November 2024

Broad
Perspective Broad-Perspective Review Series
Review

Developments in the Japanese Money Markets

and their Functioning with Excess Reserves
- Including Developments after the Termination of
the Negative Interest Rate Policy -

Financial Markets Department

Bank of Japan

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 November 2024
Financial Markets Department, Bank of Japan

Developments in the Japanese Money Markets

and their Functioning with Excess Reserves
- Including Developments after the Termination of
the Negative Interest Rate Policy -

Abstract
While implementing a variety of unconventional monetary policy measures, the Bank of
Japan has provided ample reserves that far exceed the levels of required reserves for most
of the past 25 years. This report assesses the impact of the unconventional monetary
policy measures on the money markets by looking back on the rate formation and
transaction trends in the money markets with such excess reserves.
The money markets are expected to function as (1) the starting point of the yield curve
and (2) a place to adjust the excess and shortage of funds. With excess reserves, the
importance of the latter function is considered to be declining. However, there is a
growing importance of ensuring the uncollateralized call market consisting of diverse
participants with a certain transaction volume, given the role which the uncollateralized
overnight call rate (TONA) has taken as an interest rate benchmark in recent years.
The period in which unconventional monetary policy measures were taken can be broadly
divided into (1) the quantitative easing period from 2001 to 2006 (the first phase), (2) the
period from the introduction of the complementary deposit facility in 2008 to the
introduction of the negative interest rate policy in 2016 (the second phase), and (3) the
negative interest rate policy period from 2016 to 2024 (the third phase), based on the
interest rate on excess reserves. In the first phase, in which the complementary deposit
facility did not exist and a zero percent interest rate was applied to excess reserves, trading
incentives were lost in the uncollateralized call market, and the functioning of the market
declined. In the second phase, the complementary deposit facility was introduced, and
trading incentives arose between financial institutions eligible for the facility and those
not eligible. Under these circumstances, the functioning of the uncollateralized call
market gradually recovered and was maintained in the third phase as well. Meanwhile,

The authors of this paper are Masuhiro Awai (currently, at the Secretariat of the Policy Board,
masuhiro.awai@boj.or.jp), Joji Ide (jouji.ide@boj.or.jp), and Masato Takahashi
(masato.takahashi@boj.or.jp). The authors received help from Maho Uchida, Yasuhiro Kubokura,
Takashi Suemasa, and Kaito Matsumura in preparing the figures.

1
the functioning of the GC repo market was also maintained in terms of rate formation and
transaction trends.
Following the decision to change the monetary policy framework in March 2024 and the
termination of the negative interest rate policy, the money markets transitioned smoothly
from the world of "negative interest rates" to the one with "positive interest rates." The
fact that participants in the uncollateralized call market were diversified, resulting in the
expansion of trading networks in the third phase, among other factors, has contributed to
the smooth transition.
Given the role which TONA has taken as an interest rate benchmark in recent years, in
addition to the fact that the Bank set the short-term interest rate as its primary policy tool,
it is becoming ever more important that the functioning of the money markets remains
robust. The Bank intends to continue to carefully monitor the rate formation and trading
trends in the money markets and pay attention to the market functioning.

2
 Table of Contents

1. Introduction .................................................................................................... 4

2. Expected Functions of the Money Markets .................................................. 5

(1) Function as the starting point of the yield curve

(2) Function as a place to adjust the excess and shortage of funds

3. Uncollateralized Call Market with Excess Reserves: Rate Formation and

Trading Trends................................................................................................ 6

(1) First phase: quantitative easing period from 2001 to 2006

(2) Second phase: period from the introduction of the complementary deposit
facility in 2008 to the introduction of the negative interest rate policy in 2016

(3) Third phase: period from the introduction of the negative interest rate
policy in 2016 to the changes in the monetary policy framework in 2024

4. Other Notable Developments in the Money Markets with Excess Reserves

........................................................................................................................ 17

(1) Contraction of the collateralized call market

(2) Expansion of the repo market and factors affecting the GC repo rate

(3) Investment demand for T-Bills with negative yields

5. Developments in the Money Markets after the Termination of the Negative

Interest Rate Policy ...................................................................................... 22

(1) Developments in the call markets

(2) Developments in the repo market and the T-Bill market

6. Conclusion ..................................................................................................... 29

3
 1. Introduction

This report explains developments in the Japanese money markets and their functioning
over the past 25 years, as part of the "Review of Monetary Policy from a Broad
Perspective." While implementing a variety of unconventional monetary policy measures,
the Bank of Japan has provided ample reserves that far exceed the levels of required
reserves under the reserve requirement system for most of the past 25 years (Chart 1).
The report assesses the impact of the unconventional monetary policy measures on the
money markets by looking back on the rate formation and transaction trends in the money
markets with such excess reserves. The primary subject of the analysis and assessment is
the uncollateralized call market, which was the operating target for the Bank's monetary
policy for a considerable period in the past. At the same time, other money markets, such
as the repo market, are also examined from the viewpoint of market functioning.

Chart 1: Amounts of Current Account Balances at the Bank

1st phase 3rd phase
tril. Excess reserve (Limited excess 2nd phase Three-tier system
yen balances: 0.0% reserve balances) Excess reserve balances: +0.1% (Policy-rate balances: -0.1%)
700
Negative interest rate
Current account
600 balance at the Bank Call rate Call rate Monetary Monetary
base base Yield Curve Control (YCC)
around 5 tril. yen around around +60-70 tril. +80 tril.
↓ 0.1% 0 to 0.1% yen/year yen/year Introduction of Special
500 Operations in Response
around 30 to 35 tril. yen Quantitative
Interest rate cut to COVID-19
and
400 Quantitative Easing
and
Qualitative
Comprehensive
Monetary
300 Monetary Easing
Easing

200
Introduction of the (With a negative interest rate)
complementary deposit facility Quantitative and Qualitative Monetary
100 Easing with Yield Curve Control

0
Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19 Jan-21 Jan-23
Institutions not subject to the reserve requirement (including those not eligible for the complementary deposit facility)
Excess reserves
Required reserves
Source: Bank of Japan.

The structure of this report is as follows. First, Section 2 summarizes the expected
functions of the money markets. Section 3 divides the past 25 years into three phases
based on the interest rate on excess reserves1 and then summarizes trading incentives in
the uncollateralized call market under the guideline for market operations in each phase,
while examining the rate formation and trading trends, such as changes in market
participants and trading volume. Section 4 considers notable developments regarding the
functioning of the money markets other than the uncollateralized call market. Based on
the discussions up to Section 4, Section 5 explains developments in the money markets

1 This refers to the interest rate applied to current account balances held at the Bank by financial
institutions eligible for the complementary deposit facility (excluding required reserve balances).

4
after the changes in Bank's monetary policy framework in March 2024. Finally, Section
6 presents the conclusion.

2. Expected Functions of the Money Markets

The money markets are markets for financial transactions with a maturity up to one year.
In Japan, they consist of (1) interbank markets, in which only financial institutions
participate (such as the call markets),2 and (2) open markets, in which not only financial
institutions but business corporations participate, such as the repo market, the treasury
discount bill (hereinafter referred to as "T-Bill") market, the CD market, and the CP
market. Of these markets, the uncollateralized call market, where the lending and
borrowing of unsecured funds are conducted, serves as a marketplace where financial
institutions lend and borrow short-term funds. Money markets are expected to perform
two main functions as follows.

(1) Function as the starting point of the yield curve

First, the money markets have a function as the starting point of the yield curve. The Bank
set the uncollateralized overnight call rate as the operating target for monetary policy for
a considerable period in the past. With the overnight interest rate as the starting point, the
effects of monetary policy spread to the overall financial markets through transactions
with various terms and a variety of inter-market arbitrage trading. Additionally, interest
rates determined by the market mechanism provide valuable information for the conduct
of monetary policy. Therefore, it is important that the functioning of the money markets
is maintained from the perspective of the permeation of the effects of monetary policy.3

Furthermore, in the context of interest rate benchmark reform, the uncollateralized

overnight call rate (TONA: Tokyo Overnight Average rate), which is calculated and
published by the Bank, was identified as the alternative risk-free rate for the Japanese yen
to yen LIBOR, and its importance as an interest rate benchmark has been growing
further.4

2
Pension funds and others entrust trust banks to manage surplus funds in the interbank markets.
Similarly, investment trusts manage surplus funds in the interbank markets through trust accounts of
trust banks.
3
The discussion on the functioning of the money markets as the starting point of the yield curve is
based on Shirakawa [2008] (available only in Japanese).
4 Regarding the identification of the risk-free rate for the Japanese yen, see the report published by
the Study Group on Risk-Free Reference Rates [2016] (available only in Japanese).

5
(2) Function as a place to adjust the excess and shortage of funds

Second, the money markets have a function as a place to adjust the excess and shortage
of funds. Financial institutions lend and borrow cash with each other in the money
markets in order to adjust their positions associated with the receipt and payment of
various funds. In Japan, the uncollateralized call market has traditionally played this role,
and overnight transactions, through which financial institutions lend and borrow funds
with each other from the trade day to the next business day, are most commonly used. In
addition, the repo market also fulfills a role as a place to adjust the excess and shortage
of funds, as GC repo transactions, which do not specify the securities to be traded, are
used to manage short-term funds.

With a large amount of excess reserves due to the provision of abundant reserves by the
central bank, the importance of the money markets as a place to adjust the excess and
shortage of funds is considered to be declining. However, from the perspectives of (1)
maintaining a platform to conduct smooth transactions for the future and (2) maintaining
the aforementioned role which TONA has taken as an interest rate benchmark in recent
years, it is essential that the money markets consist of diverse participants and that a
certain transaction volume is ensured in the market.

3. Uncollateralized Call Market with Excess Reserves: Rate Formation and

Trading Trends

This section summarizes developments in the uncollateralized call market under

unconventional monetary policy by dividing the period into three phases based on the
interest rate on excess reserves: (1) the quantitative easing period from 2001 to 2006, (2)
the period from the introduction of the complementary deposit facility in 2008 to the
introduction of the negative interest rate policy in 2016, and (3) the period from the
introduction of the negative interest rate policy in 2016 to the changes in the monetary
policy framework in 2024. Specifically, the section overviews trading incentives in the
uncollateralized call market in each phase and then looks back on the rate formation and
trading trends, such as changes in market participants and trading volume, while assessing
the impact of the unconventional monetary policy measures on the functioning of the
uncollateralized call market.

(1) First phase: quantitative easing period from 2001 to 2006

(Guideline for market operations and trading incentives in the money markets)

Under the quantitative easing policy introduced in March 2001 (the first phase), the target

6
for the Bank's market operations was changed from an interest rate (the uncollateralized
overnight call rate) to a quantitative indicator (current account balances at the Bank), and
the Bank actively provided reserves through operations such as purchases of bills and T-
Bills.

While the majority of financial institutions with current accounts at the Bank held current
account balances exceeding the levels of required reserves, trading for adjusting the
excess and shortage of funds among financial institutions decreased significantly. In
addition, unlike the second phase and thereafter described later, transactions for arbitrage
purposes did not occur, as there was no interest on excess reserves. Accordingly, trading
incentives for financial institutions declined, except for transactions for fulfilling funding
needs of certain financial institutions and for the purpose of relational maintenance (Chart
2). Under these circumstances, the uncollateralized call rate stayed close to zero percent
(Chart 3), and the amounts outstanding in the uncollateralized call market decreased
considerably.

Chart 2: Trading Incentives Chart 3: Uncollateralized Call Rate

Funding needs % 1st phase tril. yen

0.5 50
(by securities companies
and certain foreign banks, Current account balances (right
etc.) 0.4 scale) 40
Uncollateralized overnight call
0.3 rate 30
(No trading needs)

0.2 20
Excess reserve
balance (Relational maintenance
purposes) Surplus fund 0.1 10
(+0.0%)
Excess reserve balances
balance (+0.0%)
0.0 0
Required (+0.0%)
reserve balance Required
(+0.0%) reserve balance -0.1 -10
(+0.0%) Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06
Bank A Bank B Institutions not having
current accounts at the
Bank (such as investment
trusts)
Source: Bank of Japan.

(Trading trends)

Looking at the amounts outstanding on the cash borrowing side by sector, transactions of
city banks and regional banks were mainly for the purpose of relational maintenance, and
the amount of cash borrowing decreased significantly (Chart 4). In this situation,
transactions based on actual funding needs were concentrated among securities firms and
Japanese entities of foreign banks. The amount of cash borrowing by securities firms
slightly increased due to settlement funding needs. In addition, since Japanese entities of
foreign banks, which were in the business expansion period, shifted the means of their

7
 short-term yen funding to borrowing in the uncollateralized call market due to a decline
in the attractiveness of conversion to yen in the FX swap market, the amount of their cash
borrowing somewhat increased in the latter half of the first phase (Chart 4). Meanwhile,
on the cash lending side, the amount of lending decreased across a wide range of entities.

As a result of the decline in transactions in the uncollateralized call market as a whole in

the first phase, the foundation supporting smooth market transactions in a broad sense
became vulnerable through reduced credit lines, the contraction of the treasury section,
and a decrease in trading know-how, among other factors, resulting in a decline in the
functioning of the uncollateralized call market.5

Chart 4: Amounts Outstanding in the Uncollateralized Call Market by Sector

(Cash Borrowing Side) (Cash Lending Side)

tril. yen 1st phase tril. yen 1st phase
20 20
万

Others Others
16 Securities companies 16 Investment trusts
Foreign banks FIs of central organizations
Trust banks (excl. investment trusts) Trust banks (excl. investment trusts)
12 City banks 12 City banks
Regional banks Regional banks

8 8

4 4

0 0
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06

Note: Transactions intermediated by tanshi companies. Figures are the sum of overnight and term transactions. Monthly average.
Source: Bank of Japan.

(2) Second phase: period from the introduction of the complementary deposit
facility in 2008 to the introduction of the negative interest rate policy in 2016

(Guideline for market operations and trading incentives in the money markets)

In the monetary easing phase during the time of the global financial crisis triggered by
subprime mortgage issues, the Bank introduced the complementary deposit facility in
November 2008 to ensure stability of financial markets through further facilitating market
operations. The Bank decided to apply an interest rate of plus 0.1 percent to excess
reserves (current account balances held at the Bank exceeding required reserves), to
which no interest had been applied before (thereafter, the interest rate level was kept at

5 For the decline in the functioning of the money markets during the quantitative easing period, see
Shirakawa [2008] (available only in Japanese).

8
plus 0.1 percent until the introduction of the negative interest rate policy in 2016).6

Meanwhile, the target for the uncollateralized overnight call rate as the policy interest rate
was lowered from around 0.3 percent to around 0.1 percent in December 2008 and it was
kept unchanged until October 2010. Then, the Bank adopted the comprehensive monetary
easing policy in October 2010 and encouraged the uncollateralized overnight call rate to
remain at around 0 to 0.1 percent while actively providing reserves through purchases of
diverse financial assets. After quantitative and qualitative monetary easing was adopted
in April 2013, the target for market operations was changed from an interest rate (the
uncollateralized overnight call rate) to a quantitative indicator (the monetary base), and
the Bank provided extremely abundant reserves through large-scale asset purchases,
mainly of Japanese government bonds (JGBs).

In the above-mentioned second phase, excess reserves continued to increase, with the
Bank's fund provision mainly through asset purchases, and the pace of increase
accelerated particularly after the introduction of the quantitative and qualitative monetary
easing. Consequently, the perception of abundant liquidity in the financial markets
gradually became stronger, and, as with the first phase, trading needs to adjust the excess
and shortage of funds became limited. However, in the second phase, with the
complementary deposit facility, trading incentives arose, as financial institutions that held
current accounts at the Bank and received interest (hereinafter referred to as "financial
institutions eligible for the complementary deposit facility") borrowed funds in the money
markets at a rate below the interest rate on excess reserves and parked the funds in current
accounts at the Bank (Chart 5). On the other hand, those not eligible for the
complementary deposit facility, such as investment trusts, had incentives to lend funds
even at a rate below the interest rate on excess reserves, as there were generally limited
favorable means of managing surplus funds. As a result, a certain amount of transactions
occurred in the money markets between financial institutions eligible for the
complementary deposit facility and those not eligible.

6
The Bank decided to introduce the complementary deposit facility as a temporary measure at the
Monetary Policy Meeting (MPM) held in October 2008. Its implementation period was then extended
for some time at the MPM held in October 2009 from the viewpoint of conducting smooth market
operations.

9
 Chart 5: Trading Incentives Chart 6: Uncollateralized Call Rate

% tril.yen
tril. yen
0.20 %
0.20 2ndphase
2nd phase 400
400
Excess reserve balance
Interestrate
Interest ratecut
cutand
and Quantitativeand
Quantitative and
after arbitrage
Comprehensive
Comprehensive Qualitative
Qualitative
transactions 0.15 300
0.15 MonetaryEasing
Monetary Easing MonetaryEasing
Monetary Easing 300
(+0.1%)
Surplus fund balances Interestrate
rate
Interest
(+0.0%) applied
Excess reserve balance applied
after arbitrage 0.10
0.10 200
200
transactions Target:
Excess reserve balance Target:
(+0.1%) Target:
Target:
(+0.1%) around0.1%
around 0.1%
0.05
0.05 around0.0%
around 0.0% 100
100
Excess reserve balance
(+0.1%) Surplus fund balances toto0.1%
0.1%
after arbitrage
Required reserve transactions 0.00
0.00 00
Required reserve CurrentCurrent
account balances (right scale)
balance (+0.0%)
balance Uncollateralized overnight call rate
(+0.0%) account…
(+0.0%) 3-month T-Bill rate
Bank A Bank B Financial institutions not
-0.05
-0.05 -100
-100
eligible for the complementary Oct-08 Apr-10
Oct-08 Apr-10 Oct-11
Oct-11 Apr-13
Apr-13 Oct-14
Oct-14
deposit facility (such as
investment trusts)

Sources: Bank of Japan; Japan Bond Trading.

(Rate formation and trading trends)

Looking at developments in the uncollateralized overnight call rate, in the first half of the
second phase (the period of interest rate cuts and comprehensive monetary easing), the
rate basically moved in line with the target specified in the guideline for market operations
(Chart 6). In the latter half of the second phase (the period of quantitative and qualitative
monetary easing), the rate gradually declined and fell below 0.1 percent, the interest rate
level applied to excess reserves, largely due to the growing perception of abundant
liquidity resulting from the Bank's large-scale fund provision and a decrease in T-Bill
yields following an increase in purchases by the Bank.

Regarding the amounts outstanding, transactions between financial institutions eligible

for the complementary deposit facility and those not eligible were initially not very active.
However, they became active in the latter half of the second phase and gradually increased
(Chart 7). The increase in the amounts outstanding was partly due to changes in the level
of the T-Bill rate (Chart 8). Specifically, in the first half of the second phase, with the GC
repo and the T-Bill rate staying above 0.1 percent, the interest rate level applied to excess
reserves (Chart 6), investment trusts on the cash lending side, which are not eligible for
the complementary deposit facility, preferred investing in T-Bills to lending short-term
funds in the call market. On the other hand, city banks on the cash borrowing side
borrowed short-term funds in the call market for arbitrage against fund management in
the repo and T-Bill markets. In this situation, there were few transactions in which both
players' views on the rate were matched in the call market. Then, in the latter half of the
second phase, as a result of declines in the repo and T-Bill rates due to large-scale JGB

10
 purchases by the Bank, (1) investment trusts on the cash lending side faced difficulties in
short-term fund investments and increased lending in the call market, which provided
larger profit-taking opportunities, and (2) city banks actively engaged in borrowing in the
call market as the recipients of such lending. Consequently, transactions in the
uncollateralized call market between financial institutions eligible for the complementary
deposit facility and those not eligible became active, resulting in an increase in the
amounts outstanding.

Chart 7: Amounts Outstanding in the Uncollateralized Call Market by Sector

(Cash Borrowing Side) (Cash Lending Side)

tril. yen 2nd phase tril. yen 2nd phase
20 20
万

万
Interest rate cut and Quantitative and Interest rate cut and Quantitative and
Comprehensive Monetary Easing Qualitative Comprehensive Monetary Easing Qualitative
16 Monetary Easing 16 Monetary Easing
Others Others
Securities companies Investment trusts
12 Foreign banks 12 FIs of central organizations
Trust banks (excl. investment trusts) Trust banks (excl. investment trusts)
City banks City banks
8 Regional banks 8 Regional banks

4 4

0 0
Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16

Note: Transactions intermediated by tanshi companies. Figures are the sum of overnight and term transactions. Monthly average.
Source: Bank of Japan.

Thus, in the second phase, even with the strong perception of abundant liquidity with
ample excess reserves, since interest was applied to excess reserves under the
complementary deposit facility, a certain amount of transactions gradually occurred on a
daily basis over time between financial institutions eligible for the facility and those not
eligible. Under these circumstances, the functioning of the uncollateralized call market
improved, compared with the first phase.

11
 Chart 8: Participants in the Uncollateralized Call Market
(Period of Interest Rate Cuts and (Period of Quantitative and Qualitative
Comprehensive Monetary Easing) Monetary Easing)
Cash borrowing for Cash lending Cash lending
arbitrage purposes against Rate by term Rate by term
repo and T-Bill trading Regional transactions transactions
% banks %
Regional
banks

0.1 0.1
<Interest rate Financial institutions of <Interest rate Financial
City applied> central organizations applied>
Investment institutions of
banks
companies

Regional banks
Securities

Regional

central
trusts
banks

companies
Securities
Investment trusts <Financial organizations
<Financial institutions City
banks institutions not
not eligible for the
eligible for the
complementary deposit
complementary
facility>
deposit facility>
Cash borrowing at 0.1% or
lower from financial Prefer investing in
institutions not eligible for the T-Bills with a higher rate Cash borrowing at 0.1% or
lower from financial
Shift to lending in the call
complementary deposit facility
institutions not eligible for the market due to a decline in
0.0 complementary deposit facility 0.0 the T-Bill rate

Cash Cash Cash Cash

borrowing side lending Side borrowing side lending Side

(3) Third phase: period from the introduction of the negative interest rate policy
in 2016 to the changes in the monetary policy framework in 2024

(Guideline for market operations and trading incentives in the money markets)

Under the negative interest rate policy, which was decided to be introduced in January
2016, current account balances held by financial institutions at the Bank were divided
into three tiers: (1) "basic balances," the level of which was set roughly the same as that
before the introduction of the negative interest rate policy; (2) "macro add-on balances"
(including required reserves), which increased or decreased in line with changes in the
Bank's fund provision and the Benchmark Ratio; and (3) "policy-rate balances," which
were calculated by deducting "basic balances" and "macro add-on balances" from current
account balances. The Bank decided to apply interest rates of plus 0.1 percent to basic
balances, zero percent to macro add-on balances, and minus 0.1 percent to policy-rate
balances (Chart 9). 7 Although the Bank introduced "Quantitative and Qualitative
Monetary Easing with Yield Curve Control" in September 2016 and set a target level of
the long-term interest rate for market operations, the framework in which the Bank guided
the short-term interest rate was maintained until the lifting of the negative interest rate
policy in March 2024.

7
With regard to the introduction of the three-tier system, then Governor Kuroda explained in his
speech delivered on March 7, 2016 that the Bank had considered how it could minimize the direct
impact on financial institutions' earnings while maximizing the positive effects of the negative interest
rate policy and had also taken measures to ensure that transactions continued to take place in the short-
term money markets, taking into account its impact on the functioning of financial markets (for details,
see Kuroda [2016]).

12
 Under the three-tier system in the third phase, incentives to carry out arbitrage trading
arose among financial institutions eligible for the complementary deposit facility,
depending on the amount of current account balances accumulated before transactions in
the money markets. Specifically, while financial institutions having policy-rate balances
(to which an interest rate of minus 0.1 percent was applied) had incentives to lend short-
term funds at a rate higher than minus 0.1 percent in order to reduce the balances, those
having unused allowances in their macro add-on balances (to which an interest rate of
zero percent was applied) had incentives to borrow short-term funds at negative interest
rates and park them in current accounts at the Bank (Chart 10).

Chart 9: Overview of the Three-Tier Chart 10: Trading Incentives

System
Cash lending at a rate higher than
Cash lending at a rate higher the rate of money trust fees (-0.1%)
than the policy rate (-0.1%)
Cash borrowing
Current account balance at a negative rate
Allocation to policy-rate balance Surplus fund balances
Policy-rate balance (-0.1% fees)
Portion exceeding the following
(-0.1%)
-0.1% Allocation to macro add-on balance
Unused allowance in
Amount determined by the Bank Policy-rate balance
Policy-rate balance macro add-on balance
(Benchmark Balance, etc. × Benchmark Ratio) after arbitrage
＋ (+0.0%)
Macro 0% transactions
Amount corresponding to the balance of Special Surplus fund balances
add-on balance Operations in Response to COVID-19, the loan (-0.1%)
support program and others after arbitrage
＋ Macro add-on balance transactions
Required reserves, etc. Macro add-on balance (+0.0%) (-0.1% fees)
(+0.0%)
Allocation to basic balance
Basic balance +0.1% Basic balance
Average outstanding balance for January-to- Basic balance
December 2015 (Benchmark Balance) - Required (+0.1%)
(+0.1%)
reserves = Generally fixed value
Bank A Bank B Financial institutions not eligible
for the complementary deposit
facility (such as investment trusts)
Note: "Amount corresponding to the balance of Special Operations
in Response to COVID-19, the loan support program and
others" refers to the sum of the balances under these
operations and the increase in the balance as of the end of
March 2016 (the so-called "Loan Balance 2").

Meanwhile, for financial institutions not eligible for the complementary deposit facility,
incentives to lend short-term funds at minus 0.1 percent or higher also arose, as with the
case for financial institutions eligible for the facility with policy-rate balances. Investment
trusts and others deposited surplus funds that could not be managed in the money markets
with trust banks in the form of money trust. Under the negative interest rate policy, as
trust banks charged minus 0.1 percent on money trusts as fees to pass on the burden of
the negative interest rate, minus 0.1 percent of the fees served as the effective lower bound
of lending rates in the uncollateralized call market for investment trusts and others.

(Rate formation and trading trends)

Under the negative interest rate policy, the uncollateralized overnight call rate generally

13
stayed in the range of minus 0.01 percent to minus 0.08 percent. 8 With the
aforementioned trading incentives, not only transactions between financial institutions
eligible for the complementary deposit facility and those not eligible but arbitrage trading
between financial institutions eligible for the facility became active, and the rate swung
compared with the first and second phases (Chart 11), resulting in a significant increase
in transaction amounts.
Chart 11: Uncollateralized Call Rate

0.1 % 3rd phase

inverted, tril. yen -8

-4

0.0 0

-0.1 8

12

-0.2 Hypothetical policy-rate 16

balance (right scale)
Uncollateralized overnight 20
call rate
-0.3 24
Jan-15 Jan-17 Jan-19 Jan-21 Jan-23
Source: Bank of Japan.

Looking at developments in the amounts outstanding by sector, regional banks increased

their presence on the cash borrowing side over time, and the amount outstanding of their
transactions followed an upward trend (Chart 12). In particular, the amount outstanding
in the uncollateralized call market jumped after the introduction of the Special Funds-
Supplying Operations to Facilitate Financing in Response to the Novel Coronavirus
(COVID-19) (hereinafter referred to as "Special Operations in Response to COVID-19")
in March 2020, reaching approximately 16 trillion yen by March 2024, just before the
negative interest rate policy was terminated.

8
Looking at developments in the uncollateralized call rate under the negative interest rate policy in
detail, the rate level rose in the latter half of the period. This could be attributed to (1) the level of
hypothetical policy-rate balance (projection) decreasing from about 10 trillion yen to about 5 trillion
yen in and after the August 2018 reserve maintenance period and (2) growing intention of regional
banks and other players to borrow funds in the uncollateralized call market mainly due to the Bank's
measure to add twice the amount of funds to the macro add-on balances, as described later in the text.

14
 Chart 12: Amounts Outstanding in the Uncollateralized Call Market by Sector
(Cash Borrowing Side) (Cash Lending Side)
tril. yen 3rd phase tril. yen 3rd phase
20 20

万
万

Others Others
FIs of central organizations Investment trusts
16 Securities companies 16
Foreign banks FIs of central organizations
Trust banks (excl. investment trusts) Trust banks (excl. investment trusts)
City banks City banks
12 Regional banks 12 Regional banks

8 8

4 4

0 0
Jan-16 Jan-18 Jan-20 Jan-22 Jan-24 Jan-16 Jan-18 Jan-20 Jan-22 Jan-24

Note: Transactions intermediated by tanshi companies. Figures are the sum of overnight and term transactions. Monthly average.
Source: Bank of Japan.

The increase in transactions was heavily encouraged by the Bank's measure to add twice
the amount outstanding of funds that counterparties receive under some funds-supplying
operations to their macro add-on balances (Chart 13). In fact, after the introduction of the
Special Operations in Response to COVID-19, regional banks that used these operations
actively engaged in arbitrage trading by borrowing cash in the uncollateralized call
market and parking it to their macro add-on balances. The upper limits on regional banks'
macro add-on balances temporarily decreased after these operations were discontinued,
but later began to rise again as they increased the use of the Fund-Provisioning Measure
to Stimulate Bank Lending. Therefore, they continued to actively borrow short-term funds
in the uncollateralized call market.

15
Chart 13: Upper Bound on Macro Add-on Chart 14: Number of Financial
Balances of Regional Banks Institutions Borrowing Cash in
the Uncollateralized Call
Market by Sector
tril. yen number of financial institutions
120 50
Operations add-on amount
Regional banks I
100 Special Operations in Response Regional banks II
40
to COVID-19
Others
80 Loan Support Program, etc.
30
Benchmark Balance ×
60 Benchmark Ratio
Required reserves 20
40

10
20

0 0
Feb-16 Jan-18 Jan-20 Jan-22 Jan-24 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-24
Reserve Maintenance Period
Note: "Loan Support Program, etc." includes the Stimulating Bank Note: The number of financial institutions that have amounts
Lending Facility, the Growth-Supporting Funding Facility, outstanding on the cash borrowing side of the
the Funds-Supplying Operation to Support Financial uncollateralized call market is aggregated by sector based on
Institutions in Disaster Areas (including the funds- transaction data of direct dealing (monthly average).
supplying operations to support financial institutions in Source: Bank of Japan.
disaster areas of the Great East Japan Earthquake and of the
2016 Kumamoto Earthquake before they were abolished),
the Funds-Supplying Operations to Support Financing for
Climate Change Responses, the amount based on the
"Special Rules regarding Calculation of Interest of
Complementary Deposit Facility for Money Reserve Funds,
etc.," and the amount added or reduced in the calculation of
the limit of the Macro Add-on Balance.
Source: Bank of Japan.

The growth in regional banks' funding in the call market came about with the expansion
of trading networks. With individual trading data to identify the number of financial
institutions that borrowed short-term funds in the uncollateralized call market, it was
confirmed that the number of regional banks clearly increased under the three-tier system
(Chart 14). Thus, in the third phase, particularly after the introduction of the Special
Operations in Response to COVID-19, financial institutions that had not been active in
the uncollateralized call market began trading, and as a result, market participants were
diversified, contributing to expanding the scope of uncollateralized call market
transactions.9 The functioning of the uncollateralized call market remained robust, owing
to this expansion of trading networks. This exerted a hysteresis effect on the money
markets and helped facilitate market transactions, leading to a smooth transition to
positive interest rates after the negative interest rate policy was terminated, as described
later.

9
For the growth of uncollateralized call transactions and the expansion of trading networks under the
three-tier system, see Box 1 of "Market Operations in Fiscal 2023" (Financial Markets Department,
Bank of Japan [2024]).

16
 4. Other Notable Developments in the Money Markets with Excess Reserves

This section reviews the money markets other than the uncollateralized call market,
specifically the collateralized call market, the repo market, and the T-bill market, and
examines notable developments in the functioning of these markets.

Looking at developments in various short-term interest rates over the past 25 years, the
collateralized call rate, the GC repo rate, and the T-Bill rate roughly stayed at the same
level as the uncollateralized call rate in the first phase and the first half of the second
phase, namely, until the period of interest rate cuts and comprehensive monetary easing.
However, from the latter half of the second phase, when the quantitative and qualitative
monetary easing was introduced, the repo rate and the T-Bill rate gradually deviated from
the uncollateralized call rate, and they clearly stayed below the uncollateralized call rate
in the third phase (Chart 15). Meanwhile, major changes were observed in market size.
Specifically, while the size of the collateralized call market significantly contracted in the
third phase, those of the repo market and the T-Bill market greatly expanded (Chart 16).

Chart 15: Short-Term Interest Rates

%
0.8 1st phase 3rd phase
Excess reserve balances: 2nd phase Three-tier system
0.6 0.0% Excess reserve balances: +0.1% (policy-rate balances: -0.1%)

Interest rate cuts Quantitative

0.4
and Comprehensive and
Monetary Easing Qualitative
0.2 Monetary
Easing

0.0
Uncollateralized overnight call rate
-0.2 Collateralized overnight call rate
GC repo rate (T/N)
3-month T-Bill rate
-0.4
Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19 Jan-21 Jan-23
Note: The collateralized call rate has not been calculated since April 2016, because there have been no transactions intermediated by tanshi
companies. "GC repo rate (T/N)" denotes the Repo Rate (indication, aggregated) until October 26, 2007, and the Tokyo Repo Rate
thereafter. The Repo Rate (indication, aggregated) is spot next.
Sources: Bank of Japan; Japan Securities Dealers Association; Japan Bond Trading.

17
 Chart 16: Rate Formation in Short-Term Money Markets and Market Size in the 3rd
Phase
Market size
Rate
(background in parentheses)
Uncollateralized
-0.1 to 0% Expanded (active arbitrage transaction)
call
Call Significantly contracted
No transactions intermediated
Collateralized call (difficulties in lending under negative
by tanshi companies
interest rates)
Around -0.1%
GC Expanded (various factors)
(significantly declined at quarter-end)
Repo
Yields on some issues declined Expanded
SC
to the level of the SLF rate(note) (short position in JGBs expanded)
Expanded
Below -0.1%
T-Bills (3-month) (increased issuance during
(significantly declined at quarter-end)
the COVID-19 pandemic)
(Reference)
Expanded
Issuance
Around 0% (increased demand for issuance
(3-month)
under low interest rates)
CP
Purchase/Sale with
Contracted
repurchase Slightly negative
(investment incentives declined)
agreement

Note: The SLF rate refers to the upper limit on the selling yields for the Securities Lending Facility.

(1) Contraction of the collateralized call market

The amount outstanding in the collateralized call market increased after the global
financial crisis in 2008, due to preference for secured transactions, and reached around
14 trillion yen at the end of the second phase (Chart 17). Unlike GC repo transactions, the
majority of collateralized call transactions are overnight. 10 In addition, conservative
haircut rules are applied, while mark-to-market valuation of collateral is not required.
Thus, trust banks actively used such transactions as a means of lending short-term funds
entrusted by pension funds and life and non-life insurance companies. On the cash
borrowing side, tanshi companies served as recipients of cash. Tanshi companies engaged
in arbitrage trading in which they borrowed bonds (lent cash) in the GC repo market and
borrowed cash in the collateralized call market from trust banks at a rate lower than the
GC repo rate, using the bonds as collateral.

However, after the negative interest rate policy was introduced in the third phase,
resulting in a decline in the collateralized call rate into a negative territory, trust banks,
which had served as the main cash lending entities, nearly stopped cash lending in the
collateralized call market, because they were restricted from lending entrusted funds at

10
At present, most GC repo transactions are tomorrow next (contracted on the trade date and delivered
on the next business day), although there are overnight transactions in the GC repo market to some
extent. For details of the amount outstanding in the GC repo market by starting date, see the results of
the Bank's Tokyo Money Market Survey (Financial Markets Department, Bank of Japan [2023]).

18
 negative interest rates. As a result, the amount outstanding in the collateralized call market
declined significantly.
Chart 17: Amounts Outstanding in the Collateralized Call Market by Sector
(Cash Borrowing Side) (Cash Lending Side)
tril. yen 2nd phase 3rd phase tril. yen 2nd phase 3rd phase
20 tril. yen
40 tril. yen 2nd phase 3rd phase 20

万
tril. yen 2nd phase 3rd phase 3rd phase tril. yen 2nd phase 3rd phase
40cut 2nd
40 Interest rate phase
Quantitative 40 ratetril.
tril.Interest
yen cut yenQuantitative
36 40 2nd phaseand2nd phase 3rd phase 3rd phase

万万
and Comprehensive and 40 and Comprehensive
16 36Monetary 36 36

万
Easing Qualitative 16 Monetary Easing Qualitative
32 Tanshia
Tanshi companies 36 36 Investment trusts
Monetary Monetary
32 32 Easing Tanshi
Tanshi companies
Regionalcompanies
banks 32 Easing
Investment trusts
Regional
Investmentbanks
trusts
28 32 32 Regional banks
City banksbanks
Regional
Regional Regional
banks
City banksbanks
12 28 28 12 28 City banks Trust
City banks
banks (excl. investment trusts)
24 City banks City
Trustbanks
banks (excl. investment trusts) 28
24 28 Trust banks (excl.
Others investment
Trust banks (excl.trusts)
investment trusts)
24 Trust banks (excl.
Trust investment
banks
Securities (excl.trusts)
companiesinvestment trusts) 24
20 Securities companies
Securities
Others companies 24 24
Others Others
8 20 20 Others Others 8 20
16 20
16 16 20
12 16
12 12 16 16
4 8 4 12
8 8 12 12
4 8
4 4 8 8
0 0 0 4
Jan-08 0 Jan-12
0Jan-08 Jan-16
Jan-12 Jan-20
Jan-16 Jan-24
Jan-20 4
Jan-08
Jan-24 4 Jan-12 Jan-16 Jan-20 Jan-24
Jan-08 Jan-08 Jan-12 Jan-16 Jan-20 Jan-24 0
Jan-12 Jan-16 Jan-20 Jan-24
0 0
Note: Figures are the sum of overnight and term transactions. Monthly average. Figures for "Tanshi companies"
Jan-08 Jan-12 areJan-16
on a net basis.Jan-20 Jan-24
Source: Bank of Japan. Jan-08 Jan-08Jan-12 Jan-12 Jan-16 Jan-16Jan-20 Jan-24
Jan-20 Jan-24

(2) Expansion of the repo market and factors affecting the GC repo rate

The amount outstanding in the repo market continued on an increasing trend from the
latter half of the second phase, when the quantitative and qualitative monetary easing was
introduced, and has significantly increased in recent years (Chart 18). Multiple factors
can be pointed out behind the active repo transactions. First, under the three-tier system
during the negative interest rate policy, financial institutions having unused allowances
in their macro add-on balances (to which an interest rate of zero percent was applied) had
incentives to borrow short-term funds at negative interest rates and park them in current
accounts at the Bank. Thus, arbitrage trading in the GC repo market also became active
among financial institutions eligible for the complementary deposit facility. Second, from
2022, demand for bond borrowing from market participants grew, due to an expansion in
their short positions in bonds reflecting expectations for higher interest rates. This,
coupled with the Bank's large-scale JGB purchases, led to tighter supply-demand
conditions for JGBs. As a result, GC-SC transactions increased, as market participants
attempted to take advantage of the spread between the GC and SC repo rates.11 Third,
while the U.S. dollar funding premium widened, overseas investors were more eager to
lend cash through GC repo transactions, and they became lenders of cash for financial
institutions eligible for the complementary deposit facility (Chart 19).

11SC transactions refer to repo transactions which specify the securities acceptable for lending and
borrowing.

19
 Chart 18: Amounts Outstanding in the Chart 19: Amounts Outstanding in the
Repo Market by Transaction Repo Market by Sector
Type
tril. yen tril. yen
250 250
Others
Tanshi
Tanshi/Securities finance companies
200 GC repos 200 Foreign securities companies
SC repos Japanese securities companies
Trust banks
150 150
City banks

100 100

50 50

0 0
Jan-08 Jan-12 Jan-16 Jan-20 Jan-08 Jan-12 Jan-16 Jan-20

Note: Amounts outstanding as of the end of every July. Cash Note: Amounts outstanding as of the end of every July. Cash
borrowing side. borrowing side. Sum of GC and SC.
Source: Bank of Japan. Source: Bank of Japan.

Looking at developments in the GC tomorrow-next repo rate, the rate started to deviate
from the uncollateralized overnight call rate after the quantitative and qualitative
monetary easing was introduced, and stayed below the uncollateralized call rate under the
negative interest rate policy (Chart 20). This could be attributed to the tight supply-
demand conditions for JGBs and the existence of the U.S. dollar funding premium. In
fact, looking at the results of a regression analysis that takes the GC repo rate as the
dependent variable and the uncollateralized call rate, JGB holdings by market participants
other than the Bank, and the U.S. dollar funding premium as explanatory variables (Chart
21), the sign of the coefficient for JGB holdings by market participants other than the
Bank is positive. This suggests that an increase in JGB holdings by market participants
pushes up the GC repo rate (in other words, an increase in the Bank's holdings of JGBs
pushes down the GC repo rate). In addition, the sign of the coefficient for the U.S. dollar
funding premium is negative, indicating that an expansion in the dollar funding premium
pushes down the GC repo rate by encouraging overseas investors to convert dollar into
yen in the swap market and lend the yen cash for a short term.

20
 Chart 20: Spread between the GC Repo Chart 21: Factors Affecting the GC Repo
Rate and the Uncollateralized Rate: Estimation Results
Overnight Call Rate
%
0.4 Dependent variable:
0.3 GC repo rate (％, T/N)
GC repo rate (T/N) minus
0.2 uncollateralized overnight call rate Uncollateralized overnight call rate (％) 0.545 ***
GC repo rate (T/N)
0.1 JGB outstanding
0.002 ***
(excl. BOJ holdings, tril. yen)
0.0

-0.1 US Dollar funding premium (％) -0.079 ***

-0.2 US Dollar funding premium (％) ×

0.088 ***
dummy variable for year-end funding
-0.3
(Constant) -0.000
-0.4
Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23Jan-24

Sources: Bank of Japan; Japan Securities Dealers Association. Note: The estimation period is from February 16, 2016 (start of the
negative interest rate policy) through the end of July 2023.
Dependent and explanatory variables are estimated with the
first differences. The repo rate is estimated based on the start
date. *** denotes statistical significance at the 1 percent
level. The U.S. Dollar funding premium is on a 3-month
term. The regression coefficients for control variables
(quarter-end funding effects) are not shown in the chart.
Source: Bank of Japan.

If the GC repo rate deviates from the uncollateralized call rate, arbitrage is supposed to
arise. However, that was not necessarily the case in the third phase, because market
participants were somewhat different between the uncollateralized call market and the
GC repo market, and only city banks were able to engage in arbitrage trading between the
two markets.12

(3) Investment demand for T-Bills with negative yields

Looking at developments in the T-Bill market, the 3-month T-Bill rate stayed below minus
0.1 percent, the interest rate level applied to the policy-rate balances, in the third phase
under the negative interest rate policy (Chart 22). This is because both overseas investors
and domestic investors had incentives to hold T-Bills even at such low interest rates. In
the U.S. dollar funding market, the U.S. dollar funding premium remained high, while
Japanese banks' foreign-currency portfolio expanded after the introduction of the
quantitative and qualitative monetary easing. Under these circumstances, for the holders
of U.S. dollars, the perceived profitability of T-Bills remained high even when the rate of

12
Meanwhile, under the negative interest rate policy, the Bank provided ample liquidity to the
financial markets with a view to maintaining short-term interest rates in negative territory in a stable
manner when the supply and demand conditions in the repo market became imbalanced and upward
pressure was exerted on the GC repo rate. For instance, in fiscal 2023, the Bank conducted purchases
of Japanese government securities with repurchase agreements eight times totaling 24.5 trillion yen.

21
 such bonds was negative, and overseas investors continued to increase their T-Bill
holdings, thus expanding their presence (Chart 23). In addition, domestic banks and other
financial institutions showed strong collateral demand for T-Bills even at negative interest
rates.

Chart 22: U.S. Dollar Funding Premium Chart 23: Amounts Outstanding of T-
and T-Bill Rate Bill Holdings by Entity
% tril. yen
2.4 200
1st phase 2nd phase 3rd phase 180 Bank of Japan
2.0
↑ 160 Domestic investors
1.6 Favorable Foreign investors
to U.S.dollar 140
1.2 holders
120
0.8 100
80
0.4
60
0.0
40
-0.4 U.S. dollar funding premium
20
3-month T-Bill rate
-0.8 0
Jan-01
01 03 Jan-05
05 07 Jan-09
09 11 Jan-13
13 15 Jan-17
17 19 Jan-21
21 23 05 07 Jan-09
Jan-05 09 11 Jan-13
13 15 Jan-17
17 19 Jan-21
21 23

Sources: Japan Bond Trading; Bloomberg. Note: Figures for domestic investors are calculated by deducting
the amounts outstanding of T-Bills held by the Bank and
foreign investors (estimated figures) from the total.
Sources: Ministry of Finance; Bank of Japan.

5. Developments in the Money Markets after the Termination of the Negative

Interest Rate Policy

The Bank decided to make changes in the monetary policy framework at the MPM held
in March 2024. With a view to achieving the price stability target of 2 percent in a
sustainable and stable manner, the Bank decided to conduct monetary policy as
appropriate, guiding the short-term interest rate as a primary policy tool, in response to
developments in economic activity and prices as well as financial conditions.
Consequently, the negative interest rate policy was terminated, and the Bank set a
guideline for market operations, in which it encouraged the uncollateralized overnight
call rate to remain at around 0 to 0.1 percent. To achieve this guideline, the Bank also
decided to apply a positive interest rate of 0.1 percent to excess reserves. The following
summarizes developments in the money markets after the termination of the negative
interest rate policy.13

13
For developments in the money markets through the end of fiscal 2023, see Box 3 in "Market
Operations in Fiscal 2023" (Financial Markets Department, Bank of Japan [2024]). This report
assesses the developments until mid-August 2024.

22
(1) Developments in the call markets

(Developments in the uncollateralized call market)

In the uncollateralized call market under the new framework, transactions took place
between financial institutions eligible for the complementary deposit facility and those
not eligible, as in the second phase mentioned in Section 3. Specifically, financial
institutions eligible for the complementary deposit facility borrowed short-term funds at
a rate below 0.1 percent and parked them in their current accounts at the Bank. Meanwhile,
those not eligible, such as investment trusts, became incentivized to lend short-term funds
at a rate above zero percent given the abolishment of trust bank fees for money trust.

Under these circumstances, regional banks continued to actively borrow short-term funds
in the uncollateralized call market just after the interest rate of 0.1 percent was applied to
excess reserves, and the uncollateralized overnight call rate immediately increased from
negative territory to positive territory. Thereafter, the rate was very stable in the range of
0.075-0.08 percent, a level slightly below the interest rate of 0.1 percent on excess
reserves (Chart 24). The structure of the market has not changed even after the policy rate
was lifted in July 2024. The uncollateralized call rate has remained very stable in the
range of 0.225-0.23 percent, a level slightly below the interest rate of 0.25 percent on
excess reserves.

Chart 24: Short-Term Interest Rates after the Termination of the Negative
Interest Rate Policy

Interest rate on excess

% reserve balances (+0.25%)
0.3
Termination of
the negative Interest rate on excess
0.2 interest rate policy reserve balances (+0.1%)

0.1

0.0

-0.1 Policy-rate hike

Uncollateralized overnight call rate
Interest rate on GC repo rate (T/N)
-0.2
policy-rate balances
(-0.1%) 3-month T-Bill rate
-0.3
Jan -24 Feb Mar Apr May Jun Jul Aug

Sources: Bank of Japan; Japan Securities Dealers Association; Japan Bond Trading.

Thus, the uncollateralized call market transitioned smoothly from the world of "negative
interest rates" to the one with "positive interest rates" without major disruptions. This
smooth transition could be attributed to mainly two factors. First, based on developments

23
in the money markets under various guidelines for market operations in the past, the
operational framework, in which financial institutions eligible for the complementary
deposit facility and those not eligible were both incentivized to trade with each other, was
introduced in March 2024. Second, the functioning of the uncollateralized call market
was firmly maintained in the third phase mentioned in Section 3. With regard to the
second factor, while the majority of participants in the Japanese money markets are
financial institutions eligible for the complementary deposit facility, regional banks,
including those who had not engaged in such trading, actively engaged in arbitrage
transactions in the third phase, among other entities. As a result, market participants were
diversified, and the base of participants in the uncollateralized call market expanded.
Regional banks' such active stance on cash borrowing in the call market has continued
even after the termination of the negative interest rate policy. Thus, the overnight
uncollateralized call rate has stayed at a level slightly below the interest rate on excess
reserves.

Meanwhile, the amount outstanding of overnight transactions intermediated by tanshi

companies in the uncollateralized call market declined just after the termination of the
negative interest rate policy mainly for two reasons. First, unlike during the period of the
negative interest rate policy, due to the abolishment of the three-tier system, it became
dispensable particularly for banks to lend cash to reduce their policy-rate balances; as a
result, transactions between financial institutions eligible for the complementary deposit
facility were no longer observed. Second, some financial institutions shifted from trading
through tanshi companies to direct trading. However, the shifting to direct trading
generally went round by about April 2024, and since May, the amount outstanding of
overnight transactions intermediated by tanshi companies has remained stable at around
3 to 4 trillion yen (Chart 25).

24
 Chart 25: Amounts Outstanding in the Uncollateralized Call Market
(Daily Developments between March
(Monthly Developments in the Long Term)
and Mid-August 2024)
tril. yen tril. yen
14 14 2nd phase 3rd phase
Termination of the negative interest
12 rate policy 12

10 10

8 8

6 6

4 4

2 2

0 0
Mar.1, 2024 Apr.23 Jun.17 Aug.7 Nov-08 Nov-11 Nov-14 Nov-17 Nov-20 Nov-23
Note: The amounts outstanding of overnight transactions intermediated by tanshi companies. Figures before December 2016 include
overnight transactions delivered one or more business days after the trade date, such as tomorrow next and spot next. Figures on the
right chart show monthly averages.
Source: Bank of Japan.

As aforementioned, in the latter half of the third phase, the amount outstanding in the
uncollateralized call market significantly increased, due mainly to the effects of the
Bank's measure to add twice the amount outstanding of funds that counterparties receive
under some funds-supplying operations to their macro add-on balances. From a longer-
term perspective, however, the current amount outstanding of 3 to 4 trillion yen is roughly
the same level as that in the latter half of the second phase, when a positive interest rate
of 0.1 percent was applied to excess reserves. Therefore, it can be assessed that a
reasonable amount of transactions have been taking place. 14 These transactions have
been made by diverse market participants, such as regional banks. Additionally, TONA,
which is calculated and published based on transactions intermediated by tanshi
companies, is referenced in the rate formation of direct trading. Thus, the market
functioning of the uncollateralized call transactions intermediated by tanshi companies
has been maintained even after the termination of the negative interest rate policy. In
addition, it is considered that TONA, which is calculated based on such transactions, has
continued to clearly indicate the level of prevailing market interest rates.

(Developments in derivative transactions referencing TONA)

Looking at developments in derivative transactions (swaps and futures) which reference

14
As pointed out in this report, some institutions shifted to direct trading after the termination of the
negative interest rate policy. Given that, it is considered that the total amount outstanding in the
uncollateralized call market, which is the sum of the outstanding of direct trading and trading
intermediated by tanshi companies, has not necessarily decreased significantly since the termination
of the negative interest rate policy.

25
 TONA, the volume of yen overnight index swap (OIS) transactions and the amount
outstanding of TONA 3-month interest rate futures (TONA futures) contracts have
continuously increased, due mainly to increasing needs to hedge the risk of rising interest
rates in the future. The volume of yen OIS transactions (the amount of contracts cleared
by the Japan Securities Clearing Corporation) was 364 trillion yen in June 2024, a record
monthly high since the clearing of yen OIS contracts started in November 2014 (Chart
26). With regard to TONA interest rate futures, the amount outstanding of 3-month
interest rate futures contracts listed in the Tokyo Financial Exchange and the Osaka
Exchange increased to record high levels since they were listed in 2023 (Chart 27).

Chart 26: Volume of Yen OIS Chart 27: Amounts Outstanding of

Transactions TONA Futures Contracts

400
tril. yen 4.5 ten thousand unit
Termination of the negative
Termination of the negative
4.0 interest rate policy
350 interest rate policy
3.5
300 Osaka Exchange (listed in
3.0 May 2023)
250
2.5 Tokyo Finance Exchange
200 (listed in March 2023)
2.0
150 1.5
100 1.0
50 0.5

0 0.0
Jan-23 Mar May Jul Sep Nov Jan-24 Mar May Jan-23 Mar May Jul Sep Nov Jan-24 Mar May
end of month
Note: Figures are those for the amount of cleared contracts. Sources: Osaka Exchange; Tokyo Financial Exchange.
Source: Japan Securities Clearing Corporation.

(Developments in the collateralized call market)

As aforementioned, the collateralized call market contracted significantly in the third

phase. However, its amount outstanding has been growing to some extent since the
termination of the negative interest rate policy (Chart 28). Specifically, on the cash
lending side, investment trusts and others have resumed lending cash, while the
collateralized call rate has stayed in positive territory. Meanwhile, on the cash borrowing
side, while the GC repo rate has been rising gradually and staying above the collateralized
call rate, tanshi companies, as observed in the second phase (see Section 4 (1)), have
started engaging in arbitrage trading in which they borrow cash (lend securities) in the
collateralized call market and lend cash (borrow securities) in the GC repo market.

26
 Chart 28: Amounts Outstanding in the Collateralized Call Market
(Daily Developments between March
(Monthly Developments in the Long Term)
and Mid-August 2024)
16 tril. yen tril. yen
16 2nd phase 3rd phase
Termination of the negative
14 14
interest rate policy
12 12

10 10

8 8

6 6

4 4

2 2

0 0
Mar. 1, 2024 Apr. 23 Jun. 17 Aug. 7 Nov-08 Nov-11 Nov-14 Nov-17 Nov-20 Nov-23

Note: Figures are the sum of overnight and term transactions. Figures on the right chart show monthly averages.
Source: Bank of Japan.

However, with the collateralized call rate rising only slightly, investment trusts, which
were major cash lenders in the second phase, have not yet actively lent their excess funds.
In addition, city banks, which were the major cash borrowers following tanshi companies
in the second phase, have not conducted collateralized call transactions of late, as they
shifted to repo transactions. Under these circumstances, the rebound in the amount
outstanding in the collateralized call market as a whole has remained moderate.

(2) Developments in the repo market and the T-Bill market

(GC repo market)

Turning to the structure of daily cash borrowing and lending in the GC repo market, under
the three-tier system during the negative interest rate policy, major cash borrowers were
securities firms funding their inventories and banks engaging in arbitrage trading by
borrowing cash and parking it to their macro add-on balances, to which a zero interest
rate was applied. On the other hand, the major cash lenders were securities firms that
needed to borrow securities and banks with policy-rate balances. Since the termination of
the negative interest rate policy, the structure of cash borrowing and lending has changed
(Chart 29). On the cash borrowing side, the following became major cash borrowers:
securities firms funding their inventories and banks engaging in arbitrage trading by
borrowing cash and parking it to their current account balances at the Bank, to which a
positive interest rate of 0.1 percent was applied. On the cash lending side, securities firms
that need to borrow securities and investment trusts that lend surplus funds became major
cash lenders, since it became no longer necessary for banks to reduce their policy-rate

27
balance.

Chart 29: Participants in the GC Repo Market

(Under the Three-Tier System (After the Termination of the Negative
with Negative Interest Rates) Interest Rate Policy)
Rate (%) Rate (%)
(Cash Borrowing Side) (Cash Lending Side) (Cash Borrowing Side) (Cash Lending Side)

Banks
0.1 0.1
Tanshi

Investment
companies

companies
Securities
companies

trusts
Tanshi
Banks engaging in arbitrage
transaction with their
0.0 current accounts at the Bank 0.0
Tanshi Securities Investment trusts
companies companies Securities When the GC repo rate
Banks with policy- companies rises above the level of the
Banks with rate balances rate applied to excess
unused reserves, banks shift to the
-0.1 -0.1
allowances cash lending side.
in macro Securities Tanshi
add-on companies companies
balances

Under these circumstances, the GC tomorrow-next repo rate rose to positive territory from
its previous level of around minus 0.1 percent after the termination of the negative interest
rate policy. However, the rate remained only slightly positive until the end of March 2024,
due mainly to fiscal year-end factors (Chart 24). After the start of April, securities firms'
inventory funding needs increased following the issuance and bidding of JGBs, and city
banks borrowed cash at a rather higher rate. As a result, the GC repo rate gradually rose
and the spread between the GC repo rate and the uncollateralized call rate narrowed
compared to the third phase. When securities firms' inventories increased, the repo rate
temporarily rose above the 0.1 percent level (the rate applied to excess reserves). However,
as financial institutions eligible for the complementary deposit facility, such as city banks,
actively lent cash at a rate slightly higher than 0.1 percent, the GC repo rate did not
continued to stay above 0.1 percent.

Thus, the level of the GC repo rate has fluctuated depending on the amount of demand
for inventory funding by securities firms. However, when the rate declines, city banks
have actively borrowed cash,15 and when it rises above the rate applied to excess reserves,
city banks have actively lent cash. As a result, the upper and lower bounds of the GC repo
rate have been defined mainly by city banks' view on the cash lending and borrowing
rates, and the GC repo rate has generally remained within the upper and lower bounds.
Such structure of rate formation has remained in place even after the policy rate hike in
July 2024.

15 At the end of June 2024, some market participants reduced their cash borrowing due to their fiscal
year-end, and the GC repo rate temporarily dropped significantly.

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(T-Bill market)

With regard to the T-Bill market after the termination of the negative interest rate policy,
yields on 3-month, 6-month, and 1-year T-Bills have generally stayed in positive territory
in a stable manner. By maturity, yields on 3-month T-Bills, in particular, have remained
at a level somewhat below the rate applied to excess reserves, even after the policy rate
hike in July 2024 (Chart 24), due to (1) demand from overseas investors for foreign
exchange and currency swaps (dollar-yen conversion) owing to the existence of the U.S.
dollar funding premium and (2) strong collateral demand from domestic banks.

Meanwhile, collateral demand for T-Bills from domestic banks could decline in the future
affected by (1) the change in the structure of long-term funds-supplying operations, such
as the Fund-Provisioning Measure to Stimulate Bank Lending, in accordance with the
changes in the monetary policy framework in March 2024,16 and (2) the decision at the
MPM held in July 2024 to provide loans on a floating rate basis under the Fund-
Provisioning Measure to Stimulate Bank Lending.

In the first phase, in which the policy rate was raised after the quantitative monetary
easing period, yields on 3-month T-Bills rose earlier than the uncollateralized call rate
and the GC repo rate, reflecting expectations of future interest rate hikes (Chart 15).
Compared with that time, the pace of increase in T-Bill rates has been moderate after the
termination of the negative interest rate policy, even amid expectations of interest rate
hikes in the future. This indicates strong demand from investors both at home and abroad.

6. Conclusion

Looking back on the developments in the money markets with excess reserves, in the first
phase, in which the complementary deposit facility did not exist and a zero percent
interest rate was applied to excess reserves, trading incentives were lost in the money
markets and the functioning of the uncollateralized call market significantly declined.
However, after the complementary deposit facility was introduced and trading incentives
arose in the money markets, transactions were restored in the uncollateralized call market
between financial institutions eligible for the complementary deposit facility and those
not eligible, and the functioning of the uncollateralized call market gradually improved
in the second phase. Subsequently, even under the negative interest rate policy in the third

16
For instance, under the Fund-Provisioning Measure to Stimulate Bank Lending, the Bank decided
to provide loans with an interest rate of 0.1 percent (previously zero percent) and a duration of one
year (previously four years). The maximum amount of funds that each eligible counterparty can
borrow was set to be equivalent to the net increase in its amount outstanding of loans (previously up
to twice the amount of increase).

29
phase, the market functioning remained robust. Meanwhile, the functioning of the GC
repo market also remained robust in terms of rate formation, the variety of market
participants, and trading volume.

Following the decision to make changes in the monetary policy framework in March 2024
and the termination of the negative interest rate policy, the money markets transitioned
smoothly from the world of "negative interest rates" to the one with "positive interest
rates." This was attributed to the fact that the functioning of the money markets remained
robust in the third phase, right before the transition, owing to the diversification of market
participants and the resultant expansion of trading networks, among other factors.

With regard to the outlook, particular attention needs to be paid to the following two
points: (1) as "a state with positive interest rates" gradually takes root, how the mechanism
of rate formation will be established and how transactions will be developed in the money
markets, (2) as the reduction in the purchases of JGBs by the Bank progresses in line with
the decision in July 2024, to what extent the supply-demand conditions for JGBs will ease
and what kind of impact will be made on the rate formation in the GC repo market and
the T-Bill market. In any case, given the role which TONA has taken as an interest rate
benchmark in recent years, in addition to the fact that the Bank set the short-term interest
rate as its primary policy tool, it is becoming ever more important that the functioning of
the money markets remains robust. From these viewpoints, the Bank intends to continue
to carefully monitor the rate formation and trading trends in the money markets and pay
attention to the functioning of the money markets.

30
 Reference

Financial Markets Department, Bank of Japan [2023], "Trends in the Money Market in
Japan -- Results of the Tokyo Money Market Survey (August 2023) --."

Financial Markets Department, Bank of Japan [2024], "Market Operations in Fiscal

2023."

Kuroda [2016], "Answers to Frequently Asked Questions on ""Quantitative and

Qualitative Monetary Easing (QQE) with a Negative Interest Rate,""" speech at a
meeting held by the Yomiuri International Economic Society in Tokyo.

Shirakawa [2008], "The Functioning of Money Markets and Central Banks' Market
Operations," speech at a meeting on market operations with eligible counterparties
(available only in Japanese).

Study Group on Risk-Free Reference Rates [2016], "Report for the Identification of the
Risk Free Rate for the Japanese Yen" (available only in Japanese).

31