yen, and the maximum amount of loans to eachfinancial institution was set at 50 billion yen.

Furthermore, at the MPM held on March 12 and 13, 2012, the Bank decided to enhance theGrowth-Supporting Funding Facility both in terms of the yen and a foreign currency and toincrease the total amount of loans available by 2 trillion yen, from 3.5 trillion yen to 5.5
trillion yen. The related four concrete measures are as follows.

First, the Bank established special rules for a new lending arrangement of 500 billion yen
for small-lot investments and loans (each of which amounts to 1 million yen or more but
less than 10 million yen) that had not been deemed eligible in the main rules for the
Growth-Supporting Funding Facility.

Second, the Bank decided to establish special rules for a U.S. dollar lending arrangement
for foreign currency-denominated investments and loans that should contribute to Japan's
economic growth, using the U.S. dollar reserves already held by the Bank, equivalent to 1
trillion yen. It also compiled a preliminary outline and made it public.

69

Third, with regard to the main rules for the Growth-Supporting Funding Facility, the Bank
extended the deadline for applications for new loans by two years to March 31, 2014 andincreased the ceiling for the outstanding balance of loans by 500 billion yen, from 3 trillion
yen to 3.5 trillion yen.

And fourth, regarding the special rules for equity investments and ABL, the Bank extended
the deadline for applications for new loans by two years, to March 31, 2014, while keeping
the ceiling for the outstanding balance of loans at the current 500 billion yen.

B. Support from the Financial Side to Restore and Rebuild the Disaster Areas
Affected by the Great East Japan Earthquake

At the MPM held on April 28, 2011, the Bank decided to conduct the funds-supplying
operation to support financial institutions in disaster areas and the relaxation of thecollateral eligibility standards for debt of companies in disaster areas.

a. Funds-Supplying Operation to Support Financial Institutions in Disaster Areas

With a view to supporting the efforts to meet the demand for funds for restoration andrebuilding, the Bank provides loans at a fixed rate of 0.1 percent against the eligible
collateral to financial institutions with business offices in disaster areas that conduct lending
and central organizations of financial cooperatives whose member financial institutions
have business offices that conduct lending in disaster areas. The duration of each loan was
set at one year to meet the need for longer-term funds. The Bank's total amount of loans was
set at 1 trillion yen and the maximum amount of loans to each counterparty was set at 150
billion yen, taking into account each counterparty's total amount of lending outstanding at
business offices in disaster areas (for central organizations of financial cooperatives, theaggregated amount of lending outstanding in disaster areas made by both the central
organization and its member financial institutions).

70

b. Relaxation of the Collateral Eligibility Standards for Debt of Companies in Disaster
Areas

The Bank relaxed the collateral eligibility standards for debt of companies in disaster areas
with a view to securing sufficient financing capacity at the financial institutions in disasterareas with business offices in disaster areas that conduct lending.

Specifically, evaluation of creditworthiness and the eligibility standards of external credit
ratings and other conditions were relaxed for (1) corporate bonds, bills, and loans on deeds
issued by companies with business offices in disaster areas; (2) loans on deeds to municipal
governments in disaster areas; and (3) loans on deeds to entities in disaster areas owned bymunicipal governments in disaster areas (Chart 70). In relaxing the collateral eligibility
standards, the Bank took measures to maintain its financial soundness including moreconservative margin tables for collateral.
Chart 70: Outline for the Relaxation of the Collateral Eligibility Standards
for Debt of Companies in Disaster Areas

Companies with business offices
in disaster areas

Municipal governments
in disaster areas

Entities in disaster areas owned
by municipal governments
in disaster areas

Corporate
bonds

The eligibility standards of external
credit ratings will be relaxed from "rated
A or higher" to "rated BBB or higher."

—

—

Bills

Bills of debtor companies classified as"normal" borrowers in the latest
self-assessment by financial institutions
in disaster areas will be deemed ashaving no problems with their
creditworthiness.

——

The Bank will accept as eligible
collateral loans on deeds tomunicipal governments that do notissue publicly offered municipal
bonds, and loans on deeds for whichinterest rates are not determinedthrough a competitive auction
process.

The Bank will accept as eligible
collateral loans on deeds to entities
that are classified as "normal"
borrowers in the latest
self-assessment by financial
institutions in disaster areas.

The eligibility standards of external
credit ratings will be relaxed from "rated
A or higher" to "rated BBB or higher."Loans
on deeds

Loans on deeds of debtor companies
classified as "normal" borrowers in thelatest self-assessment by financial
institutions in disaster areas will bedeemed as having no problems with
their creditworthiness.

Note: In the case of "normal-class" standards, the Bank applies a deeper collateral haircut compared with the case ofrelaxation of the eligibility standards of external credit ratings, and also sets the limit for the amount of bills andloans on deeds submitted as collateral pursuant to the relevant rules of the Bank.

71

At the MPM held on October 6 and 7, 2011, the Bank decided to extend these two measuresby six months with a view to continuing to support financial institutions in disaster areas intheir efforts to meet demand for funds for restoration and rebuilding by making effective
use of undisbursed funds for loans originally committed for the operation, and to securing
sufficient financing capacity at the financial institutions in disaster areas. Specifically, theBank extended the deadline for new applications for loans to April 30, 2012 and theeffective period of the relaxation of the collateral eligibility standards for debt of companies
in disaster areas up to April 30, 2013.

Furthermore, at the MPM held on March 12 and 13, 2012, the Bank decided to extend themeasures by one year, taking also into account requests from financial institutions.
Specifically, the Bank extended the deadline for new applications for loans under theoperation to April 30, 2013, while keeping the existing 1 trillion yen ceiling for theoutstanding balance of loans, and extended the effective period of the relaxation of thecollateral eligibility standards for the debt of companies in disaster areas through April 30,
2014.

C. Periodic Review of Collateral Value of Eligible Collateral and Other Related
Matters

Since fiscal 2005, the Bank has generally conducted an annual review of collateral values of
eligible collateral and other related matters, comprising (1) collateral value of eligible
collateral, (2) the margin ratios of JGSs used in JGS purchasing operations with repurchaseagreements and the collateral value of margin collateral, and (3) margin ratios of JGSs usedin the securities lending facility. The review is based on developments in financial markets,and the Bank makes necessary revisions accordingly.

The collateral value and other related matters were revised at the MPM held on October 6
and 7, 2011.

72

D. Establishment of Bilateral Liquidity Swap Arrangements among the Central Banks
to Enable the Provision of Liquidity in Any of Their Currencies

At the unscheduled MPM held on November 30, 2011, in view of developments in the
global money markets and their potential repercussions on the liquidity of the yen money
market, the Bank decided to extend the expiration of the existing U.S. dollar liquidity swap
arrangement with the Federal Reserve and the concomitant U.S. dollar funds-supplying
operations through to February 1, 2013.

In addition, as a contingency measure, the Bank of Canada, the Bank of England, the Bankof Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank
agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can beprovided in each jurisdiction in any of their currencies should market conditions so warrant.
Specifically, they expanded currency swap arrangements to include, in addition to U.S.
dollars, Canadian dollars, pounds sterling, yen, euros, and Swiss francs, and thereby
established bilateral liquidity swap arrangements among the six central banks available until
February 1, 2013.

In response to the coordinated action, at the MPM held on December 20 and 21, 2011, theBank decided to formulate (1) summaries of swap agreements with four of the central banks(the Bank of Canada, the Bank of England, the European Central Bank, and the Swiss
National Bank) under which the Bank could obtain foreign currencies from other banks,principal terms and conditions for funds-supplying operations for the four currencies (theCanadian dollar, the pound sterling, the euro, and the Swiss franc), and procedures forselection of eligible counterparties in the operations; and (2) summaries of swap agreementswith the five central banks (the Bank of Canada, the Bank of England, the European Central
Bank, the Federal Reserve, and the Swiss National Bank) under which the Bank could
provide yen to other banks. The first set of measures enabled the Bank to provide liquidity
for the four currencies in addition to the U.S. dollar should it be necessary, while the second
enabled the five other central banks to provide liquidity for the yen should it be necessary.

73During fiscal 2011, there was no occasion where the liquidity provision of currencies otherthan the U.S. dollar was necessary, and the Bank did not conduct foreign currency
funds-supplying operations other than for the U.S. dollar.

E. Changes to the Operation Timetable for the Shortening of the Payment andSettlement Period for JGBs

Changes were made to the payment and settlement period for JGBs on April 23, 2012,according to which the settlement day was changed from the contract/bid date plus threebusiness days (T+3) to the contract/bid date plus two business days (T+2) for outright JGB
trades on both the secondary market and the primary market. Likewise, regarding market
practices for GC repo transactions, which are in many cases made after changes in JGB
holdings and cash positions are determined as a result of JGB trading, the payment andsettlement day was essentially changed from T+2 to T+1.

In response to these changes, the Bank aligned the timetable for the operations of outrightpurchases and purchases with repurchase agreements with market practices for payment andsettlement and shortened the payment and settlement period by one business day. For
funds-supplying operations against pooled collateral, (1) regarding variable-rate operations,
the T+1 start operations as well as the current T+2 start operations are offered to deal withfunding needs after cash positions change as a result of outright JGB transactions. The T+1
start operations are mainly offered as the Head Office lending operations at 10:10 a.m.
(Chart 71). (2) Regarding fixed-rate operations through the Asset Purchase Program, theT+2 start operations continue to be offered, since the Bank currently offers the same amountas maturing loans.
Chart 71: Timetable for the Variable-Rate Funds-Supplying Operations
against Pooled Collateral (T+1 Settlement Basis)

Variable-rate funds-supplying operations
against pooled collateral at the Head Office

Offer

Bid submission
cut-off time

Notification ofrespective result
to counterparties

Settlement date

10:10 a.m.

10:40 a.m.

About 10:55 a.m.

T +1

74

List of Data Sources and Referenced Materials

Chart 1: Bloomberg.
Chart 2: Bloomberg.
Chart 3: Bloomberg.
Chart 4: Bloomberg.
Chart 5: Bloomberg; Bank of America Merrill Lynch.
Chart 6: Bloomberg; Japan Bond Trading.
Chart 7: Bank of Japan, "Bank of Japan Accounts (Every Ten Days)."Chart 8: Bank of Japan, "Bank of Japan Accounts (Every Ten Days)."Chart 9: Federal Reserve, "Factors Affecting Reserve Balances."
Chart 10: European Central Bank, "Minimum Reserves and Liquidity."
Chart 11: Bank of Japan, "Tokyo Repo Rate," "Uncollateralized Overnight Call Rate."
Chart 12: Bank of Japan, "Tokyo Repo Rate," "Bank of Japan Operations."
Chart 13: Ministry of Finance Japan.
Chart 14: Japan Bond Trading.
Chart 15: Japan Bond Trading; Ministry of Finance Japan.
Chart 16: Ministry of Finance Japan, "International Transaction in Securities."
Chart 17: Bloomberg.
Chart 18: Federal Reserve, "Flow of Funds Accounts of the United States."
Chart 20: Japan Bond Trading.
Chart 21: Japan Bond Trading.
Chart 22: Japan Securities Depository Center.
Chart 23: Japan Securities Dealers Association.
Chart 24: Bloomberg.
Chart 25: Bloomberg; Bank of Japan, "Bank of Japan Operations."
Chart 26: Bank of England; European Central Bank; Swiss National Bank; Bank of Japan,"Bank of Japan Operations."
Chart 27: Bloomberg; Japan Bond Trading.
Chart 28: Bloomberg.

75

Chart 29: Bank of Japan, "Bank of Japan Accounts (Every Ten Days)," "Financial
Statements of the Bank of Japan," "Monetary Base and the Bank of Japan's
Transactions."
Chart 30: Bank of Japan, "Bank of Japan Operations."
Chart 31: Bank of Japan, "Sources of Changes in Current Account Balances at the Bank ofJapan and Market Operations (Updated Every Business Day)."
Chart 32: Bank of Japan, "BOJ Current Account Balances by Sector."
Chart 33: Bank of Japan, "BOJ Current Account Balances by Sector."
Chart 34: Bank of Japan, "BOJ Current Account Balances by Sector," "Tokyo Repo Rate,""Uncollateralized Overnight Call Rate."
Chart 35: Bank of Japan, "Amounts Outstanding in the Call Money Market."
Chart 36: Bank of Japan, "Amounts Outstanding in the Call Money Market."
Chart 37: Bank of Japan, "Amounts Outstanding in the Call Money Market."
Chart 39: Bank of Japan, "Sources of Changes in Current Account Balances at the Bank ofJapan and Market Operations (Final Figures)."
Chart 40: Bank of Japan, "Sources of Changes in Current Account Balances at the Bank ofJapan and Market Operations (Final Figures)."
Chart 41: Bank of Japan, "Sources of Changes in Current Account Balances at the Bank ofJapan and Market Operations (Final Figures)."
Chart 42: Bank of Japan, "Sources of Changes in Current Account Balances at the Bank ofJapan and Market Operations (Updated Every Business Day)."
Chart 43: Bank of Japan, "Bank of Japan Accounts (Every Ten Days)."Chart 44: Cabinet Office; Bank of Japan, "Bank of Japan Accounts (Every Ten Days)."Chart 45: Bank of Japan, "Currency in Circulation."
Chart 46: Bank of Japan, "Sources of Changes in Current Account Balances at the Bank ofJapan and Market Operations (Updated Every Business Day)."
Chart 47: Bank of Japan, "Sources of Changes in Current Account Balances at the Bank ofJapan and Market Operations (Final Figures)."
Chart 48: Bank of Japan, "Japanese Government Bonds Held by the Bank of Japan,""Sources of Changes in Current Account Balances at the Bank of Japan andMarket Operations (Updated Every Business Day)," "T-Bills Purchased by the
Bank of Japan."76

Chart 49: Bank of Japan, "Bank of Japan Accounts (Every Ten Days)."Chart 50: Japan Bond Trading; Bank of Japan, "Bank of Japan Operations."
Chart 51: Bank of Japan, "Bank of Japan Operations."
Chart 53: Japan Bond Trading; Bank of Japan, "Bank of Japan Operations."
Chart 54: Bank of Japan, "T-Bills Purchased by the Bank of Japan."Chart 55: Japan Securities Depository Center.
Chart 56: Bank of Japan, "Bank of Japan Operations."
Chart 57: Bank of Japan, "Bank of Japan Operations."
Chart 58: Bank of Japan, "Monetary Base and the Bank of Japan's Transactions."
Chart 59: Bank of Japan.
Chart 60: Bank of Japan, "Bank of Japan Accounts (Every Ten Days)," "Monetary Base."
Chart 61: Bank of Japan, "Bank of Japan Operations."
Chart 62: Bank of Japan, "Bank of Japan Operations."
Chart 63: Bank of Japan, "Bank of Japan Operations."
Chart 64: Bank of Japan, "Bank of Japan Operations."
Chart 65: Bank of Japan, "Bank of Japan Operations."
Chart 66: Bank of Japan, "Loan Disbursement under the Fund-Provisioning Measure to
Support Strengthening the Foundations for Economic Growth."
Chart 67: Bank of Japan, "Loan Disbursement under the Funds-Supplying Operation to
Support Financial Institutions in Disaster Areas."
Chart 68: Bank of Japan, "Collateral Accepted by the Bank of Japan."Chart 69: Bank of Japan, "Collateral Accepted by the Bank of Japan."

77