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Bank of Japan 2004 Institute for Monetary and Economic Studies (IMES) Bank of Japan CPO Box 203,

Tokyo 100-8630, Japan

Preface to the English Edition of Functions and Operations of the Bank of Japan
This is the English edition of Atarashii Nippon GinkoSono Kinou to Gyoumu (Functions and Operations of the Bank of Japan), hereinafter referred to as the Japanese edition, written and edited by the Institute for Monetary and Economic Studies of the Bank of Japan and published by Yuhikaku Publishing Co. Ltd. in December 2000. The Japanese edition explains the functions and operations of the Bank of Japan under the new Bank of Japan Law, which went into effect in April 1998. The Japanese edition was prepared by the staff of the Bank with comprehensive advice from the advisory committee for publication. The Banks core staff members behind the preparation of the Japanese edition were Michio Ayuse, Tetsuya Inoue, Tomohiro Tachibana and Wataru Takahashi of the Institute for Monetary and Economic Studies, and Shinichi Uchida of the Policy Planning Office1. The advisory committee was composed of scholars and a business person who were interested in the functions and operations of the Bank, and the Banks executives and staff. The members of the advisory committee were Junji Annen, Professor of Seikei University; Shinichi Fukuda, Assistant Professor of the University of Tokyo; Akiyoshi Horiuchi, Professor of the University of Tokyo; Nobuo Inaba, Advisor to the Governor at the Policy Planning Office of the Bank; Susumu Ito, Director of Yuhikaku Publishing Co. Ltd.; Hideki Kanda, Professor of the University of Tokyo; Eiko Shinotsuka, member of the Policy Board of the Bank; and Kazuo Ueda, member of the Policy Board of the Bank. I would like to express my gratitude again to everyone involved for their active involvement and considerable efforts in the publication. For the English edition, translations were not prepared for the original preface to the Japanese edition and some articles in the Japanese edition that were not considered meaningful for non-Japanese readers. An example of such articles is the column explaining various Japanese terms for "money". On the other
1

All positions given in this preface are those at the time the Japanese edition was prepared.

hand, the English edition contains a supplement at the end of the book on major changes in the Banks operations following the publication of the Japanese edition. The English edition was prepared by the staffs of the Institute for Monetary and Economic Studies and the Public Relations Department of the Bank with support from other departments and offices of the Bank. Major contributions were made by Michio Ayuse, Nami Numoto, Naoyuki Suzuki, and Kentaro Tamura of the Institute for Monetary and Economic Studies, and Natsuyo Aso, Misako Inagaki, Shinji Isaki, Kunio Matsuda, Hiroyuki Oie, Masao Oumi, Mariko Takeda, and Tadashi Uhira of the Public Relations Department. I hope that this book will help deepen the understanding of people overseas, such as those related to governments, central banks, international organizations, financial markets and academic circles, of the functions and operations of the Bank, and eventually lead to improvement of the transparency of the Bank, which is one of the underlying principles of the current Bank of Japan Law.

Kunio Okina Director-General Institute for Monetary and Economic Studies Bank of Japan January 2004

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Contents
Chapter I: Introduction............................................................................. 1
A. Functions of the Bank of Japan ..................................................................... 2
1. Functions of the Bank in our daily lives 2 2. Business operations of the Bank as a bank 3 3. Issuing money which can achieve the highest settlement finality 4 4. Issuance and maintenance of money 6

B. Outline of the Bank of Japans Business Operations..................................... 7


1. Issuance of banknotes and the provision of payment and settlement services 8 2. Business related to the Banks role as the lender of last resort 9 3. Business related to conducting monetary policy 10 4. Treasury funds services for the government 11

C. Innovation in Technology and the Bank of Japan ....................................... 12


Box 1: Central Banks of the World Box 2: The Payment and Settlement System, Financial Institutions, and the Financial System Box 3: Objectives of the Bank of Japan Stipulated in the Bank of Japan Law Box 4: Independence of Monetary Policy Box 5: Transparency of Monetary Policy and of the Bank of Japans Business Operations Box 6: Organization of the Bank of Japan Headed by the Policy Board Box 7: Types of Electronic Money and Their Use as a Payment Instrument 14 15 16 17 18 21 23

Chapter II: The Issuance, Circulation, and Maintenance of Bank of Japan Notes............................... 25
A. Cash and the Bank of Japan ........................................................................ 26
1. Outline of cash and the issuance of banknotes 26 2. Characteristics of banknotes 29 3. History of the banknote issuance system 30

B. Circulation of Banknotes ............................................................................. 31


1. Flow of banknotes and the role of the Bank 31 2. Fluctuation in demand for banknotes 34

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C. Maintenance of Banknotes .......................................................................... 35


1. Maintaining banknotes and making them easier to use 35 2. Security measures of banknotes and international coordination 36 Box 1: How Many Kinds of Banknotes Are Valid Today? Box 2: History of Paper Money before the Introduction of Bank of Japan Notes Box 3: Criteria for Exchange of Damaged Banknotes 38 39 41

Chapter III: The Bank of Japans Current Account Services ............. 43


A. Outline of the Bank of Japans Current Account Services .......................... 44
1. Characteristics of BOJ account deposits 44 2. Types of settlements through BOJ accounts 45

B. Settlement through BOJ Accounts and the Reduction of Settlement Risk .. 47


1. Settlement through BOJ accounts: Processing by the BOJ-NET Funds Transfer System 47 2. Reduction of settlement risk 48

C. Reserve Requirements of Financial Institutions .......................................... 51

Chapter IV: The Payment and Settlement System in Japan and the Bank of Japans Payment and Settlement Services .. 55
A. Payment and Settlement .............................................................................. 56
1. Terms relating to payment and settlement 56 2. Payment and settlement services provided by the Bank 56

B. Widely Used Payment Instruments in Japan ............................................... 57


1. Cash 57 2. Demand deposits held with financial institutions 57 3. BOJ account deposits 58

C. An Overview of Japans Payment and Settlement System .......................... 59


1. Funds clearing systems 59 2. Securities settlement systems 64 3. An overview of Japans payment and settlement system 65

D. The Bank of Japans Payment and Settlement Services .............................. 67 iv

1. Providing payment instruments and managing settlement systems for JGSs 67 2. Operating the BOJ-NET 68 3. Contributing to the stable operation of the payment and settlement system 69 4. Introducing the new RTGS system for funds and JGS transfers 76

Chapter V: On-Site Examination and Off-Site Monitoring, and Credit Extension as the Lender of Last Resort........ 79
A. The Bank of Japans Business Operations related to Financial System Stability ....................................................................................................... 80
1. Financial system stability 80 2. The Banks business operations related to financial system stability 80

B. The Role of On-Site Examination and Off-Site Monitoring ....................... 82


1. The role of on-site examination and off-site monitoring 82 2. Relationship between on-site examination and off-site monitoring 85

C. Outline of On-Site Examination and Off-Site Monitoring .......................... 86


1. Assessment of business operations and financial condition of individual financial institutions 86 2. Evaluation of the financial system 89

D. Legal Framework and Procedures of On-site Examination......................... 89


1. Outline of the legal framework of on-site examination 89 2. On-site examination procedures 91

E. The Bank of Japans Role as the Lender of Last Resort .............................. 93


Box 1: Role of Banks in Our Daily Lives Box 2: On-Site Examinations by the Bank of Japan and On-Site Inspections by the Government: A Comparison Box 3: Contract regarding On-Site Examination Box 4: Points to Check in Examining Risk Management Box 5: Four Principles of Conducting Business Necessary to Maintain Financial System Stability 94 95 96 97 99

Chapter VI: The Bank of Japans Money Market Operations and Lending ....................... 101
A. Price Stability and Monetary Policy.......................................................... 102
1. Price Stability 102 2. The Banks monetary policy and monetary control 102

B. Monetary Control ...................................................................................... 104


1. CABs and monetary markets 104 2. Sources of changes in CABs and monetary control 105

C. Money Market Operations......................................................................... 106


1. Funds-supplying operations 109 2. Funds-absorbing operations 113 3. Monetary control through money market operations 113 4. Ensuring transparency of the Banks money market operations 119

D. The Bank of Japans Lending Operations ................................................. 120


1. Discounting of bills 120 2. Loans collateralized by bills, JGSs, and other securities 121

E. Issuing of Substitute Certificates ............................................................... 122


Box 1: Money Market Operations by the Bank of Japan Box 2: Money Markets and the Call Market Box 3: Tanshi Companies and Securities Finance Companies 124 126 128

Chapter VII: Statistics, Research and Studies, and Public Relations............................................................... 129
A. Compiling and Publishing Statistics.......................................................... 130 B. Research and Studies................................................................................. 133
1. Research 133 2. Studies 136

C. Public Relations......................................................................................... 137

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Box 1: What Is Money Stock? Box 2: History and Revisions of the Wholesale Price Index Box 3: The Bank of Japans Currency Museum Box 4: What Is an Archive? Box 5: What Is the Central Council for Savings Information?

140 141 142 144 145

Chapter VIII: International Operations and Services.147


A. The Bank of Japans International Operations and Services ..................... 148 B. Services Provided as Part of the Bank of Japans Cooperation with Foreign Central Banks and International Organizations............................ 149
1. Transactions with foreign central banks and international organizations 149 2. Technical assistance 150

C. International Operations Conducted on Behalf of the Government........... 151


1. Foreign exchange market and purposes of foreign exchange intervention 151 2. The Banks business operations related to foreign exchange intervention and foreign exchange reserves 152 3. Procedures of foreign exchange intervention 153 4. Other business operations, including that conducted under the Foreign Exchange and Foreign Trade Law 154

D. Responding to International Financial Crises............................................ 157


1. International financial markets and international financial crises 157 2. Monitoring of international financial markets and response to international financial crises 158 Box 1: The Bank of Japans Participation in Major International Forums Box 2: What Are Bridging Loans? 160 162

Chapter IX: The Bank of Japans Treasury Funds Services ............. 163
A. Treasury Funds Services ........................................................................... 164
1. Government-related services of the Bank 164 2. Treasury funds services and the agent system 164 3. The flow of treasury funds services 165 4. The significance of the Banks provision of treasury funds services 168

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5. Improvement in the efficiency of treasury funds services 171

B. The Governments Cash Management ...................................................... 172


1. The government deposit balances fluctuations and the Banks services 172 2. The Banks services related to the governments cash management 175 Box 1: A Brief History of the Bank of Japans Treasury Funds Services Box 2: On-line Processing of Treasury Funds Services Overseas and the Bank of Japans Efforts 177 178

Chapter X: The Bank of Japans Japanese Government Securities Services ..................... 179
A. Services Related to Japanese Government Securities (JGSs).................... 180
1. Overview of the Banks JGS services 180 2. Services related to the issuance of government securities 181 3. Services related to registration and book-entry transfer of JGSs 185 4. Services related to payment of principal and interest on JGSs 190

B. Services related to Custody of Securities .................................................. 192


Box 1: Types of Japanese Government Securities (JGSs) Box 2: Prohibition against the Bank Underwriting JGBs and TBs and Extending Loans to the Government Box 3: Deciding the Total Amount of JGS Issuance and the Amount Underwritten by the Syndicate Box 4: Flow of Issuance Procedures in Syndicate Underwriting 193 195 196 197

Appendixes ........................................................................................... 199


Appendix 1: Organization of the Bank of Japan ............................................ 199 Appendix 2: The Bank of Japans Accounts .................................................. 203 Appendix 3: Bank of Japan Releases of Statistics and Other Materials......... 207 Appendix 4: Releases and Publications Related to Public Relations Activities.. 213 Appendix 5: The Revisions of the Bank of Japan Law .................................. 216 viii

Appendix 6: References for the Japanese edition........................................... 236

!"!"! Supplement ........................................................................................... 239


1. Issues relating to Chapter I......................................................................... 244
[Related to Section A] 244

2. Issues relating to Chapter II ....................................................................... 248


[Related to Section A] 248 [Related to Section B] 249

3. Issues relating to Chapter III ...................................................................... 250


[Related to Section A] 250

4. Issues relating to Chapter IV...................................................................... 252


[Related to Section D] 252

5. Issues relating to Chapter V ....................................................................... 257


[Related to Section A] 257

6. Issues relating to Chapter VI...................................................................... 265


[Related to Section A] 265 [Related to Section C] 270 [Related to Section D] 299

7. Issue relating to Chapter VII ...................................................................... 310


[Related to Section A] 310

8. Issue relating to Chapter VIII..................................................................... 314


[Related to Section B] 314

9. Issue relating to Chapter IX ....................................................................... 315


[Related to Section A] 315

10. Issues relating to Chapter X ..................................................................... 319


[Related to Section A] 319

!"!"! Index ....................................................................................................... 327

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Chapter I

Introduction

The Bank of Japan is an organization that contributes to the stability of the daily lives of the people and sound development of the national economy by appropriately controlling the volume of money in the economy and ensuring the smooth circulation of money. *** As Japans central bank, the Bank issues Bank of Japan notes (banknotes). Besides cash, i.e., banknotes and coins, people also use bank deposits as money to make payments for transactions in goods and services, because they have confidence in deposits as they can be exchanged for cash at anytime. To maintain public confidence in money, it is necessary that (1) the value of money is stable, in other words, prices of goods and services must be stable (price stability), and (2) the payment and settlement system is reliable and efficient, so that money necessary for economic activity circulates smoothly throughout the economy (financial system stability). To achieve these objectives, the Bank conducts monetary policy and acts as the lender of last resort through its various business operations. In recent years, innovation in information technology has transformed financial markets and the business of financial institutions. To accommodate to these changes, the Bank continuously reviews its business operations to provide central bank services that are useful to the public. ***

Chapter I: Introduction

A. Functions of the Bank of Japan 1. Functions of the Bank in our daily lives The Bank of Japan currently issues Bank of Japan notes (banknotes) in four denominations1,000 yen, 2,000 yen, 5,000 yen, and 10,000 yenand works daily to ensure their smooth flow throughout the economy so that people can use their money with confidence, anywhere and anytime. The outstanding amount of banknotes, including those issued in the past and still valid, totaled about 57 trillion yen as of the end of March 2000.1 Other services provided by the Bank that are familiar to people in their everyday life include the central banks functions of ensuring the smooth disbursement/receipt of the governments funds (treasury funds), e.g., the payment of pensions and collection of taxes. While it is financial institutions (including post offices) that actually disburse the pension payments to beneficiaries, it is the Bank that entrusts financial institutions to pay on the due date without fail through a network connecting financial institutions. The Bank transfers funds from the governments account to the financial institutions current accounts at the Bank and instructs them to make such payments. The Bank contributes to the stability of daily lives in Japan and the sound development of the national economy through the issuance of banknotes, its control over the volume of money in the economy, and its work to ensure the smooth circulation of money. The Bank was founded in 1882 as Japans central bank. The Bank is a legal person managed and operated under the Bank of Japan Law which was comprehensively revised in 1997 and came into effect in 1998.2 In contemplating what functions the Bank, or more generally, a central bank, fulfills with regard to its national economy, it is possible to view its function from several different perspectives. For example, focusing on the central banks business operations, it functions as the bank issuing banknotes, as the bank of banks, and as the bank of the government. In terms of the roles it plays, it conducts monetary policy and acts as the lender of last resort. Its
1 2

For more information on Japanese banknotes that are valid today, see box 1 for chapter II.

The Bank was established under the Bank of Japan Act in 1882. The Bank of Japan Law was enacted in 1942 during the war, to replace the Bank of Japan Act, and no major revisions were made for over 50 years. However, the globalization of the economy and financial system, as well as the increased emphasis on market mechanisms triggered discussion about updating the central banking system. Against this background, the Bank of Japan Law of 1942 was revised comprehensively in 1997 under the two principles of independence and transparency of the Banks monetary policy and business operations. For more information on the revision process, see appendix 5.

A. Functions of the Bank of Japan

policy objectives are to ensure price stability and maintain financial system stability. Looking at these different functions and objectives of the central bank, how are they related to each other? For example, what is the relationship between the roles of the bank in the conduct of monetary policy and as the lender of last resort, and why is the central bank responsible for both? What is the relationship between the two objectivesprice stability and financial system stability? Why is the central bank 3 charged with carrying out this public mission, rather than the government or other government agencies? To provide answers to these questions, the sections below explain these functions of the Bank based on the idea that the Bank is, above all, a bank, and only differs from other banks because it issues banknotes.

!Box 1: Central Banks of the World

2. Business operations of the Bank as a bank Individuals and firms make deposits with financial institutions, and they withdraw cash from their deposits when they need to make payments in cash, or use their deposits to make payments by funds transfers between bank accounts. Financial institutions use the funds deposited with them in a range of investment activities such as making loans or trading in bonds. The Bank does not accept deposits from individuals or firms, but does accept them from financial institutions. These deposits are accepted in the Banks current accounts (BOJ accounts). Financial institutions can have money on hand by withdrawing their deposits in BOJ accounts or use these deposits to settle transactions with financial institutions by funds transfers between BOJ accounts. In addition, the Bank buys and sells Japanese government securities (JGSs), bills and other instruments as well as making loans to financial institutions holding BOJ accounts. In these respects, the
3

The Bank is a legal person under Article 6 of the Bank of Japan Law and a juridical person designated as having affairs closely related to the administrative processes of the State under the Administrative Procedure Law. The Bank has paid-in capital of 100 million yen, 55 percent of which is provided by the government, with the remaining 45 percent coming from the private sector. Subscription certificates issued by the Bank are traded in the over-the-counter market, but holders of those securities have no rights in the management of the central bank. The Banks highest decision-making body is the Policy Board, whose members are appointed by the Cabinet with the approval of the Diet (see box 6).

Chapter I: Introduction

Banks banking services are not greatly different from those of the private financial institutions. In one important respect, however, the Bank is different from any other bank: it issues banknotes. It should also be noted that financial institutions deposits in BOJ accounts have a similar function to banknotes in that these deposits can be exchanged for banknotes at anytime. 3. Issuing money which can achieve the highest settlement finality Today, certain types of deposits held by individuals and firms at financial institutions and deposits held by financial institutions in BOJ accounts at the Bank (together called deposit money) function as important payment instruments in addition to cash, which consists of banknotes and coins.4 Of these, cash and deposits in BOJ accounts5 are extremely safe money, as the issuer is free of default, and can achieve the highest settlement finality.6 For example, when one goes shopping and the payment is of small value, one hands over cash at the cashier and this achieves the highest settlement finality. People obtain cash by making a withdrawal from their accounts at financial institutions. Therefore, financial institutions maintain a certain amount of cash on hand, in anticipation of payment in response to such request, by withdrawing cash from their BOJ accounts (see chart 1-1). Larger payments for transactions are often made by funds transfers to the payees account at a financial institution. In this case, if the payer and payee hold accounts with different financial institutions, funds transfer between financial institutions needs to be settled by debits and credits to their BOJ accounts for achieving the highest settlement finality. Likewise, funds transfers for transactions between financial institutions are mostly settled through their BOJ accounts (see chart 1-2).

4 Coins are issued by the government. More specifically, the government issues the coins to the Bank, which then distributes them to financial institutions (see chapter II). 5 Banknotes issued by central bank and deposits in the central bank current accounts together are sometimes called central bank money (see B.3). The term high-powered money is also used to refer to the characteristics of these funds.

The term highest settlement finality in this book is often referred to as ultimate settlement in recent years. For the highest settlement finality, see chapters II and IV.

A. Functions of the Bank of Japan

Chart 1-1

Settlement of a Transaction in Cash


Purchase of goods

Buyer A
Withdrawal of cash

Payment in cash

Seller B
Deposit of cash

Bank BB Bank AA
Withdrawal from AAs BOJ account Credits seller Bs account Deposit to BBs BOJ account

A !

B +

Bank of Japan
Debits AAs BOJ account Credits BBs BOJ account

AA !

BB +

Chart 1-2

Settlement of a Transaction using Deposits


Purchase of goods

Request of funds transfer Withdrawal of funds

Buyer A

Seller B
Notification of credit to Bs account

Bank AA
Debits As account Request of funds transfer from AAs BOJ account to BBs

Bank BB
Credits Bs account Notification of credit to BBs BOJ account

A !

B +

Bank of Japan
Debits AAs BOJ account Credits BBs BOJ account

AA !

BB +

Chapter I: Introduction

In this manner, cash and deposits in BOJ accounts can achieve the highest settlement finality for all kinds of transactions. As mentioned earlier, certain types of deposits at financial institutions also function as money because public confidence in deposits is maintained since they can easily be exchanged for the same value of cash. 4. Issuance and maintenance of money One of the inherent characteristics of a central bank such as the Bank is that it issues money by which the highest settlement finality can be achieved, and maintains the function of money.7 In other words, the central bank ensures that people can use their money with confidence. Two conditions are necessary to achieve public confidence in money. First, the value of money must be stable. In other words, prices must be stable.8 The second condition is that arrangements for payment and settlement (payment and settlement systems), and more broadly the financial system, must be stable and efficient. A sharp fall in the value of money due to inflation, or to loss of public confidence in payment and settlement using deposits at financial institutions due to financial instability, could lead to paralysis of the payment and settlement functions of both cash and deposit money. In that event, people might begin to use foreign currencies to make payments, and in extreme cases they might even resort to barter transactions. This is the primary reason why the objectives of central banks are to ensure price stability and maintain financial system stability. 9 These two factors are the basis or infrastructure for economic activity to proceed stably and efficiently, allowing people to lead orderly daily lives in todays monetary economy. To stabilize the value of money, central banks conduct monetary policy by controlling the overall volume of money in the economy and interest ratesthe prices of moneythrough a variety of ways of providing
7 This point becomes clearer upon examination of the history of central banks (for example, for the history of the Bank of England, see box 1). For a discussion of the background to the foundation of the Bank and the history of Japans banknote issuance system, see chapter II. 8

The stability of the value of a currency has two aspects: the stability of its value relative to domestic prices (price stability), and the stability of its value relative to currencies of other countries (foreign exchange rate stability). There is a global consensus that central banks should aim for price stability. To achieve financial system stability, the government also plays an important role in improving the legal foundations of the financial system and the regulation of financial institutions. The Bank contributes to the stability of the payment and settlement system and the financial system by providing payment instruments and operating the payment and settlement system, as well as by acting as the lender of last resort (see chapters IV and V).

B. Outline of the Bank of Japans Business Operations

money by which the highest settlement finality can be achieved. In the event that the stability of the payment and settlement system or that of the financial system is jeopardized, the funds that the central bank provides in its role as the lender of last resort are also money by which the highest settlement finality can be achieved. It is vital that the central bank be able to provide such money, which people can accept with confidence, especially at times of financial system instability. The reason why the Bank conducts monetary policy and acts as the lender of last resort stems from the Banks role as the sole provider of money by which the highest settlement finality can be achieved. The Banks mission of maintaining the function of money can be efficiently carried out through its banking services. It is important that this mission is aimed at ensuring a stable basis for the peoples living. This thinking was formed based on past experiences such as inflation and various problems arising from unstable money, and in most countries it is understood that the mission is best pursued by a central bank acting independently. This is why a central bank, which should be independent from the government and carries out banking services, is necessary for the task of maintaining the function of money rather than the government or other government agencies.

!Box 2: The Payment and Settlement System, Financial Institutions, and the Financial System !Box 3: Objectives of the Bank of Japan Stipulated in the Bank of Japan Law !Box 4: Independence of Monetary Policy !Box 5: Transparency of Monetary Policy and of the Bank of Japans Business Operations !Box 6: Organization of the Bank of Japan Headed by the Policy Board

B. Outline of the Bank of Japans Business Operations The section above discussed the functions of the Bank of Japan related to the issuance of money by which the highest settlement finality can be achieved and the maintenance of the function of money. Based on this, the following section discusses the business operations of the Bank in four categories: (1) issuance of banknotes and provision of payment and settlement services; (2) business related to the role as the lender of last resort; (3) business related to conducting monetary policy; and (4) treasury funds services for the government. Relevant chapters are indicated for each of these business operations as reference.

Chapter I: Introduction

1. Issuance of banknotes and the provision of payment and settlement services A fundamental service provided by the Bank is to make cash easy to use, and to ensure that individuals and firms can use cash with confidence for payment and settlement of transactions. This involves ensuring that banknotes are distributed smoothly all around the country through financial institutions to meet demands for cash by the public. The Bank must also exercise quality control to ensure that these banknotes are always in good condition. Prevention of counterfeiting is another important task of the Bank, and Japan meets high global standards in this regard. Services concerning banknotes are explained in chapter II, The Issuance, Circulation, and Maintenance of Bank of Japan Notes. In addition to cash, deposits financial institutions hold with the Bank are payment instruments by which the highest settlement finality can be achieved. The Bank provides current account services to financial institutions and a variety of payment and settlement services through these BOJ accounts. The Bank operates a computer network system called the Bank of Japan Financial Network System (BOJ-NET) to ensure safe and efficient payment and settlement services. The Bank continues to improve payment and settlement systems and implements measures to reduce various risks related to settlement. The Bank conducts monetary policy and acts as the lender of last resort through transactions with financial institutions in its banking services, and these transactions are settled using deposits in BOJ accounts at the Bank.10 Chapter III, The Bank of Japans Current Account Services, explains current account services that the Bank provides to financial institutions, which are the basis of the Banks activities. Chapter IV, The Payment and Settlement System in Japan and the Bank of Japans Payment and Settlement Services, discusses the structure of Japans payment and settlement system and the Banks role in the system. Chapter V, On-Site Examination and OffSite Monitoring, and Credit Extension as the Lender of Last Resort, discusses the significance of financial system stability and the Banks roles in maintaining it. The Bank accepts deposits from foreign central banks and international organizations, and at times extends credits to them. These international aspects of the Banks business operations are discussed in chapter VIII, International Operations and Services.
10 Under the reserve requirement system, financial institutions are required to maintain a certain fraction of deposits received from their customers as reserves in the form of deposits at the Bank (see chapter III).

B. Outline of the Bank of Japans Business Operations

2. Business related to the Banks role as the lender of last resort For a discussion of the Banks role as the lender of last resort, it is necessary to recognize that the financial system is made up of a large number of financial institutions. People can send funds from their own financial institution to an account held by an individual or a firm anywhere in the country because all the financial institutions are linked in a network. Naturally, there is a complex set of obligations between these institutions. If a problem develops with some of these obligations, a chain reaction of default could occur, and the public confidence in the entire financial system could be lost, possibly causing runs on banks. The possibility of causing such a chain reaction of settlement failures to other financial institutions or to other financial markets is called systemic risk.11 To prevent the materialization of such systemic risk, the Bank provides funds temporarily to financial institutions that are facing difficulty in raising funds12 from markets. Since the Bank extends loans to these institutions to maintain financial system stability when no one else will, it is called the lender of last resort. Given that the central bank stands at the center of the payment and settlement system, it is in an ideal position to monitor financial markets and each financial institutions liquidity management. The Bank monitors on a daily basis individual financial institutions operations, and developments in financial markets. The Bank also conducts on-site examinations of financial institutions to obtain an accurate picture of their financial condition. The findings from these monitoring and examinations not only help to support the Banks role as the lender of last resort in maintaining financial system stability, but also provide valuable information in conducting monetary policy and other business operations. These activities are discussed in detail in chapter V, and together with chapter IV it provides an overall picture of risks in Japans payment and settlement system and its financial system. As the globalization of financial markets progresses, it has become increasingly important to cooperate with foreign central banks and international organizations to prevent the materialization of systemic risk. These issues are discussed in chapter VIII.

11 12

For a discussion of systemic risk, see chapter IV. For a discussion of financial institutions liquidity management, see chapter V.

Chapter I: Introduction

3. Business related to conducting monetary policy Central banks control over interest rates and the volume of money in the economy is a function which derives from its exclusive authority to provide central bank money (banknotes and deposits in BOJ accounts), the volume of which ultimately affects the total volume of money in the economy.13 The Bank conducts such control through its banking services. For instance, when the Bank buys JGSs or bills that are held by financial institutions (known as a purchasing operation or a funds-supplying operation), those funds are transferred to the sellers BOJ accounts and increase the volume of central bank money. In the opposite case, when the Bank sells financial assets in its possession (known as a selling operation or a funds-absorbing operation), the volume of central bank money is reduced. A similar effect is seen when the Bank makes loans to or collects loans from financial institutions. By changing the size and timing of funds supplying/absorbing operations, the Bank controls14 interest rates in money markets, where financial institutions borrow/lend funds. This has a ripple effect on interest rates in other markets, and on the interest rates at which financial institutions lend to individuals and firms, allowing the effects of the central banks monetary policy to pervade the financial system. 15 The Bank strives to achieve its ultimate goal of price stability by conducting its monetary policy in this manner. For a detailed explanation of the mechanisms by which the Bank conducts its monetary policy, such as through market operations and lending, see chapter VI, The Bank of Japans Money Market Operations and Lending. The current account services provided to financial institutions that are the basis of these operations are explained in chapter III. It is extremely important for the effective conduct of monetary policy to compile statistics and to carry out research and studies on the economy and prices. Such research and studies are also indispensable for the Banks
13

Financial institutions deposit money is supplied by their credit creation function, and central banks can influence the level of money stock, including deposit money, by controlling the volume of central bank money, that is, the sum of banknotes in circulation and deposits in BOJ accounts (see box 1 for chapter VII). The sum of central bank money plus coins in circulation is called the monetary base and the Bank publishes on a monthly basis the amount outstanding data, the growth rate, and statistics explaining the relation between the monetary base and various transactions conducted by the Bank (see appendix 3).

14 As of September 2000, the Bank guides the uncollateralized overnight call rate to the targeted level decided by the Policy Board at Monetary Policy Meetings (see chapter VI). 15 The Bank implements monetary policy by conducting monetary control, changing the level of the official discount rate (the rate at which the Bank makes loans to financial institutions; see chapter VI), and changing the reserve requirement ratio (see chapter III).

10

B. Outline of the Bank of Japans Business Operations

business operations related to financial system stability and for conducting other business operations. With a view to achieving higher transparency in its monetary policy and business operations, the Bank is engaged in a wide variety of public relations activities. These activities of the Bank are described in detail in chapter VII, Statistics, Research and Studies, and Public Relations. To fully understand Japans economic and financial situation, it is also necessary to pay heed to economic and financial developments overseas as well as trends in international financial markets. From that perspective, the Bank maintains close contact with foreign central banks and international organizations, to share information and engage in joint research and analysis projects. These efforts are explained in detail in chapter VIII. 4. Treasury funds services for the government As part of its banking services, the Bank accepts deposits from the government and provides various services related to payment and receipt of the governments money (treasury funds services), for example receipt of national taxes and payments for public works and pensions. The Bank also provides services related to the issuance and settlement of JGSs. 16 Payments and receipts of treasury funds make up a significant part of the economic activity of both individuals and firms, and the Bank makes great efforts to make these transactions as convenient as possible for the people. The JGS market forms the core of Japans financial markets, and the Banks effort to make issuance and settlement as smoothly as possible plays a significant role in improving the functionality of the financial system as a whole. These activities are described in detail in chapter IX, The Bank of Japans Treasury Funds Services, and chapter X, The Bank of Japans Japanese Government Securities Services. The Banks intervention in the foreign exchange market, as the agent of the Japanese government, is discussed in chapter VIII.

16 It is because of these functions that the Bank is sometimes referred to as the bank of the government. The transactions between the Bank and the government differ, however, from those between financial institutions and individuals or firms. For example, as explained in chapter X, the Bank is prohibited by law from providing credit to the government by extending loans or underwriting JGSs except in very limited, exceptional cases. In addition, whether a central bank can handle treasury funds operations varies from country to country. For these reasons, it is not widely accepted that one of the central banks functions is as the bank of the government.

11

Chapter I: Introduction

C. Innovation in Technology and the Bank of Japan Recent years have seen vast global changes in how financial transactions are conducted and in how financial institutions operate. These changes include the globalization of financial markets, the development and spreading use of derivatives and other innovative transaction methods and financial products, and the progress of deregulation in the financial sector. One common factor underlying all of these developments is the innovation in information technology, including the development of computers and advanced communications technology. Central banks have to accommodate their services to these changes in the financial environment. Looking first at the banking services of central banks, it is necessary to make money by which the highest settlement finality can be achieved easier to use, by making cash easier to use and improving the processing of the current account services through computer networks such as the BOJ-NET. If people become reluctant to use money provided by central banks for payment because it is inconvenient to use, central banks become less able to perform its functions. Further, the emergence of new forms of financial transactions and financial markets often necessitates changes in the operational instruments and methods central banks use to conduct money market operations. Central banks also need to introduce advanced information processing technology in the handling of government securities and treasury funds services for the convenience of people. The development of new financial products and financial transactions fostered by advances in financial engineering has brought central banks new challenges in terms of conducting monetary policy and maintaining financial system stability. When a new financial product comes to be used as a payment instrument, this can drastically change the range of money that the central bank aims to control. If the distinction between banks and nonbanks becomes less marked, central banks may have to change the set of institutions with which they conduct their market operations. The development of so-called electronic money also raises new issues related to the fundamental questions of What is money? and What are banks? and could significantly change the very nature of financial transactions.

!Box 7: Types of Electronic Money and Their Use as a Payment Instrument

12

C. Innovation in Technology and the Bank of Japan

While advances in financial engineering have made financial transactions more efficient, risks in financial markets have become increasingly difficult to identify, and systemic risk has come to have a greater global impact. In their on-site examinations and off-site monitoring, central banks must keep up with these changes by developing new methods and ways of carrying out examinations and monitoring. Globalization of financial activities makes it possible for both individuals and firms to engage in transactions that extend far beyond national borders, which increases the importance of international cooperation between central banks. In the long run, the role of central banks will change to respond to these developments. This book attempts to explain the current business operations of the Bank of Japan as accurately and as understandably as possible, and it also aims to give an overview of the changes and trends in central bank services prompted by technological innovation. It is difficult to foretell the outcome of advances in financial engineering, or the impact they will ultimately have on our economy and society. As long as our actual economic activity is based on a monetary economy, however, it will remain true that peoples confidence in money whatever changes or evolution of form it may undergoin other words, the fact that the function of money is maintained appropriately forms the basis of all varieties of economic activity and the everyday life of the people. The role of the central bank is to respond appropriately to innovations in financial engineering, and to provide central bank services that are useful to the economic activity of the people. This requires central banks to keep reviewing and improving their services. The Bank is constantly mindful of this responsibility.

13

Chapter I: Introduction

Box 1

Central Banks of the World

Most countries have a central bank. Central banks take many forms, but one prototype can be seen in the Bank of England, which was founded in 1694 as a commercial bank conducting ordinary banking business. Over the course of the next century, the Bank of England earned a particularly important status among commercial banks, and following the financial crisis of 1825, other commercial banks deposited their reserves with the Bank of England, thereby effectively establishing a payment and settlement system centered on the Bank of England. The Bank Charter Act of 1844 designated the Bank of Englands banknotes as legal tender. As the case of the Bank of England shows, a central bank is an institution that has developed naturally as a result of the concentration of currency issuance and interbank settlement at a single bank. Among central banks that developed later in other countries, most were established by law concerning central bank from the beginning. One example is the U.S. Federal Reserve System consisting of: the Board of Governors of the Federal Reserve System, as one of the governmental agencies governing the Federal Reserve System; twelve regional Federal Reserve Banks conducting central bank services; and member commercial banks holding stocks in one of the twelve Federal Reserve Banks. Another example is the European Central Bank (ECB). The member states of the European Union drew up a treaty to establish the ECB and issue a single currency, the euro. The ECB sets the monetary policy direction, and the member central banks conduct their operations according to the direction. Table for Box 1 Worlds Central Banks
Year of foundation 1668 (worlds oldest) 1694 1882 1913 1998 Name Sveriges Riksbank Bank of England Bank of Japan Federal Reserve System European Central Bank Country (currency) Sweden (krona) United Kingdom (pound sterling) Japan (yen) United States (U.S. dollar) EU member states1 (euro)

Note: 1. Eleven of the European Unions 15 member states now participate in the Eurosystem (one more member state will participate from January 2001). For a list of the countries, see table 2-1 in chapter II.

14

Boxes

Box 2

The Payment and Settlement System, Financial Institutions, and the Financial System

For an economy to develop, it is vital that the transfer of money needed for all forms of economic activity takes place smoothly, and that savings be used effectively for investment. A great variety of financial transactions take place with great frequency in financial markets in the process of transferring money and bridging the gap between savings and investment. Given these transactions, a huge volume of funds and securities are transferred. A transfer of funds or a delivery of securities that completes a transaction is known as settlement. The arrangement for transferring funds and securities, which often consists of facilities such as computer systems and networks, and is operated under a common set of rules and agreements among relevant parties, as well as relevant laws and regulations, is commonly known as payment and settlement system (see chapter IV). The term payment and settlement system is used to indicate one specific payment and settlement system, as well as a nations payment and settlement system as a whole, which is made up of individual payment and settlement systems. In this book, the term refers to both individual systems and the system as a whole, with its meaning clarified where necessary. Financial institutions play a role in ensuring that transactions take place smoothly in financial markets. Many kinds of financial institutions are active in Japan, ranging from banks, securities companies, and insurance companies, with which the general public are familiar, to specialists such as foreign exchange brokers (see chapter VIII). In this book, the term financial institutions is used to embrace all of these types of institutions in principle, and where necessary the term is clarified to indicate a more limited range of institutions. The term financial system is used in this book to mean a total system comprising payment and settlement systems, various financial markets, and financial institutions (see chapter V). For an economy to achieve stable growth, it is essential to ensure smooth operation of the payment and settlement system, which is an arrangement to transfer funds and securities, so that funds and risks can be transferred and allocated efficiently through the financial system. To this end, the Bank of Japan works to maintain financial system stability through its various business operations for maintaining an efficient and sound payment and settlement system and through its role as the lender of last resort (see B.2.).

15

Chapter I: Introduction

Box 3

Objectives of the Bank of Japan Stipulated in the Bank of Japan Law

The new Bank of Japan Law promulgated in 1997 sets the Bank of Japans objectives as follows. Article 1 The objective of the Bank of Japan, as the central bank of Japan, is to issue banknotes and to carry out currency and monetary control. 2. In addition to what is prescribed by the preceding Paragraph, the Banks objective is to ensure smooth settlement of funds among banks and other financial institutions, thereby contributing to the maintenance of an orderly financial system. Article 2 Currency and monetary control shall be aimed at, through the pursuit of price stability, contributing to the sound development of the national economy. Article 1, Paragraph 1 stipulates that one of the Banks objectives is to issue banknotes and conduct monetary policy (which in the law is termed currency and monetary control). Article 2 of the law stipulates that price stability should be pursued through monetary policy to ensure the sound development of the national economy. The Banks second objective as stipulated in Article 1, paragraph 2, is to ensure smooth and stable operation of the payment and settlement system through measures such as acting as the lender of last resort so as to maintain financial system stability. In this way, the Bank of Japan Law makes it clear that the objectives of the Bank are to ensure price stability and maintain financial system stability (see also appendix 5).

16

Boxes

Box 4

Independence of Monetary Policy

It has become the norm throughout the world that monetary policy in pursuit of price stability is conducted by a central bank independent from the government. This is because it is easy for those conducting monetary policy to come under pressure to adopt inflationary policies. Looking at the past history of central banks, there are many cases where an increase in issuance of currency to cover government spending such as war expenses sparked severe inflation. Central banks are often pressured to take measures to stimulate the economy in the short run since there is a time lag before inflation actually surfaces even if the central bank has taken an easier monetary policy. With regard to this point, the Bank of Japan Law states: The Bank of Japans autonomy regarding currency and monetary control shall be respected (Article 3, Paragraph 1). Article 5, Paragraph 2 of the Bank of Japan Law states that due consideration shall be given to the autonomy of the Banks business operations. To ensure the independence of the Bank, members of the Policy Board, which is the Banks highest decision-making body, cannot be dismissed for holding opinions at variance with the government, and the government cannot order the Bank to undertake any particular policy action or to conduct any particular business operation. Of course it is important that the Banks monetary policy is consistent with the governments basic economic policy framework, so Article 4 of the Bank of Japan Law states that the Bank shall always maintain close contact with the government and exchange views sufficiently. The Bank of Japan Law also allows representatives of the government to attend Monetary Policy Meetings of the Policy Board, to give their views and submit proposals, or request that the Board postpone a vote on monetary policy measures until the next meeting. The government representatives have no votes in the monetary policy decisions, and the decisions are made only by a majority vote of the nine Members of the Policy Board (see also appendix 5).

17

Chapter I: Introduction

Box 5

Transparency of Monetary Policy and of the Bank of Japans Business Operations

The Bank of Japan Law stipulates the independence of the Bank of Japan, and at the same time it requires the Bank to make its policy-making process open and transparent so that the Bank does not become biased. Article 3, Paragraph 2 of the Bank of Japan Law requires the Bank to endeavor to clarify to the public the content of its decisions, as well as its decision-making process. In accordance with this provision, the Bank strives constantly to improve the transparency of its policy and business operations. After each Monetary Policy Meeting (MPM), the Policy Board makes public the decisions reached at the MPM, including the guidelines for money market operations and the Banks assessment of economic and financial developments, and the Bank also releases the outline of the discussions (minutes) of the MPMs and will publish a detailed record of the discussions ten years after each meeting (transcripts; Article 20 of the law). Other matters decided at the Policy Board meetings are disclosed in Nippon Ginko Seisaku Iinkai Geppou (Monthly Report of the Policy Board of the Bank of Japan, available only in Japanese). The Bank also publishes an outline of its business operations in the relevant business year, as specified in Article 55 of the law. A report on currency and monetary control is submitted to the Diet twice a year, and the Governor or a designated representative appears before Diet committees, on request, to explain the Banks policies, business operations, and balance sheet conditions (Article 54 of the law). See the table below for a list of the Banks publications on its policies and business operations. In addition, the Bank undertakes a wide variety of activities to inform the public, through various channels ranging from press conferences and speeches of the Governor, other Policy Board Members, executives and staff to information on its Web site (http:www.boj.or.jp/en/index.htm). The Bank also exchanges views with a wide range of people in economic and financial circles, and takes in a variety of opinions from the general public. Through these activities, the Bank aims to explain the thinking behind its policies and business operations, thereby increasing its accountability regarding its policies (see also appendix 5).

18

Boxes

Table for Box 5 Releases and Publications on Monetary Policy and the Banks Business Operations1
Title Announcement of Monetary Policy Meeting Decisions2 Frequency of publication After each meeting Contents Announcement of decisions on matters related to monetary policy, including guidelines for money market operations and changes in the official discount rate decided at each Monetary Policy Meeting held twice a month in principle. Released in principle immediately after each meeting. Summary of discussions at each Monetary Policy Meeting held twice a month in principle. The minutes of each meeting are approved at the first or the second Monetary Policy Meeting held around one month after the meeting concerned, and released after approval. Transcripts of discussions at each Monetary Policy Meeting held twice a month in principle. The transcripts of each meeting will be released ten years after the meeting concerned. Analyses of the economic and financial developments on which decisions on money market operations are based. The report consists of The Banks View and The Background. The Japanese and English versions of The Banks View and the Japanese version of The Background are released on the next business day after the approval of The Banks View at the first Monetary Policy Meeting of the month. The English version of the The Background is released within a few business days from the release of The Banks View. In April and October, the Outlook and Risk Assessment of the Economy and Prices is also included as part of the Monthly Report. The Outlook and Risk Assessment covers a longer period of time and provides the Policy Board members forecast of real GDP, the domestic wholesale price index, and the consumer price index as a reference.

Minutes of Monetary Policy Meetings2

After each meeting

Transcripts of Monetary Policy Meetings3 Monthly Report of Recent Economic and Financial Developments2

Ten years after each meeting Monthly

19

Chapter I: Introduction

Nippon Ginko Seisaku Iinkai Geppo (Monthly Report of the Policy Board of the Bank of Japan)2,4 Semiannual Report on Currency and Monetary Control2,5 Outline of Business Operations for Fiscal XXXX2,5 Statement by the Governor2 Summary of the Press Conferences by Bank Executives2 Speeches by Bank Executives2 Annual Review2

Monthly

Monthly report of activities by the Policy Board, including decisions on monetary policy and on other matters by the Policy Board, minutes of Monetary Policy Meetings, and Monthly Report of Recent Economic and Financial Developments. Report to the Diet on the Banks monetary policy as specified in Article 54 of the Bank of Japan Law. Outline of the Banks business operations in each fiscal period as specified in Article 55 of the Bank of Japan Law. The Banks view on monetary policy and the financial system at important junctures. Summary of the press conferences by Bank executives. Speeches by Bank executives. Review of monetary and economic developments, an outline of the Banks organization, activities, financial statements, and other materials. Report on the Banks balance sheet (assets, liabilities, and capital accounts) and the statement of income during the period concerned. Report on the amount outstanding of major items of the Banks balance sheet (assets, liabilities, and capital accounts), at the end of the ten-day period concerned.

Semiannually

Annually

Ad hoc basis After each press conference After each speech Annually

Financial Statements2 Bank of Japan Accounts2

Semiannually

Three times a month

Notes: 1. As of October 2000. Distributed free of charge at the Public Relations Department at the head office. 2. Releases and most of the articles included in these publications are available from the Bank of Japans Web site (http://www.boj.or.jp/en/index.htm for English, and http://www.boj.or.jp/ for Japanese). 3. No transcripts have yet been published. 4. Available only in Japanese. 5. Available only in Japanese, but summary of the text is available in English.

20

Boxes

Box 6

Organization of the Bank of Japan Headed by the Policy Board

The Policy Board is the Bank of Japans highest decision making body. The Board comprises the Governor, two Deputy Governors, and six appointed members. These nine members are appointed by the Cabinet and approved by the Diet (see appendix 1). The Chairman of the Policy Board is elected by the Board members among themselves. As of September 2000, the Governor of the Bank has been elected Chairman of the Policy Board. The Policy Board discusses all important policy decisions of the Bank, and makes its decisions by a majority vote. The Bank of Japan Law of 1997 stipulates that certain policy matters must be decided by the Policy Board, as outlined in the table below. These matters span a wide range from the Banks monetary policy and business operations to internal management. The Policy Board meets more than twice a week to handle its extensive agenda. Policy Board meetings where matters related to monetary policy such as the official discount rate, the guideline for money market operations, the framework for market operations, and the Banks view of economic and financial developments are decided, are called Monetary Policy Meetings (MPMs). In principle, MPMs are held twice a month separately from other Policy Board meetings. The schedule for MPMs for the following six months is made public. Table for Box 6 Matters that must be decided by the Policy Board (under Article 15 of the Bank of Japan Law)
Matters related to monetary policy (Paragraph 1) (1) The official discount rate (2) The guideline for money market operations (3) The reserve requirement ratio (4) The instruments for market operations (e.g., operation schemes, types of collateral) (5) The Banks view of economic and financial developments Other matters (Paragraph 2) (1) Issues related to maintaining financial system stability (e.g., onsite examinations) (2) International financial business (e.g., bridge loans) (3) Internal management (e.g., budget, organization) (4) Reports, rules (e.g., reports to the Diet, by-laws) (5) Other matters deemed necessary by the Policy Board

21

Chapter I: Introduction

The Banks Governor, Deputy Governors, Executive Directors, and the staff are responsible for carrying out the Banks business operations according to the decisions made at the Policy Board. For this purpose, the Bank has its head office in Tokyo, 33 branches and 13 local offices across the country, of which one is a computer center, and six overseas representative offices (see appendix 1). A new cash operations center is under construction. The Banks services related to treasury funds and Japanese government securities require transactions with individuals, firms, and government offices across the country. Therefore, the Bank entrusts some of these services to private financial institutions that are designated as the Banks agents, and post offices also provide such services (see chapters IX and X).

22

Boxes

Box 7

Types of Electronic Money and Their Use as a Payment Instrument

Various pilot projects in a past few years have made the term electronic money very familiar. Electronic money is an electronic instrument that performs the function of money. Electronic money can be broadly divided into two types based on how it is transferred. The first type is electronic money that is issued in exchange for cash or deposit money. The monetary value is transferred by exchanging electronic data to settle economic transactions. For example, by debiting a deposit account of a financial institution and storing the value as data in an IC card beforehand, an individual can make payments for goods and services by transferring the electronic data stored in the card to the sellers card. This type of electronic money is referred to as the stored-value product, because the money is stored on the IC card. Its function is very similar to prepaid cards such as telephone cards. Another type is an arrangement for giving instructions for funds transfers, electronically. For example, an individual can make payments for goods and services by giving instructions to debit its bank account and credit the sellers bank account through the exchange of electronic data on the Internet or through computer networks. This type of electronic money is called the access product because customers access financial institutions that manage their accounts to instruct funds transfers. Its function is very similar to bills and checks. Pilot tests of these types of electronic money have shown that they can be used as money to settle economic transactions. In particular, storedvalue products are used as a payment instrument that avoids the need for small change for low-value payments. Money has not just been used for payments but has also been used as a means of savings, and also as a standard of value. In the future, it may become possible to pay interest on electronic money, just as it is paid on deposits, or a new type of electronic money that has the characteristics of both the types mentioned above may be invented. Further, if it becomes possible to safely transfer a large value of funds on the Internet, this could allow electronic money to replace conventional money not only in its function as a payment instrument, but also in the various other functions of money in our society.

23

Chapter II The Issuance, Circulation, and Maintenance of Bank of Japan Notes


The Bank of Japan issues, circulates, and maintains Bank of Japan notes. This chapter explains these activities, and provides some information on the characteristics of Bank of Japan notes and related matters. *** The Bank is the sole issuer of banknotes in Japan. It issues Bank of Japan notes (banknotes) in four denominations: 10,000 yen, 5,000 yen, 2,000 yen, and 1,000 yen. As stipulated in the Bank of Japan Law, these banknotes are legal tender, a legally defined payment instrument that should not be refused by any creditor in satisfaction of any debt, and by which the highest settlement finality can be achieved. They are widely used, primarily in face-to-face transactions of low value. Banknotes enter circulation when financial institutions receive them at the head office and branches of the Bank, and their current accounts at the Bank are debited. Individuals and firms obtain banknotes at financial institutions counters, cash dispensers or automated teller machines (ATMs), by withdrawing money from their accounts. Banknotes are used to pay for goods and services or to make payments for financial transactions. They are then brought back to financial institutions as deposits made by individuals and firms, and returned to the Bank. Various measures, including steps to prevent counterfeiting, are taken to make Bank of Japan notes easy to use and reliable. ***

25

Chapter II: The Issuance, Circulation, and Maintenance of Bank of Japan Notes

A. Cash and the Bank of Japan 1. Outline of cash and the issuance of banknotes Cash consists of banknotes and coins, and is a payment instrument widely used to make payments for various economic transactions (see chapter IV), together with demand deposits1 people hold with financial institutions. Printed banknotes and minted coins need to be put into circulation for the economy to use them. Banknotes, or Bank of Japan notes, are manufactured by the Japanese government (Ministry of Finance) and are delivered to the Bank of Japan in exchange for the cost of their production. Banknotes begin circulating when they are transferred to financial institutions (see B.1) and the equivalent amount is debited from the institutions current accounts at the Bank (referred to as BOJ accounts, see chapter III). They are deemed to be issued by the Bank at this point. Article 46 of the Bank of Japan Law stipulates that the Bank shall issue banknotes, and thus the Bank is referred to as the sole issuer of banknotes in Japan. The issuance of banknotes is one of the objectives of the Bank of Japan (Article 1, Paragraph 1 of the Bank of Japan Law). The banknotes issued are entered as liabilities in the Banks balance sheet (see appendix 2). Coins, unlike banknotes, are issued by the Japanese government. Coins are minted by the government (Ministry of Finance) and are deemed to be issued when they are delivered to the Bank as stipulated in Article 4 of the Law Concerning the Unit of Currency and the Issuance of Coins. Banknotes and coins are similar, however, in that both are put into circulation from the counters of the Bank. In Japan, banknotes and coins are both produced by the government (Ministry of Finance), but banknotes are issued by the Bank and coins are issued by the government. Practices regarding the production and issuance of banknotes and coins vary from country to country (see table 2-1). The Bank issues banknotes in four denominations:2 10,000 yen, 5,000 yen, 2,000 yen, and 1,000 yen (see table 2-2). Coins are issued in six denominations (excluding commemoratives): 500 yen, 100 yen, 50 yen, 10 yen,
1 Demand deposits are deposits from which depositors can withdraw cash on demand, such as current deposits and ordinary deposits. Because of their highly liquid nature, these deposits are used as a payment instrument (see chapter IV). 2 At present, only four designs of these denominations of banknotes (see table 2-2) are issued, that is, paid to financial institutions over the counters at the head office and branches of the Bank. A total of 19 kinds of banknotes are valid at present, but the remaining 15 are not reissued for further circulation after returning to the Bank (see box 1 and the Banks Web site at http://www.boj.or.jp/en/index.htm to see the kinds of banknotes that are valid today).

26

A. Cash and the Bank of Japan

5 yen, and 1 yen. As of end-March 2000, approximately 61 trillion yen of cash was in circulation, of which banknotes accounted for 93 percent. Banknotes account for such a large portion of cash in circulation mainly because of their larger face values. Table 2-1 Issuers of Banknotes and Coins in Selected Countries and the Euro Area
Banknotes Japan Issuer Central bank Manufacturer Government (Printing Bureau, Ministry of Finance) Government National central bank, government, private entities in each Member State3 Central bank4 Private entities Issuer Government Coins Manufacturer Government (Minting Bureau, Ministry of Finance) Government Government of each Member State

U.S.A. Euro area

Central bank1 National central bank of each Member State2 Central bank4 Central bank

Government Government of each Member State

U.K. Canada

Government Government

Government Government

Notes: 1. The Board of Governors of the Federal Reserve System retains the right to issue banknotes. The Board is a federal government agency and is the supreme decision-making body of the Federal Reserve System. In practice, each of the twelve Federal Reserve Banks is authorized by the Federal Reserve Act to issue banknotes. 2. The euro area comprises 11 Member States of the European Union (EU) that adopted the euro as the single European currency in January 1999: Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, and Finland (Greece became the twelfth Member State of the euro area in January 2001). Since that time, the Governing Council of the European Central Bank (ECB), the ECBs decision-making body, has retained the right to issue banknotes, but euro banknotes will be issued by the national central banks of the euro area. Euro banknotes will be put into circulation after the transition period, which ends on December 31, 2001, and until that date the present national banknotes in the euro area will be put into circulation (starting on January 1, 2002, each national central bank will withdraw its present national banknotes). 3. Varies from country to country.

27

Chapter II: The Issuance, Circulation, and Maintenance of Bank of Japan Notes

4. In the United Kingdom, for historical reasons, banknotes issued by private banks have been used in Scotland and Northern Ireland in parallel with those issued by the Bank of England. However, the private issuing banks are, in principle, required to hold an amount of Bank of England notes equal to the outstanding amount of their own banknotes issued.

Table 2-2 Banknotes Issued Today


Denomination (yen) 10,000 Size (mm) Height Width 76 160 Major design Back A pair of pheasants Watermark design Tactile marks for the visually impaired Japanese Braille for vowel u

Front

5,000

76

155

2,000

76

154

1,000

76

150

Yukichi Fukuzawa (A pioneer of modern thought in the Meiji periods) Inazo Nitobe (An educator in the Meiji, Taisho, and Showa period) Shureimon Gate (The gate to Shuri Castle in Okinawa built by King Shosei of the Ryukyu Kingdom in the 16th century) Soseki Natsume (A leading novelist in the Meiji and Taisho periods)

Yukichi Fukuzawa

Mt. Fuji

Inazo Nitobe

Japanese Braille for vowel i

A scene from the Tale of Genji and portrait of its author, Murasaki Shikibu A pair of cranes

Shureimon Gate

Japanese Braille for ni, meaning two

Soseki Natsume

Japanese Braille for vowel a

!Box 1: How Many Kinds of Banknotes Are Valid Today?

28

A. Cash and the Bank of Japan

2. Characteristics of banknotes Banknotes are a widely used payment instrument, especially for payments of low value. Banknotes are often used in face-to-face transactions, in which cash is handed directly from one party to the other. The use of banknotes to make payments for a wide range of economic transactions (general usability) and their acceptance by anyone (general acceptability) stem from the following characteristics (see also chapter IV). First, Article 46 of the Bank of Japan Law stipulates that banknotes shall be used for payment as legal tender without limits, in other words, they are a legally defined payment instrument that should not be refused by any creditor in satisfaction of any debt.3 Banknotes is a payment instrument by which the highest settlement finality can be achieved. Unlike payment by credit card or funds transfer between bank accounts, payment in banknotes does not require the intermediation of financial institutions4 or any other third parties. Banknotes also guarantee anonymity,5 since it is difficult to know who used them when, where, or for what purpose. While banknotes have these advantages, they also have shortcomings. Safekeeping and transporting them incur considerable costs, if the volume of banknotes is large or if they are transported over long distances. They also carry the risk of loss, theft, fire, or other damage. To avoid these risks, funds transfer between bank accounts, which does not involve physical movement of cash, is commonly used. Credit cards and prepaid cards are popular payment instruments, and debit cards6 have also been introduced. The development of electronic money that employs encryption technology has progressed (see box 7 for chapter I), and pilot projects have
3

Under Article 7 of the Law Concerning the Unit of Currency and the Issuance of Coins, coins are also a legally defined payment instrument that should not be refused by a creditor. However, the recipient may refuse to accept more than 20 coins of the same denomination in one payment, since the use of too many coins in one payment may make it difficult for the recipient to count or keep them.
4

When payment is made by credit card or funds transfer between bank accounts, funds are transferred not only between the payer/recipient and the financial institutions with which they hold accounts, but also between the financial institutions involved (see chapter IV).

5 Prepaid cards also guarantee anonymity. However, they can only be used in a limited range of transactions, and thus cannot be considered generally accepted. 6 Cash cards issued by financial institutions are the most common form of debit card. When a cardholder presents such a card to a retailers cashier and enters the personal identification number, funds are immediately debited from the cardholders demand deposit account at the financial institution that issued the card.

29

Chapter II: The Issuance, Circulation, and Maintenance of Bank of Japan Notes

been conducted to test new payment instruments, which have low handling costs while retaining some of the advantages of conventional banknotes. At present, the amount of banknotes in circulation relative to GDP is higher in Japan7 than in other major industrial countries. Although the reasons for this are not entirely clear, several contributing factors are often cited: (1) the Japanese social custom of using banknotes as cash gifts on ceremonial occasions such as weddings and funerals, New Years, and farewells; (2) the fact that Japan is a relatively safe place to carry cash; (3) easier access to cash due to expanded networks of cash dispensers and ATMs; 8 and (4) public confidence in banknotes owing to the relatively small number of counterfeits. 3. History of the banknote issuance system The Bank issued its first banknotes in 1885, three years after its founding (see box 2). Originally, banknotes were convertible notes whose convertibility to silver was guaranteed; when the gold standard was adopted in 1897, they became convertible into gold. Under this standard money system,9 the Bank was required to hold standard money (gold or silver) and other reserve assets equivalent to the outstanding amount of banknotes issued10 (this is called the standard money reserve requirement). The standard money system ceased to
7 In 1998, the amount of cash (banknotes and coins) in circulation as a percentage of GDP stood at 11.0 percent in Japan, the highest among the Group of Ten countries, well above the level in Germany (6.4 percent) or the United States (5.3 percent). (Source: BIS Committee on Payment and Settlement Systems, Statistics on Payment Systems in the Group of Ten Countries, Figures for 1998, February 2000.) 8 In 1998, the number of cash dispensers and ATMs per million persons in Japan stood at 1,127, the highest among the Group of Ten countries, well above the United States (692) and Germany (556). (Source: BIS, Committee on Payment and Settlement Systems, Statistics on Payment Systems in the Group of Ten Countries, Figures for 1998, February 2000.)

Under a standard money system, the value of a national currency such as the yen or the dollar is fixed to a specified commodity. Rare and durable precious metals (e.g., gold or silver) were commonly used as the commodity (standard money). When Japan adopted the standard money system under the New Currency Act of 1871 (see box 2), the value of one yen was fixed at par to the value of 1.5 grams of pure gold. To link the value of the currency and standard money, the government or the central bank usually guaranteed the convertibility of paper money (banknotes) for a certain amount of standard money (convertible system) and authorized free export and import of the standard money.
10

The Bank entered the banknotes (convertible banknotes) it had issued as liabilities on its balance sheet, while reserve assets (gold, silver, or to a limited extent prime assets such as public bonds) were entered as assets. Even since the adoption of the fiat money system (see the main text), Bank of Japan notes are still entered as liabilities. Entering issued banknotes as liabilities is a common practice among major central banks, including the Federal Reserve Bank in the United States and the Bank of England in the United Kingdom.

30

B. Circulation of Banknotes

function as the gold standard was suspended (the convertibility of banknotes into gold was suspended) in 1931 and Japan moved into a state of war. In 1941, Japan adopted a fiat money system, and the standard money reserve requirements were abolished. The Bank of Japan Law of 1942 stipulated the reserve for banknote issuance system, which required the Bank to hold prime assets equivalent to the amount of banknotes outstanding, and the maximum issuance limit system, which set the upper limit of the amount of banknotes outstanding. These two systems were abolished under the Bank of Japan Law of 1997, about 50 years after the end of World War II. The changes were made mainly for the following reasons: (1) under the fiat money system, the stability of the value of banknotes should be maintained through the Banks appropriate conduct of monetary policy rather than through a direct link with the value of assets held by the Bank; 11 and (2) the amount of banknotes in circulation changes relative to the level of economic activity, and since the issuance limit had been changed to accommodate the actual amount of banknote issuance, the significance of the banknote maximum issuance limit system had already begun to fade.

!Box 2: History of Paper Money before the Introduction of Bank of Japan Notes

B. Circulation of Banknotes 1. Flow of banknotes and the role of the Bank This section will explain the channels of banknote circulation. The principal channel of circulation starts when financial institutions receive banknotes at the counters of the Bank of Japans head office and branches.12 Individuals and firms then obtain banknotes by withdrawing money from their deposit accounts at financial institutions. The banknotes are used for various purposes, and then they return to the Bank via financial institutions.13 The Bank and financial
11 To earn the publics confidence in the banknotes it issues, it is also important that the Bank maintain its own financial soundness. 12 To ensure that banknotes are smoothly distributed in areas that are not near the head office or a branch of the Bank, the Bank designates specific offices of financial institutions as custodians to hold unissued banknotes (banknote custody system). These banknotes are deemed to be issued when they are paid out to other financial institutions from the custodians. 13 The principal channel of circulation for coins is the same as for banknotes. Namely, they are distributed from the Bank to financial institutions and from there to individuals and firms.

31

Chapter II: The Issuance, Circulation, and Maintenance of Bank of Japan Notes

institutions serve as bases for banknote circulation, to ensure that banknotes circulate freely throughout the country. In fiscal 1999, the average amount of banknotes in circulation was approximately 52 trillion yen, equivalent to approximately 11 percent of Japans GDP (see chart 2-1). The banknotes circulate as shown below. See chart 2-2, (a)-(f). (a) The Bank receives banknotes from the government (Ministry of Finance) The Bank places orders with the government (Ministry of Finance) to manufacture banknotes based on the prospective demand for banknotes. When the banknotes are manufactured, the Bank pays the government for the cost of production and receives the banknotes. The new banknotes are kept in the vaults at its head office and branches. (b) Financial institutions withdraw money from BOJ accounts (Banknotes are issued) To have banknotes on hand to pay to individuals and firms, financial institutions obtain banknotes at the counters of the head office and branches of the Bank by withdrawing money from their BOJ accounts. Banknotes are issued when they are delivered at the counters of the Bank and commence circulation. The total amount of banknotes issued in fiscal 1999 was approximately 91 trillion yen. (c) Individuals and firms withdraw money from accounts at financial institutions Individuals and firms obtain banknotes at financial institutions counters, or from cash dispensers or ATMs by withdrawing money from their accounts at financial institutions. (d) Individuals and firms use banknotes and return them to financial institutions Individuals and firms use banknotes for payments to other firms or financial institutions for the purchase of goods and services, financial transactions, or tax payments. Those who receive the banknotes then use them to make payments for other transactions. Ultimately, individuals and firms bring them to financial institutions and have their deposit accounts credited.

32

B. Circulation of Banknotes

(e) Financial institutions return banknotes to the Bank (Banknotes are withdrawn from circulation) Financial institutions bring their excess banknotes to the head office and branches of the Bank and have their BOJ accounts credited. 14 When banknotes return to the Bank, they are withdrawn from circulation. In fiscal 1999, approximately 85 trillion yen15 of banknotes returned to the Bank.16 The Bank keeps the returned banknotes in its vaults. (f) The Bank examines returned banknotes The Bank examines the returned banknotes and destroys those unfit for recirculation (see C.1). Chart 2-1
(trillion yen) 55 50 45 40 35 30 25 20 15 10 5 0 60 65 70 75 80 85 90 4 2 0 95 fiscal year
percentage of nominal GDP (right scale)

Amount of Banknotes in Circulation as a Percentage of Nominal GDP


(%) 14 the average amount of banknotes in circulation (left scale) 12 10 8 6

14

Financial institutions use BOJ account deposits to settle transactions with the Bank, the government, or other financial institutions. Those subject to reserve requirements also use them as reserve deposits (see chapter III).

15 In fiscal 1999, approximately 91 trillion yen of banknotes was put into circulation by the Bank, while 85 trillion yen of banknotes was withdrawn from circulation. Thus, the amount of banknotes in circulation increased by 6 trillion yen in fiscal 1999 (from 51 trillion yen in fiscal 1998 to 57 trillion yen). 16

The Bank also pays banknotes directly to and receives them from individuals and firms, for example, to exchange damaged banknotes for ones fit for circulation, to receive payments of national taxes (see chapter IX), and to pay principal and interest on government securities (see chapter X).

33

Chapter II: The Issuance, Circulation, and Maintenance of Bank of Japan Notes

Chart 2-2 Circulation of Banknotes


Purchase of goods and services

Individuals
Payroll payment (c) - Withdrawal of deposits - Loans (c) (d) - Withdrawal of - Making deposits deposits - Loans - Tax payment

Firms/Retailer

(d) - Making deposits - Tax payment

- Exchange of damaged banknotes - Payment of principal and interest on JGBs - Tax payment

Financial institutions
(e) Making deposits in BOJ accounts (withdrawal of banknotes from circulation) (b) Withdrawal of money from BOJ accounts (issuance of banknotes) - Exchange of damaged banknotes - Payment of principal and interest on JGBs - Tax payment

Counters Ministry of Finance


(a) Delivery (f) Examination

Vaults

Printing Bureau

Destruction

Bank of Japan

2. Fluctuation in demand for banknotes There are regular patterns of fluctuation in the amount of banknotes issued, reflecting changes in demand for banknotes by individuals and firms. On a weekly basis, the amount of banknotes issued increases before the weekend, reflecting increased demand for use in shopping and leisure activities over the weekend. Some of these additional banknotes return to the Bank early in the

34

C. Maintenance of Banknotes

following week. 17 On a monthly basis, the amount of banknotes issued increases during the last ten days of the month, when payroll payments and settlement of various transactions are usually made. A certain proportion of these additional banknotes return to the Bank early in the following month. On an annual basis, the amount of banknotes in circulation doubles in December compared with other months. December is when winter bonuses are paid, and demand for banknotes increases to meet the need for cash at the year-end and the New Year. A significant proportion of these banknotes return to the Bank in January. In addition to regular or seasonal changes, demand for banknotes differs from region to region. Faced with these various cyclical and regional fluctuations in demand for banknotes, the Bank endeavors to ensure that banknotes circulate freely throughout the country to meet the needs of the public.

C. Maintenance of Banknotes 1. Maintaining banknotes and making them easier to use As the countrys sole issuer of banknotes, the Bank of Japan has an important responsibility to ensure that they are easy for the public to use, and that public confidence in banknotes is maintained. When banknotes return to the counters at the head office or branches of the Bank after being used for various purposes, the Bank counts them and verifies their authenticity. It also separates returned banknotes into those suitable for recirculation and those too damaged or worn for further circulation. This process is called the examination of banknotes.18 Banknotes that have been seriously damaged or worn are destroyed, while those in good condition are reissued for further circulation from the Banks counters along with new banknotes. The Bank exchanges damaged or worn
17 In recent years, it has become increasingly evident that the amount of banknotes issued increases or decreases conspicuously on certain days of the week: issuance of banknotes reaches a peak on Fridays, while their return to the Bank is concentrated on Tuesdays. This is attributed to several factors: (1) the increased prevalence of the five-day workweek means increased demand for banknotes for use over the weekend, and (2) with cash dispensers and ATMs operating on weekends and holidays, financial institutions demand for banknotes has increased to prepare for withdrawals on non-working-days. 18 The Bank developed the banknote examination machine with a private company, and put it into practical use for the first time in the world in 1972. In 1988, the Bank introduced improved banknote examination machines which doubled the processing speed of the examination, with added function of automatically destroying too damaged or worn banknotes for further circulation. In 1996, the Bank introduced further upgraded machines.

35

Chapter II: The Issuance, Circulation, and Maintenance of Bank of Japan Notes

banknotes that are brought not only by financial institutions but also individuals and firms (see box 4). The average life span of banknotes is one to two years for 5,000 yen and 1,000 yen notes which are used more frequently, and three to four years for 10,000 yen notes.

!Box 3: Criteria for Exchange of Damaged Banknotes

The government (Minister of Finance) decides the designs of banknotes, taking into consideration various factors to make the banknotes easy to use and reliable. When the present banknote designs were introduced in 1984, they were made smaller and easier to handle. The size of 10,000 yen notes was reduced by 20 percent, and a uniform height was adopted for all denominations, to facilitate handling in cash dispensers, ATMs, and vending machines. The present banknotes also feature tactile marks 19 that make it easier for the visually impaired to distinguish among the various denominations by touch. 2. Security measures of banknotes and international coordination To maintain public confidence in banknotes, it is essential that the Bank prevent counterfeiting and altering. It has taken a variety of measures to achieve this goal. First, in terms of legal provisions, there are penalties for counterfeiting or altering banknotes with the intent of using them for payment, and for the use, delivery, or receipt of counterfeit currency (under the Criminal Code). There are also penalties for the production or sale of items that resemble banknotes or coins (Law Concerning the Regulation of Counterfeit Currency and Securities). The government can also ban the issuance, delivery, or receipt of items that are deemed to have the same or similar functions as paper currency (Law Concerning the Regulation of Securities Resembling Paper Currency). The production of paper with watermarks of letters, designs, and emblems made in a certain manner is prohibited, except by those authorized by the government (Law Concerning the Regulation of Manufacturing of Watermarked Paper). In addition to these legal provisions, banknotes themselves incorporate many anti-counterfeiting features. In terms of production methods, banknotes issued today are printed with advanced technology such as multi-color overlays
Standard Japanese Braille symbols are used to help people identify the different denominations by touch.
19

36

C. Maintenance of Banknotes

in more than 10 colors, using both relief and intaglio printing. In addition, watermarking techniques based on traditional manufacturing techniques of hand-made Japanese paper (washi) are used to produce banknotes with watermarks of extremely finely detailed portraits and motifs, making banknotes extremely difficult to counterfeit or alter. Also, special paper and inks that cannot be accurately reproduced by color copiers are used, and designs that are difficult to imitate are selected, to make the banknotes highly resistant to counterfeiting and altering. As described earlier, the Bank examines banknotes that return from financial institutions. The Bank examines them rigorously to weed out possible counterfeits or altered banknotes, to prevent such notes from being returned to circulation.20 These legal provisions and advanced banknote production techniques, combined with the Banks efforts to prevent counterfeiting and alteration through the examination of banknotes, contribute to public confidence in Japans banknotes. In major industrial countries, however, counterfeiting has increased sharply in recent years, prompting authorities to issue new banknotes featuring new anti-counterfeiting technologies.21 Today, it is necessary to deal with this problem on a global basis. The Bank, therefore, actively exchanges information and conducts joint studies with other central banks, and is strengthening its ties with relevant authorities within and outside the country.

20

To prevent counterfeiting, it is important that the Bank make public its anti-counterfeiting measures, so that the banknotes are checked by the public as they circulate. The Bank prints and distributes posters and brochures describing the anti-counterfeiting measures incorporated in its banknotes (visit the Banks Web site at http://www.boj.or.jp/en/index.htm).

21 Since 1990, many European countries have redesigned their banknotes to incorporate the latest paper-making and printing technologies. Between 1992 and 1996, Australia replaced its banknotes with those made of plastic, becoming the first country in the world to use plastic banknotes. The plastic banknotes are said to be very resistant to counterfeiting and to be effective in dealing with a large volume of banknotes. The United States introduced new 100-dollar bills with higher resistance to counterfeiting in 1996, and plans to replace the other five denominations of its banknotes, one denomination each year.

37

Chapter II: The Issuance, Circulation, and Maintenance of Bank of Japan Notes

Box 1

How Many Kinds of Banknotes Are Valid Today?

The Bank of Japan has issued 50 kinds of banknotes since 1885, when it issued its first Bank of Japan note, the so-called Daikoku satsu, which was named for the Daikoku ten (God of Wealth) depicted on the front of the note. There would be grave consequences if banknotes held by the public were suddenly to turn into worthless pieces of paper, so in principle, issued banknotes remain valid as long as they are in circulation, barring truly exceptional turns of events. Nevertheless, Japan has so far experienced three such exceptional events: (1) after the Great Kanto Earthquake of 1923, when fire engulfed most of the City of Tokyo and the surrounding areas, a special conversion was made to replace banknotes lost in the disaster; (2) the conversion to the new yen immediately after World War II; and (3) the voiding of small-denomination currency including banknotes in 1953. These rendered a total of 31 kinds of banknotes invalid. Consequently, of the 50 kinds of Japanese banknotes issued to date, only 19 remain valid today. Of these 19 kinds of banknotes, only four are currently issued: namely 10,000 yen notes featuring Yukichi Fukuzawa; 5,000 yen notes featuring Inazo Nitobe; 2,000 yen notes featuring Okinawas Shureimon Gate; and 1,000 yen notes featuring Soseki Natsume. The 15 other kinds of valid notes are seldom seen today. Still, the following banknotes may occasionally be seen: 10,000 yen and 5,000 yen notes featuring Prince Shotoku (Shotoku taishi); 1,000 yen notes featuring Hirobumi Ito; 500 yen notes featuring Tomomi Iwakura; and 100 yen notes featuring Taisuke Itagaki. Today, 14 kinds of coins (excluding commemoratives) are valid. However, only seven kinds are commonly circulated: namely 500 yen nickelbrass coins; 500 yen copper-nickel coins (production and issuance of which ceased in December 1999); 100 yen copper-nickel coins; 50 yen copper-nickel coins; 10 yen bronze coins; 5 yen brass coins; and 1 yen aluminum coins. Other kinds of coins are seldom seen.

38

Boxes

Box 2

History of Paper Money before the Introduction of Bank of Japan Notes

Japan has a long history of paper money. By the early 17th century, Yamada Hagaki, the oldest Japanese paper money, circulated in the Ise Yamada Area (now Ise City, Mie Prefecture), where commerce thrived from medieval times. The Yamada Hagaki was a form of paper money issued by merchants in the area and used in place of small change for silver coins. During the Edo Period (1603-1867), many daimyo (feudal lords) or clans issued hansatsu (feudal notes), which were valid only within their own realms, while Shinto shrines, Buddhist temples, and merchant guilds also issued their own notes. After the Meiji Restoration of Imperial Rule, which marked the transition from the Edo Period to the Meiji Period, the government issued Dajokan satsu in 1868 as the first nationally accepted government notes. These notes were issued in three denominationsryo, bu, and shu which were already familiar in the Edo Period. Dajokan satsu were inconvertible notes (not convertible to gold or silver), and were issued in large amounts to meet the financial needs of a government with a very weak fiscal base, so the currency system soon encountered major confusion. To consolidate the foundation of its currency system, the Meiji government promulgated the New Currency Act in 1871, introducing the yen, sen, and rin as new denominations, and at the same time adopted the gold standard (a currency system that guarantees the conversion of paper currency into gold). A shortage of gold, however, immediately forced the government to issue new paper currency, Meiji Tsuho satsu, which was inconvertible notes (the new banknotes was called Geruman shihei [German notes] because the government had them printed in Germany). In 1872, national banks (which were actually private banks chartered by the Japanese government) were established around the country, and they also began to issue national bank notes to foster the conversion system and to supply the funds necessary for the development of industry. When the Satsuma Rebellion broke out in 1877 in the main southern island of Kyushu, the Japanese government issued massive amounts of paper currency to finance its campaign, and national banks issued national bank notes that had become in effect inconvertible, again causing serious inflation. When Masayoshi Matsukata assumed the post of Minister of Finance under these circumstances in 1881, he adopted a restrictive fiscal policy to control inflation. Part of his program included the founding of the Bank of

39

Chapter II: The Issuance, Circulation, and Maintenance of Bank of Japan Notes

Japan in 1882, with the objective of establishing a conversion system and creating a modern financial system. The Banks first task was to collect and void massive amounts of the government notes and national bank notes that were then in circulation. As this process progressed, the Bank accumulated sufficient quantities of standard money owing to the increase in exports, and issued its first banknotes in 1885. These were the Daikoku satsu, named for the image of Daikoku ten (God of Wealth) printed on the front of the notes. Because their conversion into silver was guaranteed, these notes won the confidence of the public, leading to the creation of a stable currency system. Since that time, the Bank has issued a total of 50 kinds of banknotes to date. The history of money in Japan, including the notes described in this box, is further explained in The History of Japanese Currency and Essays on the Web site of the Currency Museum, which is part of the Banks Institute for Monetary and Economic Studies (http://www.imes.boj.or.jp/english/index. html).

40

Boxes

Box 3

Criteria for Exchange of Damaged Banknotes

The Bank of Japan exchanges damaged banknotes for one fit for circulation following the criteria below, provided that both sides are maintained. Burnt banknotes are also exchangeable for ones fit for circulation following the same criteria, provided that the remaining ashes prove to be those of banknotes. (1) Damaged or burnt banknotes with at least two-thirds of the original area remaining are exchanged at full face value (10,000 yen notes will be exchanged for 10,000 yen, 5,000 yen notes for 5,000 yen, etc.).
2/3

2/3

(2) Damaged or burnt banknotes with at least two-fifths, but less than twothirds, of the original area remaining are exchanged for half of their face value (10,000 yen notes are exchanged for 5,000 yen, etc.).
2/3

2/5 2/5

2/3

(3) Damaged or burnt banknotes with less than two-fifths of the original area remaining have no value.
2/5

2/5

The colored area indicates the remaining portion of the banknote.

41

Chapter III The Bank of Japans Current Account Services

The Bank of Japan accepts deposits from financial institutions, foreign central banks, international organizations, and the Japanese government. This chapter discusses the Banks services provided to financial institutions that hold current accounts with the Bank, and some of the characteristics of deposits in these current accounts. *** Financial institutions deposits in current accounts they hold with the Bank (BOJ accounts) have three functions: as a payment instrument, as reserves for cash payment, and as reserves under the reserve requirements. Deposits in BOJ accounts are payment instruments, like cash, by which the highest settlement finality can be achieved. They are used to settle transactions between financial institutions, as well as transactions between financial institutions and the Bank or the government. Most funds transfers between BOJ accounts, and debits and credits to such accounts, are processed through a computer network system called the BOJNET. Currently, there are two ways for processing these transfers and debits/credits: real-time gross settlement (RTGS) and designated-time settlement. To reduce systemic risk, the Bank will make RTGS, in principle, the only settlement mode for the BOJ-NET by the beginning of 2001. The reserve requirement system was established as a monetary policy tool. The system requires financial institutions in Japan to hold a certain fraction of their deposits and other liabilities as reserves in the form of deposits at the Bank. ***

43

Chapter III: The Bank of Japans Current Account Services

A. Outline of the Banks Current Account Services 1. Characteristics of BOJ account deposits The Bank of Japan accepts deposits in much the same way as any commercial bank, although it accepts deposits only from institutions such as financial institutions, foreign central banks, international organizations, and the Japanese government.1 These deposits are recorded as liabilities on the Banks balance sheet (see appendix 2). This chapter focuses on the Banks services provided to financial institutions that hold current accounts with the Bank (current account services). See chapter VIII for services provided to foreign central banks and international organizations, and chapter IX for services provided to the Japanese government. Current account services are provided to financial institutions that meet certain criteria set by the Bank (see B.2) and enter into a contract for current account services with the Bank. As of the end of March 2000, 676 financial institutions held current accounts with the Bank (BOJ accounts; see table 3-1 for a breakdown of these financial institutions).2 The Bank started providing current account services from its foundation pursuant to the Bank of Japan Act in 1882. Under the new Bank of Japan Law of 1997, deposits are accepted pursuant to Article 33. Deposits in BOJ accounts (BOJ account deposits) have three functions. The first function is as a payment instrument (see chapter IV). Transactions between financial institutions and the Bank or the government are settled by debits and credits to BOJ accounts held by these institutions, while transactions between financial institutions are settled by funds transfers between BOJ accounts or debits and credits to these accounts. The second function is as reserves for cash payment (cash consists of banknotes and coins, see chapter II) by financial institutions to individuals or firms. When financial institutions need cash, they withdraw it from their BOJ accounts. The third function is as reserves to meet reserve requirements. For financial institutions subject to the reserve requirement system, their BOJ account balances are counted as reserves for the purpose of satisfying their reserve requirements (see C.).
Local public entities do not hold current accounts with the Bank. They have deposits at regional financial institutions (e.g., regional banks and shinkin banks). Institutions that hold BOJ accounts include city banks, member banks of the Regional Banks Association of Japan (regional banks), member banks of the Second Association of Regional Banks (regional banks II), trust banks, foreign banks (branches in Japan), long-term credit banks, shinkin banks, Shinkin Central Bank, The Shinkumi Federation Bank, National Federation of Labor Credit Associations, securities companies, securities finance companies, foreign securities companies, money market brokers (tanshi companies), stock exchanges, bankers associations, the Shoko Chukin Bank, and Norinchukin Bank.
2 1

44

A. Outline of the Banks Current Account Services

These three functions are common to deposits in current accounts financial institutions hold with central banks in almost all countries today. The first two functions, as a payment instrument and as cash reserves, are the same as the functions of demand deposits held by individuals and firms with financial institutions, in that individuals and firms can make payments using their demand deposits and also obtain cash by making withdrawals from their demand deposits. The third function as reserves to meet reserve requirements is unique to deposits in central bank current accounts. Further, concerning the function as a payment instrument, BOJ account deposits, like cash, can achieve the highest settlement finality (see chapters II and IV). 2. Types of settlements through BOJ accounts Payments and receipts of funds through BOJ accounts can be made by physically carrying cash to and from the Bank (see chapter II). Most such payments and receipts of funds, however, are settled through funds transfers between BOJ accounts or debits and credits to BOJ accounts, which do not require physical delivery of cash. These can be classified into three types by their objectives and underlying transactions.

Table 3-1 Number of Institutions Which Hold BOJ Accounts


(as of end-March 2000) City banks 9 Regional banks 64 Regional banks II 60 Trust banks 31 Foreign banks (branches in Japan) 84 Long-term Credit banks 3 Shinkin banks 348 Central institutions for cooperative financial institutions 5 Money market brokers (tanshi companies) 6 Securities companies 52 Securities finance companies 3 Government-related institutions 3 Others 8 Total 676

45

Chapter III: The Bank of Japans Current Account Services

The first type concerns funds settlement for transactions between financial institutions and the Bank or the government; settlements for these payments and receipts are processed individually. When the Bank conducts money market operations or lending to financial institutions (see chapter VI), payments for these transactions are settled by debiting or crediting their BOJ accounts. When financial institutions collect tax payments or disburse social security payments on behalf of the government (see chapter IX), these payments are settled between financial institutions and the government by debiting or crediting their BOJ accounts. The second type concerns funds settlement for transactions between financial institutions; these settlements are also processed individually. When financial institutions make call loans (see chapter VI), or carry out other money market transactions, these transactions are settled by funds transfers between BOJ accounts (see B.1). The third type concerns funds settlement for transactions between financial institutions that participate in clearing systems. Instead of processing a bulk of financial institutions payment instructions individually on a gross basis, these transactions are cleared by calculating the net credit or debit positionwhich is the sum of the value of all the payments a financial institution has received at a particular point of time less the sum of the value of all the payments it has madeand the net positions are settled through BOJ accounts. 3 In Japan, clearing services are provided by three major funds clearing systems: the Domestic Fund Transfer System (DFTS), the Foreign Exchange Yen Clearing System (FXYCS), and bill and check clearing systems (see chapter IV). At DFTS, FXYCS, and 34 bill and check clearing houses throughout the country in which the Banks head office or branches participate directly, the net credit or debit position is calculated for each participant, and only the net positions are settled by debiting and crediting participants BOJ accounts. As for transactions at the Tokyo Stock Exchange or the Tokyo International Financial Futures Exchange, funds settlement for the members of the exchanges takes place at each designated settlement bank, and then resultant positions of settlement banks are settled by debiting or crediting their BOJ accounts.

Transfer of funds or delivery of securities that completes a transaction is referred to as settlement (see chapter IV). The term clearing refers to various pre-settlment processes, including calculating net credit and debit positions of participants in the clearing systems based on data on payments and receipts of funds or deliveries and receipts of securities between participants.

46

B. Settlement through BOJ Accounts and the Reduction of Settlement Risk

Table 3-2 Settlement through BOJ Accounts1


Daily average; trillion yen

Total

Funds transfers between financial institutions 147.1 (91.1) 154.7 (91.3) 158.3 (90.7) 127.6 (90.6)

Settlement for private clearing systems 7.9 (4.9) 8.3 (4.9) 7.9 (4.5) 6.2 (4.4)

1996 1997 1998 1999

161.5 169.4 174.6 140.8

Others including transactions between financial institutions and the BOJ/government 6.5 (4.0) 6.3 (3.7) 8.4 (4.8) 7.0 (5.0)

Note: 1. Value of transactions settled is calculated counting each payment instruction once (see footnote 6). Figures in parentheses are percentage shares of the total value of transactions settled.

In terms of the value of transactions, funds transfers between financial institutions account for over 90 percent of all transactions settled through BOJ accounts (see table 3-2).

B. Settlement through BOJ Accounts and the Reduction of Settlement Risk 1. Settlement through BOJ accounts: Processing by the BOJ-NET Funds Transfer System Until the Bank of Japan Financial Network System (BOJ-NET) started operation for funds transfer in October 1988, settlement through BOJ accounts were processed only on a paper basis by handling papers such as BOJ checks4 and account deposit slips between financial institutions and the Bank of Japan. Since then, however, most settlements are processed through the BOJ-NET (see chapter IV for an outline of the BOJ-NET). Financial institutions can send instructions for funds transfers between BOJ accounts from 9:00 to usually 17:00 using BOJ-NET terminals. Currently, there are two ways for processing settlement through BOJ accounts: (1) real-time gross settlement (RTGS), where payment instructions are processed individually upon receipt; and (2) designated-time settlement where payment instructions are accumulated and processed at one of the four designated settlement times of 9:00, 13:00, 15:00, and 17:00.5
4 BOJ checks are checks drawn designating the Bank as the payer. There are two types of BOJ checks: those drawn by financial institutions that have current accounts with the Bank, and those drawn by the Bank. 5

See section D in chapter IV for details on RTGS and designated-time settlement.

47

Chapter III: The Bank of Japans Current Account Services

The following example offers a comparison of procedures for funds transfers between BOJ accounts for the settlement of a call loan (see chapter VI) made by bank A to bank B, using the BOJ-NET in one case and using BOJ checks in the other. When the BOJ-NET is used, the following procedures are carried out (see chart 3-1). (1) Bank A and bank B agree on a call loan transaction. (2) Using the BOJ-NET terminal located in its office, bank A sends a payment instruction with information on the name of the recipient (bank B), the value of the transaction, and the settlement date and time to the Bank. (3) The Bank receives the payment instruction and stores it until the designated settlement date, and at the settlement time designated by bank A, it debits the BOJ account of bank A (the lender) and credits the BOJ account of bank B (the borrower). When a BOJ check is used, the following procedures are carried out (see chart 3-2). (1) Bank A and bank B agree on a call loan transaction. (2) Bank A (the lender) issues a BOJ check and delivers it to bank B (the borrower). (3) Bank B brings the BOJ check and an account deposit slip to the Bank, and requests that the funds be credited to its BOJ account. (4) The Bank debits the BOJ account of bank A (the lender) and credits the BOJ account of bank B (the borrower) in accordance with the request. When funds transfers are processed on a paper basis using BOJ checks and deposit slips, this places a burden of handling both on financial institutions and on the Bank, and it also entails the risk of loss or theft during their transportation. The use of the BOJ-NET has made settlement procedures more efficient and has reduced risks. 2. Reduction of settlement risk The value of transactions settled through BOJ accounts has increased with the expansion of the economy and the growth in the volume of financial transactions. The daily average value of transactions settled in 1999 was over

48

B. Settlement through BOJ Accounts and the Reduction of Settlement Risk

Chart 3-1

Funds Transfer between BOJ Accounts Using the BOJ-NET: The Case of a Call Loan from Bank A to Bank B
Bank A Bank B

(2) Sends a payment instruction via BOJ-NET terminal (4) Confirms funds transfer through the BOJ-NET (1) Agree on a call loan transaction

(4) Confirms funds transfer through the BOJ-NET

Bank of Japan
Debits As BOJ account

(3)

Credits Bs BOJ account

A !

B +

Chart 3-2

Funds Transfer between BOJ Accounts Using a BOJ Check: The Case of a Call Loan from Bank A to Bank B
Bank A
(1) Agree on a call loan transaction (2) Issues and delivers BOJ check (3) Brings the BOJ check and a deposit slip to the Bank of Japan

Bank B

Bank of Japan
Debits As BOJ account Credits Bs BOJ account

(4)

A !

B +

49

Chapter III: The Bank of Japans Current Account Services

140 trillion yen (calculated counting each payment instruction once), 6 equivalent to 28 percent of Japans nominal GDP (see table 3-3), meaning that the value of transactions settled can exceed the nominal GDP in just four days. Payments and receipts of funds through BOJ accounts are often interdependent, as funds received in one transaction are often used for payment in another. When a financial institution becomes unable to make payments through BOJ accounts due to a computer breakdown or financial difficulty, other institutions that expected to receive funds from that institution to meet their own settlement obligations may also become unable to settle one after another. This could eventually jeopardize the functioning of the financial system through the materialization of systemic risk, i.e., the risk posed to financial system through a chain of settlement failures and through the loss of confidence in the nations payment and settlement system or in the financial system (see chapter IV). In order to prevent systemic risk from materializing, the Bank takes various measures for its current account services.

Table 3-3 Value of Transactions Settled through BOJ Accounts and Nominal GDP1
Daily average; trillion yen.

1996 1997 1998 1999

Value of transactions settled (A) 161.5 169.4 174.6 140.8

Nominal GDP (B) 500.3 507.9 498.4 495.4

Percentage Share (A/B) 32.3% 33.4% 35.0% 28.4%

Note: 1. Value of transactions settled is calculated counting each payment instruction once (see footnote 6).

6 The number and value of transactions are counted based on the number and value of payment instructions requesting funds transfers, rather than on the number and value of transactions processed for debits and credits to BOJ accounts. For example, if bank A pays 10 billion yen to bank B through BOJ accounts, the Bank of Japan debits 10 billion yen from bank As account and credits 10 billion yen to bank Bs account. This is counted as one transaction with a value of 10 billion yen, rather than as two separate transactions with a total value of 20 billion yen in which case both debits and credits are counted.

50

C. Reserve Requirements on Financial Institutions

First, financial institutions applying for the Banks current account services must meet the following three criteria.7 They must (1) be in sound financial condition in terms of their business, and their capital adequacy ratio, among others, and have appropriate business procedures in place, (2) enter into a contract with the Bank regarding on-site examinations, 8 and (3) have sufficient standing in Japans financial markets for the transfer of funds and the delivery of securities (see footnote 2). After the commencement of current account services, the Bank conducts on-site examinations and off-site monitoring, to monitor the financial soundness and risk management of these financial institutions (see chapter V). Second, to eliminate the risk that a seller delivers securities but does not receive payment, or vice versa, the Bank introduced a delivery-versus-payment (DVP) mechanism for the settlement of Japanese government securities by linking the BOJ-NET Funds Transfer System and the BOJ-NET JGB Services. It also supported the introduction of DVP for corporate bonds and other nonJGB bonds (for details see chapter IV). Further, the Bank has decided to make RTGS, in principle, the only settlement mode for settlement through BOJ accounts by the beginning of 2001, abolishing the designated-time settlement mode, to reduce systemic risk.

C. Reserve Requirements on Financial Institutions The third function of BOJ account deposits relates to the fulfillment of reserve requirements by financial institutions. This section briefly describes the reserve requirement system in Japan (see chapter VI). The reserve requirement system was established by the Law Concerning Reserve Requirement System in 1957 as a tool of monetary policy. Financial institutions9 designated in the law as subject to the system must hold a certain
These criteria were decided by the Policy Board and published in two Japanese-language documents, Nippon Ginko no Touza-Yokin Torihiki, Touza-Kashikoshi Torihiki, Tegata-Kashitsuke Torihiki matawa Tegata-Waribiki Torihiki no Aite-Kata ni Kansuru Sentei-Kijun and Touza-Yokin Torihiki no Aite-Kata ni Kansuru Sentei-Kijun Saimoku, which are available on the Bank of Japans web site at http://www.boj.or.jp/.
8 The second criterion does not apply to applicant institutions that are not subject to the Banks onsite examinations pursuant to the Bank of Japan Law (see chapter V for the scope of financial institutions that are subject to the Banks on-site examinations). 9 Financial institutions subject to the reserve requirement system include city banks, regional banks, regional banks II, trust banks, foreign banks (branches in Japan), long-term credit banks, shinkin banks (those with deposits of over 160 billion yen), and Norinchukin Bank. 7

51

Chapter III: The Bank of Japans Current Account Services

fraction (the required reserve ratio) of their deposits and other liabilities as reserves in the form of deposits at the Bank of Japan. Financial institutions holding BOJ accounts do not need to open a separate account for holding reserves, as the total amount outstanding in their BOJ account balances is counted as reserves for satisfying their reserve requirements.10 Looking a little more closely at this system, the minimum value of funds that a financial institution subject to reserve requirements is required to maintain as reserves with the Bank (required reserves) is calculated by (1) taking the daily balance of the institutions liabilities11 from the first through the final day of each month, (2) multiplying each daily balance by the respective reserve ratio, (3) finding the total of these products, and (4) dividing that total by the number of days in the month. The Bank decides at its Monetary Policy Meetings the reserve ratios for each category of financial institutions and for different types of deposits (see table 3-4). For each one-month period beginning on the 16th of a month and ending on the 15th of the following month (the reserve maintenance period), financial institutions are required to maintain on average a daily balance equal to or greater than their required reserves. Financial institutions are required to hold an average amount of reserves over the maintenance period, so even if a financial institutions balance falls below the required level on a given day, the requirement can still be met by holding excess reserves on other days during the maintenance period. If, however, a financial institutions average daily balance for the month falls short of the required reserves, a penalty is charged for the deficiency. A penalty equal to the official discount rate12 (see chapter VI) plus an annual rate of 3.75 percentage points is levied against reserve deficiencies, and this penalty is paid to the government via the Bank.

10 Financial institutions subject to reserve requirements but to which the Banks current account services are not provided must maintain special reserve accounts at the Bank. 11 Liabilities include deposits (including residents foreign-currency deposits and non-residents yen deposits), bank debentures, and the principal value of money trusts. 12

The official discount rate is the rate applied to the discounting of bills by the Bank.

52

C. Reserve Requirements on Financial Institutions

Table 3-4 Reserve Requirement System in Japan1: Reserve Ratios by Type of Instrument as of March 31, 2000
Figures in percentage points

Deposits held by banks, long-term credit banks, and shinkin banks2 Outstanding deposits of: Over 2.5 trillion yen 2.5 tril. yen or less, but over 1.2 tril. yen 1.2 tril. yen or less, but over 0.5 tril. yen 500 bil. yen or less, but over 50 bn. yen Deposits held by Norinchukin Bank Time deposits3 1.2 0.9 0.05 0.05 0.05 Other deposits 1.3 1.3 0.8 0.1 0.1 0.1 0.1 0.15 Other deposits 0.25

Debentures outstanding4 issued by banks and long-term credit banks Principal of Money Trusts (including loan trusts) outstanding Nonresidents foreign-currency denominated liabilities (excluding special international transaction accounts) Residents foreign-currency denominated deposits (excluding special international transaction accounts) Time deposits 0.2

Liabilities in Nonresident Yen Accounts (excluding special international transaction accounts) Balances Transferred from Special International Transaction Accounts to Other Accounts

0.15 0.15

Notes. 1. Japan uses progressive reserve ratios where outstanding deposits are classified into brackets by value, and higher reserve ratios are applied to higher value brackets. For example, if a bank had a daily outstanding balance of 3 trillion yen in time deposits throughout March 2000, the required reserves for the bank for the reserve maintenance period from March 16 to April 15 would be calculated as follows: 500 billion yen (the amount by which liabilities exceed 2.5 trillion yen) x 1.2% + 1.3 trillion yen (the amount between over 1.2 trillion yen and 2.5 trillion yen) x 0.9% + 700 billion yen (the amount between over 0.5 trillion yen and 1.2 trillion yen) x 0.05% + 450 billion yen (the amount between over 50 billion yen and 500 billion yen) x 0.05% = 18.275 billion yen. 2. Those with outstanding deposits of more than 160 billion yen at fiscal year-end. 3. Including CDs. 4. Yen-denominated bonds issued under Article 17-2, paragraph 1 of the Law Concerning Amalgamation and Conversion of Financial Institutions, and Article 8 of the Long-Term Credit Bank Law.

53

Chapter IV The Payment and Settlement System in Japan and the Bank of Japans Payment and Settlement Services
The Bank of Japan provides a variety of payment and settlement services including the issuance of banknotes. This chapter describes these services, outlining widely used payment instruments and payment and settlement systems in Japan. *** The term settlement refers to a transfer of money or a delivery of securities that completes an economic transaction. Money paid or received in payment and settlement is payment instrument. Payment instruments widely used in Japan today include cash (Bank of Japan notes and coins), demand deposits at financial institutions, and deposits in current accounts financial institutions hold with the Bank (BOJ account deposits). A payment and settlement system is an arrangement designed to smoothly transfer payment instruments or securities. Japans payment and settlement system comprises various funds clearing systems, and securities settlement systems such as the registration system and the book-entry system for Japanese government securities (JGSs, which comprise government bonds [JGBs], treasury bills [TBs], and financing bills [FBs]). The Bank plays a central role in Japans payment and settlement system. It provides payment instruments such as Bank of Japan notes and BOJ account deposits, and manages the JGB Registration System and the JGB Bookentry System. The Bank also operates the Bank of Japan Financial Network System (BOJ-NET), an on-line system for transferring funds and JGSs safely and efficiently. To prevent systemic risk from materializing, the Bank is working to introduce the new real-time gross settlement (RTGS) system to the BOJNET, and supports various initiatives taken by the private sector. In addition, the Bank conducts on-site examinations and off-site monitoring of financial institutions to act appropriately as the lender of last resort. ***

55

Chapter IV The Payment and Settlement System in Japan and the Bank of Japans Payment and Settlement Services

A. Payment and Settlement Various forms of economic transactions in a monetary economy may all be understood as agreements to exchange goods or services for money. The transfer of money that completes such transactions is called settlement. Where the goods in such transactions are securities, the delivery of securities is also called settlement. Settlement is an integral part of financial institutions business operations, and it is also closely related to various services the Bank of Japan provides. This section gives an overview of Japans complex and fast-changing payment and settlement system and outlines the Banks related services. 1. Terms relating to payment and settlement The following are standard terms relating to payment and settlement. Cash (see chapter II), namely banknotes and coins, is one kind of money used for settlement. Demand deposits (see footnote 1 for chapter II) held by individuals and firms with financial institutions, and current account deposits financial institutions hold with the Bank (BOJ account deposits, see chapter III) are called deposit money, and are also used for settlement. The transfer of money that completes a transaction is referred to as funds settlement. The delivery of securities that completes transactions in stocks and bonds is often referred to as securities settlement to distinguish it from funds settlement. A payment and settlement system is an arrangement for transferring payment instruments (money) or securities. As explained in box 2 for chapter I, this term is used to indicate one specific payment and settlement system, as well as a nations payment and settlement system as a whole, which is made up of individual payment and settlement systems. In this chapter, the term refers to both individual systems and the overall system, with its meaning clarified where necessary. In Japan, various forms of payment and settlement systems, such as those for clearing funds and delivering securities, are closely interrelated and make up the overall payment and settlement system (see C.). 2. Payment and settlement services provided by the Bank In todays economy, financial transactions have been expanding rapidly, as well as trades in goods and services. Such financial transactions include the borrowing and lending of funds, and issuance, sales, and purchases of stocks and bonds. It is therefore vital that these transactions be smoothly completed 56

B. Widely Used Payment Instruments in Japan

by settling the huge volume and value of funds and securities involved. The Bank plays a central role in Japans payment and settlement system by providing payment instruments, namely banknotes and BOJ account deposits, and operating the registration system and the book-entry system for Japanese government securities (JGSs). One of the Banks objectives, as stipulated in Article 1 of the Bank of Japan Law, is to ensure the smooth settlement of funds among financial institutions to maintain the stability of the payment and settlement system.

B. Widely Used Payment Instruments in Japan This section summarizes payment instruments widely used in Japan. 1. Cash Cash, consisting of banknotes and coins, has three notable characteristics. First, it is a legally defined payment instrument that should not be refused by any creditor in satisfaction of any debt (however, a recipient may refuse to accept coins when more than 20 coins of the same denomination are used in one payment). Second, cash is a payment instrument by which the highest settlement finality can be achieved. Third, cash guarantees anonymity,1 since it is difficult to know who used it when, where, or for what purpose. 2. Demand deposits held with financial institutions Demand deposits are another payment instrument closely related to everyday life, though people may be less familiar with these deposits as a payment instrument than they are with cash. For example, when a customer prearranges to pay for utilities such as electricity bills by direct debit, the monthly charges are debited from the customers deposit account and credited to the account of the electric power company. Payment for most credit card purchases is also made by debiting and crediting deposit accounts. Many other payments including payroll payments and firms payments by bills and checks for their purchases of materials are also settled by debiting and crediting accounts. Demand deposits have two notable features. One is that through the use of funds clearing systems (see C.), bulk or remote payments can be made efficiently without using cash, as obligations are settled by debiting the payers
As mentioned in chapter II, prepaid cards also guarantee anonymity. However, they can only be used in a limited range of transactions, and thus cannot be considered generally accepted.
1

57

Chapter IV The Payment and Settlement System in Japan and the Bank of Japans Payment and Settlement Services

account and crediting the payees account. This avoids the costs and risks associated with payment in cash, namely the costs of delivery and safekeeping, and the risk of loss or theft. The other feature is that individuals or firms can obtain cash anytime by withdrawing it from their deposits. 3. BOJ account deposits BOJ account deposits, which are current account deposits financial institutions hold with the Bank of Japan, are another important payment instrument closely related to everyday life, though people may be much less familiar with BOJ account deposits as a payment instrument than they are with demand deposits they hold with financial institutions. When school tuition, for example, is paid by funds transfer between bank accounts, payment is made by debiting the tuition from the payers deposit account and crediting the schools account. If the two parties hold accounts with different financial institutions, funds need to be transferred between the two institutions. Likewise, when a firm uses a check or a bill drawn against its deposit to purchase materials from another firm, and the two firms do not have accounts at the same financial institution, an interbank funds transfer between the two institutions is needed. For most of these interbank funds transfers, the net settlement position of each financial institution is calculated by a clearing system (see C.) by netting payments made and received by the institution, and is then settled by debiting and crediting the institutions current accounts at the Bank (BOJ accounts). Many other kinds of financial transactions are settled through BOJ accounts. For example, interbank call money transactions are settled by funds transfers between BOJ accounts. For the settlement of transactions between financial institutions and the Bank or the government, debits and credits to BOJ accounts are widely used. Such transactions include those related to the Banks money market operations and lending, payments and receipts of treasury funds, and the issuance and redemption of JGSs (see chapters III, VI, IX, and X). BOJ account deposits have two features as a payment instrument. One is that, like cash, these deposits can achieve the highest settlement finality. The other is that, with the Bank of Japan Financial Network System (BOJNET), settlement by funds transfer through BOJ accounts is efficient, and avoids the costs and risks associated with payment in cash.

58

C. An Overview of Japans Payment and Settlement System

C. An Overview of Japans Payment and Settlement System This section explains various payment and settlement systems for funds and securities in Japan, and gives an overall picture of Japans payment and settlement system. 1. Funds clearing systems Financial institutions need to process large volumes of funds transfers among them every day, making payments in some transactions while receiving payments in others. These interbank funds transfers are settled based on the net settlement position of each financial institution, which is calculated by privately managed clearing systems (see chapter III). Major clearing systems in Japan are (1) the Domestic Fund Transfer System, (2) the Foreign Exchange Yen Clearing System (FXYCS), and (3) bill and check clearing systems. In the first two systems, and at the 34 bill and check clearing houses in which the Bank of Japans head office or branches are direct participants, the net settlement position of each financial institution is calculated by netting payments made and received by the institution and settled by debiting and crediting BOJ accounts through the BOJ-NET Funds Transfer System. The way each system functions is explained below. a. Domestic Fund Transfer System and the Zengin System The Domestic Fund Transfer System is used for interbank funds transfers, for example, when bank customers (individuals and firms) request banks to process funds transfers. It is managed by the Tokyo Bankers Association (TBA). The following procedure takes place when a funds transfer from firm X holding an account with bank A to firm Y holding an account with bank B is cleared by the Domestic Fund Transfer System (see chart 4-1). (1) Firm X (payer) instructs its bank, bank A, to make a funds transfer to the account of firm Y (payee) held with bank B. (2) Bank A debits firm Xs account, and sends payment information to bank B via the system. (3) Bank B credits firm Ys account. (4) Bank B notifies firm Y of the transfer. The payment information sent from bank A to bank B is processed by the Zengin Data Telecommunications System (Zengin System), the computer network that handles interbank transactions in the Domestic Fund Transfer System. Data relating to payer X and payee Y, the payment value, and other

59

Chapter IV The Payment and Settlement System in Japan and the Bank of Japans Payment and Settlement Services

information are exchanged between bank A and bank B via the Zengin Computer Center. (5) The Zengin Computer Center calculates the daily net settlement positions of participating banks, including bank A and bank B. (6) The center sends information on the net positions of participating banks online to the Bank, and the settlement takes place at the designated settlement time of 17:002 on the day funds are credited to Ys account. If this is the only transaction of the day for banks A and B, the settlement is carried out by debiting the BOJ account of bank A and crediting that of bank B accordingly through the BOJNET (see D.4 for procedures after the introduction of the new RTGS system). Chart 4-1 Domestic Fund Transfer System

Payer X
(1) Requests transfer of funds

Payee Y
(4) Gives notice of transfer

Bank A
(2) Debits Xs account and sends payment information to bank B

Bank B
(3) Credits Ys account (5) Clearing

X !

Y +

Zengin Computer Center

(6) Informs net position of each financial institution

Bank of Japan
Debits As BOJ account Credits Bs BOJ account

A !

B +

(Reference) After the introduction of the new RTGS system for funds transfers via BOJ accounts, the BOJ account of the TBA (the operator of the Zengin System) will be used as the settlement account and net positions of participating financial institutions will be settled on an RTGS basis (see footnote 22 in this chapter).
2 The designated settlement time of 17:00 is sometimes called tameketsu jiten, because settlement for the Domestic Fund Transfer System takes place.

60

C. An Overview of Japans Payment and Settlement System

b. Foreign Exchange Yen Clearing System (FXYCS) The FXYCS, operated by the TBA, is used for clearing interbank yen transfers arising from transactions such as yen payments from individuals and firms overseas to residents in Japan, or foreign exchange transactions between financial institutions (see chapter VIII). The following procedure takes place in the case of a yen transfer from firm X in the United States to firm Y in Japan via financial institutions in their respective countries (see chart 4-2). (1) Firm X (payer) brings U.S. dollars to bank A, with which it holds an account, and instructs bank A to make a yen payment to firm Y (payee) in Japan. (2) Bank A sends payment information, using SWIFT3 or telex, to its correspondent bank,4 bank B, in Japan. (3) Bank B sends payment information via the BOJ-NET to the payees bank, bank C, which receives the funds on behalf of payee Y. (4) Bank C credits firm Ys account. (5) Meanwhile, the Bank, entrusted by the TBA, calculates the daily net settlement positions of member financial institutions of the system, including banks B and C, and settles the net positions at the designated settlement time of 15:00. If this is the only transaction of the day for banks B and C, the BOJ account of B is debited and that of the TBA is credited, and then, the BOJ account of the TBA is debited and that of C is credited through the BOJ-NET (see D.4 for procedures after the introduction of the new RTGS system).

3 The Society for Worldwide Interbank Financial Telecommunication, a network for banks to exchange data mainly relating to cross-border financial transactions. It is operated by a nonprofit organization whose head office is in Belgium. Japanese banks have been participants in this network since 1981. 4 A correspondent bank, in general terms, is a financial institution that is entrusted with providing payment services on behalf of other institutions to enable settlement of funds between distant areas where those institutions have no branches. A typical example is an institution entrusted by overseas institutions with handling transfer of funds in the country where it is located. In the above example, the settlement between institution A and correspondent bank B occurs, for example, by debiting As account held with B.

61

Chapter IV The Payment and Settlement System in Japan and the Bank of Japans Payment and Settlement Services

Chart 4-2

Foreign Exchange Yen Clearing System (FXYCS)


<Japan>

<U.S.A.>

(1) Brings in dollars and requests yen transfer

Payer X

Payee Y
Gives notice of transfer

Bank A in U.S.A.
(2) Sends SWIFT message and debits dollar account of X

Correspondent Bank B in Japan


(3) Debits yen account of A and sends payment instruction

Bank C
(4) Credits Ys yen account

X !

A !

Y +

BOJ-NET (FXYCS)

(5) Clearing

Bank of Japan
Credits and then debits TBAs BOJ account
TBA TBA

Debits Bs BOJ account

Credits Cs BOJ account

B !

C +

c. Bill and check clearing systems Bill and check clearing systems are used by financial institutions to clear bills and checks drawn by individuals or firms for payment. A clearing house serves a specific geographical area, and member institutions gather at a specific time to exchange bills and checks and calculate their net settlement positions. Clearing houses are operated, among others, by bankers associations of their respective areas. The Banks head office and branches are direct participants in 34 clearing houses in Japan. The following procedure takes place when firm Y makes payment to firm X using a bill for goods purchased (see chart 4-3).

62

C. An Overview of Japans Payment and Settlement System

Chart 4-3

Bill and Check Clearing System


(1) Draws bill

(2) Requests collection of funds Bank A (8) Credits Xs account X +

Payee X

Payer Y

Bank B (7) Debits Ys account (4) Clearing (6) Receives bill Clearing House (5) Informs net settlement position of each financial institution Bank of Japan
Credits As BOJ account

Y !

(3) Presents bill

Debits Bs BOJ account

A +

B !

(Reference) After the introduction of the new RTGS system for funds transfers via BOJ accounts, the BOJ account of each clearing house will be used as the settlement account and net positions of participating financial institutions will be settled on an RTGS basis (see footnote 22).

(1) Firm Y (payer) draws a bill to make payment. The bill designates a branch of the payers bank, bank B, as the place of payment, at which Ys account will be debited. (2) Firm X (payee), the recipient of the bill, brings the bill to its bank, bank A, and makes a request for collection of funds. (3) Bank A presents the bill to the clearing house on the due date and instructs bank B to pay the funds.5

Bills and checks exchanged at a clearing house are limited to those designating a head office or branch of an institution in the area as the place of payment.

63

Chapter IV The Payment and Settlement System in Japan and the Bank of Japans Payment and Settlement Services

(4) At the clearing house, member banks present and exchange bills and checks, and data are prepared on the net settlement position of each institution. Settlement for member banks at the clearing houses in which the Bank directly participates is completed by debiting and crediting BOJ accounts at the designated settlement time of 13:00 on the day the bill is exchanged, based on the calculation of net positions.6 If this is the only transaction of the day for banks A and B, the BOJ account of bank B is debited and that of A is credited through the BOJ-NET (see D.4 for procedures after the introduction of the new RTGS system). (5) Bank B then brings the bill back from the clearing house. (6) Bank B debits firm Ys account. (7) The process is completed when bank A credits firm Xs account on the following business day. 2. Securities settlement systems Securities settlement systems in Japan can be categorized into two groups: those for JGSs, i.e., the JGB Registration System and the JGB Book-entry System (for details see chapter X); and those for other securities, i.e., the registration system for corporate bonds and other non-JGB bonds and the depository and book-entry transfer system for stocks. a. Japanese government securities The JGB Registration System (system for registering JGSs) enables JGS holders to register their JGSs with the Bank without the issuance of physical securities. JGSs held under this system are called registered JGSs. The Bank, as the registrar, keeps the registration book in which JGSs are registered at their holders request. When the holders of registered JGSs change through transactions, settlement of JGSs occurs by changing the holders names on the registration book (transfer registration), without physical delivery. This system ensures the safe and efficient transfer of JGSs. Another system used for the transfer of JGSs is the JGB Book-entry System (system for transferring JGSs), which was established by the Bank to achieve greater efficiency in JGS transfers after a surge in JGS transactions that started in the 1970s. JGSs held under this system are called book-entry
6

The designated settlement time of 13:00 is sometimes called koukanjiri jiten, because settlement for bill and check clearing takes place.

64

C. An Overview of Japans Payment and Settlement System

JGSs. In this system, JGSs are transferred by debiting and crediting securities accounts on the book (book-entry transfer). It is a multi-tiered system where participants (i.e., financial institutions) keep record of their customers JGS transfers and holdings on their customers books, and the Bank, as the depository, keeps record of participants JGS transfers and holdings (including those deposited by participants customers) on the participants book. This system achieves greater efficiency in JGS transfers since transactions between customers that deposit JGSs with the same participant are completed by bookentry transfers on the customers book kept by the participant, and do not require changes in the participants book kept by the Bank. Securities transfers in the JGB Registration System and the JGB Bookentry System are both processed through the BOJ-NET JGB Services (see D.2). b. Other securities Ownership of corporate bonds and other non-JGB bonds 7 can be registered with registrar banks under the registration system for these bonds. On-line processing of transfer requests for corporate bonds and other non-JGB bonds has become available since 1997 with the launch of JB Net, a computer network system linking financial institutions and registrar banks. The JB Net is operated by the Japan Bond Settlement Network Co., Ltd. For stocks, settlement services under the depository and book-entry transfer system for stocks started in 1991. The system is managed by the Japan Securities Depository Center (JASDEC). Transactions of listed stocks and over-the-counter stocks, including stocks under supervision,8 can be completed via this system without the delivery of physical securities. 3. An overview of Japans payment and settlement system Many economic transactions involve more than one payment instrument and payment and settlement system. In other words, the various forms of payment instruments and payment and settlement systems are interrelated, forming the nations payment and settlement system, which supports the functioning of Japans financial system as an infrastructure to transfer and allocate funds and risks. Chart 4-4 below is an overview of Japans payment and settlement system.
Corporate bonds and other non-JGB bonds are corporate bonds, bank debentures, municipal bonds, government-guaranteed bonds, and yen-denominated foreign (samurai) bonds. Stocks that are scheduled to be delisted, but are still being traded for a certain period to protect investors.
8 7

65

Chapter IV The Payment and Settlement System in Japan and the Bank of Japans Payment and Settlement Services

Chart 4-4

Overview of Japans Payment and Settlement System

[Funds Transfer]

Individuals and firms


Cash Bills and checks Credit cards
Funds transfers using demand deposits

Receipt/payment

Bill and Check Clearing System Financial institutions Yen transfer stemming from FX transactions Domestic Fund Transfer System

Foreign Exchange Yen Clearing System

Credits and debits to BOJ accounts via the BOJ-NET Funds Transfer System

Interbank funds transfer

DVP

[Securities Delivery]
Physical securities of bonds and stocks Receipt/delivery
Transfer registration under the JGB Registration System via BOJ-NET JGB Services Book-entry transfer under the JGB Book-entry System via BOJ-NET JGB Services Transfer through the registration system of corporate bonds and other non-JGB bonds

Securities for on-line transfers JGSs


Corporate bonds and other non-JGB bonds

JB Net Stock exchanges


Transfer through the depository and book-entry transfer system for stocks

Stocks

66

D. The Bank of Japans Payment and Settlement Services

D. The Bank of Japans Payment and Settlement Services Every economic transaction involves the transfer of money. It is therefore crucial to ensure that money is efficacious and reliable for the public to use. To this end, the features of payment instruments as well as payment and settlement systems in Japan have been successively improved. The improvementsas observed in the development of the Zengin System (see C.1)have been in line with changes in the way money is transferred: from physical delivery of cash and securities to transfer on books, and subsequently to on-line transfer. Improvements in payment and settlement systems have helped to ensure the prompt and accurate settlement of large volumes of transactions while avoiding the costs of delivery and safekeeping and the risks of loss and theft associated with the handling of cash and physical securities. The Bank of Japan promotes the safe and efficient transfer of funds and delivery of securities by providing payment instruments, operating the JGB Registration System and the JGB Book-entry System, and also by supporting various initiatives taken by the private sector to mitigate systemic risk. The following section summarizes various payment and settlement services provided by the Bank. 1. Providing payment instruments and managing settlement systems for JGSs The Bank provides payment instruments and operates settlement systems. a. Providing payment instruments The Bank issues banknotes, 9 a payment instrument by which the highest settlement finality can be achieved (see chapter II). To ensure circulation of clean banknotes within the economy, the Bank examines banknotes that return to the Bank and separates them into those suitable for recirculation and those too damaged or worn for further circulation. As a security against counterfeiting, their authenticity is carefully verified. Further, the Bank ensures that banknotes circulate smoothly throughout the country, even in times of emergency. The Banks appropriate conduct of monetary policy and maintenance of price stability help maintain the value of banknotes.

Coins are issued by the government. The Bank, however, contributes to their smooth circulation by disbursing them into the economy from its counters, except for some commemorative coins.

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Chapter IV The Payment and Settlement System in Japan and the Bank of Japans Payment and Settlement Services

The Bank provides financial institutions with BOJ account deposits, which are also a payment instrument by which the highest settlement finality can be achieved. The Bank settles transactions between financial institutions and the Bank or the government, as well as between financial institutions, by debiting and crediting the appropriate BOJ accounts (see chapter III). Notable features of BOJ account deposits are that unlike cash they do not incur costs of delivery and safekeeping, nor do they carry risks of loss and theft. b. Operating settlement systems for JGSs The Bank is the registrar in the JGB Registration System and the depository in the JGB Book-entry System. For the transfer of JGSs, it provides transfer registration services for transfer on the registration book in the JGB Registration System, and book-entry transfer services for transfer on the participants book in the JGB Book-entry System (see C.2 and chapter X). It is important that the Bank provide JGS settlement services for several reasons. First, JGSs are closely related to funds transactions and settlement as they are often used as collateral. Second, JGSs are used as instruments in the Banks money market operations. And third, JGSs become more attractive as assets when JGS settlement services are provided by the central bank, which can ensure the safety of settlement because it is immune from credit risk. Through its operation of JGS settlement systems, the Bank contributes considerably to the safe and smooth operation of the nations payment and settlement system. 2. Operating the BOJ-NET The Bank operates a computer network, the BOJ-NET, to provide safe and efficient on-line settlement services for funds and JGSs. This system was designed to (1) ensure the safety and stability of settlement, (2) streamline settlement procedures and improve the efficiency of settlement, and (3) serve as a settlement infrastructure that is consistent with international standards. The BOJ-NET lowers the cost of delivery and safekeeping, and reduces the risk of loss or theft associated with the handling of physical certificates such as JGSs or checks drawn on BOJ accounts. Moreover, the system shortens the time lag between trade and settlement. The BOJ-NET began operating in 1988, and as of the end of March 2000, 511 financial institutions including banks and securities companies participated in the system (hereinafter called BOJ-NET participants). Chart 4-5 gives an overview of the system. Specific services processed by the BOJNET are explained in chapters III and X. 68

D. The Bank of Japans Payment and Settlement Services

The Banks head office, branches, and BOJ-NET participants are connected to the Banks computer center in Tokyo by telecommunications lines, 10 through which data are sent to the computer center for on-line processing.11 In principle, participants access the BOJ-NET using dedicated BOJ-NET terminals, but a direct link between the BOJ-NET and a participants own computer systems (CPU-to-CPU connection) is also available for FXYCS, which needs to process a large volume of transactions. To ensure the safety of transfers of funds and JGSs through the BOJNET, main equipment and circuits for the BOJ-NET are duplicated as a security measure to increase reliability. The following facilities are duplicated: the mainframe computers and communications control units at the computer center; the telecommunications lines between the Banks head office and branches; and a telecommunications companys switching centers nearest to the head office and key branches. The Bank has backup facilities for the computer center in Osaka. The computer center, with the support of the Osaka branch, monitors the operations of the BOJ-NET to detect any system failures and to take necessary measures as promptly as possible when problems arise. The Bank also uses passwords, ID cards, and data encryption12 to ensure the security of the information exchanged over the network and to prevent fraud. 3. Contributing to the stable operation of the payment and settlement system In addition to providing payment instruments, operating settlement systems for JGSs, and operating the BOJ-NET as described above, it is vital that the Bank promote the smooth functioning of the nations payment and settlement system as a whole, to ensure safe and efficient transfers of funds and securities. The following section summarizes the Banks role and business operations contributing to the smooth functioning of the payment and settlement system.

10 Some financial institutions that process only a small number of transfers choose not to have a direct link to the BOJ-NET. These institutions make transfer requests by submitting paper-based payment instructions at the counters of the Banks head office and branches. 11

The Bank and BOJ-NET participants exchange data through the BOJ-NET from 9:00 each business day. The closing time for same-day settlement is 17:00 for funds transfers and 15:00 for JGS transfers. For postdated settlement, the closing time is 17:20 for funds transfers and 16:00 for JGS transfers.

12

The BOJ-NET uses Data Encryption Standard (DES), a symmetric cryptographic algorithm widely used throughout the world. Part of the system has been modified to use Triple-DES ensuring an even higher level of security.

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Chapter IV The Payment and Settlement System in Japan and the Bank of Japans Payment and Settlement Services

Chart 4-5
BOJ-NET participant A

Overview of the BOJ-NET


BOJ-NET participant B Registrar

Clearing Systems
Domestic Fund Transfer System
Tokyo Stock Exchange (TSE) Tokyo International Financial Futures Exchange (TIFFE)

Foreign Exchange Yen Clearing System Bill and check clearing systems Settlement bank

JB Net

Settlement bank

BOJ-NET JGB services


JGB Registration System Registration book Participant A Participant B As BOJ account Funds transfer system

JGB Book-entry System


DVP for JGSs

Participants book As JGS account Bs JGS account

Bs BOJ account

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D. The Bank of Japans Payment and Settlement Services

Table for Chart 4-5 Participants of the BOJ-NET (as of end-March 2000)
City banks Regional banks1 Regional banks II2 Trust banks Long-term credit banks Foreign banks (branches in Japan) Shinkin banks Securities companies Others Total 9 64 60 31 3 84 83 110 67 511

Notes: 1. Member banks of the Regional Banks Association of Japan. 2. Member banks of the Second Association of Regional Banks.

Appendix for Chart 4-5 Services Available through the BOJ-NET


I. Services related to BOJ account deposits (years in which on-line services started are in parentheses) 1. Funds transfer through BOJ - Funds transfers through BOJ accounts accounts including debit transfers1 and third-party transfers2 (1988. Settlement for Tokyo - Settlement for the Domestic Fund Transfer International Financial System, bill and check clearing systems, and Futures Exchange started in Tokyo International Financial Futures 1989.) Exchange 2. Reports on reserves to the - Report on projected required reserves Bank (1988) - Report on finalized figures on required reserves 3. Settlement for FXYCS - Transmission and receipt of payment (1989) instructions for FXYCS, and calculation of net settlement positions 4. DVP for corporate bonds and - Funds transfers for DVP for corporate bonds other non-JGB bonds (1998) and other non-JGB bonds
1. Funds transfers are usually initiated by instructions from payers. Debit transfers, however, are initiated by a payees instruction, based on which a payers account is debited and then the payees account credited. The Bank allows debit transfers only for funds transfers between the head offices and branches of a financial institution. 2. Third-party transfers are used when financial institutions make large-value funds transfers on behalf of their customers using BOJ account transfers. When a customer instructs a financial institution to make a large-value funds transfer on the customers behalf, the financial institution transmits payment instruction with messages on the transfer (i.e., payers name, payees account) using a BOJ-NET terminal, and the payees financial institution credits the payees account based on the message.

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Chapter IV The Payment and Settlement System in Japan and the Bank of Japans Payment and Settlement Services

II. Services related to JGSs (years in which on-line services started are in parentheses) 1. JGB Registration System - Transfer registration; registration of JGSs (1990) converted from book-entry form; deletion of registration for returning JGSs in bookentry form; and supplementary registration 2. JGB Book-entry System - Book-entry transfers; accepting deposits of (1990) JGSs converted from registered form; returning JGSs in registered form 3. Auction - Announcement of public auctions, (1990. Some services started acceptance of bids, and announcement of in 1991.) auction results - Announcement of competitive auction bidding of the syndicate, acceptance of bids, and announcement of auction results 4. Receipt of payments for JGSs - Funds transfers for payment, initial issued (1992) registration, and initial deposits following JGS issuance 5. DVP (1994) - Transfer of funds and JGSs on a DVP basis III. Other Services (years in which on-line services started are in parentheses) 1. Purchases and sales of TBs - Purchases and sales of TBs and FBs by the and FBs (1991) Bank 2. Communication on market - Announcement of offer, acceptance of operations (1999) bids, and announcement of results of other market operations besides operations of TBs/FBs under repurchase agreement

a. Minimizing systemic risk The failure of a deposit-taking institution can have far-reaching consequences, well beyond the loss of deposits at the institution or the backlog of unsettled transactions that were to be settled by debiting and crediting the deposit accounts held with the institution. Given the enormous number of economic transactions that take place today, large volumes of funds and securities need to be transferred. These transfers are often interdependent, as funds or securities received in one transaction are used for transfer in another. Because of the interdependency of transfers, when a financial institution participating in a payment and settlement system becomes unable to transfer funds or securitieswhether due to a computer breakdown, an operational error, or financial difficultyother institutions that expected to receive funds or securities from that institution to meet their own settlement obligations may also become unable to settle, resulting in a systemic effect. Even if there is no problem at participating financial institutions, a chain of settlement failures 72

D. The Bank of Japans Payment and Settlement Services

could also start from a computer breakdown in a payment and settlement system. When a financial institution or a payment and settlement system becomes unable to transfer funds or securities, this could jeopardize the financial systems function as an infrastructure to transfer and allocate funds and risks in the economy through a loss of confidence in other payment and settlement systems or the nations payment and settlement system as a whole, or even in the financial system. The term systemic risk is used to describe the possibility that problems in a payment and settlement system or at one financial institution participating in a payment and settlement system pose risks to other systems, to the nations payment and settlement system as a whole, or to the financial system, through a chain of settlement failures or loss of confidence (see chapter III).13 It is therefore crucial to prevent systemic risk from materializing in the payment and settlement system. To ensure the stability of the system, the Bank conducts on-site examinations and off-site monitoring of financial institutions to check their financial condition and encourages their efforts to maintain sound management. The Bank has also improved its own settlement systems to reduce systemic risk. In 1994, the Bank introduced a delivery-versuspayment (DVP) mechanism for JGSs (DVP for JGSs) by linking the BOJ-NET Funds Transfer System and the BOJ-NET JGB Services. With this mechanism, the delivery of securities occurs only if the corresponding transfer of funds occurs, eliminating the risk that the seller delivers JGSs but does not receive payment and vice versa.14 Further, the Bank has decided to make real-time gross settlement (RTGS) the only settlement mode for settlement through BOJ accounts by the beginning of 2001, abolishing the designated-time settlement in principle, which currently accounts for most of settlements through BOJ accounts. The Bank is also working to make RTGS the only settlement mode for JGS settlement (see D.4 for details). b. Encouraging and supporting private-sector initiatives to reduce systemic risk It is also important that the Bank encourage and support private-sector
13

The Euro-Currency Standing Committee established under the Bank for International Settlements BIS (see footnote 18), renamed the Committee on the Global Financial System in February 1999, defines systemic risk in its Promisel report as the risk that a disruption (at a firm, in a market segment, or to a settlement system, etc.) causes widespread difficulties at other firms, in other market segments or in the financial system as whole.

14 The BOJ-NET Funds Transfer System and the BOJ-NET JGB Services operated separately prior to the introduction of the DVP mechanism. This led to a risk that participants in these systems might not receive funds or JGSs in the event that their counterparties went bankrupt.

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Chapter IV The Payment and Settlement System in Japan and the Bank of Japans Payment and Settlement Services

initiatives to prevent systemic risk from materializing. This form of activities by the central bank to promote the smooth functioning of private-sector systems is commonly referred to as oversight. Oversight of payment and settlement systems is one of the roles played by central banks throughout the world. As part of its oversight activities, the Bank participates in projects to devise schemes for reducing settlement risk in the Domestic Fund Transfer System 15 and the FXYCS, 16 and makes the necessary changes to BOJ-NET computer systems to accommodate such risk reduction measures. For securities settlement, the Bank supported the introduction of a DVP mechanism for the settlement of corporate bonds and other non-JGB bonds in 1998. With the link between the JB Net and the BOJ-NET Funds Transfer System, such bonds transferred at the registrar banks and the corresponding funds transferred through BOJ accounts are settled on a DVP basis (BOJ-NET DVP system for corporate bonds and other non-JGB bonds. See C.2). The Bank has also encouraged the introduction of rolling settlement for JGSs and for corporate bonds and other non-JGB bonds. In rolling settlement, transactions are settled a given number of business days after the trade contract is made. Prior to the introduction of rolling settlement, trade contracts made over a certain period were accumulated before being settled on one of the designated settlement days of each month.17 The transfer of funds and securities for most transactions in
15 It is planned to introduce a new risk reduction scheme to the Domestic Fund Transfer System before the introduction of the new RTGS system for settlement through BOJ accounts. Under the new scheme, each participating institution informs the operator of its sender net debit cap (an upper limit on aggregate value of payments made to other participants less aggregate payments received from others), and either posts collateral covering its sender net debit cap or acquires a guarantee from other participating institutions (a guarantor institution provides a certain amount of collateral). In the event a participant fails to settle its obligation, liquidity-provider banks provide funds against collateral to complete settlement.

The TBA, the operator of the FXYCS, introduced new risk reduction measures in 1998. Under the new measures, each participant sets a bilateral net credit limit (an upper limit on aggregate value of payments received from a participant less aggregate value of payments made to the participant) for all the other participants, and the TBA sets a sender net debit cap (an upper limit on aggregate value of payments made to other participants less aggregate value of payments received from others) for each participating institution. In the event a participant fails to settle its obligation, each participating institution shares the loss in proportion to its bilateral net credit limit. A liquidity-provision and a collateral scheme were also introduced to complete settlement in case the shared loss is not paid. Settlement practices have been revised in stages. For example, after 1987 and before the introduction of rolling settlement, JGS transactions were settled within 10 business days after trades were contracted, on the fifth, 10th, 15th, 20th, 25th, and the last day of each month. These settlement days were called gotoubi in Japanese, which means every fifth and tenth day of the month.
17

16

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D. The Bank of Japans Payment and Settlement Services

JGSs, and in corporate bonds and other non-JGB bonds is currently conducted on a DVP basis on the third business day after the trade contract is made. The Bank also participates in global forums to reduce various risks related to settlement (see chapter VIII). One of the major activities of the Bank is to contribute to committees and working groups established at the Bank for International Settlements (BIS).18,19 c. Acting as the lender of last resort At times when there is an imminent danger that systemic risk will materialize despite the efforts described above, the Bank acts as the lender of last resort, providing funds to financial institutions in the form of lending or other means (see chapter V). The smooth functioning of the payment and settlement system is maintained through the use of the funds by the institution to which they are provided or by another institution that has borrowed from the institution to make necessary payments. In emergency cases where systemic risk is likely to materialize, public confidence may be lost in the deposit money issued by financial institutions; in the worst cases, the deposit money may no longer be accepted as a payment instrument. At such times, the Banks provision of cash and BOJ account deposits, both of which are payment instruments by which the highest settlement finality can be achieved, is an essential and effective way to ensure smooth settlement. The Bank should act as the lender of last resort only to ensure the smooth operation of the payment and settlement system and the functioning of the financial system as a whole, and not to bail out failing institutions. In the long run, systemic risk may increase in the presence of moral hazard, that is, if financial institutions neglect to maintain sound management, based on the expectation that the Bank, as the lender of last resort, will provide emergency funds. On-site examinations and off-site monitoring are important for the Bank to act appropriately as the lender of last resort (see chapter V).
18 The Bank for International Settlements (BIS) is an international organization established in 1930 to deal with German reparations after World War I and to promote cooperation of central banks. Its headquarters is in Basle, Switzerland. As of the end of March 2000, central banks and monetary authorities from 49 countries and regions are members and have voting rights at the General Meeting. 19

The Committee on Payment and Settlement Systems (CPSS) is one of the committees established at the BIS to discuss, study, and take forward the work on payment system issues generally and to conduct cooperative oversight of cross-border payment and settlement systems by central banks. The CPSS has published many reports on its discussions and analyses of privatesector payment and settlement systems.

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Chapter IV The Payment and Settlement System in Japan and the Bank of Japans Payment and Settlement Services

4. Introducing the new RTGS system for funds and JGS transfers This section explains in detail the Banks preparations to introduce the new RTGS system to make RTGS the only settlement mode for the BOJ-NET Funds Transfer System and the BOJ-NET JGB Services, as a measure to reduce systemic risk. a. BOJ-NET Funds Transfer System Currently, there are two ways of processing debits and credits to BOJ accounts: (1) real-time gross settlement (RTGS), where payment instructions are processed immediately and individually upon receipt; and (2) designated-time settlement where payment instructions are accumulated and processed at one of the four designated settlement times of 9:00, 13:00, 15:00, and 17:00. Currently, most payment instructions are processed by designated-time settlement, since financial institutions are only required to prepare funds equivalent to their net debit positions20 at each designated settlement time (see table 4-1). However, in designated-time settlement, the failure of even one participant to pay its net obligation could potentially stop the settlement of all other instructions processed at the same settlement time, due to the interdependency of transfers among financial institutions. To solve this problem inherent in designated-time settlement and to prevent systemic risk from materializing, the Bank has decided to abolish designated-time settlement, in principle, and make RTGS the only settlement mode for settlement through BOJ accounts by the beginning of 2001. 21 Specifically, all funds transfers and debits/credits to BOJ accounts resulting from interbank transactions will be processed in real time on an instruction-byinstruction basis. As for funds transfers between financial institutions and operators of private clearing systems, such as bill and check clearing systems, the Domestic Fund Transfer System, and FXYCS, net positions will be settled on an RTGS basis at and after certain times of the day. 22, 23
20 For example, when an institutions aggregate value of payments to be made to other institutions is 10 billion yen and its aggregate value of payments to be received from other institutions is 9 billion yen at the designated settlement time of 13:00, it only needs to prepare funds equivalent to its net debit position of 1 billion yen. 21

Even when all transactions are settled on an RTGS basis, a settlement failure by a financial institution could still trigger settlement failures at other financial institutions that anticipated the receipt of funds from the participant. However, since each transaction is processed immediately and individually in RTGS, the systemic effect of a settlement failure is likely to be limited, compared with the similar situation in the designated-time settlement.

22 After the introduction of the new RTGS system to the BOJ-NET Funds Transfer System, net positions stemming from private-sector clearing systems will be settled on an RTGS basis at and

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D. The Bank of Japans Payment and Settlement Services

Table 4-1 Choice of Settlement Mode for Transfers via BOJ Accounts: Real-time Gross Settlement and Designated-time Settlement1
Trillion yen

Real-time gross settlement 0.1 (0.1)

Designatedtime settlement 137. 6 (99.9)

Settlement at 9:00 0.6 (0.4)

Settlement at 13:00 104.2 (75.7)

Settlement at 15:00 26. 9 (19.6)

Settlement at 17:00 5.9 (4.3)

Note: 1. Daily average for September 1996. Value of transfers settled is calculated by counting each payment instruction once. Figures in parentheses are the percentage share in the total value of transfers.

The Bank is planning to establish an intraday overdraft facility, to support financial institutions financing, as they are required to have more funds on hand under RTGS than they did under designated-time settlement, and to promote smooth settlement through BOJ accounts. Overdrafts will be available to financial institutions upon request, on a collateralized basis, and free of charge if repaid by the end of the day. The Bank is also planning to extend the deadline for accepting payment instructions for same-day settlement through the BOJ-NET by two hours, from 17:00 to 19:00. To streamline participants settlement procedures, the Bank also plans to allow CPU-to-CPU connections, direct links between participants host computers and BOJ-NET host computers. The Bank will make the CPU-to-CPU connections available for both the BOJ-NET Funds Transfer System and the BOJ-NET JGB Services. b. BOJ-NET JGB Services Currently there are two ways of transferring JGSs (registered JGSs and bookafter the following times: (1) 16:15 for the Domestic Fund Transfer System; (2) 14:30 for the FXYCS; and (3) 12:30 for bill and check clearing systems. The BOJ account of each system operator will be used for settlement, that is, system participants with net debit positions will transfer funds to the account and then the funds will be transferred from the account to those with net credit positions.
23

The following types of funds transfers will be processed together (simultaneous processing) for each type of transfers at specified times of the day: (1) funds transfers to/from yen deposits held at the Bank by foreign central banks and international organizations (see chapter VIII), and (2) funds transfers for DVP for corporate bonds and other non-JGB bonds.

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Chapter IV The Payment and Settlement System in Japan and the Bank of Japans Payment and Settlement Services

entry JGSs) through the BOJ-NET: (1) priority processing, where transfer instructions are processed immediately upon receipt; and (2) normal processing, where transfer instructions are accumulated and processed all together at 15:00. Instructions requesting transfers on or after the next business day (postdated settlement), as well as same-day settlement, can be sent using BOJ-NET terminals for transfers by normal processing. Most transfers are settled by normal processing. The Bank is working to make RTGS (priority processing), in principle, the only settlement mode for JGS transfers by the beginning of 2001 to prevent systemic risk from materializing. Specifically, JGS transfers between financial institutions, such as those stemming from sales and purchases of JGSs, will be settled by priority processing.24 As part of the effort to facilitate the shift to RTGS for JGS transfers, the Bank is planning to establish a liquidity-saving facility called simultaneous processing of DVP and collateralization (SPDC) 25 to ensure the smooth settlement of JGSs on a DVP basis. By using SPDC, a financial institution buying JGSs can post to the Bank the JGSs it receives from the seller as collateral to obtain funds through intraday overdraft, and use the funds to pay the seller for the JGSs.26 In addition to establishing the facility, the Bank is planning to extend the deadline for accepting transfer instructions for same-day settlement through the BOJ-NET JGB Services to 16:30 on normal business days from the current 15:00, to ensure that the entry of transfer instructions is completed smoothly.

24

Normal processing will continue to be used for the following transactions: (1) the Banks JGB purchasing operations; (2) transactions involving JGSs kept in custody with the Bank by foreign central banks and international organizations; and (3) issuance of JGSs for which corresponding payments are made through the BOJ-NET.

25

The Bank is planning to make SPDC available only for book-entry JGSs. This is because it is expected that the majority of JGSs will be held and settled in the form of book-entry JGSs instead of registered JGSs following the amendment to the Special Taxation Measures Law of March 1999. The amendment provides that exemption from withholding tax on interest payments on JGSs, for which the coupon accrual period begins on and after January 1, 2001, will be limited to interest payments on book-entry JGSs.

26 When a participant is the seller of JGSs, it takes back JGSs posted as collateral from the Bank, and delivers them to the buyer, and repays the intraday overdraft with payments received from the buyer.

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Chapter V

On-Site Examination and Off-Site Monitoring, and Credit Extension as the Lender of Last Resort

The Bank of Japan conducts a variety of business operations to maintain financial system stability. This chapter explains the Banks on-site examinations and off-site monitoring, and its credit extension as the lender of last resort. *** Financial system stability is crucial for the smooth transfer and allocation of funds and risks accompanying economic activities, as well as for the effective monetary policy. The Bank carries out the following business operations to maintain financial system stability: (1) It provides payment instruments by which the highest settlement finality can be achieved, namely banknotes and deposits in current accounts financial institutions hold with the Bank. It also manages the Japanese government bonds (JGB) Registration System, the JGB Book-entry System, and operates the Bank of Japan Financial Network System (BOJ-NET) to enhance the safety and efficiency of the nations payment and settlement system. (2) It conducts on-site examinations and off-site monitoring of financial institutions to assess their business operations and financial condition. (3) It acts as the lender of last resort to prevent the materialization of systemic risk. (4) It is involved in formulating prudential standards and guidelines on a global basis, and it extends credit in order to prevent an outbreak or contagion of international financial crises. The Bank conducts on-site examinations of financial institutions by dispatching its examiners to institutions, and off-site monitoring through meetings and telephone interviews with their executives and staff, and analysis of various documents and financial data. Findings from on-site examinations and off-site monitoring help facilitate the smooth settlement of funds and the proper exercise of the lender of last resort function. They also provide valuable information for the conduct of monetary policy. ***

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Chapter V: On-Site Examination and Off-Site Monitoring, and Credit Extension as the Lender of Last Resort

A. The Bank of Japans Business Operations related to Financial System Stability 1. Financial system stability To promote the development of the economy, it is especially important to ensure the smooth transfer of funds accompanying various economic activities and the efficient use of savings for investment. To this end, it is necessary to ensure the smooth operation of the payment and settlement system, through which funds and securities are transferred. Since these transfers of funds and the use of savings for investment involve numerous financial transactions in various financial markets, it is important to maintain financial system stability, that is, to maintain the functions of the financial system, including the payment and settlement system, as an infrastructure to transfer and allocate both funds and risks (see box 2 for chapter I). Financial system stability is a prerequisite for effective conduct of monetary policy aiming at price stability. Monetary policy is conducted through supplying or absorbing central bank money, and financial system instability would damage the mechanism by which changes in central bank money affect money stock and interest rates in the nations overall economy (see chapters I and VI). 2. The Banks business operations related to financial system stability As explained in chapter I, the objectives of the Bank of Japan are to maintain financial system stability and to pursue price stability.1 This section explains the Banks business operations relating to financial system stability. To maintain financial system stability, it is necessary to prevent the materialization of systemic risk by maintaining safe and efficient operations in the payment and settlement system, which provides for smooth transfer of funds and securities. As explained in chapter IV, the Bank is the provider of the payment instruments by which the highest settlement finality can be achieved, namely banknotes and deposits in current accounts financial institutions hold with the Bank (BOJ account deposits); it also manages the
1 The government also plays an important role in achieving financial system stability. The governments responsibilities include (1) granting licenses to or registering entities that meet the requirements for the conduct of sound and efficient business operations, i.e., those with an adequate financial base, sufficient knowledge, and experience, (2) requiring financial institutions to disclose detailed information regarding their financial condition, (3) facilitating the smooth withdrawal of failing financial institutions from financial markets, and (4) protecting depositors of failed financial institutions.

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A. The Bank of Japans Business Operations related to Financial System Stability

registration and book-entry systems for Japanese government securities (JGSs). In addition, it operates the Bank of Japan Financial Network System (BOJNET) to provide safe and efficient settlement services for funds and JGSs. To reduce payment and settlement risk, the Bank has introduced a delivery-versuspayment (DVP) mechanism for JGS settlement, where the delivery of securities occurs only if the corresponding transfer of funds occurs. It is also currently working to prepare for the introduction of the new real-time gross settlement (RTGS) system to the BOJ-NET for the settlement of funds and JGSs. Furthermore, the Bank oversees various payment and settlement systems managed by private-sector operators, and encourages and supports risk-reduction measures taken by these operators. In this way, the Bank strives to enhance the safety and efficiency of the payment and settlement system, an essential element of the infrastructure supporting the financial system. For financial system stability, it is also important to maintain the sound management of financial institutions participating in various financial markets. Financial institutions play a role in supporting the payment and settlement system, by enabling the safe and efficient transfer of funds and securities. In addition, they act as important financial intermediaries 2 between individuals and firms by accepting deposits, extending loans, and trading securities in financial markets (see chapters III and IV).

!Box 1: Role of Banks in Our Daily Lives

As a result, any problem that arises in the management of a financial institution can hamper the settlement and financial intermediary functions that financial institutions serve, thus hindering the smooth transfer and allocation of funds and risks in the financial system. Therefore, the Bank conducts on-site examinations and off-site monitoring of financial institutions that hold current accounts with the Bank, so that it can assess their business operations and financial condition, and where it is necessary from the perspective of maintaining financial system stability, urge them to make improvements (see chapter III and B.). The Bank uses the information it acquires to improve the
2 The functions of financial intermediaries can be divided into two. First, by raising short-term funds through deposits or by other means and investing in medium- to long-term assets, such as loans and securities, they change the degree of liquidity of the funds in the financial markets. Second, by guaranteeing the principal of funds they raise through deposits and investing in loans and securities that carry some degree of credit risk, they change the degree of credit risk.

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Chapter V: On-Site Examination and Off-Site Monitoring, and Credit Extension as the Lender of Last Resort

payment and settlement system, and to better understand the financial intermediary function of financial institutions when conducting monetary policy. Should there be an imminent danger that systemic risk will materialize despite these efforts, the Bank will need to act as the lender of last resort and to ensure the smooth transfer and allocation of funds and risks in the financial system. The Bank assesses the business operations and financial condition of financial institutions through on-site examinations and off-site monitoring, thereby preparing for cases in which it will act as the lender of last resort in a timely fashion and, when necessary, provide funds through lending and other measures (see E.). As financial markets have become increasingly globalized, international policy coordination is necessary to improve payment and settlement systems, and establish measures against systemic risk. The Bank works closely with foreign central banks and international institutions to prevent an outbreak or contagion of international financial crises. Specifically, the Bank monitors various risks, participates in formulating international standards and guidelines, and provides liquidity upon request or after approval by the government (specifically, the Financial Reconstruction Commission [FRC] and the Minister of Finance;3 see chapter VIII) in an emergency. In summary, the Bank conducts various business operations to maintain financial system stability. Of these, this chapter takes up on-site examinations and off-site monitoring, and the lender of last resort function. For explanations of the Banks business operations related to the payment and settlement system, see chapter IV. For explanations of international financial crises and the Banks contribution to maintaining international financial system stability, see chapter VIII.

B. The Role of On-Site Examination and Off-Site Monitoring 1. The role of on-site examination and off-site monitoring While financial institutions earn profits by acting as providers of payment and settlement services in the nations financial system and as financial intermediaries to individuals and firms, they bear various risks (see table 5-1). These risks include credit risk and market risk which they incur through
This will be changed to the Prime Minister and the Minister of Finance in January 2001 due to a reorganization of government ministries and agencies.
3

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lending, securities investment, and various derivatives transactions, and liquidity risk incurred by raising short-term funds through deposits and investing in medium- to long-term assets such as loans and securities. If these risks are not managed appropriately, a financial institution could incur a deterioration of its financial assets and an increase in borrowing costs in the event of bankruptcies among its borrowers, or fluctuations in interest rates, exchange rates, or stock prices. This could impair the capital base or profitability of the institution, cause a run on deposits, and in the worst case, the failure of the institution. Any deterioration in the management of financial institutions can have a substantial impact on economic activity, because it hinders them in their roles as providers of payment and settlement services and as financial intermediaries, and in turn disrupts the smooth settlement and allocation of funds necessary for investment and other economic activities. Thus, the sound management of financial institutions is vital for maintaining the financial system stability. The proper functioning of financial institutions as providers of payment and settlement services and as financial intermediaries is also important for the effective conduct of the Bank of Japans monetary policy. In the interest of maintaining financial system stability, the Bank assesses the business operations, risk management, capital adequacy, and profitability of financial institutions through on-site examinations and off-site monitoring, and encourages them to maintain sound management. The assessment of the business operations and financial condition of financial institutions obtained through these activities contributes to the Banks business operations and conduct of policy in the following ways. First, as stipulated in Article 44 of the Bank of Japan Law, based on the information on the business operations and financial condition of financial institutions obtained through on-site examinations and off-site monitoring, the Bank appropriately conducts or prepares to conduct its business as the lender of last resort (see E.) for maintaining financial system stability, and business that contributes to the smooth settlement of funds (Article 39 of the Bank of Japan Law). The lender of last resort function refers to the provision of central bank credit through loans and other means to prevent the materialization of systemic risk, the risk that a problem such as a financial institutions settlement failure may cause disruptions to the nations payment and settlement system and to the financial system as a whole (see chapter IV and E.). Also, from the perspective of maintaining financial system stability, the Bank, when necessary, encourages individual financial institutions to make improvements to achieve prudent and sound management.

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Table 5-1 Risks in Financial Transactions Financial institutions incur various risks by engaging in lending, securities investment, derivatives transactions, and other business operations. The table below explains the risks associated with each of these kinds of business. Several points should be noted in understanding these risks. First, the various types of risks are not mutually exclusive. If securities issued by a troubled firm decline in price, that can be regarded as an example of credit risk or as a market risk. Second, a single financial transaction can carry various types of risks. For example, loans entail credit risk because they could become uncollectable. At the same time, interest rate risk arises when the timing of interest rate novation of loans and liabilities mismatch. Third, there is systemic risk, which can materialize due to a chain of settlement failures.
Type of risk1 Credit risk Definition The risk that loans, securities, or other assets will lose value due to a deterioration in the financial condition of borrowers, issuers of securities, or guarantors. A typical example would be the bankruptcy of a borrower that renders the creditor unable to recover the principal and interest of loans extended. Credit risk includes sovereign risk, the risk that a lender will be unable to recover the principal and interest of loans extended overseas due to political or economic instability (such as war, fiscal crisis, or a shortage of external reserves) in the country concerned. The risk of losses on securities, foreign currencies, and other assets or liabilities arising from changes in market prices or interest rates. The risk that financial institutions holding assets and liabilities with mismatched maturities may be forced to borrow at higher interest rates than usual or be unable to borrow funds in the market at all in the event of, for example, a sudden, unexpectedly high volume of withdrawals of deposits. The risk that operational errors, violations of laws or regulations, or computer breakdown may result in losses or damage the reputation of an institution leading to the loss of confidence of customers and market participants, causing a decrease in volume of financial transactions that may lead to a decline in profits. The risk that the negative effects of a settlement failure of a financial institution or a disruption in a payment and settlement system may spread to other financial institutions or systems, or even to the overall payment and settlement system and the financial system. A typical example would be the bankruptcy of a financial institution or a computer breakdown in a payment and settlement system, making it difficult for other institutions to meet their settlement obligations. Through interdependency of payments between financial institutions, the chain of settlement failures could jeopardize the functioning of other payment and settlement systems.

Market risk Liquidity risk

Operational risk

Systemic risk2

Notes: 1. Payment and settlement risk is the term generally used to mean the risk of a settlement failure triggered by the first four kinds of risk in this table. 2. A detailed explanation of systemic risk is also given in chapter IV.

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Second, the Bank uses information on the financial condition and business operations of financial institutions for selecting eligible counterparties for its various business operations and for its planning to improve the payment and settlement system (see chapters III and VI). Third, the Bank studies and analyzes the information it gathers to assess the magnitude of various risks in the financial system, the distribution of these risks among financial institutions, and the likelihood that these risks will materialize. The Bank takes measures, when necessary, to maintain financial system stability based on its findings. These studies and analyses reveal whether financial institutions are functioning effectively as financial intermediaries, which the Bank takes into account when conducting its monetary policy (see chapters I and VI). 2. Relationship between on-site examination and off-site monitoring The sound financial condition of financial institutions is an indispensable element in the maintenance of financial system stability. In this regard, the Bank makes use of both on-site examinations and off-site monitoring to check various risks incurred by financial institutions and their management system of these risks, and to examine their business operations, profitability, and capital adequacy. While both on-site examinations and off-site monitoring aim to achieve the same goal, they differ in the way of achieving the goal. In on-site examinations, examiners of the Bank visit financial institutions periodically and review asset quality and risk management by studying internal documents and observing actual business operations. The Bank conducts off-site monitoring through meetings and telephone interviews with executives and staff of financial institutions and analysis of various documents submitted by these institutions to continuously monitor their business operations and profitability. Because of these differences, on-site examinations are suitable for comprehensive, detailed studies and analyses of the asset quality, risk management, and business operations of individual institutions, but not for the simultaneous assessment of a large number of institutions. Off-site monitoring, on the other hand, is well suited for monitoring daily various risks and business operations of a wide range of institutions, and the effect these could have on the financial system, so the Bank can be prepared to extend credit as the lender of last resort in a timely fashion (see E.). The Bank makes integrated use of on-site examinations and off-site monitoring in light of their respective characteristics to grasp more effectively

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the financial condition of financial institutions.4 Each of the two methods does not necessarily precede or follow the other. Regular and continuous off-site monitoring, for example, can provide information that helps to clarify points to be focused on in an on-site examination, which will reveal further detail of the business operations and the financial condition of a financial institution. Likewise, on-site examinations can provide valuable additional information for off-site monitoring. When the results of an on-site examination reveal areas requiring improvement, the Bank will request that the financial institution concerned submit follow-up reports periodically.

C. Outline of On-site Examination and Off-site Monitoring 1. Assessment of business operations and financial condition of individual financial institutions The specific points which the Bank of Japan examines through on-site examinations and off-site monitoring and the way it uses the information obtained from these activities depend on financial market conditions at the time and on the type of financial institution concerned: bank, shinkin bank, securities company, or other. This section discusses the typical points checked by the Bank in the case of banks.5 a. Lending operations Financial institutions are exposed to credit risk mainly through their lending operations. Deterioration in their asset quality due to a clients failure to repay loans will necessitate an increase in loan-loss provisions and write-offs, and harm their financial strength and profitability. Since lending is the most important financial intermediary function of financial institutions, it is vital that the Bank obtain adequate information on financial institutions lending policy

4 The complementary and integrated use of on-site examination and off-site monitoring is the most appropriate and efficient way for the Bank to grasp the business operations and management strategy of financial institutions. The Bank aims to reduce the burden on financial institutions examined by using the most efficient means possible. 5 In addition to the business operations discussed in this section, the Bank also examines financial institutions trust business, and settlement-related operations such as custody of securities, as necessary. It also investigates managerial issues facing financial institutions and exchanges views with them. For example, the Bank is actively checking institutions readiness for the introduction of the new RTGS system for the settlement of funds and JGSs via the BOJ-NET.

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C. Outline of On-site Examination and Off-site Monitoring

guidelines, loan portfolios, 6 credit risk management policy, and changes in their criteria for loans to deepen its understanding of the functioning of financial institutions as financial intermediaries. To this end, the Bank keeps track of financial institutions lending operations, their exposure to credit risk associated with lending, and their risk management by (1) analyzing documents submitted by the institutions relating to their loans outstanding and their breakdowns, lending rates, and asset quality (e.g., nonperforming loans outstanding, loan-loss provisions, and write-offs), and also by (2) obtaining information through interviews on the institutions basic policies on lending and disposal of nonperforming loans, and risk management systems. In on-site examinations, the Bank checks the effectiveness of their risk management systems by assessing individual loans and examining the actual roles and functions of units in charge of risk management (see D.2). b. Market-related business Financial institutions are exposed to market risk through investing in securities, accepting deposits, extending loans, and trading in derivatives. Fluctuations in interest rates, exchange rates, and stock prices cause changes in funding costs and in the appraised value of their assets, which in turn affect cash flow, trading gains or losses, and unrealized gains or losses, affecting their financial strength and profitability. The Bank analyzes the term structure of assets and liabilities, and the impact of market price fluctuations on the condition of financial institutions by using reports they submit on various transactions associated with market risk (for example, on the range of their securities investments, remaining term to maturity of deposits and loans, and derivatives transactions including futures and interest-rate swaps). The Bank also sees through interviews how the institutions manage market risk by using asset-liability management (ALM).7 Especially in on-site examinations, the Bank checks the effectiveness of institutions risk management by determining the magnitude of market risk and carefully examining the risk management system.

6 Information on loan portfolios includes the distribution of loans by industry and by area, which provides the basis for assessing a financial institutions profitability and soundness of assets. 7 ALM refers to the comprehensive management of assets and liabilities to maximize profits by reducing funding costs and investing funds efficiently, while controlling market risk in an everchanging financial environment.

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c. Liquidity management (funding and financial investment) Sudden, massive withdrawals of deposits from a financial institution can cause a decline in profitability if the institution is forced to raise funds at higher interest rates; the institution may even fail due to a shortage of funds. The Bank thus monitors the liquidity management of financial institutions to check, for example, whether they are able to raise the funds they need for settlement from day to day, or whether they are exposed to excessive liquidity risk due to maturity mismatches between assets and liabilities. Based on its findings, the Bank encourages individual financial institutions to improve their liquidity management, and if necessary it acts as the lender of last resort. Mainly through off-site monitoring, the Bank analyzes the following points concerning financial institutions based on submitted reports and interviews: (1) the amount of funds collected from individuals and firms through acceptance of deposits or issuance of bank debentures, and the balance between those liabilities and assets such as loans and securities investments; (2) the interest rate on funding and the amount of funds raised in money markets; 8 and (3) the amount of collateral and highly liquid assets on the balance sheet. d. Operational procedures Financial institutions must comply with relevant laws and regulations and exhibit accuracy in their operational procedures such as the acceptance of deposits, lending, collateral management, funds transfer operations, and market transactions. Frequent operational errors, accidents, and computer disruptions not only inflict damage directly, but also lead to a loss of confidence in an institution among customers and market counterparties. This can cause that institution to lose business, and may even lead to financial difficulties. To prevent this, the Bank checks, mainly through on-site examination, whether a financial institution maintains operational procedures designed to prevent errors and accidents, and whether the procedures actually function effectively. In recent years, as innovations in information technology have spurred the growth of electronic transactions such as Internet banking, the Bank has stepped up its efforts to check risk management systems for information security by monitoring such transactions.

8 In money markets, news spreads quickly and lenders are quick to react. Since the funding of financial institutions in the markets directly affects their liquidity management, the Bank scrutinizes their financial investments and funding activities in the markets especially carefully.

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e. Profitability and financial strength As described above, the materialization of various kinds of risks can harm the sound management of financial institutions, which in turn may threaten the stability of the payment and settlement system. The weakening of financial institutions payment and settlement services and financial intermediary functions has the potential to damage the economy of the entire region or even the nation. Motivated by such concerns, the Bank checks financial institutions capital adequacy and profitability by analyzing documents such as financial statements and disclosure reports and exchanges views with them on their financial strength. Mainly through on-site examinations, the Bank verifies the accuracy of financial institutions self-assessment of assets (see footnote 15) and the adequacy of their loan-loss provisions and write-offs. It also assesses the possibility of an increase in nonperforming loans. If information obtained through an on-site examination or off-site monitoring indicates that a financial institution has insufficient financial strength relative to its business operations and risk exposure, the Bank encourages it to take appropriate corrective measures to improve its business management. 2. Evaluation of the financial system The Bank not only examines, as described above, the various risks borne by individual financial institutions and their risk management systems, but also collects and analyzes information on their business operations and financial condition from a macro-prudential point of view. The findings provide the basis for identifying risks in the financial system and deliberating possible corrective measures the Bank could take as a central bank to address these risks in order to maintain financial system stability. The evaluation of the functioning and efficiency of the financial system obtained through these analyses is also used in the Banks assessment of the economic and financial situation, which provides the basis for formulating monetary policy.

D. Legal Framework and Procedures of On-site Examination 1. Outline of the legal framework of on-site examination As explained above, the Banks on-site examinations and off-site monitoring share the same objective and points for assessment. They differ, however, in that on-site examinations are conducted under a contract between the Bank of 89

Chapter V: On-Site Examination and Off-Site Monitoring, and Credit Extension as the Lender of Last Resort

Japan and the institution concerned as stipulated in the Bank of Japan Law. Another difference is that on-site examinations basically follow a standard procedure, so that they can be conducted in a short period of time. In this section, the legal and contractual framework of on-site examinations is discussed. The Bank of Japan Law (Article 44) provides the legal basis for on-site examinations. It specifies that (1) the direct objective of on-site examinations is to ensure that the Bank appropriately conducts or prepares to conduct the extension of temporary loans to financial institutions (Article 37), business contributing to the maintenance of an orderly financial system (Article 38), and business contributing to the smooth settlement of funds (Article 39), and that (2) on-site examinations must be conducted in accordance with an examination contract that requires the Bank to give due consideration to the burden placed on the financial institutions examined (see boxes 2 and 3). The Bank of Japan Law (Article 44 and Article 37, Paragraph 1) and the Bank of Japan Law Enforcement Order (Article 10, Paragraph 1) further stipulate that the financial institutions subject to on-site examinations shall be (1) financial institutions,9 defined as banks and other institutions engaged in accepting deposits and providing funds transfer services, or (2) other entities engaged in financial business (securities companies, securities finance companies, foreign securities companies, and tanshi companies). 10 Most financial institutions that hold current accounts with the Bank are in principle subject to on-site examinations, since the Bank requires an on-site examination contract to be concluded as one of the eligibility criteria for a financial institution to hold a current account with the Bank (see chapter III).

!Box 2: On-Site Examinations by the Bank of Japan and On-Site Inspections by the Government: A Comparison !Box 3: Contract regarding On-Site Examination

9 Note that here the term financial institutions has a more specific meaning than elsewhere in this book, where it refers to all types of financial business entities (see box 2 for chapter I). 10 Japanese financial institutions are expected to undergo a great change in their management with the introduction of holding companies. In anticipation of this development, the Bank is establishing a new examination framework to accurately grasp the financial condition of financial institutions which establish holding companies, and is also conferring with them.

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D. Legal Framework and Procedures of On-site Examination

2. On-site examination procedures This section discusses how on-site examinations are conducted. The frequency of on-site examinations of financial institutions is decided flexibly based on their financial condition. On-site examinations usually require a period of three to four weeks for large financial institutions such as city banks, and two to three weeks for others.11 There are two types of on-site examinations: full-scope examinations, which aim to assess the overall condition of the institution, and targeted examinations,12 which are conducted by fewer examiners over a shorter period, focusing on specific areas of business. Recently, the Bank has been making increased use of targeted examinations to focus on areas where critical problems could potentially arise, so that it can strengthen prompt assessment of the condition of financial institutions. To conduct on-site examinations effectively, the Bank determines the points on which examinations will focus for each fiscal year. These points are set by the Policy Board and made public at the end of each fiscal year as onsite examination policy for the coming fiscal year. A typical on-site examination proceeds as follows: a. Before the on-site examination The Bank decides which institutions it will examine, and notifies them in principle at least one month prior to the actual visit. After receiving the consent of the institution usually three to four weeks prior to the visit, the Bank studies documents submitted by the institution and other information obtained from daily off-site monitoring to assess its financial condition and clarify points to be focused on in the on-site examination. b. During the on-site examination During the on-site examination, which continues for about one to four weeks, the examiners interview executives and senior staff, review the quality of assets, and check whether risk management systems are functioning effectively. In interviews with executives and senior staff, the examiners are given
11 When examining city banks and other large financial institutions, the Bank also conducts on-site examinations of their subsidiaries, and for financial institutions operating internationally, of their major overseas offices and affiliates, e.g., those in New York, London, and Hong Kong, to assess asset quality and their risk management systems on a consolidated basis. 12

The Bank has conducted targeted examinations on the management of specific risks such as market risk and payment and settlement risk.

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explanations of the institutions business strategy and an outline of its risk management system. The assessment of assets involves: checking the quality of loans, 13 securities, and derivatives 14 to determine the soundness of the institutions assets; investigating the possibility of an increase in nonperforming loans; verifying the accuracy of the institutions self-assessment; and reviewing the appropriateness of its loan-loss provisions and write-offs.15 To check the effectiveness of the risk management system, examiners interview executives and staff, peruse ledgers and other transaction documents and materials, assess the institutions exposure to various risks associated with its business operations, and examine whether the institution has sufficient financial strength to withstand such exposure. Further, to ensure that the institutions financial strength will be maintained, the Bank checks whether the institution has adequate risk management systems in place relative to its financial strength and risk exposure, and whether these systems are functioning effectively (see box 4).

!Box 4: Points to Check in Examining Risk Management

After the examination is completed, the Bank gives feedback on its findings concerning points that need improvement in the management of the institution. Also, from the perspective of maintaining financial system stability, the Bank encourages the institution, where necessary, to make improvements to achieve prudent and sound management.
13 The Bank checks whether the size of financial institutions nonperforming loans is excessive relative to their capital base, by (1) examining how borrowers such as individuals and firms have used loans made to them, and (2) determining the extent of loans extended to borrowers in financial difficulties, that is, the amount of loans on which borrowers have delayed interest payments or failed to repay principal. 14 When assessing the quality of assets, the Bank also evaluates replacement cost (the cost that would be required to cover the position at current market prices if the counterparty in a transaction should fail) associated with derivatives and other off-balance sheet assets to arrive at a comprehensive view reflecting both on- and off-balance sheet transactions. 15 Within the framework of the governments Prompt Corrective Action which took effect in fiscal 1998, financial institutions are required to make self-assessment of their assets by segregating normal loans from problem loans and classifying problem loans. The Bank fully utilizes these selfassessment results in on-site examinations, and verifies the accuracy of the institutions selfassessment and reviews the adequacy of its loan-loss provisions and write-offs.

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E. The Bank of Japans Role as the Lender of Last Resort

c. After the on-site examination Should the on-site examination reveal problems such as a decline in financial strength or a critical problem in risk management, the Bank follows up regularly to monitor progress in dealing with these problems.

E. The Bank of Japans Role as the Lender of Last Resort The Bank of Japans on-site examinations and off-site monitoring have one very important purpose: preparing the Bank to appropriately act as the lender of last resort when necessary. As the lender of last resort, the central bank is called upon to provide liquidity when needed to prevent materialization of systemic risk (see chapter IV), and to maintain the function of the financial system, which is to transfer and allocate funds and risks appropriately. The Bank provides liquidity as the lender of last resort, (1) when the allocation of funds among financial institutions becomes unbalanced due to a disruption in the financial markets, and (2) when sound financial institutions face a temporary liquidity shortage. In practice, the Bank acts as the lender of last resort by (1) extending loans against collateral such as bills and JGSs at the official discount rate as part of its regular business (pursuant to Article 33 of the Bank of Japan Law), and (2) extending uncollateralized loans, with interest rates and procedures specially set by the Policy Board, to cover an unexpected temporary shortage of funds in financial institutions due to accidental causes (Article 37), or to conduct business, at the request of the FRC and the Minister of Finance,16 to maintain an orderly financial system (Article 38).17 For business at the request of the FRC and the Minister of Finance under Article 38, the Bank decides to extend the minimum amount necessary to avert systemic risk, in view of preventing moral hazard and managing the Banks exposure to credit risk, based on the four principles (see box 5).

!Box 5: Four Principles of Conducting Business Necessary to Maintain Financial System Stability
16 This will be changed to the Prime Minister and the Minister of Finance in January 2001 due to a reorganization of government ministries and agencies. 17 In some cases in the past, the Bank extended loans under Article 38 of the Bank of Japan Law at interest rates higher than the official discount rate. This took into account the fact that these loans were extended to cover the minimum requirement of liquidity to avert systemic risk and they were uncollateralized. These loans were made in the form of loans on bills or on deeds.

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Box 1

Role of Banks in Our Daily Lives

Everyone knows that banks accept deposits and make loans, but it might be helpful to take a look at the variety of roles that banks play in our daily lives. One such role is that banks provide payment and settlement services. Besides cash, people can purchase goods or services with a credit card, or by a transfer of money to the sellers bank account. In these cases, the buyers bank account is debited, and the sellers bank account is credited. Deposits, like cash, can thus be seen as a major payment instrument, and banks provide this important payment instrument by accepting deposits. Another role of banks is to function as financial intermediaries. Banks make loans or buy securities, using funds that they receive as deposits. In this way, banks help people buy houses, and they help companies buy the materials and equipment they need to do business. A disruption in the banking system would certainly have a severe impact on peoples daily lives, as payment and settlement of daily transactions would be disrupted, and the funds necessary for economic activity would not be allocated smoothly. The Bank of Japan conducts on-site examinations and off-site monitoring of financial institutions to encourage them to maintain sound management so that they can fulfill their roles, and thereby maintaining a stable financial system.

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Boxes

Box 2

On-Site Examinations by the Bank of Japan and On-Site Inspections by the Government: A Comparison

The Bank of Japan Law of 1997 sets forth specific provisions regarding on-site examinations, making clear their purposes. The Bank of Japan conducts onsite examinations based on contracts with financial institutions in order to accomplish its objectives. They are, therefore, different from the governments bank supervision, particularly from on-site inspections, which are an exercise of administrative power. Among government agencies, it is, in principle, the Commissioner of the Financial Services Agency (FSA) who has the authority to conduct on-site inspections of financial institutions. The Banking Law, e.g., Articles 24 and 25, stipulates that the purpose of on-site inspections of banks is to ensure the sound and appropriate operation of banking business. Under this law, the FSA is given the mandate to conduct on-site inspections (e.g., Article 25) and to ask banks to submit reports or materials on their business or financial condition (e.g., Article 24). The FSA may impose penalties on banks that refuse to undergo inspections or submit reports (Article 63, Items (2) and (3)). The Banks on-site examinations, on the other hand, are conducted for the purpose of ensuring the Bank to appropriately conduct or prepare to conduct its business prescribed in Articles 37 through 39 of the Bank of Japan Law, which ultimately contributes to the maintenance of an orderly financial system, that is, to the maintenance of financial system stability. Under Article 13 of the on-site examination contract, should an institution subject to on-site examination refuse to accept the Banks request for on-site examination or to provide reports or materials without any legitimate reason, the Bank may publicly announce this fact or even terminate the provision of current account services to the institution. On-site examinations by the Bank, however, are not an exercise of administrative power, and thus no legal penalties are imposed on institutions that refuse to accept the Banks request for on-site examination or to provide the Bank with information.

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Box 3

Contract regarding On-Site Examination

The contract regarding on-site examinations includes the following clauses in accordance with Article 44 of the Bank of Japan Law and Article 11 of the Bank of Japan Law Enforcement Order: (1) The Bank of Japan is obliged to clearly notify the financial institution, in writing, of the on-site examinationincluding its purpose, scope, and the scheduled datesin principle at least one month in advance. (2) The financial institution can reject the Banks request for on-site examination or refuse to provide reports or materials for legitimate reasons. The institution may also request changes in the dates or the scope of the on-site examination. (3) The Bank is obliged to notify the financial institution of the names and the job titles of the examiners prior to the on-site examination; during the onsite examination, examiners must carry identification cards and present them upon request to any persons concerned. (4) Both the Bank and the financial institution are obliged to maintain confidentiality concerning information obtained through the on-site examination. (5) If the financial institution refuses to accept the Banks request for an onsite examination or to provide reports or materials without legitimate reasons, the Bank may publicly announce this fact. The Bank may even terminate the provision of current account services to the institution. (6) The Bank is obliged to give due consideration to minimizing the burden placed on the financial institution in conducting on-site examinations.

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Boxes

Box 4

Points to Check in Examining Risk Management

The Bank of Japan reviews, through on-site examinations and off-site monitoring, how financial institutions manage risks associated with their various business operations. The following are the main points that the Bank checks when assessing major risks in accordance with the Banks On-site Examination Policy. The Bank assesses credit risk by checking the credit ratings of the institutions borrowers, and whether the institution is properly implementing credit reviews to verify self-assessments of assets and credit ratings. These assessments are conducted with a view to ensuring that institutions monitor appropriately the quality of loans both before and after they are extended so as to prevent an increase in nonperforming loans. It is also important to check the institutions loan portfolios to avoid any over-concentration of loans to specific industries or geographic areas. Given the recent sophistication of credit-risk quantification models, the Bank is monitoring carefully the extent to which financial institutions use them in practice. For market and liquidity risks, the Bank assesses whether financial institutions risk management systems, including their asset-liability management (ALM), are consistent with their risk management policies relating to assets and liabilities, and whether such systems function effectively to respond to market fluctuations such as interest rate changes. Specifically, the Bank examines the mutual checking system between the front office, which executes transactions, and the back office, which is in charge of the related processing. For institutions that are heavily involved in market-related transactions such as securities investment and trading, the Bank comprehensively reviews the adequacy of internal models for market risk management, and the functioning of the middle office in charge of measuring and monitoring risks. In so doing, in view of recent experiences, the Bank checks whether (1) stress tests 16 under scenarios of sudden change in the market environment are carried out adequately, (2) the institutions capital base is strong enough, and (3) risk management systems take account of the degree of liquidity of each financial instrument. In addition, the Bank examines each institutions contingency plans concerning liquidity risk management.

16 Stress tests measure the amount of losses that could arise from market developments that are unfavorable to the testers portfolio.

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In the management of operational risk, the Bank checks whether institutions conduct their business operations appropriately from the viewpoint of risk management, and where necessary, assesses whether they appropriately control various operational procedures. Given the growing use of computer systems in financial services, the Bank has been emphasizing the implementation of measures against risks in information technology-related areas, such as enhancing the security of computer processing. As part of checking financial institutions payment and settlement risk management, the Bank closely monitors their readiness for the introduction of the new real-time gross settlement (RTGS) system to the Bank of Japan Financial Network System (BOJ-NET; see chapters III and IV).

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Boxes

Box 5

Four Principles of Conducting Business Necessary to Maintain Financial System Stability

When the Bank of Japan extends credit (hereinafter called special loans) as the lender of last resort under Article 38 of the Bank of Japan Law, the Bank makes its decision based on the following four principles. Principle 1: There must be a strong likelihood that systemic risk may materialize. This principle states that the Bank provides central bank money through special loans solely to prevent systemic risk from spreading throughout the financial system, and not to bail out a particular financial institution. It is the most fundamental and important of the four principles. Principle 2: There must be no alternative to the provision of central bank money. This principle states that institutions and related parties applying for the loans must explore every possible solution before the Bank provides the minimum sufficient liquidity in the form of special loans. This aims to prevent moral hazard on the part of the financial institutions by encouraging them to maintain sound business management. Principle 3: All responsible parties are required to take clear responsibility to avoid moral hazard. This principle states that before it extends special loans, the Bank must ensure that the management and shareholders of the failed institution take clear responsibility, as a further step to prevent moral hazard. Principle 4: The financial soundness of the Bank of Japan itself must not be impaired. This principle states that special loans, like other policy measures and business operations, should not impair the financial soundness of the Bank. The Banks financial condition must be sound, because a loss of public confidence in the Bank would not only make the conduct of policy measures and business operations difficult, it could also impair the credibility of the entire national economy, by undermining trust in central bank money.

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Chapter VI The Bank of Japans Money Market Operations and Lending


The Bank of Japan buys and sells Japanese government securities (JGSs) and bills in money market operations, and extends loans as part of its business operations. This chapter explains these activities, which are the Banks tools for monetary control, with the aim of controlling the volume of money in the economy as part of the Banks monetary policy. *** The Bank, as the nations central bank, is charged with the responsibility of conducting monetary policy appropriately. The Banks Policy Board decides on the basic guidelines for monetary policy at Monetary Policy Meetings (MPMs). Money market operations and lending are the concrete tools through which the Bank carries out monetary policy by making adjustments to money markets on a day-to-day basis. The Bank mainly uses money market operations, that is, the buying and selling of JGSs and bills, as the principal tools to achieve the guidelines decided at MPMs. These operations, together with the Banks lending, are called monetary control. The Bank aims to maintain an appropriate level of both interest rates and the volume of money in the economy through monetary control. The Bank can use these tools to supply funds to or absorb funds from the markets. The interest rate the Bank charges on lending is known as the official discount rate. To maintain its own financial soundness, the Bank deals in or accepts as collateral only assets, e.g. bills and securities, with sufficient creditworthiness and marketability for its money market operations or lending. The Bank strives to maintain and further improve the transparency of its money market operations and lending by various measures, such as making public information on the methods of its operations and its criteria for selecting counterparties. ***

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Chapter VI: The Bank of Japans Money Market Operations and Lending

A. Price Stability and Monetary Policy 1. Price stability The Bank of Japan Law of 1997 mandates that the Bank of Japans monetary policy shall be aimed at, through the pursuit of price stability, contributing to the sound development of the national economy. Price stability is important because it provides the foundation for the nations economic activity. In a market economy, individuals and firms make decisions on whether to consume or invest, based on the prices of goods and services. Thus, the general level of prices reflects trends in the overall level of prices of various goods and services, and can be seen as a yardstick for prices of goods and services. Large fluctuations in prices can undermine the value of the yardstick, making it hard for individuals and firms to make appropriate consumption and investment decisions, which can hinder the efficient and rational allocation of resources in the economy. Unstable prices can also distort income distribution. For example, in times of inflation, people with financial assets whose value is fixed in nominal terms, such as bank deposits, will suffer a decline in the value of those assets in real terms. In these respects, price stability provides the basis for sound economic development from the perspective of both efficiency and fairness. 2. The Banks monetary policy and monetary control The Banks Policy Board decides on the basic guidelines for monetary policy at Monetary Policy Meetings (MPMs), which it holds on a regular schedule (see chapter I). To achieve price stability through monetary policy, the Bank guides the overnight interest rate for uncollateralized call moneya money market instrumentto the target level set forth in the guideline for money market operations, as of September 2000 (see B.1).1 At MPMs, the Policy Board assesses the economic and financial situation, and decides the guidelines for the Banks money market operations, for example how it should guide the uncollateralized overnight call rate. It releases its views on economic and financial developments in the Monthly Report of Recent Economic and Financial Developments (see chapters I and VII). When, for example, a decision is made at the Monetary Policy Meeting
1 The monetary base (see footnote 13 for chapter I) and reserve deposits held at central banks can also be targets for monetary control. Aside from operating targets, central banks may keep track of money stock (see box 1 for chapter VII) and loans made by private financial institutions as interim targets or reference indicators in achieving the ultimate goal of price stability.

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to encourage the uncollateralized overnight call rate to move on average around X percent, the Bank conducts its daily money market operations to achieve this target, by purchasing or selling Japanese government securities (JGSs) and bills, or by making loans to financial institutions. This is called monetary control. The Bank supplies funds to financial institutions when it purchases JGSs or bills from them, and it absorbs funds when it sells JGSs or bills. Loans extended by the Bank to financial institutions are another means of supplying funds, while collecting of those loans is another means of absorbing funds. By adjusting the amount of funds it supplies or absorbs, and the timing of these adjustments, the Bank is able to control money market rates. 2 Money market rates, in turn, affect interest rates in other financial markets and the lending rates that financial institutions apply on loans to firms and individuals. These interest rates may influence a companys decision on whether to construct a factory by borrowing funds, or a familys decision on whether to build a house by using a housing loan, or whether to purchase goods or services by acquiring loans or drawing funds from savings. In this way, money market rates can affect economic activity by influencing decisions made by firms and individuals.

!Box 1: Money Market Operations by the Bank of Japan

This chapter explains the tools of monetary control, that is, the Banks money market operations by purchasing or selling JGSs and bills, and lending to financial institutions (BOJ lending). (See chapter V for a discussion of the Banks extension of credit to stabilize the financial system, chapter VIII for credit extension to foreign central banks and monetary authorities and international institutions, and chapters IX and X for credit extension to the Japanese government by underwriting JGSs.)
2 To maintain the soundness of the central banks own assets, the Policy Board decides at MPMs which types of high-quality assets such as bills, JGSs, and other instruments may be used in the Banks money market operations, as well as the types of instruments eligible as collateral for the Banks loans (see C.). The possible economic impact is a further consideration in determining the types of assets and collateral in daily money market operations and lending; even if the same amount of funds is supplied or absorbed, there can be different effects on the flow of funds in the economy depending on the instruments used. For example, in autumn 1998 when there was a marked deterioration in financial institutions ability to raise funds, causing firms also to experience difficulties in financing, the Bank expanded its purchase of CP with repurchase agreements (see C.1) and established a lending facility to provide funds for the refinancing of a certain portion of the increase in loans extended to firms by each financial institution.

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B. Monetary Control The Bank of Japan strives to achieve price stability by controlling the volume of money it supplies, also known as central bank money (see chapter I). It does this through money market operations and lending, which affect both interest rates and the volume of money in the economy. To understand the mechanism and process of monetary control, the following points should be taken into account: (1) the Banks money market operations and lending affect financial institutions supply of and demand for funds in their BOJ accounts (current account balances at the Bank [CABs]), and this causes variations in money market rates; and (2) fluctuations in money market rates affect the overall economy, helping to realize price stability. This chapter explains the first point by taking into account the features of the markets. 1. CABs and money markets CABs play a significant role in the Banks monetary control. As seen in chapter III, deposits in BOJ accounts are payment instruments for financial institutions in the same way as demand deposits at financial institutions are payment instruments for individuals and firms. Financial institutions subject to the reserve requirement system (see chapter III) must also maintain a certain level of CABs (required reserves). If a financial institution wishes to maintain a certain level of CABs to prepare for payment and settlement or to meet reserve requirements and finds that it needs to obtain funds, as a short-term measure it will go to money markets to raise funds from other financial institutions that use the markets to invest their excess funds (see boxes 2 and 3). Among a wide variety of money markets in Japan, the call market is especially important for financial institutions that have a shortage in their CABs, because these financial institutions can receive funds on the day of contract, by borrowing funds for the short term, for example until the next business day (overnight instruments). 3 The Bank contributes to ensuring the smooth functioning of money markets (see E.).

3 The call market has no physical trading floor. Financial institutions contact and agree on fundraising and fund-investment contracts with tanshi companies (money market broker-cum-dealers; see box 3) and financial institutions by telephone or through computer terminals. The borrowing and lending of funds in the call market are called call transactions, and the interest rate paid by the borrower is called the call rate.

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B. Monetary Control

!Box 2: Money Market and the Call Market !Box 3: Tanshi Companies and Securities Finance Companies

2. Sources of changes in CABs and monetary control This section changes the focus from CABs of individual financial institutions to CABs of financial institutions as a whole. Factors other than money market operations and BOJ lending that affect CABs as a whole, i.e., specifically, changes in the flow of banknotes and treasury funds, are called sources of changes in CABs. Changes in CABs of individual financial institutions are due to (1) payments to and receipts of funds from other financial institutions, (2) changes in the balance of cash reserves for disbursement of cash to individuals and firms, and (3) payments of funds to and receipts of funds from the government4 (see chapter III). When considering CABs at the Bank as a whole, however, the transfers of funds stemming from factor (1) above net out to zero because funds only move between BOJ accounts, leaving (2) and (3) as the only factors that affect CABs as a whole other than money market operations and BOJ lending.5 The Bank adjusts CABs as a whole by providing or absorbing funds through money market operations, and by extending or collecting loans, based on the amount of required reserves and possible changes in CABs as a whole due to the sources of changes in CABs mentioned above. In the absence of sources of changes in CABs, the Banks provision of funds through money market operations and lending increases the overall CABs. This in turn weakens financial institutions demand for funds, and affects the balance of supply and demand in money markets, thus causing a decline in interest rates

4 Payments to and receipts from governments deposits take place in the payment of national taxes, and in other cases such as when individuals receive national pensions via financial institutions, or when financial institutions underwrite newly issued JGSs (see chapters IX and X). The Banks foreign exchange intervention on behalf of the government also affects CABs because it involves yen transactions between the government and financial institutions. For example, in a yen-selling, U.S. dollar-buying intervention, the governments account are debited and the BOJ account of the financial institution which sold the U.S. dollars is credited. 5 When financial institutions withdraw banknotes from their BOJ accounts to make payments to individuals and firms, the amount of banknotes in circulation increases, and CABs decline (a funds-shortage factor). When the government pays national pensions to individuals via financial institutions, CABs increase (a funds-surplus factor). See chapter IX.

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(see C.3 for specific details on the procedures used in monetary control through money market operations).6

C. Money Market Operations In principle the Bank of Japan relies as little as possible on lending and employs money market operations, in an effort to make full use of the market mechanism to influence the volume of money in the economy and the level of interest rates (see box 1). The types of money market operations and their basic frameworks are decided at MPMs. Money market operations can be categorized into (1) operations that supply funds and increase CABs as a whole, such as purchases of JGSs and bills, or borrowing of Japanese government bonds (JGBs) against cash collateral, and (2) operations that absorb funds and decrease CABs as a whole, such as sales of JGSs and bills (see table 6-1).7

6 As explained in chapter III, financial institutions subject to reserve requirements are obliged to hold sufficient reserves so that the average of their daily totals, from the 16th of the month to the 15th of the next, referred to as the reserve maintenance period, equals or exceeds the required amount. Thus, if reserve balances remain low for several days, interest rates in money markets tend to rise, because financial institutions will increase the amount of fund-raising to meet reserve requirements. Data on the total amount of reserves financial institutions will need to hold after each business day until the end of the reserve maintenance period is an important indicator for judging developments in money markets, and the Bank releases such information daily (see table 6-2). 7

It should be noted that when funds-supplying operations reach maturity, the operations are reversed, decreasing CABs by an amount equal to the original increase. Likewise, when fundsabsorbing operations reach maturity, the reversal of the operations causes an equal increase in CABs (for details, see C.3).

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Table 6-1 Money Market Operations by the Bank of Japan1 (as of September 2000) [1] Funds-supplying operations
Operations Year of introduction Eligible securities Start day2 Maturity Amount (Number of outstanding days from as of endthe day of March 2000 offer [T=day (tril. yen) of offer]) T+0 to T+2 6 months 28.9 or less T+3 T+2 6 months or less 0.8 7.9

Purchases of TBs/FBs under repurchase agreements Outright purchases of TBs/FBs Borrowing of JGBs against cash collateral (JGB repos) Purchases of CP under repurchase agreements Outright purchases of bills

19903

TBs and FBs

1999 1997

TBs and FBs Interest-bearing JGBs

1989

1972

Outright purchases of bills collateralized by corporate debt obligations

1999

Outright purchases of JGBs

1966

T+2 3 months CP with 1 year or less or less remaining to maturity,4 deemed eligible by the Bank in light of criteria such as the issuers creditworthiness T+0 to T+4 3 months Bills (master bills) or less issued by operation counterparties with 3 months or less remaining to maturity4 that are secured by securities such as JGSs and bills issued by credible issuers other than financial institutions Bills with 3 months or T+0 or T+2 3 months less remaining to or less maturity4 that meet both of the following criteria: they must be (1) bills drawn by eligible counterparties and (2) backed by private firms debt such as corporate bonds, loans on deeds, or asset-backed securities deemed eligible by the Bank Interest-bearing JGBs T+3

3.9

1.5

0.5

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[2] Funds-absorbing operations


Operations Year of introduction Eligible securities Start day2 Maturity Amount (Number of outstanding days from as of endthe day of March 2000 offer [T=day (tril. yen) of offer]) T+0 to T+2 6 months 2.1 or less T+3 0 3.8

Sales of TBs/FBs under repurchase agreements Outright sales of TBs/FBs Outright sales of bills drawn by BOJ

19865

TBs and FBs

1999 1971

TBs and FBs Bills drawn by the Bank with 3 months or less remaining to maturity4 that designate the Bank as the drawer, payer and payee

T+0 to T+4 3 months or less

Notes: 1. For details, see statement for conducting business (available only in Japanese) on the Banks Web site (http://www.boj.or.jp/). 2. The day on which funds and securities are settled and from which the term of operations starts. 3. Purchases of TBs under repurchase agreements were introduced in 1990. FBs were included in this operation with the introduction of the public auction system for FBs in 1999. 4. Maturity remaining from the next day of purchases/sales by the Bank. 5. Sales of FBs under repurchase agreement were introduced in 1986. TBs were included in this operation in 1999.

As counterparties eligible to participate in its money market operations, the Bank selects banks, securities companies, tanshi companies, and other financial institutions (hereinafter, operation counterparties) 8 that meet the criteria for each operation, as decided at MPMs (see C.4). The transfers of funds and delivery of JGSs stemming from money market operations are processed through the Bank of Japan Financial Network System (BOJ-NET)
8 Types of financial institutions eligible as operation counterparties are specified in the principal terms and conditions for each market operation decided at MPMs, and currently they are the same in all operations. They are financial institutions and other financial business entities (securities companies, securities finance companies, foreign securities companies, and tanshi companies), as stipulated in Article 37, Paragraph 1 and Article 44 of the Bank of Japan Law and Article 10, Paragraph 1 of the Bank of Japan Law Enforcement Order. (These institutions are subject to onsite examinations; see chapter V). Financial institutions refers to banks and other entities engaged in the business of accepting deposits and executing funds transfers. This definition differs from that used throughout this book, which uses financial institutions as a generic term for various types of financial institutions.

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Funds Transfer System and JGB Services (see chapter IV). Currently, to make full use of the market mechanism as mentioned above, accepted bids and rates are determined by the conventional method of competitive yield auction.9 The sections below explain funds-supplying and funds-absorbing operations. 1. Funds-supplying operations a. Purchases of treasury bills and financing bills First among the Banks funds-supplying operations are purchases of treasury bills (TBs) and financing bills (FBs), whether outright or under repurchase agreements (gensaki in Japanese). When repurchase agreements are used, the Bank purchases TBs/FBs from its operation counterparties through an auction, with the condition that it will sell them back on a specified date (within six months). On the day of maturity, the Bank sells back the TBs/FBs to the original seller in exchange for an amount equivalent to the purchase price plus interest for the period the Bank held the securities. Outright purchases of TBs/FBs are the same, except that there are no agreements to resell the securities. b. Borrowing of JGBs Borrowing of JGBs against cash collateral, referred to as JGB repos, is another form of funds-supplying operation. The Bank borrows interest-bearing JGBs against cash collateral from operation counterparties for a specified term of less than six months through an auction. On the day of maturity, the Bank returns the JGBs to the lender, pays a fee and receives its cash collateral with interest from the lender (see chart 6-1). In this type of operation, funds are supplied in the form of cash collateral.

9 For example, in funds-supplying operations under the conventional method of competitive yield auction, the Bank accepts bids starting with the highest yield bid and continuing until the total of accepted bids reaches the intended amount. Transactions are executed at the rates submitted by the bidders. If several bidders are bidding at the cut-off yield, the amount of bids accepted may be shared in proportion according to the amount of each bid.

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Chart 6-1

Basic Scheme of JGB Repo Operations (Borrowing of JGBs against Cash Collateral)

[1] At the Start of an Operation

Bank of Japan
Borrower of JGBs (Provider of funds)

JGBs

Counterparties
Lenders of JGBs (Receivers of funds)

Cash collateral1

Calculation methods: (a) Cash collateral = total market value of JGBs on the contract day standard ratio for calculating cash collateral (b) Repo rate = interest rate on cash collateral JGB-borrowing rate/standard ratio for calculating cash collateral

fee

[2] At the End of an Operation


JGBs

Bank of Japan
Borrower of JGBs (Provider of funds)

JGB-borrowing fee
Cash collateral

Counterparties
Lenders of JGBs (Receivers of funds)

Interest on cash collateral

Note: 1. If the market value of the traded JGBs drops and the amount of cash collateral provided by the Bank exceeds the amount required, the Bank may request a return of the excess portion of the cash collateral from the lender. Likewise, if the value of the traded JGBs surges and the amount of cash collateral provided by the Bank falls below the amount required, the Bank may submit additional cash collateral to the lender.

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C. Money Market Operations

c. Purchases of commercial paper The Bank also purchases commercial paper (CP) under repurchase agreements as a way of supplying funds. Specifically, the Bank purchases, through an auction, eligible CP from successful bidders with an agreement to sell it back on a specified date (within three months). On the day of maturity, the Bank sells back the CP at a price equivalent to the purchase price plus interest. d. Purchases of bills The Bank has a long history of purchasing bills for funds-supplying operations. Currently, there are two types of bill purchasing operationsoutright purchases of bills and outright purchases of bills collateralized by corporate debt obligations. In outright purchases of bills, the Bank purchases bills from counterparties10 at face value minus an amount of interest calculated from the discount rate determined through an auction. On the day of maturity, the Bank receives payment for the bills from the original seller. Bills eligible for such purchases must have three months or less remaining to maturity and meet various other criteria. Currently, the Bank uses master bills11 in this type of operation. In outright purchases of bills collateralized by corporate debt obligations, the Bank purchases bills from counterparties at face value minus an amount of interest calculated from the discount rate determined through an auction, and receives payment for the bills from the seller when they reach maturity. Bills eligible for such purchases are bills 12 drawn by operation counterparties with three months or less remaining to maturity. The bills must be collateralized by corporate bonds, loans on deeds, or asset-backed securities (ABSs)13 deemed eligible by the Bank.14
Types of financial institutions eligible as operation counterparties are the same as in other money market operations (see footnote 8). However, the Bank may decide to carry out this operation only with tanshi companies until RTGS becomes the only settlement mode for settlement through BOJ accounts.
11 Bills drawn by operation counterparties (financial institutions) and collateralized by securities deemed to be eligible by the Bank, such as JGSs, or bills, drawn by entities other than financial institutions. 10

Specifically, bills drawn and accepted by operation counterparties that designate themselves as the drawer, payee, and payer. ABSs are securities whose principal and interest are paid from cash flow generated by specific assets.
13

12

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Chapter VI: The Bank of Japans Money Market Operations and Lending

e. Purchases of JGBs The Bank also conducts money market operations to supply long-term funds. Specifically, the Bank makes outright purchases of interest-bearing JGBs (excluding JGBs issued within the last twelve months) through an auction, without repurchase agreements. These purchases of JGBs15 are scheduled to match the long-term growth trend in the outstanding amount of banknotes issued. The Bank considers it most natural to employ long-term operations to supply funds to meet long-term demand for cash stemming from the expansion of economic activity. In the funds-supplying operations mentioned above, the Bank purchases or accepts as collateral JGSs, CP, bills, and various other assets. To maintain its own financial soundness, the Bank selects only assets with sufficient creditworthiness and marketability.16 The Bank will not purchase or accept as collateral liabilities of financial institutions that are BOJ account holders. This is because the Bank should (1) avoid disclosing its judgment on the credibility of individual BOJ account holders, and (2) exclude from the Banks assets and collateral liabilities that might be compensated by the Banks own extension of credit.17 As another measure to maintain financial soundness, the Bank makes provisions against possible losses on securities transactions on its balance sheet
14 It is planned that outright purchases of bills collateralized by corporate debt obligations will be combined with the other outright bill purchasing operations after RTGS becomes the only settlement mode for settlement through BOJ accounts. In the new operation, the Bank will continue to accept collateral for bills from operation counterparties in the form of pooled collateral prior to actual purchase.

Since 1984, outright purchases of JGBs have been conducted in rotation, that is, the Bank changes the bidders for each operation. Currently, for outright purchases of JGBs, JGB repos, purchases of CP under repurchase agreements, and outright sales of bills drawn by the Bank, certain bidders can participate in auctions every time, while the rest take turns. In October 2000, the Bank established the guidelines on eligible collateral which will be effective on the day RTGS becomes the only settlement mode for settlement through BOJ accounts. The guidelines prescribe the principles governing collateral eligible for the Banks provision of credit. The guidelines establish a unified standard for the categories and prices of collateral and eligibility standards, in an effort to enhance the efficiency of processing eligible collateral. For further information, see the Banks Web site (http://www.boj.or.jp/en/index.htm).
17 16

15

As previously mentioned, the Bank purchases bills drawn by BOJ account holders through outright purchases of bills and outright purchases of bills collateralized by corporate debt obligations, as long as they are backed by collateral in ways the Bank deems appropriate. Furthermore, the guidelines on eligible collateral state that (1) debt obligations of a holding company of a financial institution, which is an affiliate holding a BOJ account, are not eligible for purchase and not acceptable as collateral, and (2) debt obligations issued by a company which the Bank considers as having a close relationship with one or more BOJ account holders cannot be accepted as collateral from these BOJ account holders.

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C. Money Market Operations

pursuant to the Accounting Rules (see appendix 2) and related government ordinances to take price fluctuation risk into account. 2. Funds-absorbing operations a. Sales of TBs/FBs Sales of TBs/FBs, under repurchase agreements or outright, are the two kinds of funds-absorbing operations using JGSs. When TBs/FBs are sold under repurchase agreements, the Bank sells them to operation counterparties through an auction, with the condition of repurchasing them on a specified date (within six months). On the specified day, it repurchases the securities at prices equivalent to the selling prices plus interest. Outright sales of TBs/FBs are the same, except that there are no repurchase agreements. b. Sales of bills In outright sales of bills, the Bank draws bills18 and sells them to operation counterparties at face value minus an amount of interest calculated from the discount rate determined through an auction; on the day of maturity (within three months), the Bank repays the buyer.19 3. Monetary control through money market operations The following is an illustration of how operational tools are employed in response to changes in the factors affecting CABs, based on data from April 20, 2000 (see table 6-2).20

Specifically, bills drawn and accepted by the Bank that designate the Bank as the drawer, payee, and payer. Types of financial institutions eligible as operation counterparties are the same as in other money market operations (see footnote 8). However, the Bank may decide to carry out this operation only with tanshi companies until RTGS becomes the only settlement mode for settlement through BOJ accounts.
20 For details, refer to A Guide to Bank of Japans Market Operations, by Atsushi Miyanoya, Financial Markets Department Working Paper Series, Financial Markets Department, Bank of Japan, 00-E-3, 2000. 19

18

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Chapter VI: The Bank of Japans Money Market Operations and Lending

Table 6-2 Sources of Changes in Current Account Balances at the Bank of Japan and Money Market Operations1 The table below shows data for April 20, 2000. The data has been rearranged in the format used as of September 2000.
Billions of yen
Projections (excludes same-day-start operations) "310 (a) "4,320 (b) "4,630 (c) Results "300 "4,200 "4,500

Banknotes (minus: net issuance) Treasury funds and others (minus: net receipt of funds) Surplus/shortage of funds (minus: shortage) BOJ loans Outright purchase of JGBs and money Purchases of JGBs under market repurchase agreements operations Borrowing of JGBs against cash collateral (JGB repos) Outright purchases of TBs/FBs Outright sales of TBs/FBs Purchases of TBs/FBs under repurchase agreements Sales of TBs/FBs under repurchase agreements Outright purchases of bills2 Outright purchases of bills collateralized by corporate debt obligations Purchases of CP under repurchase agreements Outright sales of bills drawn by BOJ Loans Subtotal Net change in current account balances Current account balances (amount outstanding)3 Reserve balances Held by institutions that have satisfied reserve requirements for the current period Excess reserves Held by institutions that have NOT satisfied reserve requirements for the current period Current account balances held by institutions NOT subject to reserve requirements

800 (e) 1,000 (g) 100 (d)

800 600 (S) (j) 1,000 100

2,300 (13:00) (f) 4,200 (h) "430 (i)

2,300 (13:00) 4,800 (k) 300 5,130 4,030 170 100 3,860 1,100

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C. Money Market Operations

(Reference)
Required reserves4 for the current maintenance period (April 16-May 15, cumulative total) Required reserves4 for the current maintenance period (April 16-May 15, daily average) Remaining required reserves on and after April 21 (cumulative total) Remaining required reserves on and after April 21 (daily average) 116,810 3,890 99,000 3,960 (l)

Notes: 1. Figures are rounded off to the nearest 10 billion yen. Same-day-start operations are marked with an S. Operations are settled at the designated settlement time of 15:00 unless otherwise indicated. 2. Excludes outright purchases of bills collateralized by corporate debt obligations. 3. The total current account balance financial institutions hold with the Bank. Reserves are included in this. 4. The figure for required reserves is usually revised twice: on the last business day of the month and on the seventh of the following month (or the preceding business day when the seventh falls on a bank holiday).

As seen in footnote 6 in this chapter, the total amount of required reserves remaining of all financial institutions is an important indicator for judging developments in money markets. According to the reference table, daily average reserves from April 21 should be 3,960 billion yen (l) to satisfy reserve requirements.

a. Before the money market operation In advance of the day of any given money market operation, the Bank makes a projection of the changes in total CABs due to sources of changes in CABs on that day, based on (1) information on the issuance of banknotes and their withdrawal from circulation (see chapter II), payment and receipt of treasury funds (chapter IX), and issuance and redemption of JGSs (chapter X), and (2) analysis of historical patterns of funds surplus and shortage, and recent economic developments.21 Projections in table 6-2 show net issuance of 310 billion yen under banknotes22 ([a] in table 6-2; a funds shortage factor) and

21

The Bank also projects funds surplus and shortage for each month. This data is published on the Banks Web site (http://www.boj.or.jp/en/index.htm) as Sources of Changes in Current Account Balances at the Bank of Japan (Projections) on the second business day of every month.

22 If the amount of banknotes withdrawn from circulation exceeds banknote issuance, the amount by which it exceeds issuance is indicated with a plus sign to show an increase in CABs.

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Chapter VI: The Bank of Japans Money Market Operations and Lending

net receipt of 4,320 billion yen under treasury funds and others 23 ([b]; a funds shortage factor). The total projected funds shortage is, therefore, the sum of these two factors, or 4,630 billion yen ([c]; a decline in CABs). By looking at this figure, combined with the net total effect of operations offered before that start or end on April 20, the Bank could calculate its projection of changes in CABs. For example, in table 6-2, the Bank planned to supply funds through operations starting on April 20, i.e., the Bank planned to supply 100 billion yen through outright purchases of bills collateralized by corporate debt obligations (d) and 800 billion yen through purchases of TBs/FBs under repurchase agreements (e). Funds supply was also expected to increase by operations reaching maturity on April 20, i.e., 2,300 billion yen was supplied through repayment of outright sales of bills drawn by the Bank ([f]; the total of four operations each amounting to 600 billion yen, 700 billion yen, 500 billion yen, and 500 billion yen) and 1,000 billion yen through buying back of TBs/FBs under repurchase agreements ([g]; the total of two operations each amounting to 400 billion yen and 600 billion yen). The sum of (d), (e), (f), and (g), which is the total amount of funds supply through money market operations, is 4,200 billion yen (h). The sum of (h) and the projected funds shortage (c) is a negative 430 billion yen, which shows a projected decline in the total CABs (i) excluding the effect of operations that may be offered on April 20 (see the section below).24 b. On the day of the operation In the morning of the day of the operation, the Bank, based on these projections of changes in total CABs due to sources of changes in CABs and information collected on financial market conditions, determines the amount of funds supply/absorption for the day in line with the guidelines for money market operations decided at MPMs, and offers same-day-start operations (operations for which settlement is conducted on the day of offer and contract)

23 If the payment of treasury funds and redemption of JGSs exceed the receipt of treasury funds and issuance of JGSs, the amount by which it exceeds issuance is indicated with a plus sign to show an increase in CABs. 24

The Bank releases these projections for the day concerned on the Banks Web site (http://www.boj.or.jp/en/index.htm) as Sources of Changes in Current Account Balances at the Bank of Japan and Market Operations (Projections) after 17:30 on the previous day.

116

C. Money Market Operations

at 9:20.25 In view of money market conditions on April 20, 2000, the Bank supplied 600 billion yen through same-day-start purchases of TBs/FBs under repurchase agreements (j) in line with the guideline decided at MPMs The Bank of Japan will flexibly provide ample funds and encourage the uncollateralized overnight call rate to move as low as possible. As a result, a total of 4,800 billion yen (k) was supplied through money market operations on April 20. This matched approximately the funds shortage of 4,630 billion yen (c) that had been projected by calculating the possible funds shortage due to banknotes and treasury funds factors alone.26 As can be seen from this example, the Bank adjusts CABs by combining same-day-start and future-date-start operations, and managing the flow of funds on the day of maturity. To facilitate participation by financial institutions as bidders in money market operations, offers are basically made at a fixed time determined for each type of operation (see table 6-3 for the times as of March 2000). Settlement of operations that start or end on the day concerned is completed between the Bank and counterparty financial institutions by credits and debits to BOJ accounts and the delivery and receipt of JGSs, bills, and CP traded in the operation. Settlement of the Banks operations, including same-day-start operations, usually takes place at the designated settlement time of 15:00, 27 but can also be completed at the designated settlement time of 13:00 or 17:00.28 A typical day in the way the Bank conducts money market operations is shown in table 6-3, again using the example of April 20, 2000.

25 The Bank offers additional same-day-start operations if the overnight call rate is anticipated to deviate greatly from the target level as a result of liquidity risk or unexpectedly large or small demand for CABs reflecting changes in financial institutions demand for funds settlement. 26

The Bank discloses the funds surplus/shortage for the day and the final results of its money market operations and lending on its Web site (http://www.boj.or.jp/en/index.htm) under Sources of Changes in Current Account Balances at the Bank of Japan and Market Operations (Results) at around 17:30 after the designated settlement time of 17:00. Settlement through BOJ accounts is settled at the designated settlement time of 15:00, and delivery of JGSs is completed through normal processing using the BOJ-NET at 15:00 (see chapters III, IV, and X).

27

Specifically, bills are settled at the designated settlement time of 13:00, 15:00, or at 17:00, while CP is settled at 13:00 or 15:00.

28

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Chapter VI: The Bank of Japans Money Market Operations and Lending

Table 6-3 A Typical Flow of Money Market Operations1 Money Market Operations Conducted on April 20, 2000
Time of Offer 9:20 9:30 10:10 10:20 Business operations by the Bank of Japan - Offers same-day-start purchases of TBs/FBs under repurchase agreements (600 billion yen [j]). - Offers future-day-start JGB borrowing against cash collateral (JGB repos) (starting on April 24; 400 billion yen). - Offers future-day-start purchases of TBs/FBs under repurchases agreements (starting on April 24; 600 billion yen). - Deadline for bids for same-day-start purchase of TB/FB under repurchase agreements offered at 9:20. Successful bids are determined immediately and the results, including the amount of total bids and accepted bids, and the average rate of accepted bids, are notified to the counterparties and news agencies. - Deadline for bids for future-day-start JGB repos offered at 9:30. Successful bids are determined immediately and the results, including the amount of total bids and accepted bids, and the average rate of accepted bids, are notified to the counterparties and news agencies. - Deadline for bids for future-day-start purchases of TBs/FBs under repurchase agreements offered at 10:10. Successful bids are determined immediately and the results, including the amount of total bids and accepted bids, and the average rate of accepted bids, are notified to the counterparties and news agencies. - Receives bills from and credits the BOJ accounts of the buyers of bills, relating to the maturity of outright bill selling operations started by the day before (totaling 2,300 billion yen [f]). - Receives bills from and credits the BOJ accounts of the sellers of bills, relating to the execution of outright purchases of bills collateralized by corporate debt obligations offered by the day before (100 billion yen [d]). - Receives TBs/FBs from and credits the BOJ accounts of the sellers of securities, relating to the execution of TB/FB purchase operations under repurchase agreements offered by the day before (800 billion yen [e]). - Receives TBs/FBs from and credits the BOJ accounts of the sellers of the securities, relating to the execution of same-daystart TB/FB purchase operations under repurchase agreements (600 billion yen [j]). - Receives TBs/FBs from and credits the BOJ accounts of the buyers of securities relating to the maturity of sales of TBs/FBs under repurchase agreements started by the day before (totaling 1,000 billion yen [g]). (There were no operations to be settled at the designated settlement time of 17:00 on this day.)

10:30

11:15

13:00 (the designated settlement time of 13:00) 15:00 (the designated settlement time of 15:00)

17:00 (the designated settlement time of 17:00)

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(Reference) Time of Regular Auction Offers for Money Market Operations as of the End of March 2000
Time of offer 9:20 Type of settlement Same day start Type of operation Purchases or sales of TBs and FBs under repurchase agreements, outright purchases of bills, and outright sales of bills drawn by the Bank. JGB borrowing against cash collateral (JGB repos). Purchases or sales of TBs and FBs under repurchase agreements, outright purchases or sales of TBs and FBs, purchases of CP under repurchase agreements, and outright purchases of JGBs. Outright sales of bills drawn by the Bank (offered at this time when a funds surplus is anticipated for the day). Outright purchases of bills, outright purchases of bills collateralized by corporate debt obligations, and outright sales of bills drawn by the Bank.

9:30 10:10

Future day start Future day start

12:10

Same day start

Future day start

Note: 1. Compare (a)-(l) in this table with (a)-(l) in table 6-2.

4. Ensuring transparency of the Banks money market operations The Bank takes various measures to ensure the transparency of its money market operations. The Bank discloses its operational schemes for each type of operation decided at MPMs. These are called the principal terms and conditions for the operation, and specify the types of instruments the Bank will sell or purchase, the maturity of the operation, and methods of determining interest rates. The Bank also discloses its criteria for selecting operation counterparties for each type of operation. The Bank regularly selects operation counterparties from a pool of applicants based on the published criteria, and the results are also made public. The criteria for selecting operation counterparties include (1) terms to be met by operation counterparties i.e., active participation in the bidding, prompt and accurate processing, and provision of information useful in implementing monetary policy, and (2) sufficient capital adequacy ratio and market share (transaction volume, number of clients, and ability to provide market information). As part of the latter point, the criteria include creditworthiness of counterparties to ensure the smooth execution of operations. The Bank releases data after each operation, including the value of bids, the value of successful bids, and the average rate of successful bids. These are available on the Banks Web site (http://www.boj.or.jp/en/index.htm).

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D. The Bank of Japans Lending Operations The Bank of Japan extends loans to financial institutions holding BOJ accounts that it deems eligible. Bank of Japan loans were once a major tool of monetary control. In the course of interest rate deregulation, however, the Bank made explicit its intention to use the market mechanism to influence interest rates and the volume of money in the economy. Consequently, the Bank uses money market operations as principal tools of monetary control, and makes less use of lending (see box 1). There are two types of BOJ lending: the first are loans made against collateral such as bills and JGSs (under Article 33 of the Bank of Japan Law), while the second are uncollateralized loans that have special conditions attached (under Articles 37 and 38). An explanation of the first type, which was once the major tool of monetary control, is given below. For the second type, see chapter V. As previously mentioned, the Policy Board decides at MPMs the Banks official discount rates, the interest rates on Bank of Japan discounts and those on loans. There are actually two types of discount rates, although the first of these is usually referred to as the official discount rate:29 (1) the discount rate of commercial bills or the interest rate applied to loans secured by JGSs, specially designated securities or bills corresponding to commercial bills; and (2) the interest rate on loans secured by other collateral.30 There are two forms of BOJ lending: discounting of bills, and loans collateralized by bills, JGSs or other marketable securities. The following sections examine these two forms of lending. 1. Discounting of bills The Bank discounts eligible bills (see D.2.) maturing within three months.31 Such bills have already been discounted by financial institutions for their clients, and the Bank purchases each bill from the financial institutions at face value less the amount of interest to be paid for the remaining maturity. Later, the Bank collects its funds by taking the bills to the clearing house on the date of maturity, or by selling them back to the counterpart financial institutions

29 30

The loan rate for the latter is currently 0.25 percentage point higher than the former.

The two discount rates will be replaced by one rate for all collateralized lending when RTGS becomes the only settlement mode for settlement through BOJ accounts. This is sometimes called rediscounting of bills because bills that have already been discounted by financial institutions are discounted again by the Bank.
31

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D. The Bank of Japans Lending Operations

before they reach maturity. In this way, the Bank provides funds from the time of purchase of the bills until the date of maturity or resale. 2. Loans collateralized by bills, JGSs, and other securities The Bank extends loans to financial institutions by accepting eligible bills, JGSs, and other instruments as collateral.32 In loans on bills, financial institutions draw and submit to the Bank promissory notes with a face value equal to the value of the loan. The Bank then credits their BOJ accounts with an amount equal to the face value of the promissory notes minus the amount of interest to be paid for the remaining maturity. On the day of maturity if not before, the Bank collects the funds from financial institutions. The term of loans on bills is, in principle, three months or less. An overdraft is a form of credit extended by the Bank. In other words, the Bank permits financial institutions to hold a net debit position in their BOJ accounts. To ensure the smooth settlement of funds, the Bank plans to provide intraday overdrafts after RTGS is made the only settlement mode for settlement through BOJ accounts (see chapters III and IV).33 To ensure its own financial soundness, the Bank discounts or accepts as collateral for loans only instruments that meet a certain credit standing and other criteria. After RTGS becomes the only settlement mode for settlement through BOJ accounts, the Bank will accept the following instruments as eligible collateral: JGBs, TBs, FBs, government-guaranteed bonds, municipal bonds, Fiscal Investment and Loan Program Agency Bonds, corporate bonds, asset-backed securities, foreign government bonds, international financial institution bonds, bills, CP, and loans on deeds (see footnote 16 for the Guideline on Eligible Collateral). Also, in accordance with the Accounting Rules, the Bank maintains reserve for possible loan losses34 (see appendix 2).

32 Financial institutions can offer collateral to the head office and branches of the Bank as pooled collateral. This is called collateral deposited in advance. This system helps reduce the operational burden on financial institutions and on the Bank, while enhancing the efficiency of loan extension. 33

Financial institutions will be able to make overdrafts within the value of collateral offered to the Bank free of charge. Institutions are expected, however, to raise funds to cover the shortage by the end of business hours of the same day.

34 General reserve for possible loan losses is calculated based on the actual loan-loss ratio (this accounting item was not registered at the end of fiscal 1999 because there was not enough data to calculate the historical loan-loss ratio). Special reserve for possible loan losses for specific assets is based on decisions by the Policy Board.

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E. Issuing of Substitute Certificates Apart from the case of money market operations, the Bank of Japan issues substitute certificates in exchange when it receives JGSs and other securities transferred from or deposited by financial institutions. These certificates themselves can be used as collateral for the Banks loans to financial institutions and also used in collateralized transactions in money markets, such as collateralized call transactions and purchases or sales of bills. The Banks issuance of substitute certificates is part of its business operations contributing to the smooth settlement of funds stipulated in Article 39 of the Bank of Japan Law. The Bank currently issues substitute certificates for registered JGSs for use as collateral in money market transactions.35 This practice was introduced in 1945 to facilitate the use of registered JGSs as collateral for transactions in money markets. Registered JGSs are rarely used as collateral for funds transactions without substitute certificates because of the heavy administrative costs. For example, when making supplementary registration for setting security interest on registered JGSs, both the secured party and the provider of collateral must make requests in writing. 36 The Bank, therefore issues substitute certificates (of the same type and value as the received JGSs) when it receives registered JGSs and book-entry JGSs from banks, tanshi companies,

The Bank can also issue substitute certificates for registered bonds which can be used as collateral in particular transactions, but these have not been issued recently. These substitute certificates were introduced in 1979 to facilitate the use of registered bonds as collateral when securities finance companies (SFCs) raise funds or securities companies borrow funds relating to the following transactions: (1) the extension of short-term loans by SFCs to securities companies for underwriting, buying or selling bonds (taking JGSs and other securities as collateral); (2) the extension of short-term loans by SFCs to securities companies to cover the time from the purchase of bonds in small lots from customers until enough such bonds have been accumulated to sell as a unit; and (3) extension of short-term funds by SFCs to securities companies customers as bond collateral loans (see box 3). The Bank issues substitute certificates (the same type and of the same value as the received bonds) when it receives registered bonds transferred (currently, they are limited to registered JGSs) from securities companies, SFCs, and tanshi companies. The Bank entrusts to SFCs part of the responsibility for issuing and collecting these certificates, and other related business. On the BOJ-NET JGB Services, the operational burden for making supplementary registration is eased by using JGB-MAC (Message Authentication Code; see footnote 21 for chapter X).
36

35

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E. Issuing of Substitute Certificates

securities companies, securities finance companies, insurance companies, and others (see box 3).37

37 The Association of Call Loan and Discount Companies, or the association of tanshi companies, established the Collateral Center for Short-Term Money Market Transactions in 1995 to realize book-entry transfer of collateral accompanying collateralized money market transactions. Financial institutions that engage in money market transactions conclude a contract with the Association of Call Loan and Discount Companies and entrust collateral to the Center (physical securities are kept by the Bank as part of its custody services under Article 33 of the Bank of Japan Law). The transfer of collateral accompanying transactions is completed on the book between the accounts of financial institutions held at the Center. Currently, this system only operates for transactions in markets in Tokyo. Eligible collateral includes JGSs, bank debentures, bills issued by nonfinancial companies and endorsed by financial institutions, and substitute certificates issued by the Bank.

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Box 1

Money Market Operations by the Bank of Japan

In the past, to achieve price stability, the Bank of Japan strove to maintain an appropriate level of money stock and interest rates by raising or lowering its lending rates and directly influencing financial institutions lending and securities investment. This was because (1) the bills and bond markets were still developing, which made it difficult to conduct money market operations continuously, and (2) loans were highly flexible tools, that is, loans could be extended or called at the Banks discretion, while the absence of an on-line transaction system for money market operations meant the operational burden was heavy and the time lag between trade and settlement was long. The loans extended by the Bank, however, started to have side-effects financial institutions became overly dependent on them. To address this situation, the Bank introduced, in 1962, a new scheme for monetary control in which (1) the increase in demand for money stemming from economic expansion would be met by funds supplied through operations using bonds, and (2) an upper limit would be set on loans to major financial institutions. Later, as the patterns of the flow of funds changed in line with the stable growth of Japans economy, various financial markets such as JGS markets grew more mature, and interest rates such as deposit rates were deregulated. Meanwhile, the Bank made explicit its new approach of using the market mechanism to control the money stock and the level of interest rates overall, by guiding the overnight call rate to a certain level by increasing or decreasing BOJ account balances as a whole. The Bank took various measures in carrying out money market operations based on this approach, as explained below. In 1991, the Bank abolished the so-called window guidance, under which it had asked financial institutions holding BOJ accounts to keep any increase in their lending over a certain period within the level the Bank considered appropriate. In 1996, the Bank decided not to use loans in monetary control in principle. The Bank took various measures to enhance the effectiveness of its money market operations. Following the introduction of bill purchase and sale operations in the early 1970s, the Bank strengthened the functions of money markets and started a series of new types of money market operations. They included (1) purchases and sales of TBs/FBs under repurchase agreements (sales of FBs under repurchase agreements were introduced in 1986, and purchases of TBs under repurchase agreements were introduced in 1990; these were modified and combined in 1999 so that both TBs and FBs could be

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Boxes

bought and sold in the money market operations), (2) purchases of CP under repurchase agreements, (3) borrowing of JGBs against cash collateral, and (4) outright purchases and sales of TBs/FBs. The Bank also (1) introduced competitive yield auctions for all money market operations to further utilize the market mechanism, (2) diversified the maturity of transactions for various types of operational tools to increase their flexibility, and (3) introduced, in 1995, same-day-start operations (operations that are settled on the same day they are offered) with competitive yield auction for outright purchases and sales of bills and for purchases of TBs/FBs under repurchase agreements.

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Box 2 Money Markets and the Call Market Money markets are where participants raise and invest short-term funds maturing within a year. It can be broadly divided into two categories: the interbank market, where participants are mainly financial institutions, and the open market, where nonfinancial institutions and local governments can also participate. The interbank market includes the call market, explained below in detail, and the bills market. The open market includes (1) the bond gensaki market, where JGSs and other securities are bought and sold under resale and repurchase agreements, (2) the repo market, where JGBs and other securities are borrowed against cash collateral, (3) the certificate of deposit (CD) market, where CDs (negotiable time deposits) issued by financial institutions are traded, (4) the commercial paper (CP) market, where CP issued mainly by nonfinancial institutions is traded, and (5) the TB/FB market, where TBs and FBs are traded. The TB/FB market has been expanding rapidly in recent years following the introduction of the public auction system for FBs in 1999. The repo market has also shown significant growth in the past few years (see table for box 2). The call market is especially important, because it is where financial institutions make the days final adjustments of BOJ account balances, and the Bank of Japan targets an interest rate in this market in money market operations. There are two types of transactions in the call marketcollateralized and uncollateralized. Bills, JGSs, and other securities are accepted as collateral in the collateralized transactions. Transactions which mature within half a business day are called half-day call transactions. Those maturing on the next business day are called overnight call transactions, and those with maturities of longer than overnight are called term call transactions. These transactions are mainly handled by tanshi companies (money market broker-cum-dealers), but direct dealing (DD call) between financial institutions has been increasing recently. Settlement is carried out either on the day of the contract or in some cases later. Transactions settled on the day of contract are called same-daystart transactions for collateralized call transactions, and cash transactions for uncollateralized call transactions. The role of money markets is extremely important in that (1) it provides a place for financial and nonfinancial institutions to raise or invest short-term funds, and (2) money market operations conducted in this market spread the effect of the Banks monetary policy throughout the economy. The Bank thus cooperates with financial institutions and other related parties to develop and improve the markets, and to ensure proper functioning of the market mechanism in money market transactions.

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Boxes

Table for Box 2 Amounts Outstanding in Money Markets1


(Year-end figures, in trillions of yen) 1997 1998 1999 End-March 2000 49.6 59.3 25.0 31.3 26.0 (12.4) 5.3 (0.0) 213.0 29.1 42.6 16.4 33.6 44.2 47.1 244.3 (49.5%)

1985

1990

1995

1996

19.8 41.1 48.5 51.0 Interbank market (A) 5.1 24.0 38.6 39.9 39.3 33.6 21.9 Call (0.8) (12.3) (29.3) (30.5) (30.6) (23.8) (12.5) market2 14.7 17.1 9.9 11.1 10.3 25.7 3.1 Bills (9.4) (10.2) (0.3) (0.1) (0.2) (0.1) (0.0) market3 14.3 49.9 59.3 68.5 112.4 131.6 192.0 Open market (B) 4.6 6.6 11.1 11.9 10.0 11.5 20.8 Gensaki 9.7 18.9 24.3 32.0 38.6 39.1 35.5 CDs 15.8 10.5 10.8 12.0 18.1 22.2 CP 7.6 12.8 12.9 13.1 15.2 27.5 TBs 0.0 1.0 0.6 0.9 0.0 0.0 38.4 FBs n.a. 38.7 47.7 47.6 Repos 34.1 91.0 107.8 119.5 162.0 190.9 217.0 Total (10.6%) (21.2%) (22.3%) (23.9%) (31.9%) (38.4%) (43.8%) (A+B)4

Notes: 1. n.a. means figures not available. means cell not applicable. 2. Figures in parentheses indicate the amount outstanding of uncollateralized call transactions. 3. Figures in parentheses indicate the amount outstanding of transactions excluding bill operations by the Bank. 4. Figures in parentheses indicate percentage of nominal GDP.

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Box 3 Tanshi Companies and Securities Finance Companies Tanshi companies and securities finance companies both play a vital role in Japans money markets, even if they may seem to have little relation to the daily lives of the people. Broadly defined, tanshi companies are divided into two types, money market broker-cum-dealers and foreign exchange brokers. Money market broker-cum-dealers provide intermediary services in money markets, and there are six participating in the markets as of September 2000. They are dealers in call money, bill, CD, CP, TB, and FB transactions acting as the principal to financial institutions that wish to borrow or lend, buy or sell these money market instruments. They are also brokers who match buyers and sellers in transactions. They also deliver collateral for collateralized call transactions, and they operate the Collateral Center for Short-Term Money Market Transactions established by the Association of Call Loan and Discount Companies (see footnote 37 of this chapter). The other type of tanshi companies called foreign exchange brokers provide brokerage services for interbank transactions in the foreign exchange market (see chapter VIII). Seven foreign exchange brokers are participating in the market as of September 2000. Securities finance companies (licensed under the Securities and Exchange Law) specialize in providing funds and securities necessary to ensure the smooth issuance and circulation of stocks and bonds. There are three securities finance companies in the stock and bond markets as of September 2000. They mainly engage in lending funds for bond-collateralized loans and lending funds and stocks to securities companies for margin transactions with their clients (see footnote 35 of this chapter).

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Chapter VII Statistics, Research and Studies, and Public Relations


To formulate and execute its policies and business operations, the Bank of Japan compiles statistics, conducts research and studies, and undertakes a full range of public relations activities. This chapter explains how these activities work. *** The Bank compiles a wide variety of statistical data, including data on money and finance. The statistics it compiles are not only for the Banks own use, and to a great extent they are made available to the public. To formulate and execute its policies and business operations, the Bank conducts a broad range of research at its head office, branches, and local offices in Japan, and overseas representatives offices: it analyzes various statistics, and obtains information through discussions with a wide range of organizations, including financial and nonfinancial institutions, the government, and foreign central banks. The Bank studies fundamental financial and economic issues, with mediumto long-term perspectives, for establishing an appropriate background for its policies and business operations; such studies also support the Banks shorter-term or daily research. Many of the fruits of its research and studies are made public, through the Banks Web site and paper publications. The Banks public relations activities, which aim to foster understanding of its policies and business operations, consist of making available a wide variety of information on finance and the economy, while paying heed to the broad spectrum of public opinion. ***

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Chapter VII: Statistics, Research and Studies, and Public Relations

A. Compiling and Publishing Statistics The Bank of Japan compiles various kinds of monetary and financial statistics, such as Sources of Changes in Current Account Balances at the Bank of Japan and Market Operations, Money Stock, Flow of Funds Accounts, and economic statistics such as Tankan,1 wholesale price index (WPI), corporate service price index (CSPI), and balance of payments2 (see table 7-1). Many members of the Banks staff are involved in compiling these statistics, within the head office, branches, and domestic and overseas offices (see appendix 3 for the list of statistics and publications released by the Bank). The statistics the Bank compiles are used in formulating and executing its policies and business operations (see B.). At the same time, many of these statistics are made available to the public through the Banks Web site 3 and other means. Researchers and firms who analyze economic developments make wide use of these statistics.

!Box 1: What is Money Stock?

1 Tankan is the common shortened form of the Japanese name for the Banks Short-Term Economic Survey of Enterprises in Japan, which itself consists of two parts: the Principal Enterprises Tankan and the All Enterprises Tankan. The Tankan survey is conducted four times a year, in March, June, September, and December, covering approximately 10,000 firms around the country. It summarizes in diffusion indexes these firms views on the business conditions, production capacity, and employment conditions. It also asks about their forecasted and actual sales, profits, and fixed investments. It is one of Japans most carefully watched economic indicators, to grasp the economic conditions. 2 The Bank compiles data on the balance of payments on behalf of the government (Minister of Finance) under the Foreign Exchange and Foreign Trade Law (Article 69), based on reports filed by financial institutions, firms, and individuals. See chapter VIII for further explanation. 3

The Bank has set up a Web site at http://www.boj.or.jp/en/index.htm for the purpose of distributing the information and statistical data it compiles to the widest possible audience of users. In addition to information on monetary policy and related topics, the site includes the latest statistical releases in its Reports and Statistics section. The Download section features approximately 38,000 long-term time-series data as well as reports and research papers. The site also features the Schedule and List of Releases, which is the release schedule for key economic data.

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A. Compiling and Publishing Statistics

Table 7-1 Registered Statistics Compiled by the Bank of Japan The Bank compiles the following four registered statistics based on surveys it conducts under provisions such as Article 8 of the Statistics Law (Law No. 18 of 1947) and other regulations. The Bank informs the Management and Coordination Agency4 in advance of the purposes of the surveys and items to be surveyed. The input-output price index of manufacturing industry by sector (IOPI) was deleted from the list of the Banks registered statistics when the revision of the IOPI was decided on July 21, 2000. This was because the Bank started to compile the IOPI by using the data for the wholesale price index (WPI), and abolished the price survey conducted exclusively for the IOPI.
Title All Enterprises Tankan and Principal Enterprises Tankan Contents (1) Coverage (a) All Enterprises Tankan Covers private nonfinancial firms in Japan employing 50 or more persons (or 20 or more in the wholesaling, retailing, services, and leasing industries). About 10,000 sample enterprises are selected from a population of about 160,000 private firms listed in the Establishment and Enterprise Census of Japan released by the Management and Coordination Agency. (b) Principal Enterprises Tankan About 700 firms deemed to generally reflect trends in their industries are selected, principally from among those listed on the stock exchange with at least 1 billion yen in capital. (2) Items surveyed Both surveys are conducted quarterly using questionnaires. The questionnaires include the following: (1) judgment items such as the judgment on business conditions, supply and demand conditions for products, employment conditions, and the financial position; (2) numerical items such as the amount of sales, profits, and fixed investment; and (3) forecasts of these items. Surveys on fixed investment of financial institutions have been conducted and published since 1989. (3) Purposes The surveys provide the results of judgment survey that show business sentiment, as well as quantitative data. Long-term time-series data of these surveys are available. The survey results are used to assess the economic condition and make projections.

The Ministry of Public Management, Home Affairs, Posts and Telecommunications, from January 2001.

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Wholesale Price Index (WPI)

(1) Coverage The WPI covers 1,427 items and 4,810 samples (both with the base year of 1995) of all types of goods traded between firms. The survey covers over 90 percent of the total value of goods traded between firms (1995 base). (2) Items surveyed The Bank surveys the prices of sample goods and compiles the domestic wholesale price index, the export price index, and the import price index. The Bank also calculates the Overall Wholesale Price Index using these three indexes. (3) Purposes In analyzing the economy, the WPI is used as (1) an indicator that reflects supply and demand conditions of goods traded between firms, and (2) a deflator for converting nominal shipment values to real values. (1) Coverage The CSPI covers 102 items and 2,963 samples (both with the base year of 1995) of all types of services traded between firms (e.g., transportation, real estate services, communications, and advertising services). The survey covers about 60 percent of the total value of services traded between firms (1995 base). (2) Items surveyed The CSPI is calculated based on the prices of the abovementioned services. (3) Purposes The CSPI is used in the same way as the WPI, (1) as an indicator that reflects supply and demand conditions of services traded between firms, and (2) as a deflator.

Corporate Service Price Index (CSPI)

[Reference]

These statistics are available on the Bank of Japans Web site (http://www.boj.or.jp/en/index.htm) and are also distributed free of charge at the head office. See appendix 3 for the list of the Banks publications that contain long-term time-series data of the above statistics.

The Bank is perennially trying to think of ways to make the statistics it compiles more reliable and more useful to the public (for example, see box 2 for the revision of the WPI).5 Specifically, the Bank has been making efforts (1) to provide accurate statistics that reflect structural changes in Japans economy and financial system, by continually reviewing and revising the coverage and sub-categories of the statistics as well as the method of calculation, (2) to make the process of gathering and compiling data more
5 See Enhancement of Statistics Provided by the Research and Statistics Department included in the November 1999 issue of the Bank of Japan Quarterly Bulletin for a discussion of the Banks thinking on how it compiles and publishes its statistics. The article is also available on the Banks Web site.

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B. Research and Studies

rational and efficient, by continually testing the necessity of individual statistics and statistical publications, 6 and (3) to improve the clarity and transparency of its data compilation process, by making public the ways it compiles its data, publishing the plan of revisions in advance, and seeking comment from the public. In addition, the Bank exchanges views on the improvement of statistics at regular conferences in Japan and abroad held by the Management and Coordination Agencys Statistics Council, the Task Force on Global Financial Market Statistics of the Organisation for Economic Cooperation and Development (OECD), and others. It also takes part in international initiatives for formulating statistical standards under the United Nations (UN) and the International Monetary Fund (IMF).

!Box 2: History and Revisions of the Wholesale Price Index

The Bank prepares and releases its statistics on a regular schedule, but it also compiles them, along with other selected statistics prepared by the Japanese and overseas governments and international organizations, in collections it publishes such as the Financial and Economic Statistics Monthly, and Balance of Payments Monthly. To maximize the value of the statistics to the user, the Bank makes efforts to minimize the time between the gathering of the raw data and the publication of the statistics. The Bank makes its statistical data available in a variety of media, from the hand distribution of data at the head office, to facsimile (since 1995), Web site (1996), and CD-ROM (1997).

B. Research and Studies 1. Research The Bank of Japans research activities include the gathering and analysis of a wide variety of data, to assist in the formulation and execution of policies and business operations. These activities take place at many levels, at the head office, branches, and other offices domestically and abroad. The Bank analyzes various statistics on finance and the economy, and the Banks staff
6 In recent years, the Bank has stopped publishing the Analysis of Financial Statements of Principal Enterprises (since 1995), the Economic Statistics Annual by Prefecture (1996). The data on Personal Savings was merged into Flow of Funds Accounts (1997).

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actively exchange views with a wide range of organizations, including financial and nonfinancial institutions, industrial organizations, research institutes, the government, foreign central banks, and international organizations, and take part in seminars sponsored by these organizations. The Bank is also active in public relations activities, and exchanges views with all kinds of people (see C.). The content of such discussions covers the broadest possible range of topics related to the Banks policy and business operations. For example, (1) to ensure that banknotes circulate freely throughout the country, the head office and branches grasp accurately fluctuations in the volume of banknotes put into and withdrawn from circulation, (2) to ensure that the Bank of Japan Financial Network System (BOJ-NET) operates safely and efficiently, the Bank follows technological innovations in payment and settlement systems, (3) to conduct money market operations effectively, the Bank monitors the financial markets and exchange views with financial institutions, and (4) to improve efficiency of treasury funds services, the Bank follows developments in other countries. The fruits of these activities are constantly communicated to the Policy Board and the relevant operating divisions, 7 to be used in formulating and executing the banks policies and business operations. The Banks research activities play an important role in the central banks pursuit of its objectives: ensuring price stability and maintaining financial system stability. Of the many kinds of research in which the Bank engages, the following section focuses on research that supports the appropriate conduct of monetary policy. a. Economic developments The Bank conducts two kinds of research on economic developments: the first is macroeconomic research, based on its analysis of a wide variety of statistical indicators on the state of the economy; and the second is microeconomic research, based on interviews with company representatives from various industries. The focus of the Banks macroeconomic research is trends in demand for goods and services (investment and consumption, government spending, and net exports), corporate activity (production, employment, and profits), and trends in prices. Specifically, it conducts research that analyzes corporate
7

In addition, the Governor and all executives, general managers of branches, and chief representatives of overseas offices of the Bank meet four times a year in General Managers Meetings to report on finance and the state of the economy in each region, for discussion and deliberation.

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B. Research and Studies

activity and trends in demand for goods and services, based on the Banks statistics such as the Tankan and balance of payments statistics, and others such as National Accounts, indexes of industrial production, household surveys, machinery orders, and housing starts, which are compiled by government agencies or various industrial organizations. Prices are the indicator that reflects trends and expectations of supply and demand conditions for goods and services, and their stability is the objective of monetary policy. In view of this, the Bank closely monitors and analyzes price indicators which it compiles, such as the WPI, the CSPI, and the input-output price index of the manufacturing industry by sector (IOPI), as well as the consumer price index (CPI),8 domestic and overseas commodities prices, and land prices. The Banks microeconomic research gives an even more finely detailed view of the background to overall economic trends, so that the Bank can grasp changes in the economy that are not completely revealed in macroeconomic indicators, and cover time lags in the release of macroeconomic statistics. These microeconomic research activities are by and large conducted through interviews with firms ranging from major corporations, e.g., in the steel, machinery, construction, and large-scale retail and trading sectors, to smaller corporations throughout the country. The Bank keeps track of trends in every industry and the state of the economy in each geographic region, by focusing on developments in production, business fixed investment, corporate profits, exports and imports, and firms fund-raising. b. Monetary and financial developments One of the most important tasks in studying financial trends is to gather and analyze information on the supply of and demand for money. The Bank closely monitors developments in money stock, which is the measure of the amount of money in the economy. At the same time, it also monitors trends in firms financing activities that affect their access to funds in the loan, bond, and stock markets, and it analyzes the data it collects in interviews with major financial institutions concerning the background factors that affect their lending volumes and interest rates. The Bank also maintains an active watch over the money market, where it conducts money market operations. It monitors developments in interest rates and stock prices by keeping constant communication with financial
8

The CPI is an indicator of prices for goods and services at the household level, and is compiled by the Management and Coordination Agency (the Ministry of Public Management, Home Affairs, Posts and Telecommunications, from January 2001).

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institutions. Monitoring of the bond and stock markets is important because trends there reflect market participants current assessments and expectations concerning conditions of corporate activity, the economic developments, and the conduct of monetary policy. c. Overseas economic and financial developments As economies around the world grow ever more interdependent, it is increasingly important for the Bank to gather and analyze information on global economic trends. The Bank conducts research on the current situation and outlook of the global economy to use the results in making projections about Japans economy. Such research activities are conducted by (1) gathering and analyzing a wide variety of statistical indicators on production, prices, and trade in foreign countries and regions, as well as overseas financial markets, including foreign exchange markets, and (2) constantly exchanging information with other central banks and international organizations such as the Bank for International Settlements (BIS), the IMF, and the OECD (see A.). This research, along with the Banks day-to-day monitoring of international financial markets, is also used in detecting and preventing the materialization of risks involved in the economy (see chapter VIII). The fruits of these research activities are promptly communicated to the Policy Board and to the relevant divisions of the Bank. They are also used in formulating the Banks monetary policy at Monetary Policy Meetings (MPMs), and are published in the Monthly Report of Recent Economic and Financial Developments (see box 5 for chapter I). 2. Studies The Bank also conducts theoretical and empirical studies of fundamental financial and economic issues. Some of these studies are undertaken in the short term and used in the Banks assessment of the economic and financial situation, while other studies conducted in the medium- to long-term perspectives are used in establishing an appropriate background for the Banks policies and business operations. The fields covered by these studies span from economics, financial engineering, law, accounting, and high technology related to the financial industry, to the history of finance and currency. The Bank regularly invites academics and practitioners in these fields to spend some time working as visiting scholars at the Bank, or to participate in workshops and conferences it organizes, to share and exchange views on issues in the fields. The results of these studies are published in Japanese and English in the Banks publications such as Kinyu Kenkyu (Monetary and Economic 136

C. Public Relations

Studies, available only in Japanese), Monetary and Economic Studies, Discussion Paper Series, Working Paper Series.9 The Bank also maintains a 170,000-volume library for use by researchers. In addition, as part of its studies on the history of currency, the Bank maintains a collection of 200,000 notes and coins both ancient and modern from around the world. This collection includes the worlds largest collection of Japanese and East Asian currencies. About 4,000 items are always on display in the Banks Currency Museum, located in the Bank of Japan Annex Building (see box 3). Images of many items, with notes on their historical significance, are available at the Virtual Museum on the Web site of the Institute for Monetary and Economic Studies. The Bank has an archive and makes historical materials on monetary and economic issues available to the public in the Annex Building (see box 4), and some appear in the Banks publication in Japanese, Nihon Kinyu Shi Shiryo (Collected Documents on Japanese Financial History).

!Box 3: The Bank of Japans Currency Museum !Box 4: What is an Archive?

C. Public Relations Article 3 of the Bank of Japan Law requires the Bank of Japan to clarify to the public the content of its decisions as well as its decision-making process regarding currency and monetary control. Specifically, the law stipulates the following: publication by the Bank of the outline of the discussions (minutes) and transcripts of the MPMs 10 (Article 20; see also box 6 for chapter I);
9

These publications can be viewed at the Web site of the Banks Institute for Monetary and Economic Studies (http://www.imes.boj.or.jp/english/index.html), as well as on the Banks Web site. Full texts of recent publications can be downloaded from the site.

10 Announcements concerning MPM decisions are released, in principle, immediately after each MPM. At the first MPM of each month, the Policy Board determines The Banks View of recent economic and financial developments, which provides the basis for monetary policy decisions. The full text of the report in Japanese and the English translation of The Banks View are released on the next business day after approval, in the Monthly Report of Recent Economic and Financial Developments. The Outlook and Risk Assessment of the Economy and Prices is issued twice a year in April and October as part of the Monthly Report. The Outlook and Risk Assessment covers a longer period and provides the Policy Board members forecasts of real GDP, the domestic WPI, and the CPI (excluding perishables) as a reference. The minutes (summary of discussions) of the MPM are approved at the first or the second MPM held around one month after

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submission of the Semiannual Report on Currency and Monetary Control11 to the Diet (Article 54); and publication of an outline of its business operations in the relevant business year (Article 55). To enhance the transparency of its policies and business operations, as intended by the Bank of Japan Law, the Bank also discloses a great deal of information beyond that required by law. For example, the Bank, through its Web site and by other means, announces the decisions reached by the Policy Board, and also provides data on daily market operations, changes in current account balances at the Bank (both results and projections), the Banks major financial items as well as payment and settlement statistics, and also information about the standards for selecting counterparties for its money market operations, its function as the lender of last resort, and policies for on-site examinations. The Bank also conducts other public relations activities, aiming to explain its policies, business operations, and the thinking behind them, and to hear a wide variety of views on them. Such activities range from speeches and press conferences by the Governor, other Policy Board members, other Executives, and staff, to exchange of views with the public at the head office, branches, and domestic and overseas offices. The Bank also disseminates information on financial and economic matters. The Bank not only compiles statistics and statistical publications but makes public the results of its research activities in such publications as the Monthly Report of Recent Economic and Financial Developments, the Annual Review, the Bank of Japan Quarterly Bulletin, and the Japanese-language Nippon Ginko Chousa Geppou (Bank of Japan Monthly Bulletin). The Bank also provides current information on the level of market interest rates and foreign exchange rates through its Web site and a telephone information service. 12 Other publications include the Japanese-language Nichigin Quarterly, which is a magazine explaining financial and economic topics of current interest. The Bank also provides a telephone information service to

the meeting concerned, and released on the third business day after approval. The transcripts (detailed record of discussions) will be released ten years after the meeting concerned. Other matters decided at the Policy Board meetings are released on the Banks Web site as well as included in the Japanese-language Nippon Ginko Seisaku Iinkai Geppo (Monthly Report of the Policy Board of the Bank of Japan).
11

Under Article 54 of the Bank of Japan Law, the Bank gives an explanation of its monetary policy to the Diet twice a year and also provides, on request from the Diet, explanations on the Banks policies, business operations, and balance sheet conditions. Some branches of the Bank have their own Web sites as well, providing information on the economy of the region and the Banks activities there.

12

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respond to inquiries from the public.13 Further, the Bank offers a tour of the Banks head office by appointment.

!Box 5: What is the Central Council for Savings Information?

13

The Bank also lends videos about the Bank, available both in English and Japanese.

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Box 1

What Is Money Stock?

The group of data collectively known as money stock statistics is the measure of the amount of money that is available as a payment instrument. It is an aggregate amount of cash in circulation, deposits, and other financial assets that could be relatively easily sold or otherwise converted into cash or deposits, held by firms, individuals, or local governments (collectively defined as money holders). Cash and deposits held by financial institutions or by the central government are not considered part of the money stock. The money stock statistics compiled and made public by the Bank of Japan are divided into several categories, based on how easily the funds can be made available to individuals or firms as payment instruments. The most widely used indicator among them is M2+CDs, cash in circulation (banknotes and coins) and deposit money (demand deposits at financial institutions such as current and ordinary deposits), which are highly liquid payment instruments, plus time deposits and certificates of deposit (CDs, a form of time deposits). Since time deposits can be relatively easily converted to more liquid deposits or cash for payment, they are also called quasimoney. The Bank publishes monthly the amount outstanding and rate of growth of M2+CDs. Since 1978, it has also published quarterly its projection of the year-on-year growth rate for the next quarter of M2+CDs. A wider measure, known as broadly-defined liquidity, includes financial assets such as postal savings, money trusts, investment trusts, Japanese government securities, bank debentures, and commercial paper issued by financial institutions, as well as M2+CDs. As with M2+CDs, the Bank publishes monthly data on the amount outstanding and growth rate of broadlydefined liquidity, and since June 2000 has published the amount outstanding and year-on-year changes of the individual components that make up broadlydefined liquidity. It is considered that there is a relationship between money stock and economic trends. In times of economic expansion, when individuals and firms are vigorously engaged in economic activity, the amount of money paid and received increases, and so too does money stock. On the other hand, money stock can also increase rapidly, when the failure of financial institutions causes a loss of confidence in the financial system. At such times, firms may decide to increase their liquidity on hand, such as cash, in the event they cannot borrow from financial institutions. Therefore, although there is a loose relationship between money stock, the economy, and prices, there is not always a definite correlation. The Bank monitors the money stock data closely along with other primary economic indicators to assess the economic and financial situation.

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Boxes

Box 2

History and Revisions of the Wholesale Price Index

The wholesale price index (WPI) is a measure of trends in prices for goods traded between firms. It is an important price indicator along with the corporate service price index (CSPI), which measures prices of services in transactions between firms, and the consumer price index (CPI), which measures prices of goods and services at the retail level. The Bank of Japan began publishing the WPI in 1897, at a time when a sharp rise of prices related to the outbreak of the Sino-Japanese War were becoming a serious concern to the Japanese public. From the start, the WPI was intended to be a key indicator in both economic analysis and policy formulation. The history makes the WPI one of the longest-running continuous series of economic data available on the Japanese economy. The current basic structure of the WPI is given in table 7-1. To reflect structural changes in the economy and to accurately address the needs of the users of the statistics, the Bank periodically revises the composition of the basket of goods and adequately changes the compilation method of the index. In the process of these revisions, the Bank seeks public comment as necessary. For example, in 2000, the Bank changed the publication form of the ten-day index to make it easier to understand its compilation method. When the base year of the input-output price index of manufacturing industry by sector (IOPI) was revised from 1990 to 1995, the Bank changed the compilation method, to reduce the cost of compiling the IOPI and the burden on reporting firms. The new compilation method uses data for the WPI, and the additional collection of price data that had been undertaken exclusively for the IOPI was abolished. In 2002, when the base year of the WPI is scheduled to be updated to 2000, the following changes will be made: (1) To respond more broadly to the need to use the price indexes as the deflator to calculate the value of producers shipments in real terms, the Bank will use data on producer prices instead of wholesale prices as long as supply and demand conditions can be appropriately measured at both the wholesaler level and the producer level (currently, the Bank uses wholesale prices, in principle). (2) As transactions that do not pass through wholesalers increase, the proportion of prices accounted for by wholesalers has fallen to about 30 percent of the components of the index. To better reflect this fact, the Bank plans to change the name from the WPI to the corporate goods price index (CGPI).

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Box 3

The Bank of Japans Currency Museum

To commemorate its centennial in 1982, the Bank of Japan decided to establish a Currency Museum inside the Institute for Monetary and Economic Studies, and began to make preparations. The Museum opened in 1985. The heart of the Museums collection is the one donated by renowned numismatist Keibun Tanaka in 1944 to protect his collection from the worsening wartime situation. His collectionthe Sempeikan Collection includes not only a wide range of Japanese currencies from ancient times to the present, but also currencies of East Asian countries including China, and a large number of historical documents related to currency. The Banks Currency Museum now stores over 200,000 items of historic and cultural importance under optimum conditions. About 4,000 items are usually on display, with maps and other historical documents to illustrate how currency has changed over time, particularly in Japan. The Currency Museum, which is an illustrated publication produced by the museum, features photographs and explanatory texts (see appendix 3). The museum hosts special exhibitions and publishes related research papers in Kinyu Kenkyu in Japanese (some of them are available in English in Monetary and Economic Studies). It also mounts exhibitions featuring currency and traditional colored woodblock prints (nishikie) related to specific themes on occasion. Guided tours by staff members of the Bank are available (for further information, call the number below). Admission to the Currency Museum is free of charge. Groups of 20 or more are requested to make reservations in advance. The Institute for Monetary and Economic Studies Web site includes a Virtual Museum section providing some photographs and a brief description of the collection of the Currency Museum, a chronology of the history of the Japanese currency, a question-and-answer section, short articles on currency, and a bibliography of scholarly studies in the history of currency. These materials can be viewed online or obtained by downloading them. Location: Bank of Japan Annex Building 1-3-1 Nihonbashi-Hongokucho Chuo-ku, Tokyo +81-3-3277-3037 http://www.imes.boj.or.jp/english/index/html

Contact: Web site:

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Hours:

9:30 to 16:30 (last admission at 16:00) Closed on Mondays, national holidays (except Saturdays or Sundays), and from December 29 to January 4. The museum may also be closed temporarily for installation of new exhibitions.

Information on special exhibitions and temporary closings can be obtained from the museums Web site noted above.

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Box 4

What Is an Archive?

An archive is an institution that selects, preserves, and makes available to the public the documents and records of an organizations operations that it determines to be of historic, cultural, or academic importance. The documents to be entrusted to the archive for custody are selected after they are used and kept at workplaces for a certain period of time. The word archive is not yet familiar in Japan, but in Europe and the United States, archives have a long history, and the central banks of major countries operate archives as separate and specialized divisions or institutions to preserve their records. The archivists (specialists operating such facilities) are experts in history and the administration and preservation of documents, and they take appropriate measures for the storage of the records. Such historical documents are made available to scholars, researchers and the general public. The Bank of Japan has made public historically valuable documents and records on the financial developments of Japan since October 1982, commemorating its centennial year. In September 1999, the Bank started to operate an archive to systematize its procedures for administering and preserving historical documents. The archive has prepared about 4,000 volumes of records dating from the founding of the Bank in 1882 to 1950s mainly for the use of scholars and researchers. The Bank believes that the preservation and publication of these historic documents will serve a social need, and that the resulting academic studies will contribute to the Banks conduct of policies and business operations. To view documents and records kept in the Banks archive, please make reservations by telephone (+81-3-3277-2151) or by E-mail (archive@imes.boj. or.jp). Further information in Japanese is available on the Web site (http://www.imes.boj.or.jp/archives).

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Box 5

What Is the Central Council for Savings Information?

The Central Council for Savings Information is an organization comprising Council Memberswho are representatives from academic circles, womens groups, the press, and financial and industrial organizationsand Advisors and Counsellors who are representatives from relevant government agencies. The secretariat of the council is in the Bank of Japan. The council was established in 1952 under the name of the Central Council for Savings Promotion, but changed its name in 1988 to better reflect its function. The aim of the council is to support a better living of the Japanese people by (1) providing information on finance and the economy that can be useful to everyday living, particularly in making decisions about savings, (2) encouraging the drafting of life plans that balance savings and consumption, and (3) promoting educational programs that teach children from an early age to have a sense of the value of money and the things that are bought with it. The council works extensively to pursue its goals in cooperation with national government offices and local governments. It compiles and distributes publications and videos, conducts surveys (e.g., Public Opinion Survey on Household Savings and Consumption), and provides information via its Web site. It also provides life planning computer consultation service free of charge (provided only in Japanese), and holds seminars on finance and the economy. For details, see the councils Web site (http://www.saveinfo.or.jp/e/index.html).

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Chapter VIII International Operations and Services

The Bank of Japan engages in a wide range of transactions with foreign central banks and international organizations, and also performs many kinds of operations and services on behalf of the Japanese government including intervention in the foreign exchange market. This chapter explains the kinds of activities that make up these international operations and services. *** To support other central banks and international organizations in their management of yen-denominated assets, the Bank performs services for them, such as accepting deposits, acting as custodian for securities, and trading in securities. The Bank also provides technical assistance on central banking business. Some aspects of the Banks international operations and services are conducted on behalf of the Japanese government, as specified by law. One of these is foreign exchange intervention to achieve stability of the foreign exchange rate, which the Bank undertakes as the agent of the government (Minister of Finance) using government funds. In recent years, the volume of transactions in international financial markets has expanded. As financial institutions activities have become increasingly international, how best to maintain the stability of international financial markets is an issue of concern. By monitoring various types of risks in international financial markets, and through participation in international forum for formulating international standards and guidelines, the Bank contributes to contain and address global financial crises in cooperation with foreign governments and central banks, as well as international organizations. ***

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A. The Bank of Japans International Operations and Services The Bank of Japans international operations and services can be summarized in the following three points. First, the Bank provides services that are part of its cooperation with the central banks of other countries and with international organizations. The Bank accepts yen deposits from them, acts as custodian for their securities, trades government securities for them, and provides technical assistance to foreign central banks. Second, the Bank acts on the governments behalf in international financial business. The Bank buys and sells yen for foreign currencies 1 (foreign exchange intervention) to stabilize the exchange rate of Japans national currency, the yen. The Bank also maintains foreign exchange reserves, and receives reports of cross-border transactions required under the provisions of the Foreign Exchange and Foreign Trade Law. Third, the Bank monitors international financial markets, taking steps as needed to avert or address international financial crises. As financial markets grow increasingly global, and financial institutions operate more actively in the international arena, the Bank monitors market developments closely to ensure that the markets function smoothly. The Bank cooperates closely with foreign central banks and international organizations, and contributes to the formulation of standards and guidelines on international finance. When international financial crises arise, the Bank, at the request or with the approval of the Japanese government, extends credit to foreign central banks and international organizations. Each of these types of activities is explained closely in the sections below.

1 Buying and selling of foreign currency includes the exchange of cash, deposits, checks, bills, and bonds denominated in one currency, such as the U.S. dollar, for those denominated in another currency, such as the yen, or the exchange of these instruments in two foreign currencies. The following are examples of such transactions: (1) financial institutions buy, in exchange for yen funds, foreign currency-denominated bills of exchange drawn by Japanese exporters to be paid by their counterparties in other countries, (2) financial institutions mutually exchange holdings of yen funds for U.S. dollar funds, and (3) individuals exchange yen cash for travelers checks in U.S. dollars.

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B. Services Provided as Part of the Bank of Japan s Cooperation with B. Services Provided as Part of the Bank of Japan s Cooperation with Foreign Foreign Central Banks and International Organizations

B. Services Provided as Part of the Bank of Japans Cooperation with Foreign Central Banks and International Organizations 1. Transactions with foreign central banks and international organizations Under Article 41 of the Bank of Japan Law, the Bank of Japan cooperates with overseas account holders, which are foreign central banks and international organizations, by accepting yen deposits and acting as custodian for yendenominated securities 2 in the management of their yen-denominated assets and settlement of yen funds. 3 As of March 31, 2000, 89 overseas account holders had funds accounts with the Bank, and 66 of these 89 also had securities accounts. Similarly, the Bank maintains funds and securities accounts in local currencies with such institutions as major central banks and the Bank for International Settlements (BIS) to manage its foreign currencydenominated assets. More specifically, the Bank settles funds and securities on behalf of overseas account holders, and accepts and manages the principal and interest of these securities (custody services) according to their instructions. Also, the Bank helps overseas account holders manage their yen cash positions, selling them financing bills (FBs) when they have surplus funds in their yen accounts with the Bank, and repurchasing such FBs to provide liquidity when overseas account holders are short of funds for settlement.4 When an overseas account holder has a sudden need to raise yen funds, the Bank meets this need by purchasing securities, either with or without repurchase agreements. The Bank also provides safekeeping for promissory notes issued by the Japanese government in lieu of subscription fees to international organizations. These

2 Under the Bank of Japan Law of 1942 (Article 27), the permission of the government (Minister of Finance) was needed for the provision of payment and custody services, but the new Bank of Japan Law of 1997 (Article 41) stipulates that the Bank may perform such services based on decisions by the Banks Policy Board (Article 15). 3

Securities eligible under the Banks guidelines for custody services provided to overseas account holders include government securities, government-guaranteed bonds, bank debentures, and certificates of deposit.

4 These transactions take place on the basis of prearranged agreements with overseas account holders, without individual instruction for each transaction. The guideline stipulates that the interest rate on the FBs sold to such overseas account holders is set 0.05 percentage point below the prevailing rate in the market.

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notes are maintained in the securities accounts at the Bank, and it receives and pays their principal (see chapter X).5 To ensure the transparency of these transactions, the Bank adopted guidelines6 for its custody services for overseas account holders in 1999. Under Article 40 of the Bank of Japan Law, the Bank conducts transactions related to foreign currencies, such as foreign exchange transactions, with private financial institutions as the agent of overseas account holders (so-called arranged transactions). 2. Technical assistance In addition to the operations and services discussed above, the Bank provides technical assistance on central banking business as part of its cooperation with foreign central banks and international organizations.7 In response to requests from international organizations and foreign central banks, especially those in Asia, the Bank either sends staff to relevant institutions in these countries or organizes seminars and workshops at the Bank for staff of such institutions, to share the Banks knowledge and skills concerning central banking business in areas such as banknote issuance, market operations, payment and settlement systems, and on-site examinations and off-site monitoring (see table 8-1). Table 8-1 The Banks Technical Assistance in Recent Years1
Number of cases

Year TA in which staff were TA in which staff were (fiscal year) sent within 1 year sent over 1 year 1996 1997 1998 1999 8 16 13 18 (10) (19) (15) (21) 1 1 0 0 (1) (1) (0) (0)

Seminars/workshops at the Bank for participants abroad 67 (570) 52 (449) 60 (435) 55 (441)

Note: 1. Figures in parentheses are the number of staff/participants.

Relevant Japanese laws designate the Bank as the custodian of funds and securities denominated in yen for the International Monetary Fund (IMF), International Bank for Reconstruction and Development, Asian Development Bank, and other international organizations. The guidelines are available (in Japanese only) at the Banks Web site (http://www.boj.or.jp/).

6 7

In 1998, the Banks Policy Board established new guidelines on the technical assistance the Bank provides. The guidelines state that technical assistance should contribute to (1) enhancing the stability and development of international finance, and (2) strengthening the Banks relationships with other central banks and international organizations.

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C. International Operations Conducted on Behalf of the Government

C. International Operations Conducted on Behalf of the Government 1. Foreign exchange market and purposes of foreign exchange intervention The foreign exchange market 8 refers generally to the marketplace where individuals, firms, and financial institutions buy and sell foreign currencies as needed to finance imports, exports, and overseas travel; to purchase and sell foreign currency-denominated securities; or to establish overseas subsidiaries or factories (see also footnote 1). Transactions in the foreign exchange market are broadly divided into two categories: (1) transactions in which a financial institution trades with nonfinancial customers, e.g., individuals or firms, known as financial institutions customer trades; and (2) transactions in which one financial institution trades with another directly or through foreign exchange brokers (see box 3 for chapter VI), known as interbank trades. Financial institutions engage in interbank trades mainly to manage their exposure to foreign exchange risk arising from currency positions as a result of customer trades, to manage their investment in foreign-currency assets, or to raise foreign-currency funds. Major industrial countries, including Japan, have over the years abolished regulations governing cross-border financial transactions in securities and deposits (capital transactions), which now take place on an enormous scale daily. Foreign exchange rates are conversion rates between two currencies, for example, the rate for exchanging yen into another currency, or for exchanging one foreign currency to another. The fluctuation in exchange rates reflects changes in the supply and demand for currencies by market participants such as financial institutions and firms. The supply and demand balance in the foreign exchange market is extremely sensitive to developments in the financial markets of the countries concerned, such as the movements of interest rates and stock prices, which may reflect the macroeconomic fundamentals of the countries, including inflation rate, economic growth, and balance of payments. From time to time, however, market participants expectations concerning the macroeconomic fundamentals and financial markets in their own or another country can acquire a bias in one direction or the other, leading to a concentration of certain financial transactions and resulting in a one-way capital flow. When this occurs, supply and demand in the foreign exchange market becomes unbalanced and the exchange rate can become volatile.
8 Although it is called the foreign exchange market, in most countries, including Japan, there is no physical trading floor (such as a stock exchange) where foreign-currency trading takes place. For the most part, financial institutions conduct trades with one another using telephones or specialized terminals provided by information vendors.

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Volatile movements in foreign exchange rates can have a disruptive effect on imports and exports as well as on cross-border capital transactions, and volatile prices for imports and exports can threaten the stability of domestic prices. This in turn may have a negative impact on the domestic economy, which can spread to the economies of trading partners abroad. Foreign exchange intervention is intended to prevent or contain excessive fluctuations in foreign exchange rates, and to stabilize them. 2. The Banks business operations related to foreign exchange intervention and foreign exchange reserves When the yen becomes unstable in the foreign exchange market, the Japanese government (Minister of Finance) may instruct the Bank of Japan, its agent, to conduct foreign exchange intervention by buying or selling yen for foreign currencies as needed.9 As the agent of the Japanese government (Minister of Finance), the Bank asks foreign central banks to intervene in the foreign exchange market on its behalf on some occasions.10 When the Bank intervenes, it uses government funds, specifically those in the Foreign Exchange Fund Special Account (FEFSA). Since the introduction of floating exchange rates, Japans interventions in the foreign exchange market have primarily taken the form of yen sales because Japan has often faced rapid yen appreciation. The governments foreign-currency assets held in the FEFSA, together with other foreign-currency assets held by the Bank,11 make up Japans foreign exchange reserves, the balance of which at the
9

The entities that conduct foreign exchange intervention vary from country to country. In the United States, the Treasury Department has the authority to intervene, while the Federal Reserve can also intervene in the market as part of its open market operations (similar to the Banks money market operations explained in chapter VI). In practice, the Federal Reserve and the Treasury Department consult each other before intervention and usually share the cost of the intervention. In the euro areathe European Union (EU) member states that have adopted the single European currencyan EU council of the ministers of finance and economy (ECOFIN) has entrusted the European Central Bank (ECB) with the authority to intervene in the foreign exchange market. ECB interventions must be consistent with the general orientation for exchange rate policy formulated by ECOFIN in consultation with the ECB, and the general orientation must not jeopardize the maintenance of price stability in the area. The Bank also acts upon such requests from other central banks.

10 11

The Bank manages its foreign-currency assets in accordance with guidelines decided by the Policy Board. The guidelines lay down that (1) a high level of safety and liquidity of invested assets are of primary importance, while profitability is of secondary concern, and (2) the Bank must conduct its transactions with due diligence to prevent any disruption in the financial markets. In practice, this means the Bank holds its foreign currency-denominated assets primarily in government and government-guaranteed bonds of major industrial countries, and in deposits at the central banks of major industrial countries and the BIS.

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end of each month is released by the Ministry of Finance.12 Foreign exchange reserves are also used as reserves to pay foreign currency-denominated debt to creditor countries at times of currency crises or other events when repayment of such debt becomes difficult. The Bank monitors developments in the foreign exchange market closely because it regards foreign exchange rates as an important economic indicator and one of the key elements in its judgment of overall economic and financial developments. 13 The Bank exchanges information concerning the foreign exchange market with the Ministry of Finance and with overseas monetary authorities. The Bank uses all available information when it conducts foreign exchange intervention as the agent of the government (Minister of Finance). The Bank is also involved in the accounting of the FEFSA. Foreign exchange intervention and the accounting of the FEFSA are functions of the government performed by the Bank as stipulated in the Foreign Exchange Fund Special Account Law and the Bank of Japan Law (Articles 36 and 40). 3. Procedures of foreign exchange intervention This section explains the operational flow of foreign exchange intervention (see chart 8-1). When the Japanese government (Minister of Finance) deems it necessary to intervene in the foreign exchange market because of rapid fluctuations in the yen, the government (Ministry of Finance) places a hotline call to the Banks dealing room. The Bank provides the Ministry with the latest market information relevant for making the decision on intervention. Based on this information, the government (Ministry of Finance) gives the Bank specific instructions for the intervention. The Bank conducts intervention operations according to the instructions. The Banks dealers conclude foreign exchange trade agreements with major participants in the interbank marketi.e., financial institutions and foreign exchange brokers by telephone and other means. If intervention is required during Japans night-time hours when Japans market is closed, the Bank usually entrusts the operation to a foreign central bank that is familiar with the market where foreign exchange trading is most active at that time of day.
12

Since August 2000, the Ministry of Finance has released quarterly data on the total and the daily amounts of foreign exchange intervention operations in the previous quarter, broken down by currency pairs. The Bank makes the results of this monitoring publicly available (see chapter VII).

13

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Even as intervention is going on, the Bank gathers real-time information on the markets responses and media coverage and provides this to the government (Ministry of Finance). The method of intervention may be adjusted based on such information. Once the Banks dealers reach agreement on the terms of a foreign exchange transaction with financial institutions or foreign exchange brokers, they draw up a contract record of the intervention, including the currencies, amounts, and rates involved, and circulate it to the Banks back office. Based on this record, the back office then confirms the terms of contract with the counterparties via telephone or SWIFT (see footnote 3 for chapter IV), and after matching and confirming the contract it then proceeds to the settlement of funds. For example, when the Bank buys U.S. dollars for yen in a spot transaction,14 on the second business day after the contract the Bank debits the yen amount from the governments account and credits the same amount to the current account of the receiving party at the Bank. U.S. dollars involved in the trade are also settled on the second business day after the contract. 4. Other business operations, including that conducted under the Foreign Exchange and Foreign Trade Law In addition to foreign exchange intervention and FEFSA accounting, the Bank performs two other types of international services for the government. The first type includes accepting reports required under the Foreign Exchange and Foreign Trade Law, and the second includes the compilation of statistics on Japans balance of payments and international investment position. Processing of documents related to cross-border transactionssuch as requests for Minister of Finance permission and notifications to the Ministeraccounted for a large part of the first type of services until recently. Formerly, documents had to be submitted through the Bank to the Ministry of Finance whenever firms and financial institutions conducted crossborder transactions such as outward direct investment (establishment/financing of overseas branches or subsidiaries) and cross-border capital transactions (buying/selling of securities, borrowing/lending of funds, and deposit transactions). However, the revised Foreign Exchange and Foreign Trade Law of 1998 abolished virtually all requirements for acquiring permission and prior notification for capital transactions. Currently, the Banks main responsibility

Foreign exchange transactions that are settled two business days after the contract are called spot transactions.

14

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C. International Operations Conducted on Behalf of the Government

is to receive reports on capital transactions from firms and financial institutions and regular reports on foreign exchange transactions from financial institutions. For the second type of services, the Bank collects data on cross-border current transactions (transactions in goods and services), capital transactions, and financial institutions foreign exchange transactions, and compiles flow statistics for a given period of time (balance of payments), and stock data on assets and liabilities (international investment position).15 These statistics are reported by the Ministry of Finance to the Cabinet annually, and are released to the public periodically (the Ministry releases balance of payments statistics jointly with the Bank).

15 The Japanese government (Ministry of Finance) and the Bank thoroughly revised the method of compiling Japans balance of payments statistics in 1996 in accordance with changes in international guidelines developed by the IMF (Balance of Payments Manual, Fifth Edition). The main points of the revision were changes in the treatment of cross-border transactions (eliminating some categories such as overall balance and balance of monetary movements, establishing new categories such as services and income, and examining derivatives transactions more thoroughly), and enhancing the statistical content (addition of regional balance figures and use of market exchange rates as conversion rates). In addition, the new Foreign Exchange and Foreign Trade Law, which came into effect in 1998, reduced much of the burden on financial institutions and firms associated with the various reporting requirements that form the basic data of the balance of payments statistics.

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Chart 8-1

Flow of Operations in Foreign Exchange Intervention: An Example


Government of Japan (Ministry of Finance) Intervention instructions Information on market conditions

Bank of Japan Direct dealing (DD) intervention Intervention through brokers Intervention entrusted to foreign central banks

Foreign Central Bank(s)

Intervention through brokers

Direct dealing (DD) intervention

Domestic Interbank Market Foreign exchange brokers

Overseas Interbank Market Foreign exchange brokers

Interbank market participants (Financial institutions)

Interbank market participants (Financial institutions)

Customer trades

Customer trades

Customers (importers/exporters and individuals)

Customers (importers/exporters and individuals)

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D. Responding to International Financial Crises

D. Responding to International Financial Crises 1. International financial markets and international financial crises In recent years, the volume of transactions in international financial markets has expanded significantly due to the increase in international economic and financial activity, especially the growth in cross-border financial transactions driven by deregulation and innovation in information technology (see table 82). While this gives market participants the opportunity to transfer and allocate funds and risks efficiently, it increases the possibility of sudden, unanticipated movements of large amounts of capital triggered by an incident. Emerging market economies have recently experienced a number of currency crises, some of which have spread around the world, affecting industrial countries as well. This phenomenon underscores the need for international coordination in addressing systemic risk and improving and maintaining the function of payment and settlement systems.

Table 8-2 Flow of Funds in the International Financial Market


US$ billions

End of year 1985 1990 1995 1996 1997 1998 1999

International claims of BIS reporting banks1 2,580 6,298 8,073 8,327 9,354 9,902 9,906

International bonds and notes n.a. n.a. 2,574 2,956 3,310 4,102 5,100

Note: 1. The amount outstanding of unconsolidated gross international on-balance-sheet assets (claims such as loans to overseas entities) held by banks of reporting countries (BIS reporting banks). Reporting countries are the eleven members of the G-10 countries (see box 1), plus Australia, Austria, Denmark, Finland, Ireland, Luxembourg, Norway, Portugal, Spain, and six offshore centers (the Bahamas, Bahrain, Hong Kong, Cayman Islands, Netherlands Antilles, and Singapore). Source: The Bank for International Settlements, International Banking and Financial Market Developments.

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Chapter VIII: International Operations and Services

2. Monitoring of international financial markets and response to international financial crises Governments, central banks, and international organizations throughout the world cooperate with private financial institutions to support the development of international financial markets and to devise a variety of measures both to prevent the occurrence of international financial crises and to contain the spread of such crises. The Bank of Japan participates in these processes in three significant ways. First, the Bank closely monitors international financial markets to identify the underlying risks, and to have a firm grasp of scenarios of where and when such risks might materialize. The Bank maintains a constant and detailed exchange of observations and opinions about the current state of international financial markets with foreign central banks, international organizations such as the BIS and the International Monetary Fund (IMF), and at the Meetings of Finance Ministers and Central Bank Governors of the G-7 and G-20 Countries, the Executives Meeting of East Asia-Pacific Central Banks (EMEAP), and other international forums (see box 1). Among these, the bimonthly Meeting of Central Bank Governors of the G-10 Countries at the BIS offers an important opportunity to exchange information on the current state of global financial markets including activities of financial institutions. With the cooperation of BIS member central banks, the Bank compiles and makes public a wide range of statistical indicators to gain deeper understanding of trends in international financial markets.

!Box 1: The Bank of Japans Participation in Major International Forums

Second, the Bank contributes to the construction of systems that can withstand international financial crises. The Bank participates in discussions on the formulation of new standards and guidelines for governing international financial markets, and contributes to making proposals based on its research, analysis, and findings from the exchange of views with financial institutions. The Bank takes part in certain committees under the Meeting of the Central Bank Governors of the G-10 countries. For example, the Committee on the Global Financial System aims to strengthen monitoring of international financial markets to maintain financial system stability by improving statistics on derivatives, improving disclosure by financial institutions, and exploring measures to maintain market mechanisms at times of financial crises. The 158

D. Responding to International Financial Crises

Basel Committee on Banking Supervision deals with capital adequacy ratio (Basel Capital Accord) for financial institutions. To prevent risks related to settlement from having a systemic effect, the Committee on Payment and Settlement Systems examines and develops the principles that payment and settlement systems should follow, and encourages operators of payment and settlement systems to operate them safely and efficiently. By actively participating in the work of these committees, the Bank contributes to the formulation of standards and guidelines that help maintain the stability and efficiency of international financial markets. Third is the Banks contribution to addressing international financial crises. When international financial crises are triggered, the governments of industrial countries and international organizations such as the IMF respond by providing emergency funds as well as medium- to long-term credits to the governments and financial institutions of the countries in crisis, and review existing credit arrangements. The Bank, at the request of the government or with its approval, and acting in accordance with the decisions of the Policy Board under Articles 40 and 42 of the Bank of Japan Law, also takes part in these measures by (1) buying and selling foreign currencies in concert with central banks of other countries,16 (2) acquiring loan claims on foreign central banks which are held by the BIS (bridging loans; see box 2), and (3) providing loans to foreign central banks and international organizations.

!Box 2: What Are Bridging Loans?

16 To counteract the currency crisis that broke out in Asia in 1997, the Banks Policy Board decided to provide financial assistance to the Bank of Korea in the amount of 165 billion yen through yen-won swap transactions. This type of financial assistance can be regarded as a bridging loan because the amount was to be paid back by a loan extended by the IMF.

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Box 1

The Bank of Japans Participation in Major International Forums

The following is a list of major international meetings often mentioned in media reports. 1. Meeting of Finance Ministers and Central Bank Governors of the Group of Seven (G-7) Countries Germany, the United Kingdom, France, the United States, and Japan formed the Group of Five in the 1970s, and were joined by Canada and Italy by 1986, becoming the Group of Seven (G-7). The finance ministers and central bank governors from these countries participate in this conference to discuss the current state of the economy and financial markets in each country, related policy developments, the state of international financial markets, and possible improvements to the international financial system. Three regular meetings are held annually, and ad hoc meetings when problems arise. 2. Meeting of Central Bank Governors of the Group of Ten (G-10) Countries The G-10 is now made up of the central bank governors from 11 countries, i.e., the G-7 countries plus Belgium, the Netherlands, Sweden, and Switzerland. Under the auspices of the Bank for International Settlements, the G-10 meets bimonthly in principle to discuss the state of the economy and financial markets in each country, relevant policy developments, and the state of international financial markets. At the meeting, the group chooses current issues in international finance to be discussed at its committees such as at the Committee on the Global Financial System, Committee on Payment and Settlement Systems, and Basel Committee on Banking Supervision. The group also deliberates on the result of discussions by the committees. The G-10 originally referred to the above ten countries excluding Switzerland that arranged to make loans to the International Monetary Fund (IMF) to finance drawings by an IMF member (General Agreements to Borrow). Switzerland joined the accord later, and since then the term refers to all eleven countries. 3. Meeting of Finance Ministers and Central Bank Governors of the Group of 20 (G-20) Countries The meeting of G-20 countries began in 1999. The members are the G-7 countries plus 12 other countries with large economies, i.e., Argentina,

160

Boxes

Australia, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, Korea, and Turkey, and international organizations such as the IMF, International Bank for Reconstruction and Development, the European Union, and the European Central Bank. With the participation of a large number of countries and organizations that have great influence over the global economy, this group discusses issues on the stability of the international financial system. 4. Executives Meeting of East Asia-Pacific Central Banks (EMEAP) EMEAP is made up of the central banks and monetary authorities of 11 economies, i.e., Australia, China, Hong Kong, Indonesia, Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Japan. EMEAP was established in 1991 as a forum for discussions of monetary policy and central bank operations. Discussions are held both at the Governors level and Deputies level. In addition, EMEAP has working groups dealing with issues such as financial markets, and payment and settlement systems. It also conducts seminars on various topics, such as the development of government securities markets. For details, visit EMEAPs Web site (http://www.emeap.org).

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Box 2

What Are Bridging Loans?

In general, the term bridging loans refers to interim, short-term financing to bridge the time lag until the borrower receives longer-term financing from another source. Such loans are also called bridging finance. The Bank for International Settlements (BIS) makes bridging loans to countries in financial crisis, to cover the needs for funds until funding arrives from the International Monetary Fund (IMF) or other organizations. The BIS makes loans because it sometimes takes time for funds to arrive from the IMF or other organizations after decisions for loans are made. Bridging loans from the BIS are usually backed by guarantees from member central banks, including the Bank of Japan. In the unlikely event that the principal of such a loan cannot be repaid by the debtor country, the member central banks will pay the BIS on the debtors behalf and acquire loan claims on the debtor country held by the BIS.

162

Chapter IX The Bank of Japans Treasury Funds Services

The Bank of Japan provides various services for the Japanese government. This chapter explains the Banks services related to treasury fundsthe governments moneyand the governments cash management by following the outline of the flow of treasury funds. *** The Banks treasury funds services consist of (1) Collection and disbursement of funds; (2) Accounting for the government deposits maintained at the Bank; and (3) Sorting of receipts and disbursements of treasury funds for government agencies and specific government accounts, calculation of their total amounts, and matching and checking of the figures against those calculated by the government agencies themselves. For the convenience of the public and the government, treasury funds are paid and received at the head office and the 33 branches of the Bank as well as at the offices of private financial institutions designated as the Banks agents. In connection with the governments cash management, the Bank forecasts daily inflows and outflows of treasury funds, and handles the issuance and redemption of financing bills. ***

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Chapter IX: The Bank of Japans Treasury Funds Services

A. Treasury Funds Services 1. Government-related services of the Bank In addition to accepting deposits from financial institutions in current accounts (BOJ accounts) as explained in chapter III, the Bank of Japan accepts deposits (treasury funds) from the central government as government deposits. Funds received by the government such as national taxes and social security premiums are called government revenues, and payments such as public works expenditures and public pensions are called government expenditures. Japanese laws and ordinances stipulate that the Bank shall (1) provide services related to treasury funds, (2) provide services related to Japanese government securities (JGSs) and maintain custody of securities held by the government (see chapter X), and (3) conduct foreign exchange intervention on behalf of the government (see chapter VIII). This chapter will explain the Banks treasury funds services and the governments cash management. 2. Treasury funds services and the agent system The Bank carries out various treasury funds services under statutes including the Bank of Japan Law (Article 35), and the Public Accounting Law (Article 34), which sets the framework for the governments accounting. These services consist of (1) collection of revenues and disbursement of expenditures, (2) accounting for increases and decreases in government deposits as collection of revenues and disbursement of expenditures are made, and (3) sorting of receipts and disbursements of treasury funds for government agencies and specific government accounts, calculating the total amounts, and checking them against those calculated by the government agencies themselves (see chart 9-1).1 An agent system has been established for the convenience of both the public and the government. Under this system, treasury funds are accepted and paid not only at the head office and branches of the Bank but also at designated offices of private financial institutions. With the approval of the government specifically, the Minister of Financethe Bank has made agent contracts with private financial institutions throughout Japan so that designated offices of those financial institutions can accept and disburse treasury funds as the
1 The central banks of the United States and major European countries also provide treasury funds services, but their business is usually limited to the accounting of government deposits. The Bank came to perform these three types of operations due to the situation when it was founded, as outlined in box 1.

164

A. Treasury Funds Services

Banks agents. Agents can be divided into treasury agents and revenue agents.2 As of the end of March 2000, there were 588 treasury agents and 23,500 revenue agents (see table 9-1).3 Treasury agents provide most kinds of treasury funds services handled at the Banks head office and branches, and also carry out services related to payments of principal and interest on JGSs (see chapter X). Revenue agents, on the other hand, deal only with the collection of government revenues such as national taxes and social security premiums. The collection and payment of major types of treasury funds are also handled at post offices throughout Japan. 3. The flow of treasury funds services This section describes the flow of treasury funds services, by following typical transactions. a. Flow of government revenues The following section gives an example of the flow of treasury funds when an individual pays national taxes through an agent of the Bank (see chart 9-2). The process starts when the individual receives a notice of tax payment due and related documents from a tax office. The taxpayer pays the tax in cash at an agent of the Bank, or by having his/her bank account debited. At present, approximately 70 percent of the total number of tax payments are made in cash, and the remaining 30 percent are made by debiting bank accounts.4 After the tax payment is received, the agent sends a notification of receipt to the tax office concerned. It also reports its acceptance of tax payment to the Bank and sends calculation sheets showing the total amount of taxes received on behalf of each tax office.

2 The Bank has treasury agent contracts with city banks, regional banks, regional banks II, and shinkin banks. It has revenue agent contracts with these types of banks and also with trust banks, long-term credit banks, foreign banks (branches in Japan), Shinkin Central Bank, Shokochukin Bank, Norinchukin Bank, and the National Federation of Credit Cooperatives.

The number of revenue agents includes revenue sub-agents, which are entrusted with the handling of government revenues by revenue agents. At present, offices of the Credit Federation of Agricultural Cooperatives and credit cooperatives serve as revenue sub-agents under Norinchukin Bank and the National Federation of Credit Cooperatives, respectively.
4 Payment to the government can be made in cash or by debiting a bank account, and under certain conditions, by negotiable instruments such as Japanese Government Bond (JGB) coupons, or checks that can be readily cashed.

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Chapter IX: The Bank of Japans Treasury Funds Services

Chart 9-1

The Flow of Treasury Funds Services1


Notice of payment Government

Individuals and firms

(1) Receipt/disbursement of treasury funds

Issuance/redemption of FBs; and receipt/payment of treasury funds at the Banks head office and branches Matching

Government deposits

(3)

(2)
Funds transfers

Current accounts of agent financial institutions


Sorting of receipts/disbursements by government agencies and accounts

Agents (Offices of financial institutions)

Report on receipt /disbursement

Bank of Japan

Note: 1. Blue arrows indicate the flow of funds, and Black arrows indicate the flow of papers and messages. Each shaded oval represents the following treasury funds services: (1) receipt and disbursement of treasury funds; (2) accounting of the government deposits; and (3) sorting of receipts/disbursements for government agencies and accounts, calculation of their total amounts, and matching of instructions of figures against those calculated by government agencies themselves.

166

A. Treasury Funds Services

Table 9-1 Number of Agents as of end-March 20001 Type of financial institution City banks Regional banks Regional banks II Shinkin banks Total, including others Treasury agents 92 443 48 5 588 (9) (59) (15) (5) (88) Revenue agents 2,651 7,139 4,467 8,094 23,500 (9) (64) (60) (334) (526)

Note: 1. Figures in parentheses are the number of financial institutions having agent contracts with the Bank.

Funds collected by agents of the Bank are then settled by debiting the BOJ account of the financial institution whose offices are designated as the Banks agents and crediting government deposits at the Bank. There is some time lag between the collection of treasury funds by agents and the settlement between the agent financial institution and the government, 5 to give agents time to process the transactions. The Bank collects and aggregates the calculation sheets sent from treasury and revenue agents to calculate the national tax income levied and collected by each tax office, and checks the calculation results against the figures calculated by tax offices themselves every month. b. Flow of government expenditures The flow of government expenditures can be shown by taking the example of pensions being paid into an individuals deposit account (see chart 9-3). At present, most government expenditures are paid by transferring funds to individuals bank accounts.6 To make payment of pensions, the Social Insurance Agency (SIA) asks the Bank to transfer funds to agent financial institutions to be credited to pensioners bank accounts. The SIA brings to the Bank magnetic tapes on which it has stored the pensioners names, the bank accounts to which the
5

The BOJ account of the agent financial institution is debited and government deposits are credited two business days after the acceptance of payment at the agent. For government revenues that are handled by a treasury agent after being accepted at revenue agents, government deposits are credited four business days after the receipt of payment at revenue agents. Government expenditures can also be paid by drawing government checks with the Bank as the payer, which payees can cash at the Banks offices or at treasury agents, but this method is rarely used.

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Chapter IX: The Bank of Japans Treasury Funds Services

transfers are to be made, and the transfer amounts, along with a government check for the total amount of payment. The Bank delivers the magnetic tapes to the designated financial institutions, requesting them to credit the pensioners accounts. The Banks operations of receiving funds from the government and then requesting financial institutions to transfer the funds to the bank accounts of specified payees are called treasury funds remittances. A notification of payment is sent separately from the SIA to each pensioner. Funds settlement stemming from the disbursement of pensions occurs in the following way: (1) the Bank debits the total amount of pension payment from the government deposits, (2) it credits the BOJ accounts of the designated financial institutions, and (3) the financial institutions credit the pensioners bank accounts with the amount of their pensions. 7 Approximately 42,500 offices of financial institutions (including treasury and revenue agents) were engaged in treasury funds remittances as of the end of March 2000.8 The Bank keeps records of such payments of pensions, and checks the figures against those calculated by the SIA every month. 4. The significance of the Banks provision of treasury funds services Article 35 of the Bank of Japan Law stipulates that the Bank shall handle treasury funds as the central bank of Japan. The Bank has performed treasury funds services since its establishment in 1882, starting with services related to government revenues (see box 1). Since 1921, when the vault system was replaced by the deposit system, the Bank has carried out the services as part of its central bank business.

!Box 1: A Brief History of the Bank of Japans Treasury Funds Services

In principle, the debiting of the government deposits, the crediting of the financial institutions BOJ accounts, and the crediting of the payees bank accounts are all executed on the same day. Such offices include treasury and revenue agents as well as offices of credit cooperatives, labor credit cooperatives, agricultural cooperatives, and fishery cooperatives.
8

168

A. Treasury Funds Services

Chart 9-2

Procedures for the Collection of Government Revenues: An Example of National Tax Payment by Cash1

Individuals and firms (Taxpayer)

(1) Notice of tax payment

Government (Tax office)

(3) Notification of tax receipt (2) Tax payment by cash

(8) Matching

Bank of Japan

Financial institutions

(6) Calculation of figures for each tax office (7) Matching

Revenue agents

(3) calculation sheet for each tax office

Government deposits
(5) Crediting/ debiting

Treasury agents
(4) Funds transfer

Current accounts of treasury agents

Note: 1. Blue arrows indicate the flow of funds, and Black arrows indicate the flow of papers and messages.

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Chapter IX: The Bank of Japans Treasury Funds Services

Chart 9-3

The Procedures for the Payment of Government Expenditures: An Example of Pension Payment through a Bank Account1

Individuals (pensioners)

(1) Notification of payment

Government (Social Insurance Agency)

(2) Government check

(2) Funds transfer request (magnetic tape)

(6) Matching

Financial institution

Bank of Japan
Government deposits (3) Crediting/ debiting (4) Funds transfer Current accounts of financial institutions (5) Calculation (4) Funds transfer request (magnetic tape)

Pensioners account

Note: 1. Blue arrows indicate the flow of funds, and Black arrows indicate the flow of papers and messages.

The Bank performs the treasury funds services soundly and accurately, observing the detailed statutory provisions, to maintain the public confidence in the handling of treasury funds and to ensure the accuracy of the nations accounting. Related statutes include the Public Accounting Law, which stipulates how treasury funds are to be handled, books kept, and deeds originated. The Bank also checks that the treasury funds services entrusted to private financial institutions based on agent contracts are performed accurately and in compliance with related statutory provisions. To this end, Bank staff visit agents regularly for inspections every two to five years, depending on the 170

A. Treasury Funds Services

range of services entrusted; it checks how each agent handles treasury funds, and the headquarters of the financial institutions oversee each agent.9 Based on the result of the inspection, the Bank gives operational guidance to the financial institution concerned if necessary. 5. Improvement in the efficiency of treasury funds services Treasury funds transactions have been increasing each year due to the diversification and expansion of the governments economic activity, so improving the efficiency of treasury funds services has become an important task (see table 9-2). In this context, the Bank has introduced the use of magnetic tapes to enable computer processing of funds transfer requests to financial institutions regarding payment of government expenditures such as public pensions. The Bank has also started using optical character readers (OCR) for sorting and calculating some revenue items such as national taxes. The majority of treasury funds services, however, are still performed on a paper basis, and most of the payments to the government are still made in cash. 10 This causes the burden and cost to the public, the government, the Bank, and the agents to grow as treasury funds transactions increase. Moreover, the time lag between the collection of revenues at agents and the crediting of collected funds to government deposits makes the governments cash management less efficient and also incurs settlement risk. If a financial institution with an agent contract should fail during this time lag, the receipt or payment of treasury funds would not be completed.11

The agent inspection is similar to an on-site examination in that Bank staff regularly visit financial institutions. The purpose and content of the two differ, however. The main purpose of an on-site examination is to maintain financial system stability (see chapter V), and the Banks focus is on the financial institutions risk management, its business performance, and its financial strength, and makes necessary requests for improvement in its management based on the results. The present Public Accounting Law provides that payments to the government should be made in principle in cash, and allows payments to be debited from payers accounts only when this is useful and reliable for the government in collecting payments. For example, the payment of selfassessed income taxes, corporate taxes, and consumption taxes can be paid by debits to accounts because in all of these cases the amounts are determined before payment, but not for the payment of withholding income taxes.

10

11

To reduce settlement risk, the Bank requires financial institutions with agent contracts to deposit collateral equal to twice the amount of the average daily revenues they accept.

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Chapter IX: The Bank of Japans Treasury Funds Services

Table 9-2 Receipts and Disbursements of Treasury Funds by Number and Value of Transactions
1,000 transactions, trillion yen

Fiscal year 1980 1985 1990 1995 1996 1997 1998 1999

Number of transactions 108,542 135,601 205,913 246,243 254,069 263,711 271,114 275,712

Value of transactions 484 560 985 1,454 1,571 1,571 1,650 1,584

The Bank has therefore been discussing on-line processing of treasury funds services, taking into consideration progress in other countries, and the plans and recommendations put forward by the government and private economic organizations (see box 2).

!Box 2: On-line Processing of Treasury Funds Services Overseas and the Bank of Japan Efforts

B. The Governments Cash Management 1. The government deposit balances fluctuations and the Banks services Treasury funds are received from and paid to the private sector through the government deposits at the Bank of Japan. 12 The receipt and payment of various kinds of government revenues and expenditures result in the settlement
12 In addition to the government deposits in its current account, the government maintains (1) a special deposit account for negotiable securities submitted in payment of treasury funds and coins collected or to be paid, and (2) designated deposit accounts, for which specific conditions are set by the Minister of Finance, such as their method of investment and interest. Regarding designated deposit accounts, previously, there was only a foreign currency designated deposit account for the handling of funds for principal and interest payment on foreign currency-denominated bonds that were issued in the past by the government, but in fiscal 1999, a domestic designated deposit account was established (see B.2).

172

B. The Governments Cash Management

of a large number of treasury funds transactions amounting to massive values every day. Since the due dates for payments are concentrated on specific days, the inflows and outflows of treasury funds follow a regular pattern. During the first ten days of each month, government receipts tend to exceed disbursements because agents transfer the national taxes and social security premiums they received around the end of the previous month to the government accounts. For the second ten-day period of each month, there are two alternating patterns depending on what month it is. In January, March, May, July, September, and November, receipts and disbursements nearly balance due to the collection of withholding income taxes and the payment of medical compensation and public employees salaries. In February, April, June, August, October, and December, disbursements tend to exceed receipts due to the payment of employees pensions and national pensions in addition to the above payments. In the last ten days of each month, disbursements tend to exceed receipts due to the payment of public works expenditures and fiscal investment and loan program. Looking at the pattern during the fiscal year, there are large net disbursements at the beginning of the fiscal year in April, and again at the end of the fiscal year in March (see table 9-3). In April, local allocation taxes are distributed, and employees pensions and national pensions are paid; in March, there are sizable distributions of local allocation taxes and payments of public works expenditures. In July and January, there are net receipts of treasury funds due to the collection of withholding income taxes for summer and winter bonuses, while there are no substantial disbursements. The flow of revenues to the government from the private sector is accompanied by a decrease in cash and/or deposit money of firms and individuals, which is followed by a decrease in the balance of financial institutions BOJ accounts. When funds flow from the government to the private sector, the reverse effects are seen: an increase in the BOJ accounts of financial institutions, followed by an increase in cash and/or deposit money of firms and individuals. Thus, the flow of treasury funds between the government and the private sector affects the volume of money in the economy through fluctuations in the balance of financial institutions BOJ accounts in other words, through changes in the funds surplus/deficit in the money market. The Bank therefore interviews government agencies involved in large receipts and disbursements and analyzes past data to follow and predict the daily flows of treasury funds accurately. The Bank finally absorbs these funds surpluses and replenishes deficits through its daily money market operations (see chapter VI).

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Chapter IX: The Bank of Japans Treasury Funds Services

Table 9-3 Factors behind Monthly Increases/Decreases in the Government Deposit Balance1
Month of fiscal year April Increasing factors (receipts) Self-assessed income taxes (final declaration) Welfare insurance premiums Welfare insurance premiums Labor insurance premiums Corporate taxes and consumption taxes (from firms whose accounting period ends in March) Welfare insurance premiums Withholding income taxes (on summer bonuses) Welfare insurance premiums Withholding income taxes (on summer bonuses) Welfare insurance premiums Collection of loans by the Trust Fund Bureau and their interest income Welfare insurance premiums and labor insurance premiums Consumption taxes (interim payment from firms whose accounting period ends in March) Welfare insurance premiums Welfare insurance premiums Corporate taxes and consumption taxes (interim payment from firms whose accounting period ends in March) Welfare insurance premiums and labor insurance premiums Withholding income taxes (on winter bonuses) Welfare insurance premiums Welfare insurance premiums Welfare insurance premiums Consumption taxes (interim payment from firms whose accounting period ends in March) Collection of loans by the Trust Fund Bureau and their interest income Decreasing factors (disbursements) Distribution of local allocation taxes Employees pensions and national pensions Adjustment funds for the previous fiscal year Loans to local governments by the Trust Fund Bureau and Postal Life Insurance Distribution of local allocation taxes Employees pensions and national pensions

May June

July August September

Employees pensions and national pensions Distribution of local allocation taxes

October November December

Employees pensions and national pensions Distribution of local allocation taxes Employees pensions and national pensions Year-end compensation for government officers Year-end payment of various expenditures

January February March

Employees pensions and national pensions Distribution of local allocation taxes Public works expenditures Fiscal year-end payment of various expenditures

Note: 1. Excluding issuance, redemption, and interest payment of JGSs.

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B. The Governments Cash Management

2. The Banks services related to the governments cash management The government needs to maintain its deposit balance at an appropriate level to avoid having an excessive balance, or an insufficient balance that could disrupt the smooth disbursement of funds. The Bank contributes to the governments efficient cash management by communicating its projections of the daily flow of treasury funds to the government. When extra short-term funds are needed for disbursement of treasury funds, the government issues financing bills (FBs).13 FBs are discount bills issued to cover day-to-day shortfalls in funding. They are issued on the first business day of each week to financial institutions 14 through competitive auction15 and redeemed in principle in 13 weeks.16 There are exceptional cases where the Bank underwrites FBsfor example, when bids from financial institutions fall short of the amount offered, or when the government is in unexpected need of funds. The Bank underwrites the minimum amount necessary of newly issued FBs, at the average successful bidding rate of the most recent auction. The FBs underwritten are redeemed as soon as possible with funds raised through public auctions of FBs. When the government has surplus funds, the Bank will respond to its request for early redemption of the Banks holdings of FBs, as long as this does not disrupt the smooth implementation of the Banks monetary control or other business operations. The Bank will also transfer excess funds from the governments current account to the designated domestic deposit account (see footnote 12),
13 There are three types of FBs: (1) Ministry of Finance bills, which are issued for the general budget account; (2) Food bills, issued for the Food Management Special Account; and (3) Foreign Exchange Fund bills, issued for the Foreign Exchange Fund Special Account. These were previously issued separately as three distinct types of 60-day discount bills, but since fiscal 1999, the distinction at issuance has been abolished. 14 Financial institutions that can bid for FBs include banks, securities companies, insurance companies, Norinchukin Bank, Shokochukin Bank, tanshi companies (money market broker-cumdealers), and shinkin banks. 15

Before public auctions were introduced for the issuance of FBs in April 1999, they were offered at a fixed discount rate, with the Bank purchasing those that were left unsold. Since then, shortterm JGSsthat is, FBs and treasury bills (TBs)have come to account for a large share of the money market (see box 2 for chapter VI).

16 Since April 2000, FBs with a maturity of about two months have been issued. These FBs are issued on days when there is a substantial excess disbursement of treasury fundsthat is, when there is a funds surplus in the money marketfor example, due to distribution of local allocation taxes and payment of pensions. They are redeemed on days when there is a sizable excess receipt of treasury fundsthat is, when there is a funds deficit in the money marketfor example, due to receipt of national taxes.

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and pay interest based on the average successful bidding rate of the most recent FB auction. To ensure the appropriateness of transactions with the government, in 1999 the Policy Board established principal terms and conditions for the Banks transactions with the government. These principles include the terms and conditions that (1) the Bank could purchase FBs at issuance in exceptional cases, and (2) the Bank could underwrite JGBs and TBs from the government, with an approval of the Policy Board in advance, to refund JGBs and TBs that the Bank purchased through money market operations and that have reached maturity (see box 2 for chapter X).

176

Boxes

Box 1

A Brief History of the Bank of Japans Treasury Funds Services

When the Bank of Japan was established in 1882, a department of the Ministry of Finance, which was in charge of the receipt and disbursement of treasury funds as the governments vault, entrusted the Bank with assisting in the handling of the governments cash. In 1890, when the department was closed due to the implementation of the Public Accounting Law, the vault was placed with the Bank. Accordingly, the Governor of the Bank was assigned the role of the governments vault accounting officer, and was entrusted with the entire service related to the receipt, disbursement, and holding of treasury funds. In 1921, a revision of the Public Accounting Law abolished the vault system, ending the Bank Governors role as the vault accounting officer. Instead, the Bank, as a legal person, started to manage the government deposits. Under this new deposit system, the receipt and disbursement of treasury funds started to be conducted by crediting and debiting the government deposits at the Bank, and the Banks services related to the receipt and disbursement of treasury funds continued.

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Chapter IX: The Bank of Japans Treasury Funds Services

Box 2

On-line Processing of Treasury Funds Services Overseas and the Bank of Japans Efforts

The on-line processing of treasury funds services has been actively promoted overseas. In the United States, for example, given the massive workload related to the processing of checks and tax documents for the collection of federal taxes, the government and relevant institutions introduced the Electronic Federal Tax Payment System (EFTPS) in 1996. With this system, payers of federal taxes need only send the necessary information to EFTPS using a phone or a personal computer. On the following day, (1) the taxpayers deposit account at a private financial institution is debited, and settlement is made between the financial institutions current account and the Treasury deposit both at the Federal Reserve Bank of New York, and (2) EFTPS sends tax payment details to the Internal Revenue Service and a tax receipt notice to the Treasury. As a result of this system, the percentage of taxpayers filing electronically increased to over 20 percent in fiscal 1998, which was approximately 70 percent by value, from 2 to 3 percent in fiscal 1996. In Germany, most tax payments are processed electronically. The taxpayers bank account is debited, and settlement is made between the banks current account and the tax offices current account at the Bundesbank. The tax payment details and the notice advice are exchanged between the Bundesbank and the tax office on magnetic tapes. Further, almost 100 percent of government expenditures are paid by funds transfers to bank accounts. In France as well, an increasing number of tax payments are being made using electronic messages and funds transfers, and nearly 100 percent of government expenditures are paid into bank accounts. In view of these examples overseas, the Bank of Japan has also started to plan on-line processing of its treasury funds services. The Bank aims at realizing straight-through processing of treasury funds transactions, using electronic messages in receiving or disbursing funds while ensuring authenticity of the parties concerned and the integrity of the data. Specifically, the Bank has started to examine technical issues and exchange views with government agencies and private financial institutions with regard to the following: (1) realizing on-line processing for paper-based reporting and accounting; (2) promoting the use of electronic funds transfers for payments to and from the government; and (3) establishing computer networks linking government agencies, the Bank, and its agents.

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Chapter X The Bank of Japans Japanese Government Securities Services


The Bank of Japan provides a wide variety of services related to Japanese government securities (JGSs), which comprise government bonds (JGBs), treasury bills (TBs), and financing bills (FBs), and services related to custody of securities for the government. This chapter explains these services. *** Pursuant to the Bank of Japan Law and the Law Concerning Government Bonds, the Bank provides services related to the issuance, registration and book-entry transfer of JGSs, as well as payments of principal and interest. For the convenience of JGS holders, payments of principal and interest can be received at private financial institutions throughout the country which are the Banks agents, as well as at the Banks head office and its 33 branches. The Bank is the registrar for JGSs in the JGB Registration System pursuant to the Law Concerning Government Bonds. The Bank is also the depository for JGSs and manages the JGB Book-entry System established under contracts with participants in the system. In addition, the Bank holds in custody securities owned by the Japanese government. ***

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Chapter X: The Bank of Japans Japanese Government Securities Services

A. Services Related to Japanese Government Securities (JGSs) 1. Overview of the Banks JGS services The Bank of Japan provides a variety of services related to Japanese government securities (JGSs), which comprise government bonds (JGBs), treasury bills (TBs), and financing bills (FBs), as stipulated in Article 36 of the Bank of Japan Law, Article 1 of the Law Concerning Government Bonds, and other laws and regulations. The Banks JGS services are broadly classified into the following three categories. The first is JGS issuance, for which the Bank announces public auctions, accepts bids, and collects payments (see A.2.). The second is registration of JGSs and book-entry transfer of JGSs, for which the Bank acts as the registrar or depository and provides JGS transfer services (see A.3.). And the third is payments of principal and interest on JGSs: the Bank pays interest on JGSs, redeems JGSs,1 and collects coupons2 and physical securities (see A.4.). To facilitate the provision of JGS services to JGS holders, there is an agent system similar to that for treasury funds services. Specifically, with the authorization of the Minister of Finance, the Bank concludes contracts with private financial institutions so that these institutions can also offer JGS services. There are three types of agents3: (1) treasury agents (see chapter IX), which in addition to providing JGS services, disburse and receive treasury funds; (2) JGS agents, which make JGS principal and interest payments; and (3) JGS paying agents, which make principal and interest payments for certain types of JGSs. In addition, post offices throughout the country handle certain services related to JGSs. The Bank ensures the smooth provision of services related to JGSs by managing these agents, and communicating and coordinating with the government. There are several types of JGSs, classified by the purpose, legal basis, maturity, and method of issuance (see box 1). This chapter deals mainly with

Redemption is the repayment of a debt security (or other type of securities) by paying the principal of the security.
2

Coupons are detachable certificates attached to the bottom of paper certificates of interest-bearing bonds, corresponding to a series of payment dates. The bearer of the bonds receives interest in exchange for the coupons.

3 As of March 31, 2000, there were 1,526 offices of city banks, regional banks, regional banks II, trust banks, long-term credit banks, shinkin banks, Shinkin Central Bank, Shoko Chukin Bank, and Norinchukin Bank designated as JGS agents; and 48 offices of trust banks, foreign banks, securities companies, and securities finance companies designated as JGS paying agents.

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A. Services Related to Japanese Government Securities (JGSs)

ordinary government securities, or revenue securities, 4 which constitute the great majority of JGSs, and explains (1) how they are issued, (2) how registrations and book-entry transfers are processed, and (3) how payments of principal and interest are made.

!Box 1: Types of Japanese Government Securities (JGSs)

2. Services related to the issuance of JGSs This section explains the Banks role in the issuance of JGSs by following the flow of procedures for the issuance of revenue securities (hereinafter, the term JGSs refers only to revenue securities in section A.2). JGSs are, for the most part, issued in the market and bought by investors, mainly financial institutions and individuals. Article 5 of the Public Finance Law prohibits the Bank of Japan from underwriting JGBs and TBs, in principle (see chapter I and box 2 of this chapter). However, pursuant to the proviso to Article 5 of the above law, the Bank can underwrite JGBs and TBs, up to an amount authorized by the Diet, to refund JGBs and TBs that the Bank had purchased through money market operations (see chapter VI) and that have reached maturity.

!Box 2: Prohibition against the Bank of Japan Underwriting JGBs and TBs and Extending Loans to the Government

In fiscal 1965, when Japan resumed issuing JGSs for the first time after World War II, the only method available was underwriting by a syndicate 5 (syndicate underwriting). The syndicate is made up of banks, securities companies, insurance companies, and other financial institutions. Issuance
4

Ordinary government securities or revenue securities are issued by the government to finance various expenditures.

5 Nearly all major financial institutions active in Japans financial markets participate in the syndicate for JGS underwriting. As of the end of March 2000, there were 1,634 institutions in the syndicate, including city banks, regional banks, regional banks II, trust banks, foreign banks (branches in Japan), long-term credit banks, shinkin banks, Shinkin Central Bank, Shoko Chukin Bank, Norinchukin Bank, securities companies, life insurance companies, and non-life insurance companies.

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through public auctions started in fiscal 1978, so that the terms of issuance would better reflect prevailing market conditions. At present, both methods are used to issue JGSs.6 The following sections explain in more detail how JGSs are issued through syndicate underwriting and public auctions. a. Syndicate underwriting In syndicate underwriting, the Japanese government issues JGSs under terms agreed in a contract (underwriting agreement) with the syndicate, and the syndicate members, in turn, offer the JGSs to investors. If the syndicate members fail to sell the full amount of the issue, they themselves purchase the remaining JGSs. Currently, syndicate underwriting is used to issue 10-year interest-bearing bonds, which account for nearly 70 percent of JGSs outstanding, and five-year discount bonds (see table 10-1). The procedures for the issuance of 10-year interest-bearing bonds through syndicate underwriting are as follows. The total amount of JGS issuance and the amount of bonds to be underwritten by the syndicate for the fiscal year is determined before the fiscal year (see box 3 for the procedures of these decisions), and during the fiscal year the government (Ministry of Finance) makes its proposal each month on the issuance amount and the coupon rate for that month to the syndicate. If the syndicate agrees to the terms, the issue price and the amount to be underwritten by each syndicate member are determined through partial competitive auction bidding, where 60 percent of each months issue is assigned to syndicate members through competitive auction bidding and noncompetitive tender, and the remaining 40 percent is allocated to each syndicate member in a fixed share. At the time of each auction, the government (Ministry of Finance) informs the Bank of the terms of issuance (e.g., issue number, issue amount, coupon rate, dates of issuance and maturity). The Bank then announces the auction, accepts bids on prices and amount from participating financial institutions (auction participants), and reports the results of the bids to the Ministry of Finance. The Ministry of Finance confirms the auction results,7 which are notified to auction participants by the Bank.8
6 7

In addition to these two methods, post offices started selling JGSs in April 1988.

The Ministry of Finance determines which auction participants underwrite how much of the JGSs issued.

Issue prices of five-year discount bonds are determined through negotiations between the government and the syndicate, based on the terms of issuance for 10-year interest-bearing bonds, and all the bonds are underwritten by syndicate members in a fixed share.

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A. Services Related to Japanese Government Securities (JGSs)

Table 10-1 Maturity of JGSs and How They are Issued


Type and maturity of JGSs (years) Interestbearing securities 10 Method of issuance Syndicate underwriting Method used for determining terms of issuance 60% of the issue is determined by competitive auction bidding and noncompetitive tender by the syndicate. The remaining 40% is allocated, in a fixed share to each member of the syndicate, at the average price of the auction. Result of auction Result of auction Frequency of issuance Monthly

Bonds

30 20 15 6 5 4 2 5

Public auction Public auction Public auction Public auction Public auction Public auction Public auction Syndicate underwriting

Discount securities

Bills

0.5, 1

Public auction

Twice a year Every three months Result of auction Every three months Result of auction Every other month Result of auction Monthly Result of auction Every other month Result of auction Monthly Determined by the January, May, Ministry of Finance and July, the syndicate based September, and mainly on terms of November issue for 10-year JGBs. Result of auction Twice a month

!Box 3: Deciding the Total Amount of JGSs Issuance and the Amount Underwritten by the Syndicate !Box 4: Flow of Issuance Procedures in Syndicate Underwriting

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Chapter X: The Bank of Japans Japanese Government Securities Services

b. Public auction When JGSs are issued through public auction, the terms and amount of the new issue are determined through competitive auction bidding.9 Currently, public auction is used for issuance of interest-bearing bonds with maturities of two, four, five, six, 15, 20, and 30 years;10 and TBs with maturities of six months and one year. TBs were introduced in fiscal 1985, and the amount of issuance has been increasing. The procedures of the public auction are similar to those used in the competitive auction bidding in syndicate underwriting. Successful bidders and issue terms are determined by multiple price auction, or the conventional auction method, where bids are accepted from the highest price until the issue is fully subscribed.11 c. Processing through the BOJ-NET JGB Services The Bank started processing services related to the issuance and underwriting of JGSs through the BOJ-NET JGB Services in 1990, to carry out these services safely and efficiently as JGS issuance expanded (see chapter IV for an overview of the BOJ-NET). Banks, securities companies, money market brokers, securities finance companies, insurance companies and other institutions participate in the system, which allows on-line processing 12 of auction announcements, acceptance of bids, notification of auction results, payment for newly issued JGSs,13 credits to the governments deposit account,
9 Auction participants must be members of the underwriting syndicate. In addition, shinkin banks, agricultural cooperatives, credit cooperatives, and labor credit associations that wish to participate must be authorized to conduct dealing business (buying/selling on their own account) in public bonds. For auction of TBs, auction participants are required to be participants in the JGB Bookentry System. 10 Noncompetitive tenders are also used for interest-bearing bonds with maturities of two, four, five, and six years, to facilitate bidding by smaller financial institutions that do not have access to bondmarket information or sufficient experience in analyzing such information.

For 30-year interest-bearing bonds, however, successful bidders are determined by the single price auction, or Dutch auction method. Bidders make competitive bids on yields, and all the successful bidders are offered bonds at a single price.
12 On-line processing started in 1990 for announcements of public auctions, acceptance of bids, and notification of auction results; in 1991 it started to be used for announcements of price-competitive auctions as part of syndicate underwriting, acceptance of bids and notification of auction results; and in 1992 it started to be used for payment for newly issued JGSs and requests for initial registration or initial deposit of issued JGSs. 13

11

Payment for newly issued JGSs is made by debiting financial institutions BOJ accounts.

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A. Services Related to Japanese Government Securities (JGSs)

and requests for initial registration or initial deposit of issued JGSs in the JGB Registration System or the JGB Book-entry System, all of which used to be conducted on a paper basis. 3. Services related to registration and book-entry transfer of JGSs Currently, JGSs can be held in three forms: (a) physical securities, where JGSs are held as paper certificates, (b) registered JGSs, where securities are held in the JGB Registration System, and (c) book-entry JGSs, where securities are held in the JGB Book-entry System. Physical securities are bearer bonds,14 and hence carry the risk that the holder will be unable to execute the right to receive principal or interest if the securities are lost or damaged. Moreover, the operational burden of handling them could be substantial for financial institutions that conduct a large volume of transactions, mainly because there is a wide variety of issues and denominations (from 50,000 yen to 1 billion yen). For these reasons, physical securities account for only a small percentage of all JGS transactions; 15 most JGSs are held either as registered JGSs for which transactions are settled by changing the holders name in the registration book, or as book-entry JGSs for which transactions are settled by transferring securities on the participants book or customers books.16 The sections below explain the JGB Registration System and the JGB Book-entry System, and the roles the Bank of Japan plays in these systems, and look briefly at the Banks initiatives to reduce settlement risk in the delivery of JGSs. a. The JGB Registration System and the role of the Bank of Japan The JGB Registration System was established in 1906 mainly to protect the rights of JGS holders17 based on the Law Concerning Government Bonds, and
14 Article 2 of the Law Concerning Government Bonds stipulates that physical securities are in principle bearer bonds. 15 Physical securities are most often held by individual investors, but also by banks and securities companies as reserves for returning JGSs to customers who deposited JGSs with these financial institutions.

As of the end of March 2000, the total amount outstanding of revenue securities was 332 trillion yen: of which physical securities accounted for about 2 trillion yen, or approximately 0.6 percent of the total amount outstanding; registered JGSs accounted for about 67 trillion yen (approximately 20.2 percent); and book-entry JGSs accounted for about 263 trillion yen (approximately 79.2 percent). TBs and FBs are held only as book-entry JGSs. The term JGS holder refers to a person or an entity holding the rights against the Japanese government that are conferred by JGSs.
17

16

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Chapter X: The Bank of Japans Japanese Government Securities Services

other laws and regulations. Each JGS holder registers the JGSs directly with the registrar of the system (i.e., the Bank), 18 and ceases to hold them in a physical form (see chart 10-1). After registration on the registration book, JGS holders can assert their rights concerning these JGSs against the government or other third parties without holding the physical securities. In this system, the Bank, as the registrar, provides services related to registration, including those related to transfer registrations, in which the name of the JGS holder is changed on the registration book following requests from both the buyer and the seller of registered JGSs. The main purpose of the JGB Registration System is to protect the rights of JGS holders, but at the same time, the system has played a significant role in making the issuance and trading of JGSs more efficient. It serves to minimize the cost of safekeeping and delivery, and the risk of loss or theft associated with physical securities. b. The JGB Book-entry System and the role of the Bank The JGB Book-entry System was established by the Bank in 1980 with the authorization of the Minister of Finance under the Bank of Japan Law of 1942. The system is managed by the Bank based on contracts between the Bank and participants. Before the establishment of the JGB Book-entry System, the JGB Registration System contributed greatly to making JGS issuance and trading more efficient. However, the procedures were still strict: for example, requests on a paper basis from both the seller and the buyer were required for transfer registration since the original purpose of the JGB Registration System was to protect the rights of JGS holders. When issuance and trading volume of JGSs surged in the late 1970s, huge volumes of registration requests amassed on the designated settlement days of each month under the market practices prevailing at that time (see footnote 17 for chapter IV), making it difficult for market
18 A registration entry consists of three parts: the main registration, in which the basic information on the registered JGSs (e.g., the holders name and address as well as the issue number and amount of the JGSs) is recorded; supplementary registration, for establishing security interest on JGSs, including pledging JGSs as collateral; and trust registration, for placing JGSs in a trust. Three types of requests exist for the main registration: initial registration, in which the successful bidder or underwriter of newly issued JGSs makes registration; registration of physical securities, in which the holder of physical securities requests to convert them to registered JGSs; and transfer registration, in which the name of the JGS holder is changed on the registration book following requests from both the buyer and the seller of registered JGSs. In addition, there is the deletion of registration, in which registered JGSs are converted to physical securities.

186

A. Services Related to Japanese Government Securities (JGSs)

participants to smoothly process the transactions. To streamline the delivery procedures of JGSs and to reduce the operational burden of participants, the Bank established the JGB Book-entry System. The system comprises participants (e.g., banks and securities companies), their customers (e.g., individuals and firms), and the depository (the Bank) (see chart 10-1). Participants manage JGSs deposited by their customers in separate accounts for each customer on their customers books. Participants then deposit their own JGSs as well as their customers JGSs with the Bank, the depository. 19 The Bank manages these JGSs in separate accounts for each participant, on its participants book and registers the deposited JGSs with the registrar (the Bank) in the JGB Registration System under the name of the depository, the Bank. This is called package registration. When book-entry JGSs are traded, the Bank transfers JGSs by debiting and crediting securities accounts on the participants book upon receiving instructions from the seller alone. The JGB Book-entry System reduces the operational burden on participants and makes issuance and trading of JGSs more efficient. For example, delivery of JGSs arising from sales or collateral transactions is initiated by instructions from the seller alone, while the JGB Registration System requires instructions from both the buyer and the seller. Since it is a multi-tiered system, JGS transactions that take place between customers that deposit JGSs with the same participant are completed by transfer on the participants customers book, and do not require any changes in the participants book kept by the Bank. The proportion of revenue securities held in book-entry form has grown steadily, from about 49 percent of total revenue securities outstanding at the end of March 1992 to about 79 percent at the end of March 2000. The growth is certainly due to the efficiency of JGS transfer in the JGB Book-entry System. Also, looking ahead to the tax reform measures due to take effect in 2001,20 many financial institutions are shifting their JGS holdings from registered form to book-entry form.
19 Newly issued JGSs are also deposited, at the request of the successful bidder or underwriter. This is called initial deposit. When registered JGSs are converted to book-entry JGSs, the registration is first deleted to convert the registered JGSs to physical securities. These are deposited as book-entry JGSs with the Bank, the depository of the JGB Book-entry System, and the Bank then makes a package registration to register these JGSs in the JGB Registration System.

From January 2001 onward, exemption from withholding tax on interest on JGSs held by financial institutions will be limited to book-entry JGSs.

20

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Chapter X: The Bank of Japans Japanese Government Securities Services

Chart 10-1 Holding of JGSs: The Way They Are Held


(i) Physical securities

JGS holder

Issuance of JGSs ! Certificates

The government

(ii) Registered JGSs


JGS holders Register JGSs

Registration Book of Registrar


Bank of Japan

(iii) Book-entry JGSs


JGS holders

Deposit JGSs

Deposit JGSs Indirect participant

Deposit JGSs

Customers Book of direct participant Redeposit JGSs

Redeposit JGSs Direct participant Direct participant

Participants Book of Depository


Package Registration

Registration Book of Registrar

Bank of Japan

188

A. Services Related to Japanese Government Securities (JGSs)

c. Processing through the BOJ-NET JGB Services In 1990, the Bank started on-line processing for the settlement of both registered JGSs and book-entry JGSs through the BOJ-NET JGB Services, achieving further efficiency in processing compared to that on a paper basis (see chapter IV for an overview of the BOJ-NET). For registered JGSs, for example, the on-line processing allows the seller to complete transfer registration procedures by sending a JGB Message Authentication Code (JGBMAC)21 received from the buyer by facsimile or by other means, together with settlement information, to the Bank using a BOJ-NET terminal. Supplementary registrations such as pledging JGSs as collateral are also available online. For book-entry JGSs, participants can request transfers simply by sending transfer instructions to the Bank using BOJ-NET terminals. d. Minimizing risks in the settlement of JGSs Government securities are generally recognized as the most credible and liquid securities in any country, and as such they play a vital role in financial market trading. For Japan as well, a large volume of JGSs are traded every day by a wide range of investors both domestic and foreign. JGS issuance continued to increase steadily (see chart 10-2), and the trade volume expanded as banks were approved by financial authorities to enter into the securities dealing business (allowing banks to trade on their own account) and as financial markets became more global. To ensure the smooth settlement of JGSs and prevent systemic risk from materializing, the Bank has taken various measures, including the cooperation with settlement system operators and other parties (see chapter IV for details). In 1994, the Bank introduced a delivery-versus-payment (DVP) mechanism for JGSs (DVP for JGSs) by linking the BOJ-NET Funds Transfer System and the BOJ-NET JGB Services. With this mechanism, delivery of JGSs occurs only if the corresponding transfer of funds occurs, eliminating the risk that the seller delivers JGSs but does not receive payment and vice versa. The Bank has also encouraged the introduction of rolling settlement for JGSs. In rolling settlement, transactions are settled a given number of days after the trade contract is made. Prior to the introduction of rolling settlement, trade contracts made over a certain period were accumulated before being settled on the designated settlement days of each month (see footnote 17 for
21 The MAC is a numerical value calculated using a special encryption method from (i) an encryption key (JGB-MAC key) provided to each participant in the BOJ-NET JGB Services, and (ii) the content of the request (e.g., seller, buyer, and value). It is used instead of a signature and seal, to confirm the intent of the counterparties for registration.

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Chapter X: The Bank of Japans Japanese Government Securities Services

chapter IV). The transfer of funds and securities for most JGS transactions is currently conducted on a DVP basis on the third business day after the trade is concluded. To further reduce settlement risk in JGSs, the Bank has been preparing to introduce the new real-time gross settlement (RTGS) system to the BOJNET JGB Services, as well as the funds transfer system, by the beginning of 2001. 4. Services related to payment of principal and interest on JGSs The Bank provides services such as payment of principal and interest on JGSs and collection of physical securities and coupons. The Bank calculates the amount needed for principal and interest payments of JGSs based on the amount of JGSs outstanding, and asks the government (Ministry of Finance) to transfer the funds to the governments deposit account at the Bank from the Special Account for Government Debt Consolidation Fund.22 The Bank then debits the governments deposit account as payments of principal and interest23 are made through the Banks head office and branches, and through agent financial institutions throughout the country. When principal and interest payments of JGSs are made to JGS holders by the agents, the Bank credits the BOJ accounts of the agents. In practice, the method of principal and interest payments varies for different forms of JGSs. For physical securities (JGSs in paper certificates), payments are made in exchange for certificates or coupons at the head office or any branch of the Bank or at any treasury agent, JGS agent, JGS paying agent, or post office. For registered JGSs, payment is made to the registered owner of the JGSs, at the head office or a branch of the Bank, or a treasury agent, a JGS agent, or a JGS paying agent, that is specified by the JGS holder as the place of payment, in exchange for a certificate of receipt sent in advance by the Bank. In the case of book-entry JGSs, the Bank, as the depository, receives principal and interest on behalf of all the JGS holders from the government and credits the funds directly to participants BOJ accounts; and the participants then pay their customers.24
Established in 1906. Funds in this account are used to redeem JGSs regularly, to even out the governments fiscal burden and maintain the creditworthiness of JGSs. Funds for redemption of JGSs are in principle appropriated from the general account of the government budget every fiscal year.
23 24 22

Interest on revenue securities is paid twice a year.

Payments of principal and interest on inscribed bonds (physical securities on which a holders names are inscribed; see box 1) are made in exchange for certificates or coupons at the head office or a branch of the Bank, a treasury agent, a JGS agent, or a post office, that is specified as the place of payment by the holder.

190

A. Services Related to Japanese Government Securities (JGSs)

Chart 10-2 Amount of Revenue Security Issuance


80 70 60 50 40 30 20 10 0 1975 1985 1995 (fiscal year)

(trillion yen) refunding securities

new financial resource bonds

Note: Figures do not include TBs that mature within the fiscal year.

Appendix to Chart 10-2 Amount Outstanding of JGSs by Type


Trillion yen; figures in parentheses are the proportion of bonds and TBs as a percentage of revenue securities

Type of JGSs Revenue securities Interest-bearing bonds (20 years) Interest-bearing bonds (10 years) TBs Compensation bonds Subscription/contribution bonds1 Financing bills

Amount Outstanding 331.7 (100.0) 27.4 (8.3) 218.2 (65.8) 33.6 (10.1) 0.6 10.9 44.2

Note: 1. Includes promissory notes issued by the Japanese government in lieu of subscriptions to international organizations, or bonds issued by the government instead of payments to Deposit Insurance Corporation of Japan, and bonds relating to the debt that the government assumed from Japanese National Railways Settlement Corporation.

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Chapter X: The Bank of Japans Japanese Government Securities Services

For physical securities, the Bank collects certificates and coupons for which principal and interest payments were made, examines and classifies them by type, and either holds them or disposes of them.

B. Services related to Custody of Securities Pursuant to Article 36 of the Bank of Japan Law, and Article 35 of the Public Accounting Law, the Bank of Japan provides custody, transfer, and bookkeeping services for the following securities: securities owned by the government, which are either securities the government has purchased as a means of investing the Ministry of Finance Trust Funds Bureaus funds surpluses, or that it has accepted in payment of inheritance tax, and securities held by the government, which are securities held by government agencies as collateral for post-dated payment of postal charges or election deposits. Securities eligible for deposit at the Bank by the government for these services include paper certificates of JGSs, municipal bonds, stocks, or corporate bonds. These services are available at the head office and branches of the Bank as well as at treasury agents.

192

Boxes

Box 1

Types of Japanese Government Securities (JGSs)

There are several types of Japanese government securities (JGSs), classified by the purpose, legal basis, maturity, and the method of issuance and the interest payment. The paragraphs below classify and explain JGSs by the purpose, the method of interest payments, and maturities. In terms of the purpose of funds raised through issuance, JGSs can be divided into revenue securities, deferred bonds, and cash management bills. Revenue securities, also referred to as ordinary government securities, are issued to finance government expenditures. Revenue securities can be further divided into two types: new financial resource securities, which are issued to finance expenditures for the year of issue, and refunding securities, which are issued to finance funds for redeeming securities. Deferred bonds are issued, instead of treasury funds payments, to defer payments until the maturity of deferred bonds. Deferred bonds include government compensation bonds and subscription/contribution bonds. Specifically, these are inscribed bonds (government bonds issued with the bondholders name inscribed, used as payment to veterans of World War II, and to the families of those who died in the war), promissory notes issued by the Japanese government in lieu of subscription fees to international organizations (e.g., International Monetary Fund and World Bank), and government bonds issued instead of payments to the Deposit Insurance Corporation of Japan. Cash management bills, also referred to as financing bills (FBs), are issued when the government is temporarily short of funds on a daily basis in its accounts. Technically, there are several separate legal bases for the issuance of FBs, relating to the general budget account and seven other special budget accounts. In practice, however, three types of FBs are issued: Ministry of Finance bills (also known as kura ken) for the general budget account, Foreign Exchange Fund bills (also known as tame ken) for the Foreign Exchange Fund Special Account, and Food bills (also known as ryou ken) for the Food Management Special Account, and since fiscal 1999, the distinction at issuance has been abolished (see chapters VI and IX). In terms of interest payments, there are two types of JGSs: interestbearing bonds with detachable coupons that are exchanged for interest payments, and discount securities, for which no interest payments are made during the life of the securities, and which are issued at less than face value with redemption at par at maturity; the discount on the securities represents interest.

193

Chapter X: The Bank of Japans Japanese Government Securities Services

In terms of maturities, interest-bearing bonds are issued in the following maturities: two, four, five, six, 10, 15, 20, and 30 years. Discount bonds have a maturity of five years, and treasury bills (TBs), which are discount bills issued as revenue securities, mature in six months or one year. TBs have been issued since fiscal 1985, when a large volume of JGSs was to be redeemed, to provide bridging funds to even out the volume and issue period of refunding securities. Ten-year interest-bearing bonds account for nearly 70 percent of revenue securities outstanding (see appendix to chart 10-2).

194

Boxes

Box 2

Prohibition against the Bank of Japan Underwriting JGBs and TBs and Extending Loans to the Government

Article 5 of the Public Finance Law and Article 34 of the Bank of Japan Law both prohibit the Bank of Japan from underwriting JGBs and TBs or extending loans to the government, in principle. The Bank is not allowed to underwrite JGBs and TBs, based on the principle that JGBs and TBs should be issued in the market. The principle that the central bank should not provide credit to the government is drawn from valuable lessons learned from the history of Japan and other major countries. If the central bank were to provide credit to the government by, for example, underwriting JGBs and TBs, the government might lose the fiscal discipline. There would be no brakes to stop the government from making the central bank issue more currency, leading in all likelihood to spiraling inflation. This would cause a loss of confidence, both domestically and internationally, in the countrys currency and its economic policy. Central banks of Japan and other major countries are forbidden to provide credit to their governments in an effort to avert such a chain of events. In the United States, for example, the Federal Reserve Act allows the Federal Reserve Banks to buy U.S. Treasury securities from the market, but prohibits them from underwriting them. Moreover, in the 1951 accord between the Federal Reserve Board and the Treasury, it was agreed that the Federal Reserve Banks will not purchase U.S. Treasury securities through open market operations aimed at supporting Treasury security prices. In Europe, both the Maastricht Treaty, which came into effect in 1993, and the European Central Bank Law based on the Treaty, call upon participating countries to establish similar prohibitions against credit provision to the government as one of the requirements for taking part in the European Monetary Union and the European System of Central Banks. A proviso to Article 5 of the Public Finance Law allows the Bank of Japan to extend credit to the government, up to an amount authorized by the Diet, in exceptional cases. In practice, such cases are limited to the Banks underwriting of JGBs and TBs from the government to refund JGBs and TBs that the Bank purchased through market operations that have reached maturity.

195

Chapter X: The Bank of Japans Japanese Government Securities Services

Box 3

Deciding the Total Amount of JGS Issuance and the Amount Underwritten by the Syndicate

The total amount of JGS issuance and the amount to be underwritten by the syndicate are determined through the process outlined below for each fiscal year, which starts in April in Japan. To decide the total amount of JGS issuance, the government (Ministry of Finance) examines projected budget expenditures, projected tax revenues, and developments in financial markets, and draws up a provisional issuance plan as part of the draft budget for each fiscal year. As revisions are made to the draft budget, and before the draft budget is submitted to the Cabinet for approval (usually in the last 10 days of December), the Minister of Finance convenes a special advisory panel on JGS issuance consisting of experts on bond markets and fiscal and financial issues, including the Governor of the Bank of Japan, the chairmen of the Japanese Bankers Association (JBA), the Japan Securities Dealers Association (JSDA), the Fiscal System Council, and the Financial System Council, to discuss the issuance of JGSs and governmentguaranteed bonds. The total amount of JGS issuance for the fiscal year is determined when the budget is approved by the Diet. The amount of JGSs underwritten by the syndicate is, in effect, decided by the same advisory panel. The chairmen of the JBA and the JSDA, who are the managers of the JGS underwriting syndicate, take part in the panel and use the opportunity to exchange views on the volume of JGSs to be underwritten by the syndicate and the breakdown by method of issuance. The final decision is made by the JGS issuance managing group, consisting of representatives of the syndicate, the Ministry of Finance, and the Bank, after the budget is finalized. (In years when special deficit-financing bonds are to be issued, special legislation is established).

196

Boxes

Box 4

Flow of Issuance Procedures in Syndicate Underwriting

Partial competitive auction bidding has been used in syndicate underwriting since fiscal 1989 for issuance of 10-year interest-bearing bonds, the most representative form of revenue securities. The flow of partial competitive auction bidding is as follows. In the partial competitive auction bidding, 40 percent of each months issue is allocated to syndicate members in fixed shares and at the weighted average price of the competitive auction bidding (see below). The remaining 60 percent of the issue is allocated to the syndicate members by auction. Small members with a fixed share of 0.3 percent or less can choose either competitive auction bidding or the noncompetitive tender, while other members can only participate in competitive auction bidding. After an auction is announced by the Bank of Japan, syndicate members submit their bids on prices and amounts of JGSs in the competitive auction bidding. In a noncompetitive tender, members submit their tenders on amounts only. The Bank accepts the bids from members and reports the results to the government (Ministry of Finance). The government (Ministry of Finance) then confirms the auction results by the following methods. After deducting the total noncompetitive tenders from the total JGSs being auctioned, the auction results of the competitive auction bidding are determined by assigning bonds first to the highest price bidder and proceeding in order until the issue is filled. No single participants allotment, however, may exceed 30 percent of the amount allotted for competitive auction bidding. In the noncompetitive tender, JGSs are allocated at the weighted average price of the competitive auction bidding. The government (Ministry of Finance) reports the auction results to the Bank of Japan and the Bank informs the syndicate members of the results. The syndicate members then conclude an underwriting agreement with the Bank, the agent of the government (Ministry of Finance), and the syndicate members offer the JGSs to investors. Payments for JGSs are made according to instructions sent by the syndicate members using BOJ-NET terminals, or using checks drawn on their BOJ accounts. The Bank then debits members BOJ accounts and credits the governments deposit account based on these instructions and checks.

197

Appendix 1

Organization of the Bank of Japan

Appendixes
Appendix 1 Organization of the Bank of Japan The Bank of Japans current organizational structure is based on the Bank of Japan Law, by-laws, and other internal rules. The Banks executives include the appointed Members of the Policy Board, the Governor, Deputy Governors, Executive Auditors, Executive Directors, and Counsellors. The Policy Board, the Banks highest decision-making body, is made up of the appointed Members, the Governor, and the two Deputy Governors. To execute its business operations, the Bank has a head office (ten departments, five offices, and one institute), 33 domestic branches, 13 local offices, and six overseas representative offices. 1. Bank Executives a. The Policy Board (nine members) (1) The Policy Board is the Banks highest decision-making body. It determines matters relating to monetary policy (which in the Bank of Japan Law is termed currency and monetary control), and sets the basic principles for carrying out the Banks business operations. (2) The Policy Board oversees the work of Bank executives, except for the Executive Auditors and Counsellors. (3) The chairman of the Policy Board is elected by the Board members from among themselves. b. Appointed Members of the Policy Board (six) (1) Are appointed by the Cabinet, subject to the consent of the House of Representatives and the House of Councillors. (2) The term of office is five years. c. Governor (1) Represents the Bank and exercises general control over the Banks business operations in accordance with decisions made by the Policy Board. (2) Is appointed by the Cabinet, subject to the consent of the House of Representatives and the House of Councillors. (3) The term of office is five years.

199

Appendix

d. Deputy Governors (two) (1) Represent the Bank and assist the Governor, in accordance with decisions made by the Governor. (2) Act in place of the Governor whenever the Governor is prevented from attending to the Governors duties. (3) Perform the Governors duties when the Governors post is vacant. (4) Are appointed by the Cabinet, subject to the consent of the House of Representatives and the House of Councillors. (5) The term of office is five years. e. Executive Directors (six or fewer) (1) Represent the Bank and assist the Governor and the Deputy Governors, in accordance with decisions made by the Governor. (2) Act in place of the Governor whenever the Governor and Deputy Governors are prevented from attending to their duties. (3) Perform the Governors duties when the posts of the Governor and Deputy Governors are vacant. (4) Are appointed by the Minister of Finance on the recommendation of the Policy Board. (5) The term of office is four years. (6) There were six Executive Directors as of March 2000. f. Executive Auditors (three or fewer) (1) Inspect the business operations of the Bank. (2) May submit their views to the Minister of Finance, the Financial Reconstruction Commission (from January 2001, the Prime Minister), or the Policy Board if deemed necessary based on the results of the inspection. (3) Are appointed by the Cabinet. (4) The term of office is four years. (5) There were three Executive Auditors as of March 2000. g. Counsellors (1) To be consulted by the Policy Board on any important matters concerning the Banks business operations; may express their views to the Policy Board if necessary. (2) Are appointed by the Minister of Finance on the recommendation of the Policy Board. (3) The term of office is two years. (4) There were 10 Counsellors as of March 2000.

200

Appendix 1

Organization of the Bank of Japan

2. Organization of the Banks Head Office


Department/office Secretariat of the Policy Board Business Operations Arranges proceedings for Policy Board meetings; liaises with the Diet and the media; reviews the content and wording of important documents from a legal perspective; provides administrative services for executives; supports the Executive Auditors in auditing. Audits the Banks operations. Plans and formulates monetary policy measures and related matters. Conducts daily market operations; intervenes in the foreign exchange markets; deals with issues related to improving the functioning of Japans financial markets including the foreign exchange market; monitors and analyzes developments in financial markets in Japan as well as overseas, including foreign exchange markets. Conducts research on the domestic economic and fiscal situation; compiles statistics. Plans and formulates measures that contribute to the maintenance of an orderly financial and payment system. Conducts on-site examinations and off-site monitoring of financial institutions that have current accounts with the Bank; determines the specifics of credit extension by the Bank as the lender of last resort. Liaises with overseas central banks and international organizations; conducts operations for international financial support; conducts research on global economic and financial conditions; compiles statistics such as the balance of payments statistics. Conducts business operations relating to issuance, circulation, and maintenance of banknotes; conducts payment/receipt of banknotes and coins and examines them. Conducts banking operations including: (1) discounting of bills; (2) extension of loans; (3) purchasing/selling of bills and Japanese government securities (JGSs); (4) borrowing/lending of securities with cash collateral; (5) services through deposit accounts; (6) treasury funds and JGS services. Manages the design and development of the Banks computer systems as required to automate the Banks business operations; operates the Banks computer systems including the BOJ-NET (Bank of Japan Financial Network System). Related chapters Chapters I and VII

Internal Auditors Office Policy Planning Office Financial Markets Department

Chapter VI Chapters VI and VIII

Research and Statistics Department Financial and Payment System Office Bank Examination and Surveillance Department International Department

Chapter VII Chapters IV and V Chapter V

Chapters VII and VIII

Currency Issue Department Operations Department

Chapters II and IV Chapters III, IV, VI, IX, and X

Information System Services Department

Chapters IIIV

201

Appendix

Public Relations Department Budget and Management Office Human Resources Management Department Administration Department

Institute for Monetary and Economic Studies

Responsible for public relations; administers the Banks library; disseminates information on financial services. Plans and formulates measures relating to the organization and resources of the Bank; responsible for the Banks budgeting and accounting. Handles personnel policy issues relating to recruitment, assessment of job performance, career planning and training, wages and salaries, the Banks ethical discipline code, and other aspects of personnel administration. Conducts administrative operations relating to purchases/sales/management of real estate and movable property, staff welfare, security, transportation, and subscription certificates of the Banks capital. Studies theoretical, institutional, technical, and historical aspects of monetary and economic issues; collects, preserves, and exhibits historical materials and documents related to monetary and economic issues; exchanges views with academics.

Chapter VII Appendix 2

Chapter VII

3. Other Offices
Other offices Branches (33)1 Business Operations The branches mainly conduct (1) business operations relating to currency issues such as issuance, circulation, and maintenance of banknotes, and payment/receipt/ examination of banknotes and coins, (2) banking operations such as discounting of bills, extension of loans, purchases and sales of bills, services through deposit accounts, and services relating to treasury funds and JGSs, and (3) research on the economic and financial situation in each area. The Fuchu computer center operates the Banks computer systems, and other local offices handle some of the business operations of the head office or branches. The overseas representative offices perform a liaison function, gather information, and conduct research. Related chapters Chapters IIIV, VII, IX, and X

Local offices in Japan (13)2 Overseas representative offices (6)3

Chapters II, IV, and VII Chapters VII and VIII

Notes: 1. The 33 branches are located in the following cities: Kushiro, Sapporo, Otaru, Hakodate, Aomori, Akita, Sendai, Fukushima, Maebashi, Yokohama, Niigata, Kanazawa, Kofu, Matsumoto, Shizuoka, Nagoya, Kyoto, Osaka, Kobe, Okayama, Hiroshima, Matsue, Shimonoseki, Takamatsu, Matsuyama, Kochi, Kitakyushu, Fukuoka, Oita, Nagasaki, Kumamoto, Kagoshima, and Naha. 2. The 13 local offices are located in the following cities: Asahikawa, Obihiro, Morioka, Yamagata, Mito, Toyama, Fukui, Nagano, Tottori, Tokushima, Saga, Miyazaki, and Fuchu (computer center). 3. Overseas representative offices are located in New York, Washington DC, London, Paris, Frankfurt, and Hong Kong.

202

Appendix 2

The Bank of Japans Accounts

Appendix 2 The Bank of Japans Accounts 1. Accounting Rules of the Bank of Japan The results of the Bank of Japans business operations explained in this book appear in the Banks financial statements (e.g., the balance sheet and the statement of income). Previously, the Bank kept its accounts taking into consideration generally accepted principles of corporate accounting, to maintain its financial soundness as a central bank. In 1998, however, to enhance the transparency of its business operations (see box 5 in chapter I), the Bank formalized and published its accounting policy and procedures as a new set of Accounting Rules. The Accounting Rules cover the following: (1) implementation of the budget, such as the criteria for diverting funds to other purposes and using contingency funds; (2) methods of valuation of securities; (3) criteria for maintaining reserve; and (4) the setting of a target for the Banks capital adequacy ratio. From the settlement of accounts for the fiscal year 1998 (April 1, 1998-March 31, 1999), the Bank produces and makes available to the public a schedule of its financial statements and a table of appropriation of net income to disclose its financial condition more clearly. 2. The Banks Balance Sheet Items closely related to the Banks money market operations and loans took up a large share of its total balance-sheet assets at the end of fiscal 1999 (March 31, 2000; see table 1; also see chapters V and VI). These included, for example, bills and commercial paper purchased, government securities,1 cash collateral for government securities borrowed, government securities in custody,2 and loans and bills discounted. Other major accounting items under assets are foreign currency assets (foreign currency securities and foreign currency deposits to foreign central banks and monetary authorities; see chapter VIII), and deposits with agents (deposits held at agents that provide services related to treasury funds and government securities on behalf of the Bank; see chapters IX and X). As for liabilities, major accounting items are banknotes (the amount outstanding of banknotes issued; see chapter II), deposits (excluding those of the government) (mainly the current account deposits of financial institutions held at the Bank; see chapter III) and deposits
1 2

Includes financing bills.

Japanese government bonds used in repo operations are accounted for as government securities in custody under assets and as government securities borrowed under liabilities.

203

Appendix

of the government (see chapter IX), and bills sold (bills sold in the Banks money market operations). 3. The Banks Statement of Income and Appropriation of Net Income According to the Banks statement of income (table 2), the bulk of operating income consists of interest and discounts on bills and Japanese government securities (JGSs) purchased in money market operations, and gains on sale and redemption of JGSs. Major accounting items under operating expenses are general and administrative expenses and costs (including cost of production of banknotes [see chapter II], administrative expenses for government securities and treasury business, and personnel expenses), losses on sale and redemption of government securities, and losses on sale, purchase, redemption, and arising from revaluation of foreign currency assets. Net income is calculated as follows: Net income = operating profits (operating income operating expenses) + special profits arising from transfers from reserve for possible losses on foreign exchange transactions and reserve for possible losses on securities transactions special losses incurred from transfers to reserve for possible losses on securities transaction and reserve for possible losses on foreign exchange transactions provision for taxes such as corporate income tax. From net income, funds are appropriated for the legal reserve and dividend payments to shareholders, and the remainder is paid to the government (Article 53 of the Bank of Japan Law).3

3 Article 53 of the Bank of Japan Law stipulates that (1) the Bank shall retain, as a reserve fund, 5 percent of net income for each fiscal period (if deemed particularly necessary, the Bank may, upon the authorization of the Ministry of Finance, retain more than 5 percent of net income), and (2) the rate of dividend payments over paid-up capital may not exceed 5 percent per annum.

204

Appendix 2

The Bank of Japans Accounts

Table 1

Bank of Japans Balance sheet as at March 31, 20001


Item ASSETS

Billions of yen

Gold Cash Bills and commercial paper purchased Government securities in custody Government securities Loans and bills discounted Foreign currency assets Deposits with agents Cash collateral for government securities borrowed Capital subscription to an international financial institution Provision of funds to the Deposit Insurance Corporations Jusen account Provision of funds to the New Financial Stabilization Fund Withdrawn cash to be returned to the government Accrued interest receivable Premises and movable property Total assets LIABILITIES Banknotes Deposits (excluding those of the government) Deposits of the government Bills sold Government securities borrowed Reserve for possible loan losses Reserve for retirement allowances Reserve for possible losses on securities transactions Reserve for possible losses on foreign exchange transactions Total liabilities CAPITAL ACCOUNTS Capital Legal reserve Special reserve Net income Total capital accounts Total liabilities and capital accounts

432.8 278.8 5,907.9 7,722.5 74,596.3 1,558.7 3,323.9 3,603.3 7,938.1 12.7 100.0 20.0 201.6 154.3 223.4 106,200.9 57,120.1 18,373.5 13,031.1 3,800.8 7,722.5 215.8 11.4 2,355.6 182.7 102,849.6 0.1 2,208.1 0.01 1,143.0 3,351.3 106,200.9

205

Appendix

Table 2

Statement of Income for Fiscal Year 1999 (April 1, 1999March 31, 2000)1

Billions of yen Item Operating income Interest on loans and discounts Discounts on bills purchased Interest and discounts on government securities Interest and discounts on foreign currency assets Gains on sale and redemption of government securities Gains on sale, purchase, and redemption, and arising from revaluation of foreign currency assets Operating expenses Discounts paid on bills sold Losses on sale and redemption of government securities Losses on sale, purchase, and redemption, and arising from revaluation of foreign currency assets General and administrative expenses and costs Operating profits Special profits Special losses Net income before taxes Provision for corporate income tax, inhabitants tax, and enterprise taxes Taxes for prior fiscal periods Net income 3,070.4 23.4 2.8 1,107.2 132.5 1,727.7 42.0 1,877.9 3.6 849.9 715.8 208.1 1,192.5 375.0 430.1 1,137.4 0.01 -5.6 1,143.0

Table 3

Appropriation of Net Income for Fiscal Year 19991

Billions of yen Appropriations: Transfer to legal reserve Dividends, 5 yen per share Payment to the government Total

57.1 0.005 1,085.8 1,143.0

Note: 1. Figures are calculated in yen and then rounded down to the nearest 0.1 billion yen. Only the major accounting items of the original balance sheet and the statement of income for fiscal year 1999 are listed in the above table; therefore figures under Total do not necessary equal the total of relevant items listed in the above table.

206

Appendix 3

Bank of Japan Releases of Statistics and Other Materials

Appendix 3 Bank of Japan Releases of Statistics and Other Materials 1. Major Statistics1 a. Financial Statistics
Title Sources of Changes in Current Account Balances at the Bank of Japan and Market Operations Frequency of compilation Monthly Frequency of release Projections: beginning of the month Actual results: beginning of the month with the results of the previous month Early in the month with the results of the previous month Contents Changes in current account balances at the Bank of Japan (due to banknotes, treasury funds, and other factors), results of market operations, and changes in reserve balances.

Money Stock (preliminary)

Monthly

Principal Figures of Financial Institutions (preliminary) Flow of Funds Accounts

Monthly

Quarterly

Payment and Settlement Statistics

Monthly

Monetary Base

Monthly

Amount outstanding of money (e.g., cash in circulation and deposit money) held by money holders. Amount outstanding of loans, Early in the month discounts, deposits (excluding with the results of the previous month unsettled bills and checks), and CDs. Preliminary figures: Flow of funds by sectoral classification of economic end of the month entities and financial with the results of three months before transactions. Actual results: late in the month with the results of six months before Figures for payment and Early in the month settlement services of the with the results of Bank of Japan, such as current two months before account services, and for private clearing systems, such as the value of bills and checks exchanged. Second business day Average amount outstanding of banknotes and coins in of the month with circulation and current the results of the account balances at the Bank previous month of Japan.

207

Appendix

Monetary Base and the Bank of Japans Transactions

Monthly

Sixth business day of the month with the results of the previous month Early in the month with the results of two months before

Monthly Average Contracted Interest Rates on Loans and Discounts

Deposits, Loans, and Discounts Outstanding (Amount Outstanding of Deposits by Depositor, Loans and Discounts Outstanding by Industry, and Others) Results of Consolidated International Banking Statistics in Japan Results of Locational International Banking Statistics in Japan Results of Regular Derivatives Market Statistics in Japan (Yoshikuni Statistics)

Quarterly

February, May, August, and November

Statistics explaining the relation between the monetary base and various transactions conducted by the Bank of Japan. The average rates of contracted interest rates on loans and discounts (longterm, short-term, and total) of domestically licensed banks by type of bank. Amount outstanding of deposits by (1) depositor (corporations, individuals, and financial institutions), (2) type of deposits, and (3) amount, and loans and discounts outstanding by industry.

Quarterly

Quarterly

Semiannually

January, April, July, Statistics pertaining to Japan and October included in Consolidated International Banking Statistics released by the Bank for International Settlements. January, April, July, Statistics pertaining to Japan and October included in Locational International Banking Statistics released by the Bank for International Settlements. February and Statistics pertaining to Japan August included in Regular Derivatives Market Statistics in Japan released by the Bank for International Settlements.

208

Appendix 3

Bank of Japan Releases of Statistics and Other Materials

b. Economic Statistics
Title All Enterprises Tankan and Principal Enterprises Tankan (Tankan Short-Term Economic Survey of Enterprises in Japan) Wholesale Price Indexes Frequency of compilation Quarterly Frequency of release Beginning of April, July, and October, and mid-December Contents The results of the questionnaire on judgment items such as the judgment on business conditions, supply and demand conditions for products, as well as numerical items such as the amount of sales, profits, and fixed investment (table 7-1 in chapter VII). Domestic wholesale price index, the export price index, the import price index, and the overall wholesale price index (table 7-1 in chapter VII).

Corporate Service Price Index

Monthly (monthly indexes) Every ten days (10-day indexes) Monthly

Input-Output Price Monthly Indexes of Manufacturing Industry by Sector Monthly Balance of Payments (provisional)

Early in the month with the results of the previous month End of the period with the results of the previous period End of the month with the results of the previous month Mid-month with the results of the previous month

Foreign Exchange Rates

Monthly

Price index of services traded between firms (table 7-1 in chapter VII). Input price index, output price index, and output/input price ratio index. Available only in Japanese. Mid-month with the Increase/decrease in the current account, capital and results of two financial account, and reserve months before assets. The Bank compiles balance of payments statistics on behalf of the government. Exchange rates of the yen Beginning of the against major foreign month with the currencies. results of the previous month

Note: 1. Available from the Bank of Japans Web site (http://www.boj.or.jp/en/index.htm), and distributed free of charge at the head office (Public Relations Departments Public Information Division).

209

Appendix

2. Major Statistical Publications1


Title Financial and Economic Statistics Monthly Tankan Report Short-Term Economic Survey of Enterprises in Japan Price Indexes Monthly Frequency of Contents release End of each month Statistics covering the overall financial, monetary, and economic activities of Japan. April, July, October, and December Mid-month with the results of the previous month Detailed results of the short-term economic surveys conducted by the Bank of Japan, namely the, All Enterprises Tankan and Principal Enterprises Tankan. Indexes released by the Bank of Japan, namely the wholesale price index (WPI), corporate service price index (CSPI), and input-output price indexes of manufacturing industry by sector (IOPI). Data from Financial and Economic Statistics Monthly, TankanShort-Term Economic Survey of Enterprises in Japan, price indicators, and ChartsMain Economic Indicators of Japan (Charts), in a longer timeseries. Compatible with Windows and Macintosh PCs. Bank of Japan Financial and Economic Data is equipped with a Web browser that allows an easy search of data. A compact publication containing key economic indicators.

1. Economic and Financial Data on CD-ROM 2. Bank of Japan Financial and Economic Data

Around April

Toukei Binran March, June, (Statistics Handbook) September, and December Balance of Payments Early in the month Systematic records of Japans cross-border economic transactions. Monthly that follows the release of Balance of Payments (provisional)

Note: 1. Available at bookstores and the Government Publication Service Center. Long-term time-series data of major statistics included in the above publications are also available from the Bank of Japans Web site (http://www.boj.or.jp/en/index.htm).

210

Appendix 3

Bank of Japan Releases of Statistics and Other Materials

3. Publications Related to Research and Studies


Title Frequency of release or year of publication Monthly Contents

Nippon Ginko Chousa Geppo1,2,3 (Bank of Japan Monthly Bulletin) Bank of Japan Quarterly Bulletin2

Quarterly

Kinyu Kenkyu About six times a (Monetary and year Economic Studies)1,3,4

Monetary and Economic Studies3,4

About two times a year

IMES Discussion Paper Series4 (J-Series [Japanese]) (E-Series [English])

Ad hoc basis

Working Paper Series Ad hoc basis (Japanese and English) Released by 1. Financial Markets Department2 2. Research and Statistics Department2 3. International Department2 4. Financial and Payment System Office2 5. Chief Representative Office in Europe2

Articles on the Banks business operations and the Japanese financial system, and research and analysis on finance and the economy of Japan. Includes the Governors speeches, Monthly Report of Recent Economic and Financial Developments, research papers on finance and the economy of Japan, and various statistics. Research papers produced by staff members of the Institute for Monetary and Economic Studies (IMES) or by researchers outside the IMES. Also includes minutes of conferences, workshops, and various symposiums. Research papers produced by staff members of the IMES or by researchers outside the IMES. Also includes minutes of conferences, workshops, and various symposiums. Papers included may not correspond to those that appear in the above Kinyu Kenkyu. Discussion papers produced by staff members of the IMES or by researchers outside the IMES. The series is intended to elicit comments from scholars, market participants, and others. All opinions in the papers are those of the authors and, therefore, do not represent the view of the Bank of Japan or the IMES. Working papers produced by staff members of the Financial Markets Department, Research and Statistics Department, International Department, Financial and Payment System Office, and Chief Representative Office in Europe. The series is intended to elicit comments from market participants, researchers, and scholars from both Japan and overseas. All opinions in the papers are those of the authors and, therefore, do not represent the view of the Bank or the above departments or offices.

211

Appendix

Nippon Kahei Nenpyou1,3 (Chronological Table of the Japanese Currency) Currency Museum (Catalog)3,4

Published in 1994

Published in 1987

Atarashii Nippon Published in 2000 GinkoSono Kinou to Gyomu (Functions and Operations of the Bank of Japan)1,3,4

Historical table on the issuance and circulation of the Japanese currency. The table covers the period from the issuance of the first Japanese currency, Wado Kaichin (or Wado Kaiho), in 708 to 1993. A publication containing a number of photographs of currencies selected from those displayed in the Currency Museum of the Bank of Japan. Explanations are given on the history of the Japanese currency. The Japanese originals of this book. A publication explaining the purposes and functions of the Bank and the Banks various business operations to serve those purposes and functions.

Notes: 1. Available only in Japanese. 2. Most of the articles included in the publications are available from the Bank of Japans Web site (http://www.boj.or.jp/en/index.htm for English, and http://www.boj.or.jp/ for Japanese). 3. Available at bookstores and the Government Publication Service Center. 4. Available from the Institute for Monetary and Economic Studies Web site (http://www. imes.boj.or.jp/english/index.htm for English, and http://www.imes.boj.or.jp/ for Japanese).

212

Appendix 4

Releases and Publications Related to Public Relations Activities

Appendix 4 Releases and Publications Related to Public Relations Activities 1. Releases and Publications on Monetary Policy and the Banks Business Operations1
Title Frequency of Contents publication After each meeting Announcement of decisions on matters related Announcement of to monetary policy, including guidelines for Monetary Policy money market operations and changes in the Meeting Decisions2 official discount rate decided at each Monetary Policy Meeting held twice a month in principle. Released in principle immediately after each meeting. Minutes of Monetary After each meeting Summary of discussions at each Monetary Policy Meeting held twice a month in Policy Meetings2 principle. The minutes of each meeting are approved at the first or the second Monetary Policy Meeting held around one month after the meeting concerned, and released after approval. Ten years after Transcripts of discussions at each Monetary Transcripts of each meeting Policy Meeting held twice a month in Monetary Policy 3 principle. The transcripts of each meeting will Meetings be released ten years after the meeting concerned. Monthly Analyses of the economic and financial Monthly Report of developments on which decisions on money Recent Economic and market operations are based. The report Financial consists of The Banks View and The Developments2 Background. The Japanese and English versions of The Banks View and the Japanese version of The Background are released on the next business day after the approval of The Banks View at the first Monetary Policy Meeting of the month. The English version of the The Background is released within a few business days from the release of The Banks View. In April and October, the Outlook and Risk Assessment of the Economy and Prices is also included as part of the Monthly Report. The Outlook and Risk Assessment covers a longer period of time and provides the Policy Board members forecast of real GDP, the domestic wholesale price index, and the consumer price index as a reference.

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Nippon Ginko Seisaku Iinkai Geppo (Monthly Report of the Policy Board of the Bank of Japan)2,4 Semiannual Report on Currency and Monetary Control2,5 Outline of Business Operations for Fiscal XXXX2,5 Statement by the Governor2 Summary of the Press Conferences by Bank Executives2 Speeches by Bank Executives2 Annual Review2

Monthly

Semiannually

Annually

Ad hoc basis After each press conference After each speech Annually

Monthly report of activities by the Policy Board, including decisions on monetary policy and on other matters by the Policy Board, minutes of Monetary Policy Meetings, and Monthly Report of Recent Economic and Financial Developments. Report to the Diet on the Banks monetary policy as specified in Article 54 of the Bank of Japan Law. Outline of the Banks business operations in each fiscal period as specified in Article 55 of the Bank of Japan Law. The Banks view on monetary policy and the financial system at important junctures. Summary of the press conferences by Bank executives. Speeches by Bank executives. Review of monetary and economic developments, an outline of the Banks organization, activities, financial statements, and other materials. Report on the Banks balance sheet (assets, liabilities, and capital accounts) and the statement of income during the period concerned. Report on the amount outstanding of major items of the Banks balance sheet (assets, liabilities, and capital accounts), at the end of the ten-day period concerned.

Financial Statements2 Semiannually

Bank of Japan Accounts2

Three times a month

Notes : 1. As of October 2000. Distributed free of charge at the Public Relations Department at the head office. 2. Releases and most of the articles included in these publications are available from the Bank of Japans Web site (http://www.boj.or.jp/en/index.htm for English, and http:// www.boj.or.jp/ for Japanese). 3. No transcripts have yet been published. 4. Available only in Japanese. 5. Available only in Japanese, but summary of the text is available in English.

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2. Other Publications1
Title Nichigin Quarterly2,3 Contents and frequency of publication A communications magazine issued quarterly. Contains interviews and articles on selected current economic and financial issues. A pamphlet explaining the role of the Bank by Q&A format. A pamphlet plainly describing the relationship between the Bank and daily lives of people. A pamphlet explaining the Japanese financial system. A pamphlet describing the importance of price stability. A pamphlet describing features of Bank of Japan notes, e.g., anti-counterfeiting measures. A pamphlet describing features of 2,000 yen notes, e.g., anti-counterfeiting measures.

Bank of Japan Guidebook if Watashitachi no Kurashi to Nippon Ginko no Yakuwari3 (The Role of the Bank of Japan in Our Daily Lives) Watashitachi no Kurashi to Shinyo Seido3 (The Financial System in Our Daily Lives) Watashitachi no Kurashi to Bukka no Antei3 (Price Stability and Our Daily Lives) Nippon Ginko Ken Tora no Maki3 (A Guide to Bank of Japan Notes) Nippon Ginko Ken Nisenen Emaki3 (A Guide to Bank of Japan 2,000 Yen Notes)

Notes: 1. As of October 2000. Distributed free of charge at the Public Relations Department at the head office. 2. Most of the articles included in the publication are available from the Bank of Japans Web site (http://www.boj.or.jp/). 3. Available only in Japanese.

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Appendix 5 The Revisions of the Bank of Japan Law The Bank of Japan Law that came into force in 1942 was first revised in 1949. The revision included the establishment of the Policy Board and the abolition of an article requiring the permission of the government to set or change the official discount rate. Further revisions were discussed in 1957-60 and around 1965, but they were not realized. The discussions of the comprehensive revision of the Law were initiated by the three-party coalition government in 1996. More discussions followed at the Central Bank Study Group (with Chairman Yasuhiko Torii, President of Keio University), an advisory panel to Prime Minister Ryutaro Hashimoto set up in July 1996, and at the Subcommittee on the Revision of the Bank of Japan Law (with Chairman Ryuichiro Tachi, Professor-Emeritus of the University of Tokyo) of the Financial System Research Council (an advisory committee to the Minister of Finance) set up in November 1996. Finally in June 1997, the new Bank of Japan Law was enacted by the Diet and came into effect in April 1998.
The Bank of Japan Law (Preliminary translation by the Bank of Japan) Enforced Amended : April 1, 1998 : June 22,1998; December 15,1998; April 1, 2000; July 1, 2000; January 6, 2001

Chapter I General Provisions (Objectives) Article 1 The objective of the Bank of Japan, as the central bank of Japan, is to issue banknotes and to carry out currency and monetary control. 2. In addition to what is prescribed by the preceding Paragraph, the Bank's objective is to ensure smooth settlement of funds among banks and other financial institutions, thereby contributing to the maintenance of an orderly financial system. (The principle of currency and monetary control) Article 2 Currency and monetary control shall be aimed at, through the pursuit of price stability, contributing to the sound development of the national economy. (Respecting the autonomy of the Bank of Japan and ensuring transparency) Article 3 The Bank of Japan's autonomy regarding currency and monetary control shall be respected.

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2. The Bank shall endeavor to clarify to the public the content of its decisions, as well as its decision making process, regarding currency and monetary control. (Relationship with the government) Article 4 In recognition of the fact that currency and monetary control is a component of overall economic policy, the Bank of Japan shall always maintain close contact with the government and exchange views sufficiently, so that its currency and monetary control and the basic stance of the government's economic policy shall be mutually harmonious. (Public nature of the Bank's business and autonomy) Article 5 In light of the public nature of its business and property, the Bank of Japan shall endeavor to conduct its business in a proper and efficient manner. 2. In implementing this Law, due consideration shall be given to the autonomy of the Bank's business operations. (Legal status) Article 6 The Bank of Japan shall be a legal person. (Head office and branches) Article 7 The Bank of Japan shall locate its head office in Tokyo. 2. The Bank may, in accordance with an ordinance from the Ministry of Finance and upon authorization from the Minister of Finance, establish, move, or abolish branches and other offices. 3. The Bank may, in accordance with an ordinance from the Ministry of Finance and upon authorization from the Minister of Finance, establish or abolish agencies that perform a part of the Bank's business. 4. If the authorizations in Paragraphs 2 and 3 above are sought but not granted, the Minister of Finance shall publicly announce this denial of authorization and the reason for denial without delay, together with the content of the requested application. (Capital) Article 8 The amount of the Bank of Japan's capital shall be one hundred million yen to be subscribed to by both the government and non-governmental persons. 2. Of the amount of capital referred to in the preceding Paragraph, that part which is subscribed to by the government shall be no less than fifty five million yen.

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(Subscription certificates) Article 9 The Bank of Japan shall issue subscription certificates for capital subscription under Paragraph 1 of the preceding Article. 2. Other matters relating to subscription certificates under the preceding Paragraph as well as matters relating to capital subscription in general, shall be prescribed by a Cabinet Order. (Transfer of ownership of capital) Article 10 Subscribers to the Bank's capital may, as prescribed by a Cabinet Order, transfer ownership of capital or put it in pledge. (By-laws) Article 11 The Bank of Japan shall stipulate the following matters in by-laws: (1) objectives; (2) official name of the Bank; (3) location of the head office and branches; (4) matters related to capital and capital subscription; (5) matters related to the Policy Board; (6) matters related to Bank Executives; (7) matters related to the Bank business and its execution; (8) matters related to banknote issuance; (9) matters related to accounting; (10) means of public announcement and publication. 2. Amendments to the by-laws shall be considered invalid unless authorized by the Minister of Finance and the Prime Minister. 3. Provisions of Article 7, Paragraph 4 shall apply mutatis mutandis to the authorization prescribed by the preceding Paragraph. (Registration) Article 12 The Bank of Japan shall register relevant matters as prescribed by a Cabinet Order. 2. Matters to be registered in accordance with the preceding Paragraph cannot be asserted against a third party unless registered. (Restriction on the use of the Bank's name) Article 13 None other than the Bank of Japan may use the name "Bank of Japan". Chapter II Policy Board (Establishment) Article 14 A Policy Board (hereinafter referred to as the "Board" in this and next Chapter) shall be established in the Bank of Japan.

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(Powers) Article 15 The following matters, relating to currency and monetary control, shall be decided by the Board: (1) determining or altering the basic discount rate, other discount rates, and the types and terms of bills to be discounted, in relation to the discounting of bills pursuant to Article 33, Paragraph 1, Section (1); (2) determining or altering the basic loan rate, other loan rates, and the types, terms, and value of collateral to be used for loans, in relation to the loans made pursuant to Article 33, Paragraph 1, Section (2); (3) determining, altering, or abolishing reserve requirement ratios, the base date, and other matters prescribed by Article 4, Paragraph 1 of the Law Concerning Reserve Deposit Requirement System (Law No. 135 of 1957); (4) determining or altering the guidelines for money market control (which is currency and monetary control conducted in financial markets, including open market operations) through various measures such as buying and selling of bills or bonds prescribed by Article 33, Paragraph 1, Section (3), as well as determining or altering the types, terms, and other conditions of bills or bonds to be used for such money market control; (5) determining or altering the guidelines for currency and monetary control in other forms; (6) determining or altering the Bank of Japan's view on currency and monetary control, including its basic view on economic and monetary conditions which provide the basis for matters listed in Sections (1) through (5) above. 2. In addition to those listed in the preceding Paragraph as being subject to the Board's vote, the following matters shall also be decided by the Board; (1) making loans prescribed by Article 37, Paragraph 1, and executing business prescribed by Article 38, Paragraph 2; (2) applying for authorization prescribed by Article 39, Paragraph 1, and determining important matters related to the business pursuant to such authorization; (3) buying and selling of foreign exchange to facilitate those types of international financial business which the Minister of Finance designates as constituting cooperation in the field of international finance pursuant to Article 40, Paragraph 3, initiating transactions with a foreign central bank or an international institution to carry out business prescribed by Article 41, and executing transactions prescribed by Article 42;

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(4) applying for authorization prescribed by the exception clause of Article 43, Paragraph 1, and determining important matters relating to the business pursuant to such authorization; (5) determining the content of a contract regarding on-site examination prescribed by Article 44, Paragraph 1, as well as determining important matters relating to the conduct of on-site examinations for each business year; (6) altering by-laws; (7) making or altering a written statement of manners of conducting business; (8) establishing, moving, or abolishing branches, other offices, or agencies; (9) determining important matters relating to the Bank's organization and the size of staff (except for that referred to in Section (8) above); (10) making or altering the standards of salaries prescribed by Article 31, Paragraph 1, as well as rules with respect to ethical discipline prescribed by Article 32; (11) acquiring or disposing of real estate and other important assets; (12) making or altering a current expenditure budget (referred to the current expenditure budget prescribed by Article 51, Paragraph 1), making an inventory, balance sheet, profit and loss statement, and other financial reports, and determining important accounting matters including disposal of profit; (13) making the report prescribed by Article 54, Paragraph 1, as well as the outline of business operations prescribed by Article 55; (14) making or altering the rules prescribed by Article 59; (15) determining matters which this Law prescribes the Board to determine, or doing what this Law or other laws and regulations prescribe the Board to do; (16) determining matters, other than those listed from Sections (1) through (15) above, which the Board considers particularly necessary to determine. 3. The Board shall oversee the execution of duties by executives (with the exception of Executive Auditors and Counsellors) . (Organization) Article 16 The Board shall be composed of nine members. 2. Members shall consist of six Deliberative Members, the Bank of Japan's Governor and two Deputy Governors. Irrespective of the provisions of Article 22, Paragraphs 1 and 2, the Governor and the Deputy Governors shall perform their duties as Board members independently of each other. 3. The Board shall have a chairman, to be elected by Board members from among themselves.

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4. The chairman shall exercise general control over Board business. 5. The Board shall designate, in advance, a member who shall perform the duties of the chairman when the chairman is prevented from attending to his or her duties. (The call of Board meetings) Article 17 Board meetings are called by the chairman of the Board (or by the designated alternate prescribed by the previous Article, Paragraph 5. This rule applies to the remainder of this Article, the next Article, and Article 20). 2. The chairman shall, as prescribed by a Cabinet Order, regularly call Board meetings, at which the matters listed in Article 15, Paragraph 1 (hereafter called "monetary control matters" in this Chapter) are to be discussed. 3. The preceding Paragraph may not be interpreted as preventing a Board meeting for monetary control matters from being called on an ad hoc basis, if the chairman believes that such a meeting is necessary, or if one-third or more of the total incumbent Board members believe that such a meeting is necessary and request the chairman to call such a meeting. (Procedures) Article 18 The Board may neither meet nor vote unless the chairman and twothirds or more of the total incumbent Board members are present. 2. Matters shall be decided by a majority of votes cast by members who are present. When the votes are equally split, the chairman shall make a final decision. 3. Except where otherwise specified in this Law, necessary matters concerning management of Board meetings, such as the procedures for Board discussion, shall be determined by the Board. (Attendance of government representatives) Article 19 The Minister of Finance and the minister who is in charge of economic and fiscal policy as prescribed by Article 19, Paragraph 2 of the Law Establishing the Cabinet Office (Law No.89 of 1999) (The latter minister is referred to as the "minister for economic and fiscal policy" in Article 19, Paragraph 2 of this Law. In the case that the office is vacant, it shall be assumed by the Prime Minister.) may, when necessary, attend and express views at Board meetings for monetary control matters, or may each designate a staff member of the Ministry of Finance or the Cabinet Office, respectively, to attend and express views at such meetings. 2. The Minister of Finance (or a designated delegate) and the minister for economic and fiscal policy (or a designated delegate), when attending the Board meetings for monetary control matters, may submit

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proposals regarding monetary control matters, or request that the Board postpone a vote on monetary control matters until the next Board meeting of this type. 3. If a request is made to postpone a Board vote under the provisions of the preceding Paragraph, the Board shall decide whether or not to accommodate the request, in accordance with the same voting procedures which apply to other matters. (Publication of transcripts and other documents) Article 20 After each Board meeting for monetary control matters, the chairman shall, without delay, prepare a document which contains an outline of the discussion at the meeting in accordance with the decisions made by the Board, and publish the document upon its approval at another Board meeting for monetary control matters. 2. The chairman shall produce the transcripts of each Board meeting for monetary control matters in accordance with the decisions taken by the Board, and publish the transcripts after appropriate amount of time, as determined by the Board, has passed since the meeting. Chapter III Executives and Staff (Executives) Article 21 The executives of the Bank of Japan shall consist of six Deliberative Members, a Governor, two Deputy Governors, three or less Executive Auditors, six or less Executive Directors, and a few Counsellors. (Duties and powers of executives) Article 22 The Governor shall represent the Bank of Japan and exercise general control over the Bank's business in accordance with decisions made by the Board. 2. The Deputy Governors shall, in accordance with decisions made by the Governor, represent the Bank, administer the business of the Bank assisting the Governor, act in place of the Governor whenever he or she is prevented from attending to his or her duties, and perform the Governor's duties when the post is vacant. 3. The Executive Auditors shall inspect the business of the Bank. 4. If deemed necessary based on the results of the inspection, the Executive Auditors may submit their views to the Minister of Finance, the Prime Minister or the Board. 5. The Executive Directors shall, in accordance with the decisions made by the Governor, administer the business of the Bank assisting the Governor and the Deputy Governors, act in place of the Governor when the Governor and Deputy Governors are prevented from attending to their duties, and perform the Governor's duties when the posts of the Governor and Deputy Governors are vacant.

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6. The Counsellors shall be consulted with by the Board on any important matters concerning Bank business, and if deemed necessary, the Counsellors may express their views to the Board. (Appointment of executives) Article 23 The Governor and the Deputy Governors shall be appointed by the Cabinet, subject to the consent of the House of Representatives and the House of Councillors. 2. The Deliberative Members shall be appointed by the Cabinet, subject to the consent of the House of Representatives and the House of Councillors from among those with academic expertise or experience including experts on the economy or finance. 3. The Executive Auditors shall be appointed by the Cabinet. 4. The Executive Directors and the Counsellors shall be appointed by the Minister of Finance based on the Board's recommendation. 5. If the term of office of a Governor, Deputy Governor, or Deliberative Member expires or if any of these positions becomes vacant, and if the Diet is out of session or the House of Representatives is dissolved so that it is impossible to obtain the consent of both Houses, the Cabinet may appoint a Governor, Deputy Governor, or Deliberative Member irrespective of the provisions of Paragraphs 1 and 2 of this Article. 6. The appointment, as prescribed by the preceding Paragraph, shall be approved ex post by both Houses in the first Diet session after the said appointment. If the Cabinet fails to obtain such ex post approval, it shall immediately dismiss the Governor, Deputy Governor, or Deliberative Member. (Executives' term of office) Article 24 The term of office shall be five years for the Governor, the Deputy Governors, and the Deliberative Members, four years for the Executive Auditors and the Executive Directors, and two years for the Counsellors. However, if a position of Governor, Deputy Governor, or Deliberative Member becomes vacant during his or her term of office, the term of office for the replacing Governor, Deputy Governor, or Deliberative Member shall be limited to the remaining term of the predecessor. 2. The Governor, the Deputy Governors, the Deliberative Members, the Executive Auditors, the Executive Directors, and the Counsellors may be reappointed. (Guarantee of the executives' status) Article 25 Executives of the Bank of Japan (except for Executive Directors) shall not be dismissed against their will during their term of office except as prescribed by Article 23, Paragraph 6 and in the following situations: (1) an executive is adjudicated bankrupt;

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(2) an executive receives penalties under this Law; (3) an executive is sentenced to imprisonment or given heavier punishment; (4) an executive is deemed incapable of carrying out his or her duties by the Board (or by the Board and the Cabinet in the case of the Executive Auditors), because of physical or mental disorders. 2. The Cabinet or the Minister of Finance shall dismiss a Bank executive if any of Sections (1) through (4) of the preceding paragraph applies to the said executive. 3. In addition to the dismissals prescribed by the preceding Paragraph, the Minister of Finance may dismiss an Executive Director if the Board requests such dismissal. (Restrictions on the executives' activities) Article 26 Executives (excluding Counsellors in this Article as well as in Articles 31 and 32) may not engage in any of the following activities during his or her term of office; (1) become a candidate for the National Diet, for the assembly of any municipality or for any elected public office; (2) become an officer of any political body including political parties or actively engage in political activities; (3) maintain or take other posts that bring remuneration (except when the Board considers that such post does not interfere with the proper execution of his or her duties at the Bank, based on the rules with respect to the ethical discipline prescribed by Article 32); (4) engage in commercial or other business for pecuniary gain. 2. If an executive of the Bank becomes a candidate for the National Diet, for the assembly of any municipality, or for any elected public office, he or she shall be considered as having resigned as an executive of the Bank. (Appointment of attorney) Article 27 The Governor and the Deputy Governors may appoint, from among the Bank's Executive Directors and staff, a local representative who shall have full power to act for the Bank of Japan before any court, or in any non-judicial capacity regarding the business of the Bank's head office and branches. (Appointment of staff) Article 28 The Governor shall appoint the Bank's staff. (Secrecy imposed on the executives and staff) Article 29 The Bank of Japan's executives and staff shall not leak secrets which they have learned in performing their duties, or use such secrets for

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their own interest. These requirements are equally applicable after they leave the Bank. (The status of the executives and staff) Article 30 The Bank of Japan's executives and staff shall be deemed to be those engaged in public service by laws and regulations. (Standard of salaries) Article 31 The Bank of Japan shall determine the standards of salaries (including all types of pecuniary remuneration such as bonuses and retirement allowances) paid to its executives and staff, consistent with the general standards prevailing in society. These standards shall be reported to the Minister of Finance and, at the same time, publicly announced. The same steps shall be taken when making any change to the standards. 2. Among the standards of salaries prescribed by the preceding Paragraph, that which is applicable to executives shall be determined in consideration of salaries, retirement allowances, and other remunerative conditions of public servants to whom the Law Concerning Salaries of Government Officials with Special Capacity (Law No. 252 of 1949) is applicable. (Rules with respect to the ethical discipline) Article 32 In light of the public nature of its business, and in order to ensure appropriate discharge of duties by the Bank of Japan's executives and staff, the Bank shall establish rules regarding ethical discipline of its executives and staff, such as the obligations to devote themselves to their duties and to separate themselves from private enterprises. These rules shall be reported to the Minister of Finance and, at the same time, publicly announced. The same steps shall be taken when making any change to the rule. Chapter IV Business (Regular business) Article 33 In order to achieve the objectives prescribed by Article 1, the Bank of Japan may conduct the following business: (1) discounting of commercial bills and other bills or notes; (2) making loans against collateral in the form of bills or notes, government bonds and obligations, and other negotiable securities; (3) buying and selling of commercial bills and other bills or notes (including those drawn by the Bank of Japan), government bonds and obligations, and other bonds or debentures; (4) lending and borrowing of government bonds and obligations, and other bonds or debentures against cash collateral;

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(5) receiving money for deposits; (6) dealing in domestic exchange; (7) taking custody of negotiable securities, other securities and certificates which represent property rights; (8) performing other business incidental to the business enumerated in the preceding Sections (1) through (7), such as buying and selling of gold and silver bullion. 2. "Deposits" in Section (5) of the preceding Paragraph refers to taking deposits based on a deposit contract. (Loans to the government and other business) Article 34 As the central bank of Japan, the Bank of Japan may, in addition to the business listed in Paragraph 1 of the preceding Article, conduct the following business with the government: (1) making loans, without collateral, subject to a limit imposed by a Diet resolution prescribed by the exception clause in Article 5 of the Fiscal Law (Law No. 34 of 1947); (2) making loans, without collateral, to finance the government's temporary borrowing permitted under the Fiscal Law or other laws concerning the government's accounting; (3) subscribing or underwriting government bonds subject to a limit imposed by a Diet resolution prescribed by the exception clause in Article 5 of the Fiscal Law; (4) subscribing or underwriting financial bills and other bills issued for stopgap financing; (5) accepting custody of precious metals and other items. (Handling of Treasury funds) Article 35 As the central bank of Japan, the Bank of Japan shall handle Treasury funds in compliance with relevant laws and regulations. 2. When handling Treasury funds as prescribed by the preceding Paragraph, the Bank of Japan may conduct business necessary for this purpose in addition to the types of business listed in Article 33, Paragraph 1. (Handling affairs of the government) Article 36 As the central bank of Japan, the Bank of Japan shall handle the affairs of the government relating to currency and finance in compliance with relevant laws and regulations. 2. When handling the affairs of the government prescribed by the preceding Paragraph, the Bank may conduct business necessary for this purpose in addition to the types of business listed in Article 33, Paragraph 1.

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3. Necessary expenses to handle the affairs of the government prescribed by Paragraph 1 of this Article may be borne by the Bank in compliance with relevant laws and regulations. (Temporary loans to financial institutions) Article 37 The Bank of Japan, irrespective of the provisions of Article 33, Paragraph 1, may provide uncollateralized loans to financial institutions (defined as those engaged in the business of taking bank deposits (deposits prescribed by Article 2, Paragraph 2 of the Deposit Insurance Law, Law No. 34 of 1971) as well as engaging in exchange transactions, the same definition shall apply hereinafter) and other financial business entities prescribed by a Cabinet Order (hereinafter referred to as "financial institutions" together) for a period within that prescribed by a Cabinet Order when they unexpectedly experience a temporary shortage of funds for payment due to accidental causes, including computer system problems, whereby the business operations of the financial institutions may be seriously hampered if the shortage is not recovered swiftly, provided that the advance is necessary to secure the smooth settlement of funds among financial institutions. 2. The Bank shall, when providing loans as prescribed by the preceding Paragraph, report the fact to the Prime Minister and the Minister of Finance without delay. (Business contributing to the maintenance of an orderly financial system) Article 38 The Prime Minister and the Minister of Finance may request that the Bank of Japan conduct the business necessary to maintain an orderly financial system, including provision of loans, when it is believed to be especially necessary for the maintenance of an orderly financial system including the case where it is judged, after consultation pursuant to the provisions of Article 57-2 of the Banking Law (Law No. 59 of 1981) and other relevant laws and regulations that a serious problem in an orderly financial system may arise. 2. At the request of the Prime Minister and the Minister of Finance as prescribed by the preceding Paragraph, the Bank may conduct business necessary to maintain an orderly financial system, including provision of loans under special conditions, in addition to the business prescribed by Article 33, Paragraph 1. (Business contributing to smooth settlement of funds) Article 39 The Bank of Japan, in addition to the business prescribed by Articles 33 through 38, may, upon authorization from the Prime Minister and the Minister of Finance, conduct business deemed to contribute to the smooth settlement of funds among financial institutions when conducted in conjunction with the business prescribed by Article 33,

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Paragraph 1, Sections (5) through (7) or that prescribed by Article 35, Paragraph 2 or Article 36, Paragraph 2. 2. The provisions of Article 7, Paragraph 4 shall apply mutatis mutandis to the authorization in the preceding Paragraph. (Buying and selling of foreign exchange) Article 40 The Bank of Japan, when necessary, may buy and sell foreign exchange on its own account or as an agent of the government, in accordance with the provisions in Article 36, Paragraph 1. In addition, as the central bank of Japan, the Bank may buy and sell foreign exchange as an agent of foreign central banks (foreign central banks and similar institutions, the same definition shall apply hereinafter) and international institutions (those international institutions of which Japan has a membership including the Bank for International Settlements, the same definition shall apply hereinafter) in order to pursue cooperation with them. 2. The Bank shall buy and sell foreign exchange as an agent of the government, in accordance with the provisions of Article 36, Paragraph 1, when its purpose is to stabilize the exchange rate of the national currency. 3. When buying and selling foreign exchange on its own account or as an agent of foreign central banks and international institutions for the purpose of pursuing cooperation with them as the central bank of Japan under the provisions of Paragraph 1 of this Article, the Bank shall conduct the business which the Minister of Finance designates as constituting cooperation in the field of international finance at the request of the Minister or upon receipt of the Minister's approval. (International financial business) Article 41 The Bank of Japan may conduct the following business with foreign central banks and international institutions in order to pursue cooperation with them as the central bank of Japan: (1) Accepting deposits denominated in the national currency (deposits prescribed by Article 33, Paragraph 2); (2) Buying and selling government bonds in exchange for deposits accepted in accordance with the preceding Section; (3) Accepting articles of value, negotiable securities and other items for custody; (4) Acting as an intermediary, broker or agent for central banks abroad and international institutions engaged in buying and selling of government bonds; (5) Other business prescribed by an ordinance from the Ministry of Finance as those deemed to contribute to the proper management of deposits and other assets denominated in the national currency and held by foreign central banks and international institutions.

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Article 42 In addition to the business prescribed by the preceding Article, the Bank of Japan may engage in the following transactions and other business necessary for cooperating, as the central bank of Japan, with foreign central banks and international institutions in the field of international finance, including international financial assistance at the request of the Minister of Finance or upon receipt of the Minister's approval. (1) Acquiring loan claims on foreign central banks which are held by the Bank for International Settlements (2) Providing loans to foreign central banks and international institutions (Prohibition of other business) Article 43 The Bank of Japan may not conduct any business other than those prescribed by this Law unless such business is necessary to achieve the Bank's objectives prescribed by this Law and the Bank obtains authorization from the Minister of Finance and the Prime Minister. 2. The provisions of Article 7, Paragraph 4 shall apply mutatis mutandis to the authorization in the preceding Paragraph. (On-site examination) Article 44 The Bank of Japan may, for the purpose of appropriately conducting or preparing to conduct business prescribed by Articles 37 through 39, enter into a contract with financial institutions which become the correspondents in such business (referred to as "correspondent financial institutions" in this Article) regarding on-site examination (On-site examination of the business operations and the state of the property of correspondent financial institutions conducted by the Bank of Japan, the same definition shall apply hereinafter in this Article. Such contract must contain the clauses required by a Cabinet Order including, that requiring the Bank to notify correspondent financial institutions and obtain prior consent from them when conducting onsite examinations). 2. The Bank shall consider administrative burden incurred by financial institutions when conducting on-site examinations. 3. At the request of the Commissioner of the Financial Services Agency, the Bank may submit the results of on-site examinations or other information to the Commissioner, or provide them for his or her staff for their perusal. (Written statement of manners of conducting business) Article 45 The Bank of Japan shall prepare a written statement of manners of conducting business, and submit it to the Minister of Finance and the Prime Minister. The same steps shall be taken when making any change to the statement.

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2. The written statement in the preceding Paragraph shall contain matters prescribed by a Cabinet Order, including those related to loan provision. Chapter V Bank of Japan Notes (Issuance of Bank of Japan notes) Article 46 The Bank of Japan shall issue banknotes. 2. The banknotes issued by the Bank (hereinafter referred to as "Bank of Japan notes"), in accordance with the provisions of the preceding Paragraph shall be legal tender, and hence shall be used for payment without limits. (Types and forms of Bank of Japan notes) Article 47 The types of Bank of Japan notes shall be decided by a Cabinet Order. 2. The Minister of Finance shall decide the forms which Bank of Japan notes shall take, and release these forms in the Official Gazette. (Exchange of Bank of Japan notes) Article 48 The Bank of Japan shall exchange, without fees, Bank of Japan notes rendered unfit for further circulation due to defacement, mutilation or other causes in accordance with an ordinance from the Ministry of Finance. (Printing and cancellation of Bank of Japan notes) Article 49 The Bank of Japan shall determine the procedures regarding printing and cancellation of Bank of Japan notes and submit these procedures to the Minister of Finance for approval. The same steps shall be taken when making any change to the procedures. 2. The provisions of Article 7, Paragraph 4 shall apply mutatis mutandis to the approval under the provisions of the preceding Paragraph. Chapter VI Accounting (Fiscal period) Article 50 The fiscal period of the Bank of Japan shall run from April 1 to March 31 of the following year. (Budget for general and administrative expenses and costs) Article 51 Every fiscal period, the Bank of Japan shall prepare a budget for general and administrative expenses (those prescribed by a Cabinet Order as not hampering the currency and monetary control, hereinafter referred to as "a current expenditure budget"), and submit it to the Minister of Finance for his or her authorization before the business year begins.

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2. If the Minister of Finance deems it inappropriate to authorize the current expenditure budget submitted in accordance with the preceding Paragraph, he or she shall immediately notify the Bank, stating the reason, and announce the details of the submitted current expenditure budget and the reason publicly. 3. If the notification prescribed by the preceding Paragraph is made, the Bank may express its views to the Minister of Finance or, if necessary, announce them publicly. (Financial statements) Article 52 The Bank of Japan shall prepare an inventory and balance sheet for each six month period running from April through September and from October through March as well as profit and loss statement for each fiscal period and each six month period provided for above and submit these documents (hereinafter referred to as "financial statements") with Executive Auditors' opinions to the Minister of Finance for his or her approval within two months after the relevant six month period or the fiscal period. 2. When submitting the financial statements for a fiscal period to the Minister of Finance under the provisions of the preceding Paragraph, the Bank shall attach its report on the settlement of accounts for each fiscal period to the Executive Auditors' opinions. 3. Upon receipt of the approval from the Minister of Finance prescribed by Paragraph 1, the Bank shall, without delay, make available the financial statements, the report on the settlement of accounts in the preceding Paragraph, and the Executive Auditors' opinions prescribed by the preceding two Paragraphs at its head office and branches, and keep them for the public's perusal for a period determined appropriate by the Policy Board. (Disposal of surplus) Article 53 The Bank of Japan shall retain, as a reserve fund, five-hundredths of the surplus resulting from the settlement of profits and losses for each fiscal period. 2. Irrespective of the provisions of the preceding Paragraph, if deemed particularly necessary, the Bank may, upon the authorization from the Minister of Finance, retain more than the amount prescribed by the preceding Paragraph, as a reserve fund. 3. The reserve fund prescribed by the preceding two Paragraphs shall not be drawn on, except to cover losses incurred by the Bank or to use them for dividends as prescribed by the next Paragraph. 4. The Bank may, upon the authorization from the Minister of Finance, pay dividends to shareholders out of the surplus resulting from the settlement of profits and losses for each fiscal period. The rate of

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5.

6.

7.

8. 9.

dividend payments over paid-up capital may not exceed fivehundredths per annum. The Bank, after deducting the retained reserves prescribed by Paragraphs 1 and 2 and the dividend payments prescribed by the preceding Paragraph from the surplus resulting from the settlement of profits and losses for each fiscal period, shall transfer the remaining surplus to the national treasury within two months after each relevant fiscal period. The government may have the Bank make, by estimate, a partial amount of the payment to the national treasury for each fiscal period under the provisions of the preceding Paragraph during the relevant fiscal period in accordance with a Cabinet Order. The transfer to the national treasury under the provisions of Paragraph 5 shall be treated as losses when computing the amount of income prescribed by the Corporation Tax Law (Law No. 34 of 1965) and the amount of income related to the business tax prescribed by the Local Tax Law (Law No. 226 of 1950). Necessary matters regarding the transfer to the national treasury under the provisions of Paragraph 5, other than those prescribed by the preceding three Paragraphs, shall be provided by a Cabinet Order. The provisions of Article 7, Paragraph 4 shall apply mutatis mutandis to the authorization under the provisions of Paragraphs 2 and 4.

Chapter VII Reporting to the Diet (Reporting to and attendance at the Diet) Article 54 The Bank of Japan shall, approximately every six months, prepare and submit to the Diet through the Minister of Finance, a report on the Policy Board's decisions regarding the matters prescribed by each Section of Article 15, Paragraph 1 and conditions of business operations which have been carried out based on such decisions. 2. The Bank shall endeavor to explain to the Diet the report prescribed by the preceding Paragraph. 3. The Governor, the Chairman of the Policy Board or a representative designated by them shall attend the sessions of the House of Representatives, the House of Councillors, or their Committees when requested by them, in order to explain the state of the Bank's business operations and property. (Public announcement of an outline of business operations) Article 55 Upon the approval regarding financial statements for each fiscal period prescribed by Article 52, Paragraph 1, the Bank of Japan shall prepare, without delay, an outline of its business operations in the relevant business year and publicly announce the outline together with the

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financial statements and a report on the settlement of accounts for the relevant fiscal period. Chapter VIII Rectification of Illegal Actions (Rectification of illegal actions) Article 56 The Minister of Finance or the Prime Minister may request that the Bank of Japan take necessary measures to rectify deeds of the Bank, its executives or staff, when such deeds have violated or may potentially violate this Law or other laws, regulations, or by-laws. 2. The Bank shall, at the request of the Minister of Finance or the Prime Minister as prescribed by the preceding Paragraph, take swift actions which the Policy Board deems necessary, such as rectifying the deeds concerned, and report these actions to the Minister of Finance or the Prime Minister. (Inspection at the request of the Minister of Finance or the Prime Minister) Article 57 When the Bank of Japan, its executives or staff have violated or may potentially violate this Law or other laws, regulations, or by-laws, the Minister of Finance or the Prime Minister may request that the Executive Auditors of the Bank inspect the deeds concerned and other necessary matters, and report the result of such inspection to the Minister of Finance or the Prime Minister. 2. The Executive Auditors of the Bank shall, at the request of the Minister of Finance or the Prime Minister prescribed by the preceding Paragraph, swiftly inspect such matters and report the result of such inspection to the Minister of Finance or the Prime Minister and also to the Policy Board. (Submission of reports, etc.) Article 58 The Minister of Finance or the Prime Minister may, when deemed necessary in light of the conditions of business operations of the Bank of Japan, request a report or relevant documents from the Bank. Chapter IX Others (Rules) Article 59 The Bank of Japan shall, when setting rules regarding the organization or other matters other than those prescribed by this Law, report such rules to the Minister of Finance without delay. The same steps shall be taken when making any change to the rules.

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(Dissolution) Article 60 The dissolution of the Bank of Japan shall be prescribed by a separate law. 2. At the time of dissolution, if the remaining property of the Bank of Japan exceeds the amount of paid-up capital, the excess amount shall belong to the national treasury. (Application of provisions regarding a legal person) Article 61 The provisions of Articles 44, 50, 54, and 57 of the Civil Code (Law No. 89 of 1896) as well as the provisions of Article 35, Paragraph 1 of the Law of Procedure in Non-Contentious Cases (Law No. 14 of 1898) shall apply mutatis mutandis to the Bank of Japan. (Entrusting of powers of the Prime Minister) Article 61-2 The Prime Minister shall entrust its powers prescribed by this Law (except for Article 19) to the Commissioner of the Financial Services Agency except for those prescribed by a Cabinet Order. (Entrusting to a Cabinet Order) Article 62 In addition to the provisions in this Law, matters necessary to implement this Law shall be provided by a Cabinet Order. Chapter X Penalty Article 63 Those who leak secrets or use such secrets for their own interest, in violation of the provisions of Article 29, shall be liable to a term of penal servitude not exceeding a year or a fine not exceeding five hundred thousand yen. Article 64 Those who fail to conduct the inspection or reporting prescribed by Article 57, Paragraph 2 or make false reporting shall be liable to a fine not exceeding five hundred thousand yen. Article 65 The Bank of Japan's executives and staff shall be punished by a nonpenal fine not exceeding five hundred thousand yen for the commission of any of the following breaches: (1) Failing to obtain authorization from the Minister of Finance or from both the Minister of Finance and the Prime Minister, or the approval of the Minister of Finance, as required by this Law (excluding the provisions of Article 43, Paragraph 1); (2) Failing to make a report to the Minister of Finance or both the Minister of Finance and the Prime Minister as required by this Law or making a false report to the Minister of Finance or both the Minister of Finance and the Prime Minister ;

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(3) Failing to make public announcements required by this Law or making false public announcements; (4) Neglecting to register in violation of a Cabinet Order under the provisions of Article 12, Paragraph 1; (5) Maintaining or taking other posts that bring remuneration or engaging in other business for pecuniary gains in violation of the provisions of Article 26, Paragraph 1; (6) Conducting business other than those prescribed as the Bank's business in violation of the provisions of Article 43, Paragraph 1; (7) Violating the provisions of Article 48; (8) Failing to keep financial statements, a report on the settlement of accounts, or the Executive Auditors' opinions or failing to provide the aforementioned documents for perusal in violation of the provisions of Article 52, Paragraph 3; (9) Failing to retain a surplus as a reserve fund in violation of the provisions of Article 53, Paragraph 1; (10) Disposing of a reserve fund in violation of the provisions of Article 53, Paragraph 3; (11) Paying dividends in violation of the provisions of Article 53, Paragraph 4; (12) Failing to make a report as required by Article 56, Paragraph 2 or making a false report; (13) Failing to make a report, or failing to submit documents as required by Article 58 or making a false report or submitting false documents. Article 66 Those who violate the provisions of Article 13 shall be punished by a non-penal fine not exceeding five hundred thousand yen.

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Appendix 6 References for the Japanese edition1


Chapter I Chuo Ginko Kenkyukai, Chuo Ginko Kenkyukai Houkokusho, Chuo Ginko Seido no Kaikaku Hirakareta Dokuritusei wo Motomete (Reform of Central Banking System Toward Independence and Transparency) Fujiki, Hiroshi, Kinyu-Shijou to Chuo Ginko (Financial Market and Central Bank), Toyo Keizai Shinposha Kinyu Seido Chousakai, Kinyu Seido Chousakai Houkokusho, Nipponginkouhou no Kaisei ni Kansuru Toushin (Report regarding Revision of Bank of Japan Law) Chapter II Nippon Ginko Ken Kenkyukai, Okane Monoshiri Hakase (Doctor of Money), Tokiwa Sogo Service Chapter III, IV Iwamura, Mitsuru, Denshi Money Nyumon (Introduction to Electronic Money), Nihon Keizai Shinbunsha Minowa, Shigenori, Nihon no Kessai System (The Payment and Settlement System of Japan), Keizai Hourei Kenkyukai Chapter V Ikeo, Kazuhito, Ginko Risk to Kisei no Keizaigaku (The Economics of Bank Risk and Regulation), Toyo Keizai Shinposha Ikeo, Kazuhito, Kaneko, Takashi, and Shikano Yoshiaki, Seminar Gendai no Ginko (Seminar: Modern Banking), Toyo Keizai Shinposha Iwamura, Mitsuru, Ginko no Keiei Kakushin (Reforms of Bank Management), Toyo Keizai Shinposha Okina, Yuri, Ginko Keiei to Shinyo Chitsujo (Bank Management and Financial System Stability), Toyo Keizai Shinposha Zenkoku Ginko Kyoukai Rengoukai, Zusetsu Wagakuni no Ginko (Explanations and Figures of Japanese Banks), Zaikei Shouhosha Chapter VI Hasegawa, Yoshiharu, The Money Market, Kinyu Zaisei Jijou Kenkyukai Morita, Tatsuro, and Hara, Makoto, Tokyo Money Market, Yuhikaku Okina, Kunio, Kinri no Chisiki (Introduction to Interest Rates), Nihon Keizai Shinbunsha !!!, Kinyu Seisaku (Monetary Policy), Toyo Keizai Shinposha
1

The references here are all available only in Japanese.

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Appendix 6

References for the Japanese edition

Chapter VII Ishida, Kazuhiko, and Shirakawa, Hiromichi, Money Supply to Keizai Katsudo (Money Supply and Economic Development), Toyo Keizai Shinposha Nippon Ginko Bukka Kenkyukai, Bukka no Chisiki (Knowledge about Prices), Nihon Keizai Shinbunsha Nippon Ginko Keizai Tokei Kenkyukai, Keizai Shihyo no Mikata, Tsukaikata (How to Use Economic Statistics), Toyo Keizai Shinposha Nippon Ginko Kokusai Tokei Kenkyukai, Kaigai Keizai Shihyo no Yomikata (How to Use International Economic Statistics), Toyo Keizai Shinposha Shiratsuka, Shigenori, Bukka no Keizai Bunseki (Economic Analysis of Prices), University of Tokyo Press Chapter VIII Fukao, Mitsuhiro, Jissen Seminar Kokusai Kinyu (Seminar of International Finance), Toyo Keizai Shinposha Nippon Ginko Kokusaishusi Tokei Kenkyukai, Nyumon Kokusaishusi (Introduction to Balance of Payments), Toyo Keizai Shinposha Okurasho Kokusai Kinyukyoku, Zusetsu Kokusai Kinyu (Explanations and Figures of International Finance), Zaikei Shohosha Chapter IX Nippon Ginko Zaiseishusi Kenkyukai, Zaiseishusi no Mikata (How to Analyze Receipts and Payments of Treasury Funds), Tokiwa Sogo Service Chapter X Okurasho Rizaikyoku, Kokusai (Japanese Government Securities), Okura Zaimukyokai

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Supplement
The Supplement contains the public statements issued by the Bank of Japan and other information, which reflect major developments concerning the Banks operations for the period from the publication of the original book in Japanese (December 2000) until the end of January 2004. As some attachments of the original public statements are omitted, please see the Banks website (www.boj.or.jp) for the full text of the public statements.

[Contents]
1. Issues relating to Chapter I (Introduction) ............................................244
[Related to Section A] Function of the Bank of Japan .............................. 244
! Changes concerning Monetary Policy Meetings (decided in April 2001) ........... 244 ! Closing of Otaru branch (closed in September 2002) and opening of The Bank of Japan Otaru Museum (opened in May 2003) ....................................... 245 ! Opening of a BOJ Representative Office in Beijing (announced in July 2003) .. 245 ! Enhancement of Monetary Policy Transparency (decided in October 2003) ...... 246

2. Issues relating to Chapter II (The Issuance, Circulation, and Maintenance of Bank of Japan Notes) ...................................................248
[Related to Section A] Cash and the Bank of Japan.................................. 248
! The Introduction of New Series Bank of Japan Notes (announced in August 2002) ................................................................................................................... 248

[Related to Section B] Circulation of Banknotes ....................................... 249


! Start of receipt and payment of cash at Cash Operations Center (started in April 2003).......................................................................................................... 249

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3. Issues relating to Chapter III (The Bank of Japans Current Account Services).....................................................................................250
[Related to Section A] Outline of the Banks Current Account Services . 250
! Maintenance of a designated minimum amount of balances by the Japan Post with the Bank of Japan (decided in March 2003)................................................ 250

4. Issues relating to Chapter IV (The Payment and Settlement System in Japan and the Bank of Japan's Payment and Settlement Services)....................................................................................................252
[Related to Section D] The Banks Payment and Settlement Services ..... 252
! Introduction of the New Real-Time Gross Settlement (RTGS) System to the BOJ-NET for Funds and JGS Transfers (introduced in January 2001) ............... 252 ! Additional measures for the changeover to the real-time gross settlement (RTGS) system (announced in April 2001)......................................................... 254 ! Conversion to the New JGB Book-entry System Based on the New Legal Framework (started in January 2003).................................................................. 255 ! Introduction of DVP Mechanism for Settlement of Commercial Paper (introduced in March 2003)................................................................................. 255

5. Issues relating to Chapter V (On-Site Examination and Off-Site Monitoring, and Credit Extension as the Lender of Last Resort) .......257
[Related to Section A] The Bank of Japans Business Operations related to Financial System Stability......................................................... 257
! Introduction of the standardized agreement regarding examinations at the premise with financial holding companies (decided in August 2002)................. 257 ! New Initiative Toward Financial System Stability (decided in September 2002) ................................................................................................................... 257 ! Japans Nonperforming Loan Problem (decided in October 2002)..................... 258

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! Purchases of Stocks Held by Banks (decided in October 2002).......................... 260

6. Issues relating to Chapter VI (The Bank of Japan's Money Market Operations and Lending) ........................................................................265
[Related to Section A] Price Stability and Monetary Policy ..................... 265
! New Procedures for Money Market Operations (decided in March 2001).......... 265

[Related to Section C] Money Market Operations .................................... 270 (1) Broadening the range of assets and collateral eligible for market operations .................................................................................................... 270
! Broadening the range of eligible CP for CP operations and collateral uses to include Asset-backed Commercial Paper (ABCP), and broadening the range of eligible ABS as collateral (decided in January 2002) ..................................... 270 ! Broadening the range of eligible collateral to include loans to the Deposit Insurance Corporation as well as loans to the Government's "Special Account for the Allotment of Local Allocation Tax and Local Transfer Tax." (decided in March 2002).................................................................................................... 272 ! Measures to Facilitate Smooth Corporate Financing (acceptance of a broader range of loans on deeds as eligible collateral, and relaxation of standards for ABCP as eligible collateral), and Acceptance of STRIPS government securities as eligible collateral (decided in December 2002)............................... 275 ! Acceptance of Dematerialized Commercial Paper as Eligible Collateral (decided in February 2003) ................................................................................. 277 ! Acceptance of loans on deeds to the Industrial Revitalization Corporation of Japan as Eligible Collateral (decided in April 2003)........................................... 278 ! Inclusion of Dematerialized Commercial Paper in eligible assets for CPpurchase operation (decided in June 2003) ......................................................... 280 ! Purchase of Asset-Backed Securities (decided in June 2003) ............................. 280

(2) Other revisions to Money Market Operations Instruments.................... 290

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! Early introduction of Bill Purchasing Operations at all business offices (decided in February 2001) ................................................................................. 290 ! Measures for facilitating Money Market Operations (extension of the maturity date for bills purchased in Bill Purchasing Operations, expansion of the range of Japanese government bonds in outright purchase of JGBs etc.) (decided in May 2001) ........................................................................................ 290 ! Amendment to the Principal Terms and Conditions for the Outright Purchase/Sale of JGBs (expansion of the range of bonds to be purchased/sold) (decided in January 2002) ......................................................... 291 ! Introduction of the Purchase/Sale of Japanese Government Securities with Repurchase Agreements (decided in September 2002) ..................................... 293 ! Extension of maturities for bills purchased in the "Outright Purchases of Bills" operation (decided in October 2002)......................................................... 294 ! Extension of maturities for the purchase of Japanese government securities with repurchase agreements (decided in October 2003)...................................... 294

(3) Others .......................................................................................................... 295


! Announcement of the Bank of Japans Issue-by-Issue Holdings of JGBs by Amount Outstanding (announced in June 2001), Release of Data on Collateral Accepted by the Bank of Japan (announced in June 2002), and Release of the Amount of the Bank's Purchases of TBs and FBs (announced in July 2003) ....................................................................................................... 295

[Related to Section D] The Banks Lending Operations ........................... 299


! Establishment of Complementary Lending Facility (decided in February 2001) ................................................................................................................... 299 ! Amendments to Principal Terms and Conditions for Complementary Lending Facility (decided in June 2001) ........................................................... 306

7. Issue relating to Chapter VII (Statistics, Research and Studies, and Public Relations) ......................................................................................310
[Related to Section A] Compiling and Publishing Statistics ..................... 310

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! Revision of the Wholesale Price Index (Switchover to the 2000 Base Corporate Goods Price Index <CGPI>) (announced in December 2002)............ 310 ! Release of New Statistics on Loans Syndicated and Loans Transferred (released in December 2003)............................................................................... 312

8. Issue relating to Chapter VIII (International Operations and Services)....................................................................................................314


[Related to Section B] Services Provided as Part of the Banks Cooperation with Foreign Central Banks and International Organizations .............................................................................................. 314
! Conclusion of the Swap Arrangement between the Peoples Bank of China and the Bank of Japan (concluded in March 2002) ............................................. 314

9. Issue relating to Chapter IX (The Bank of Japan's Treasury Funds Services)....................................................................................................315


[Related to Section A] Treasury Funds Services ........................................ 315
! A New Scheme for Electronic Payment of Government Taxes and Fees (announced in November 2001) .......................................................................... 315

10. Issue relating to Chapter X (The Bank of Japan's Japanese Government Securities Services)............................................................319
[Related to Section A] Services Related to Japanese Government Securities (JGSs) ......................................................................................... 319
! Conversion to the New JGB Book-entry System Based on the New Legal Framework (started in January 2003).................................................................. 319

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Supplement

1. Issues relating to Chapter I (Introduction)


[Related to Section A] Function of the Bank of Japan !" Changes concerning Monetary Policy Meetings (decided in April 2001)
(Related public statement) !" April 3, 2001! Changes concerning Monetary Policy Meetings

Changes concerning Monetary Policy Meetings

April 3, 2001 Bank of Japan

The Bank of Japan has decided at the Policy Board meeting held today to make the following changes concerning Monetary Policy Meetings (MPMs). The changes, effective from the next MPM, are designed to provide sufficient time for Policy Board members to hold extensive discussion and to enable Tokyo's financial markets to digest the decisions reached at the meetings within the day of the meeting as much as possible.

1. Duration of Monetary Policy Meetings The first MPM of each month will be held over a period of two days. On the first day, the meeting will start in the afternoon and the Bank's staff will present their reports on economic and financial developments. On the second day, the meeting will start in the morning and Policy Board members will discuss economic and financial developments as well as monetary policy and vote on proposals put forward at the meeting. As a result, decisions reached at the first MPM of the month are expected, in most cases, to be made public before 3:00 p.m. The scheduled dates of MPMs for April to September 2001 have been revised (see Attachment 1). 2. Change in the Release Schedule of the Outlook and Risk Assessment of the Economy and Prices The Bank announced on October 13, 2000 that the Outlook and Risk Assessment of the Economy and Prices (Outlook Report) would be released twice a year in April and October as part of the Monthly Report of Recent Economic and Financial Developments. The Bank has, however, decided to discuss and vote on the Outlook Report separately from the Monthly Report of Recent Economic and Financial Developments, at the second MPM in April and October. Thus, the two reports will be issued independently. The move will help avoid substantial extension of the time

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Issues relating to Chapter I

required for the first MPM of the month and will give Policy Board members sufficient time to discuss the Outlook Report. The next Outlook Report will be released at 8:50 a.m. on April 26. The "blackout period"the period during which Policy Board members must refrain from commenting on monetary policy and the monetary and economic situationfor MPMs that discuss the Outlook Report will be in effect until the Outlook Report is released (see Attachment 2). " Attachment 1 and 2 are not attached.

!" Closing of Otaru branch (closed in September 2002) and opening of The Bank of Japan Otaru Museum (opened in May 2003)
(Details of the issue <Related public statement was not issued in English.>) The Bank of Japan decided to close its Otaru branch in September 2002 and shifted the branchs operations to the Sapporo branch. The Otaru branch building was remodeled as The Bank of Japan Otaru Museum for the display of materials related to finance and history, opened on May 14, 2003.

!" Opening of a BOJ Representative Office in Beijing (announced in July 2003)

(Related public statement)

!" July 30, 2003: Opening of a BOJ Representative Office in Beijing

Opening of a BOJ Representative Office in Beijing July 30, 2003 Bank of Japan The Bank of Japan will open a representative office in Beijing by the end of 2003. China has enhanced its presence in the global economy and, at the same time, its relations with Japan have also become increasingly close. In these circumstances, the Bank of Japan has built up cooperation with the People's Bank of China, the central bank in China, in recent years, by way of, amongst other things, establishment of the swap agreement in March 2002. The Bank believes that the opening of the office will enable it to better understand economic and financial developments in China as well as to broaden channels of communication with financial communities of China. " BOJ Representative Office in Beijing was opened in December 18, 2003.

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!" Enhancement of Monetary Policy Transparency (decided in October 2003)


(Related public statement) !" October 10, 2003! Enhancement of Monetary Policy Transparency

Enhancement of Monetary Policy Transparency October 10, 2003 Bank of Japan

At the Monetary Policy Meeting (MPM) held today, the Bank of Japan decided, by unanimous vote, to take the following measures to enhance the transparency of monetary policy. 1. New Measures With the aim of presenting the basic thinking on the conduct of monetary policy and the evaluation of the developments of the economy and prices in a more timely and lucid manner, the Bank decided to take the following measures. (1) Interim assessment Currently, the Policy Board reviews the standard scenario in the "Outlook and Risk Assessment of the Economy and Prices" (the Outlook Report) at the MPMs in April and October. It will make the deliberations on the possible deviation from the standard scenario three months after these MPMs (July in the case of April, and January of the following year in the case of October), and report the outcome in "The Bank's View" of the "Monthly Report of Recent Economic and Financial Developments" (the Monthly Report). (2) Same-day publication of the Monthly Report Currently, the Bank publishes the Monthly Report one day after the MPM. It will publish "The Bank's View" of the Monthly Report on the same day of the MPM1. "The Bank's View" will be made more lucid and concise. In addition, the Outlook Report will be published in two parts. The first part is the concise description of the Bank's basic judgment, and the second part deals with the detailed background information.
1

See Attachment for the change in the dates of "Publication of Monthly Report."

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Issues relating to Chapter I

(3) Governor's press conference on the same day Currently, the Governor calls a press conference once a month, two days after the MPM, or two days after the first MPM in the case of two MPMs held in the same month. The Governor will call a press conference after every MPM on the same day. 2. More Detailed Description of the Commitment to Maintaining the Quantitative Easing Policy With the aim of laying the foundation for sustainable growth of Japan's economy, the Bank is currently committed to maintaining the quantitative easing policy until the consumer price index (excluding fresh food, on a nationwide basis, hereafter the core CPI) registers stably a zero percent or an increase year on year. Such commitment is underpinned by the following two conditions. First, it requires not only that the most recently published core CPI should register a zero percent or above, but also that such tendency should be confirmed over a few months. Second, the Bank needs to be convinced that the prospective core CPI will not be expected to register below a zero percent. This point will be described in such materials as the analysis and the forecasts of Policy Board members in the Outlook Report. To be more specific, many Policy Board members need to make the forecasts that the core CPI will register above a zero percent during the forecasting period. The above conditions are the necessary condition. There may be cases, however, that the Bank will judge it appropriate to continue with quantitative easing even if these two conditions are fulfilled. " Attachment is not attached.

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2. Issues relating to Chapter II (The Issuance, Circulation, and Maintenance of Bank of Japan Notes)
[Related to Section A] Cash and the Bank of Japan !" The Introduction of New Series Bank of Japan Notes (announced in August 2002)
(Related public statement) !" August 2, 2002! The Introduction of New Series Bank of Japan Notes

The Introduction of New Series Bank of Japan Notes

August 2, 2002 Bank of Japan

The Ministry of Finance has decided and announced the manufacture of new series of the 10,000 yen, 5,000 yen, and 1,000 yen Bank of Japan notes, as stated below, in order to improve their security against counterfeiting. The Bank of Japan considers the decision of the Ministry appropriate which takes into account the recent increase of counterfeited banknotes. The Bank will make necessary arrangements for the introduction of new notes in the first half of fiscal year 2004.

1. Main Features (1) Security Features In addition to watermark, intaglio printing, and microprinting, etc., that are used in the current notes, the security features of new notes will include pearl (iridescent) ink and latent image (combination of line art works and watermark) adopted in the 2,000 yen note. Other latest security features shall be introduced, including hologram and watermark-bar-pattern. (2) Design Front (Portrait) Back Yukichi Fukuzawa (1835-1901) Statue of Phoenix in Byodoin <educator, protagonist of Temple enlightenment>

10,000 yen

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Issues relating to Chapter II

5,000 yen 1,000 yen

Ichiyo Higuchi (1872-1896) <female novelist> Hideyo Noguchi (1876-1928) <bacteriologist>

"Kakitsubata-zu" (painting of irises) Work of Korin Ogata Mt.Fuji and cherry blossoms

(3) Size 10,000 yen 5,000 yen 1,000 yen (4) Tactile Marks The new notes will include the tactile mark similar to that adopted in the 2,000 yen note. The designs of the tactile mark will be decided after further consideration. Height 76mm Height 76mm Height 76mm Width 160mm Width 156mm Width 150mm

(Note) Size of the current 2,000 yen note 76 x 154 mm

2. Date of Issuance The new series of Bank of Japan notes will be put into circulation in the first half of fiscal year 2004. " Please see the Bank of Japans website (http://www.boj.or.jp/en/about/bnnew.htm) for samples of the new series Bank of Japan notes.

[Related to Section B] Circulation of Banknotes !" Start of receipt and payment of cash at Cash Operations Center (started in April 2003)
(Details of the issue <Related public statement was not issued in English.>) On April 1, 2003, the Bank of Japan started receipt and payment of cash with financial institutions that hold current accounts with the Bank, at cash operations center located at Toda city, Saitama prefecture. The cash operations center introduces an integrated automatic system to enhance the efficiency of the operations.

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Supplement

3. Issues relating to Chapter III (The Bank of Japans Current Account Services)
[Related to Section A] Outline of the Banks Current Account Services !" Maintenance of a designated minimum amount of balances by the Japan Post with the Bank of Japan (decided in March 2003)
(Related public statement) !" March 5, 2003! Maintenance of a designated minimum amount of balances by the Japan Post with the Bank of Japan

Maintenance of a designated minimum amount of balances by the Japan Post with the Bank of Japan

March 5, 2003 Bank of Japan

At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan voted to approve that the Bank shall enter into a contract with the Japan Post, on April 1, 2003, for its maintenance of a designated minimum amount of balances, in the form of a current account, with the Bank. The contract shall become effective on April 1, 2003. The Japan Post, which will be established on April 1, 2003, as a result of reorganization of the Postal Services Agency, is scheduled to have a current account with the Bank for its funds settlement. Unlike private financial institutions, the Japan Post is not subject to the reserve requirements unless otherwise designated by the Cabinet Order (No designation has been made.). Under such circumstances, the contract for maintenance of a designated minimum amount of balances with the Bank is designed to ensure smooth money market operations. The summary of the contract is as follows; (1) The Japan Post shall maintain a sum of balances (monthly average) equal to or more than a designated amount in the form of a current account with the Bank. (2) The designated minimum amount of a current account shall be calculated by multiplying balances of "time postal savings" and "demand postal savings" by the corresponding maintenance ratios.

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(3) The Bank shall determine maintenance ratios. The Bank has also established a calculation formula for the maintenance ratios. In essence, the maintenance ratios for the Japan Post shall be set at the average effective reserve requirement ratios for private financial institutions during the previous year (i.e. ratios of total required reserves on time/demand deposits to total time/demand deposit balances subject to the reserve requirements). The maintenance ratios shall be reviewed annually by the Bank. For more details, see Japanese version of this announcement.

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4. Issues relating to Chapter IV (The Payment and Settlement System in Japan and the Bank of Japan's Payment and Settlement Services)
[Related to Section D] The Banks Payment and Settlement Services !" Introduction of the New Real-Time Gross Settlement (RTGS) System to the BOJ-NET for Funds and JGS Transfers (introduced in January 2001)
(Related public statement) !" January 2, 2001! Introduction of the New RTGS System !" November 1, 2001! Real-Time Gross Settlement (RTGS) in Japan: An Evaluation of the First Six Months

Introduction of the New RTGS System

January 2, 2001 Bank of Japan

Since December 30, 2000, the Bank of Japan has been working to ensure that financial institutions have completed their systems preparation and at the same time has been preparing its own systems for the changeover. It has also conducted on-line connection tests with financial institutions under the new RTGS environment. Today the Bank of Japan has checked that these preparations have been completed. The Bank can therefore confirm that it will introduce the new RTGS system on January 4, 2001 as scheduled.

Real-Time Gross Settlement (RTGS) in Japan: An Evaluation of the First Six Months * * This is a translation of the summary of the report in Japanese released on August 22, 2001.

November 1, 2001 Bank of Japan

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1. On the first business day of January 2001, the Bank of Japan introduced the new RTGS system, making real-time gross settlement (RTGS) the only mode for its settlement system for funds and Japanese government securities (JGSs) and abolishing designated-time net settlement. As a preliminary to the changeover to the RTGS system, the Bank sought public comment on specific issues relating to the scheme in 1996, and then began the necessary preparations including system development. In this process, the Bank received significant cooperation from market participants with regard to changes that would need to be made in computer systems and market practices, especially those in trade and settlement, to accommodate to the RTGS system.

2. Since the start of the RTGS system, the Bank's settlement system (the BOJ-NET) has been operating stably, and funds and JGS settlement between financial institutions has taken place smoothly. Financial institutions and private clearing systems have also accommodated to the new settlement method smoothly. Examining the daily volume of transactions settled through the BOJ-NET under the RTGS system in comparison with designated-time net settlement, for funds settlement, i.e., funds transfers via current accounts at the Bank (BOJ accounts), the total value of transactions has fallen sharply. The main reason for this is that the changeover to the RTGS system has made financial institutions more aware of the risks and costs involved in settlement, leading them to review market practices for transactions such as call money transactions. For JGS settlement, the total value of transactions settled has remained more or less unchanged since the start of the RTGS system, but the number of transactions has increased substantially. This is because the new market practices require market participants to set an upper limit of 5 billion yen on the size of trades for smooth settlement. Examination of the way funds and JGS settlement are processed in the course of the day shows that a regular pattern has emerged. Settlement takes place at a fast pace starting early in the morning trading session, given the Bank's introduction of an intraday overdraft facility to provide liquidity throughout the day, and new market practices that facilitate smooth settlement.

3. RTGS is a settlement mode that limits the direct effect of the inability to pay of one financial institution, in the event that the institution becomes unable to transfer either funds or JGSs for any reason, to the immediate counterparties of that institution. The changeover to the RTGS system was aimed at reducing the systemic risk1 inherent in designated-time net settlement.
1 The risk of systemic disruptions posed to financial institutions, and ultimately to the entire financial system, through a chain of settlement failures or delays in settlement.

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Following the introduction of the RTGS system, funds and JGSs are transferred and settled on a transaction-by-transaction basis, i.e., "gross" basis, unlike in designatedtime net settlement where each participant's net position (the sum of the value of all the payments it has received at a particular point of time less the sum of the value of payments it has made) was calculated and settled. In designated-time net settlement, each payment was interrelated with other payments settled at the same settlement time through the netting process, but in RTGS each payment is settled individually. As a result, the systemic risk has been significantly reduced. In addition, since the changeover to real-time settlement, settlement of most transactions at the Bank is completed early in the day. The earlier timing of settlement has also contributed to the reduction of systemic risk by significantly reducing the amount outstanding of transactions remaining unsettled on the settlement day.

4. These developments show that the Bank's changeover to the RTGS system for funds and JGS settlement has taken place smoothly, successfully reducing systemic risk as planned. It constitutes a substantial improvement in the stability of Japan's financial infrastructure. The changeover to the RTGS system is an important factor contributing to more active trading in Japan's financial markets. It is worth noting, however, that innovation in information technology has been going forward at a remarkable pace in recent years, and that the specific nature of services demanded of the settlement system continues to change. The challenges that the Bank will continue to face will be how best to incorporate technological innovations in the BOJ-NET to further enhance the safety and efficiency of the system for its participants. The Bank of Japan will continue to make unceasing efforts to improve the safety and efficiency of the BOJ-NET and Japan's payment and settlement system as a whole in close cooperation with market participants and the operators of private clearing systems. " The full text can be obtained from the Bank of Japans website (http://www.boj.or.jp /en/ronbun/01/data/ron0111a.pdf).

!" Additional measures for the changeover to the real-time gross settlement (RTGS) system (announced in April 2001)
(Details of the issue<Related public statement was not issued in English>) At the beginning of 2001, the Bank of Japan introduced the new RTGS system for transfer of funds and Japanese Government Bonds (JGBs), but the settlements of certain types of JGB transactions were not shifted to RTGS at that time. These exceptions were: (1) transactions involving JGBs kept in custody with the Bank of Japan by foreign central banks and international organizations; (2) JGB issuance for which payments are

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made online; and (3) JGB transactions involving the Bank of Japan or the government as the buyer or borrower, and outright purchases/sales of TBs/FBs in the Banks open market operations. In April 2001, however, the Bank published its Schedule for Additional Measures Relating to Real-Time Gross Settlement of Japanese Government Securities Transactions, in which it laid out a schedule for switching to RTGS for these types of transactions. Switching to RTGS for these types of transactions has been proceeding according to this schedule, and it is scheduled to be completed in January 2004.

!" Conversion to the New JGB Book-entry System Based on the New Legal Framework (started in January 2003)
(Related public statements) !" See page 319 (10. Issues relating to Chapter X) for related public statements.

!" Introduction of DVP Mechanism for Settlement of Commercial Paper (introduced in March 2003)
(Related public statement) !" June 19, 2003! Introduction of DVP Mechanism for Settlement of Commercial Paper

Introduction of DVP Mechanism for Settlement of Commercial Paper 1


1

The Bank released the Japanese original of this statement on March 31, 2003.

June 19, 2003 Bank of Japan

On March 31, 2003, the Japan Securities Depository Center (JASDEC) started operation of a book-entry transfer system for dematerialized commercial paper (CP). This new system, together with the Bank of Japan's BOJ-NET Funds Transfer System with newly added functions, have achieved delivery versus payment (DVP)2 for settlement of CP transactions.
2 DVP is a link between a securities transfer system and a funds transfer system that ensures that delivery occurs if, and only if, payment occurs, and vice versa. The settlement of securities transactions on a DVP basis eliminates principal risk.

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CP is issued by firms and banks for financing, and is traded as a financial instrument in the money markets. Before the start of the new system, since CP could be issued only as promissory notes, physical certificates were required to create, transfer, and exercise the rights of holders. This caused significant difficulties in achieving the safety and efficiency of CP settlement. For example, it was costly and time-consuming to create and transport certificates. It was also impossible to achieve DVP settlement with physical securities. To address these problems, a new legal framework 3 was established, making possible the dematerialization of CP, and the online system was developed for operation under the new framework.
3

The Law Concerning Book-Entry Transfer of Short-Term Corporate Debt Securities, which enabled dematerialization and book-entry transfer of CP, became effective on April 1, 2002. The Law was later amended and renamed the Law Concerning Book-Entry Transfer of Corporate and Other Debt Securities (hereafter "Transfer of Corporate Debt Securities Law"), which became effective on January 6, 2003. The amended Law made possible the dematerialization of various types of debt securities including Japanese government bonds and bills and corporate bonds, as well as the book-entry transfer of these debt securities in a tiering arrangement, where the transfer institution is in the top tier and account-management institutions in the lower tiers. In the law, CP is referred to as "short-term corporate debt securities."

To achieve DVP for settlement of CP transactions, the Bank added new functions to the BOJ-NET Funds Transfer System, enabling processing of individual transfers of CP in JASDEC to be linked with processing of funds transfers over current accounts with the Bank. Specifically, payments for CP transactions are distinguished from other payments processed within the BOJ-NET Funds Transfer System. In addition, JASDEC is notified of the processing of these payments. By using these functions, it has become possible for JASDEC to transfer CP if, and only if, the payment for that transaction has been completed. An institution that would like to receive notification from the Bank regarding the processing of funds transfers over current accounts at the Bank is approved if the following conditions are satisfied: (1) the applicant is a transfer institution for shortterm corporate debt securities designated under the Transfer of Corporate Debt Securities Law; (2) it requests such information for the purpose of achieving DVP using funds transfers over current accounts with the Bank; and (3) it has adequate operational capabilities. It is expected that the dematerialization of CP and the achievement of book-entry transfer on a DVP basis will significantly enhance the safety and efficiency of CP settlement. The Bank will continue to contribute to the further improvement of Japan's securities settlement systems, in cooperation with relevant parties.

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5. Issues relating to Chapter V (On-Site Examination and OffSite Monitoring, and Credit Extension as the Lender of Last Resort)
[Related to Section A] The Bank of Japans Business Operations related to Financial System Stability !" Introduction of the standardized agreement regarding examinations at the premise with financial holding companies (decided in August 2002)
(Details of the issue <Related public statement was not issued in English.>) On August 30, 2002, the Bank of Japan decided to introduce standardized agreement regarding examinations at the premise with financial holding companies whose subsidiaries are subject to the Banks on-site examination. The financial holding companies include bank holding companies prescribed in Banking Law, holding companies of the securities companies prescribed in Article 59 of Securities and Exchange Law, and parent companies having the same management and control function as the former two types of holding companies. The Bank of Japan also decided to require the holding companies to enter into the agreement above as a condition for their subsidiaries to hold current account with the Bank.

!" New Initiative Toward Financial System Stability (decided in September 2002)
(Related public statement) !" September 18, 2002!New Initiative Toward Financial System Stability

New Initiative Toward Financial System Stability

September 18, 2002 Bank of Japan

1. At a regular board meeting following the Monetary Policy Meeting today, the Policy Board of the Bank of Japan decided the following course of action to facilitate resolution of the non-performing loan problem and to secure financial system stability.

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2. While Japan's non-performing loan problem basically stems from the bursting of asset price bubbles, newly generated non-performing loans have emerged as a result of aggressive restructuring efforts. In order to resolve the overall problem, a comprehensive and tenacious approach is needed, centering on a more appropriate evaluation of non-performing loans, the promotion of their early disposal, and efforts toward higher profitability on the part of both firms and financial institutions.

3. For the management of financial institutions to pursue this approach, market risk pertaining to the shareholdings of these institutions has become a significant destabilizing factor. Thus, reducing such risk is an urgent task from the viewpoint of ensuring financial system stability as well as laying the foundation for financial institutions to steadfastly deal with the non-performing loan problem. Based on such recognition, the Bank has decided to explore possible policy measures to enhance financial institutions' efforts to reduce their shareholdings. The Bank will endeavor to submit proposals as soon as possible.

4. In the context of the above, the Bank of Japan will conduct a comprehensive review of the non-performing loan problem and publish the result. At the same time, the Bank reiterates its intention to continue making a maximum contribution to financial system stability.

!" Japans Nonperforming Loan Problem (decided in October 2002)


(Related public statement) !" October 11, 2002! Japan's Nonperforming Loan Problem

Japan's Nonperforming Loan Problem

October 11, 2002 Bank of Japan Summary Japan's nonperforming loan (NPL) problem should be regarded as being inextricably linked with structural changes both in the financial sector and corporate sector. While the problem was previously characterized primarily as the negative legacy from the

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bursting of asset price bubbles, recently it has increasingly become more a question of the disposal1 of NPLs newly generated in the transformation of industry and individual businesses.
1

Disposal of NPLs includes loan write-offs and loan-loss provisions.

During the past ten years, Japanese banks have made progress in addressing the problem by disposing of more than 90 trillion yen in NPLs. Nevertheless, they now face a more severe challenge than ever, given the decline in their financial strength and earning power against the following background. First, a substantial amount of new NPLs is continuously being generated as structural changes progress. Second, the lending margins of banks remain low. And, third, unrealized gains on bank shareholdings, which used to serve as a buffer, have been exhausted. A comprehensive approach is required to resolve the NPL problem, the principal components of which should include a more appropriate evaluation of NPLs, the promotion of their quick disposal based on such evaluation, and the enhancement of earning power on the part of both firms and banks. At the same time, the government and the central bank should preemptively seek to prevent a financial crisis from arising, and prepare an environment which is conducive to the steadfast resolution of the NPL problem. A. Appropriate Evaluation and Quick Disposal of NPLs An appropriate evaluation of the reduced economic value of NPLs and concomitant provisioning for the potential losses are prerequisites for the quick disposal of NPLs. In light of recent rapid changes in the economic structure and the sophistication of credit risk management, opportunities to improve current provisioning methods should be explored. In this conjunction, the Bank of Japan, through its on-site examination and off-site monitoring, intends to encourage major banks, in particular, to strengthen their own efforts toward more appropriate provisioning. Furthermore, it is essential to expand the secondary market for loan assets through such measures as the active use of the Resolution and Collection Corporation (RCC), thereby preparing an environment in which NPLs are priced on a market basis, and to urge banks to remove these loans from their balance sheets. B. Improving the Competitiveness of Both Banks and Firms From the viewpoint of promoting the efforts of bank management to improve earning power and restore financial soundness, the financial system, banking regulations, and the tax system should be constantly reviewed. To resolve the NPL problem, we need a comprehensive approach toward improving competitiveness and promoting rehabilitation of the corporate sector by incorporating the viewpoints of both industrial and regional development policy. At the same time, to secure smooth corporate financing activities, we should nurture new markets for

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securitization, with credit enhancement devices provided by the government as appropriate. C. Securing Financial System Stability If faced with the risk of a financial crisis, we should respond to the situation in an appropriate and flexible manner with the government invoking Article 102 of the Deposit Insurance Law and the Bank of Japan acting as lender of last resort. While staving off a financial crisis, we need to prepare an environment which is conducive to the steadfast resolution of the NPL problem. In this regard, we should encourage banks to reduce their shareholdings. Furthermore, we should consider an option to inject public funds into banks at risk of becoming undercapitalized in the process of the quick disposal of NPLs. Injection should be conducted in such a way as not to undermine the incentives to improve competitiveness. "The full text can be obtained from the Bank of Japans website (http://www.boj.or.jp/ en/set/02/data/fss0210a.pdf). " Some editorial revisions have been made to the English translation since it was initially released on October 11, 2002. The original Japanese text, however, remains entirely unchanged.

!" Purchases of Stocks Held by Banks (decided in October 2002)


(Related public statements) !" October 11, 2002: Stock Purchase Guidelines !" October 11, 2002: (Reference) The Outline of the Stock Purchasing Plan !" March 25, 2003: Increase in Share Purchase Amount Limits !" September 16, 2003: Extension of Period for Stock Purchase

Stock Purchase Guidelines

October 11, 2002 Bank of Japan At a regular board meeting1 held today, the Policy Board of the Bank of Japan approved basic guidelines on the purchase of stocks held by commercial banks. The Bank of Japan subsequently applied to the Minister of Finance and the Commissioner of the Financial Services Agency for official approval to bring the

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guidelines into effect, in accordance with the Bank of Japan Law. The approval was made in response to the Bank's announcement of September 18, 2002 ("New Initiative Toward Financial System Stability"), in which the Bank announced that it would explore possible policy measures to enhance financial institutions' efforts to reduce their shareholdings. Upon government approval, the Bank of Japan will begin purchasing operations as soon as the necessary measures are in place. To ensure high standards of legal compliance, the Bank of Japan will also establish internal rules concerning stock purchasing operations and an internal control system to avoid the risk of violating insider trading rules as soon as possible.
1

The meeting was not a Monetary Policy Meeting.

" Some editorial revisions have been made to the English translation since it was initially released on October 11, 2002. The original Japanese text, however, remains entirely unchanged.

(Reference) The Outline of the Stock Purchasing Plan

October 11, 2002 Bank of Japan

The outline of the stock purchasing plan based on the "Stock Purchase Guidelines" is as follows. 1. Purchase of Stocks (1) Eligible institutions A bank whose stockholdings exceed its Tier I capital. (2) Eligible stocks Listed stocks with a rating of BBB- and above; and 1) such stocks need to be actually traded on a stock exchange for 200 days or more per year, and 2) such stocks need to have an annual turnover of 20 billion yen or more on a stock exchange.

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(3) Method BOJ will establish a trust and purchase stocks as trust property. (4) Price BOJ will purchase stocks at the market price (the lesser of [a] the volumeweighted average price or [b] the day's closing price). (5) Period BOJ will purchase stocks until end-September 2003 (the period can be extended until end-September 2004 if the cumulative amount of purchased stocks does not reach 2 trillion yen by end-September 2003). (6) Size BOJ will purchase a total of 2 trillion yen worth of stocks. (7) Limit per bank The maximum amount of stock BOJ will purchase from a bank will not exceed the lesser of (a) the amount exceeding the bank's Tier I capital, or (b) 500 billion yen. (8) Limit per issuer The maximum amount/number of shares per issuer will not exceed the lesser of (a) 5 percent of all voting rights, or (b) amounts set forth in the table below. Purchase limits Rating Turnover per year 200 or more 100 or more 50 or more 20 or more A and above 100 50 25 10 (billion yen) BBB 50 25 12.5 5

2. After Purchase (1) Stock disposal policy BOJ will not sell purchased stocks until end-September 2007 (however, BOJ

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will respond to the issuer's request to sell shares at market price on the condition that BOJ does not suffer a loss). BOJ will complete disposal of stocks by end-September 2017 (BOJ will consider the impact of its action on the stock market and the BOJ's risk of suffering losses). (2) Exercise of voting rights BOJ will present basic principles regarding the exercise of voting rights to trust bank(s) ("the trustee"), and the trustee will exercise such rights taking due account of fiduciary responsibility (the trustee has a duty to exercise reasonable care and skill). (3) Loss reserve policy BOJ will set aside amounts for unrealized loss on the purchased stocks (the difference between the market value and the book value) at endSeptember/March. Upon government approval, BOJ will commence purchasing operations as soon as the necessary measures are in place. " Some editorial revisions have been made to the English translation since it was initially released on October 11, 2002. The original Japanese text, however, remains entirely unchanged.

Increase in Share Purchase Amount Limits

March 25, 2003 Bank of Japan

At a regular meeting held today, the Policy Board of the Bank of Japan decided to increase the maximum amount of equity holdings it will purchase from commercial banks. Immediately after this decision the Bank applied to the Minister of Finance and the Commissioner of the Financial Services Agency for official approval in accordance with Article 43 of the Bank of Japan Law. Against the background of more volatile stock prices in light of the military action against Iraq taken by the US and allied forces, the Board has made this decision to

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encourage banks to make more efforts to reduce their exposure to market volatility resulting from their equity holdings. Details of the measure are as follows: The Bank will: 1. increase the maximum total amount of equity holdings it purchases from banks to 3 trillion yen from the current 2 trillion yen, and 2. increase the maximum cumulative amount of equity holdings it will purchase from any one bank to 750 billion yen from the current 500 billion yen. The measure will come into effect upon government approval. The Bank of Japan will make continuing efforts to ensure its own financial soundness such as by strengthening own capital. The Bank of Japan strongly hopes that banks will reduce their excess equity holdings as soon as possible by utilizing the measure offered by the Bank.

Extension of Period for Stock Purchase

September 16, 2003 Bank of Japan

The Policy Board of the Bank of Japan decided today to extend the period for purchasing stocks from banks by one year to end-September 2004. The Board made this decision based on the following perceptions. 1. Some banks still hold stocks in excess of their Tier I capital, although recent data show a decrease in bank stockholdings. 2. A potential demand for the Bank's stock purchase program still exists as a way to reduce bank stockholdings. Application of the Stock Purchase Guidelines remains unchanged except for the period of stock purchase.

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6. Issues relating to Chapter VI (The Bank of Japan's Money Market Operations and Lending)
[Related to Section A] Price Stability and Monetary Policy !" New Procedures for Money Market Operations (decided in March 2001)
(Related public statements) !" March 19, 2001: New Procedures for Money Market Operations and Monetary Easing !" March 19, 2001: (Short Note 1) New Steps for Monetary Easing: What is Significant? !" March 19, 2001: (Short Note 2) Q&A: New Procedure for Money Market Operations !" October 10, 2003: Enhancement of Monetary Policy Transparency (see page 246)

New Procedures for Money Market Operations and Monetary Easing

March 19, 2001 Bank of Japan

1. Japan's economic recovery has recently come to a pause after it slowed in late 2000 under the influence of a sharp downturn of the global economy. Prices have been showing weak developments and there is concern about increase in downward pressures on prices stemming from weak demand.

2. In retrospect, both monetary and fiscal policies have taken considerably strong actions during the past decade in Japan. Whereas fiscal policy has repeatedly implemented expansionary measures, the Bank of Japan has adopted a policy of maintaining interest rates at levels unprecedentedly low during the history of central banking at home and abroad, thereby providing ample liquidity. All this notwithstanding, Japan's economy has failed to return to a sustainable growth path, and is now faced again with a threat of deterioration.

3. In light of this, the Bank has come to a conclusion that the economic conditions warrant monetary easing as drastic as is unlikely to be taken under ordinary circumstances. Accordingly, the Bank decided at its Monetary Policy Meeting of today to take the following policy actions. a) Change in the operating target for money market operations The main operating target for money market operations be changed from the current uncollateralized overnight call rate to the outstanding balance of the

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current accounts at the Bank of Japan. Under the new procedures, the Bank provides ample liquidity, and the uncollateralized overnight call rate will be determined in the market at a certain level below the ceiling set by the Lombardtype lending facility. b) CPI guideline for the duration of the new procedures The new procedures for money market operations continue to be in place until the consumer price index (excluding perishables, on a nationwide statistics) registers stably a zero percent or an increase year on year. c) Increase in the current-account balance at the Bank of Japan and declines in interest rates For the time being, the balance outstanding at the Bank's current accounts be increased to around 5 trillion yen, or 1 trillion yen increase from the average outstanding of 4 trillion yen in February 2001 (see Attachment). As a consequence, it is anticipated that the uncollateralized overnight call rate will significantly decline from the current target level of 0.15 percent and stay close to zero percent under normal circumstances. d) Increase in outright purchase of long-term government bonds The Bank will increase the amount of its outright purchase of long-term government bonds from the current 400 billion yen per month, in case it considers that increase to be necessary for providing liquidity smoothly. The outright purchase is, on the other hand, subject to the limitation that the outstanding amount of long-term government bonds effectively held by the Bank, i.e., after taking account of the government bond sales under gensaki repurchase agreements, be kept below the outstanding balance of banknotes issued.

4. The Bank of Japan has decided to implement these policy measures with firm determination with a view to preventing prices from declining continuously as well as preparing a basis for sustainable economic growth.

5. In order to make this monetary easing fully effective in restoring Japan's economy on a sustainable growth path, progress in structural reforms with respect to the financial system, e.g., resolution of the non-performing asset problem, as well as in the area of economy and industry is essential. Structural reform may be accompanied by painful adjustments. Without such adjustments, however, neither improvement in productivity nor sustainable economic growth can be obtained. The Bank of Japan strongly hopes that decisive actions be taken to address fundamental problems both with a clear support of the nation for structural reform and under a strong leadership of the government of Japan.

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Attachment

March 19, 2001 Bank of Japan

At the Monetary Policy Meeting held today, the Bank of Japan decided, by majority vote, to change the guideline for money market operations for the inter-meeting period into the following:

The Bank of Japan will conduct money market operations, aiming the outstanding balance of the current accounts at the Bank at around 5 trillion yen. Should there be a risk of financial market instability, e.g., a rapid surge in liquidity demand, the Bank will provide ampler liquidity irrespective of the guideline above.

(Short Note 1) New Steps for Monetary Easing: What is Significant?

March 19, 2001 Bank of Japan

New Procedures for Money Market Operations !" The same benefit of the "Zero Interest Rate Policy" can be expected while leaving room for a market mechanism !" Volatile interest rate fluctuation can be avoided by the "Lombard-Type" lending facility

Strong Commitment in terms of Policy Duration !" The new procedures continue until the CPI (excluding perishables) registers stably a zero percent or an increase year on year !" Affect people's expectation to remove a deflationary bias !" Fall in interest rates across the yield curve

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More Effective Market Operations with a Clear Ceiling to Secure Discipline !" In order to provide funds smoothly, increase the amount of outright purchase of the long-term government bonds if necessary !" Secure the credibility of the monetary policy by establishing a ceiling for the purchase set at the outstanding amount of bank note issuance

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

March 19, 2001 Bank of Japan

Q1: Please explain the new procedures in which the outstanding balance of the current accounts at the BOJ is set as a main target for money market operations. A1: The Bank has conducted money market operations based on the guidelines set by the Monetary Policy Meeting of the Policy Board in terms of the uncollateralized overnight call rate. In the new procedures, the Monetary Policy Meeting will decide the guidelines in terms of the "outstanding balance" of the current accounts at the BOJ and operations will be conducted to meet the target balance. Q2: What is its impact on interest rates? A2: So far, the overnight call rate has stayed around 0.15% with around 4 trillion yen of the current account balance. As the outstanding balance of the current accounts will be raised to 5 trillion yen for the time being, the overnight call rate is expected to decline to stay around zero percent under normal circumstances. Furthermore, as market participants expect the procedures to last until "the CPI (excluding perishables) registers stably a zero percent or an increase year on year," we can also expect a decline in interest rates across the yield curve (commitment effect). Q3: Is this a return to the "Zero Interest Rate Policy"? A3: Under the "Zero Interest Rate Policy," the Bank adjusted the amount of fund provision to guide a call rate close to zero. In the new procedures, the Bank sets the amount of fund provision as a main target and let market forces decide a call rate. Although interest rates are expected to stay around zero under normal circumstances with 5 trillion yen of the current account balance, they could somewhat rise when the market tightens and could reflect a certain difference in a credit risk. As such, the new procedures intend to achieve the same monetary easing effect of the "Zero Interest Rate Policy" while preserving a market mechanism as

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much as possible. Q4: More fluctuation in call rates is expected? A4: No. Thanks to the "Lombard-Type" lending facility introduced in this February, the official discount rate (0.25%) will set a ceiling, beyond which a call rate will not rise. Q5: Why was monetary base not chosen as a target? A5: Monetary base consists of the "current account balance at the BOJ" and "cash in circulation". In a short run, it is difficult for the Bank to effectively control the amount of cash, which accounts for 90 percent of monetary base, because it is determined by the demand from households and companies. In the case of the current account balance at the BOJ, the Bank has better control through daily market operations. If we assume a recent growth rate of bank notes (6% annually), it is expected that, by increasing the current account balance to 5 trillion yen, the growth rate of monetary base will rise from the current level (around 3% in February) to 7% within six months. Q6: The Bank has long opposed to the idea of increasing the outright purchase of the long-term government bonds. Has the policy changed? A6: No. In the new procedures, we decided to allow an increase in the outright purchase only in the case when such an increase is necessary for providing funds smoothly to meet the target current account balance, e.g. when we repeatedly fail to get enough bids for money market operations. The Bank still has no intentions to increase the amount of outright purchase of the long-term government bonds for the purpose of supporting bond prices or government financing. In order to make this point clear, the Bank continues its policy to control the amount of outright purchase of the longterm government bonds with reference to the bank note issuance by establishing a new ceiling on a stock basis. Q7: Does it mean that the Bank has adopted inflation targeting? A7: Inflation targeting is usually defined as a scheme under which 1) a desirable inflation rate from a long-term perspective is set as a target and 2) a central bank adjusts monetary policy in a forward-looking manner when an actual inflation rate is expected to deviate from the target. The Bank's policy on inflation targeting is that we have to further examine its desirability and feasibility because it is difficult to numerically define a desirable inflation rate from a long-term perspective in the current situation in Japan. This time, the Bank committed itself that this unorthodox policy will be continued until the actual CPI registers a zero percent or an increase year on year. Although it is not inflation targeting, it shows the Bank's determination to prevent a continuous price decline and to form a basis for a sustainable growth.

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[Related to Section C] Money Market Operations (1) Broadening the range of assets and collateral eligible for market operations !" Broadening the range of eligible CP for CP operations and collateral uses to include Asset-backed Commercial Paper (ABCP), and broadening the range of eligible ABS as collateral (decided in January 2002)
(Related public statements) !" December 19, 2001: Change in the Guideline for Money Market Operations !" January 16, 2002: Amendments to Guidelines on Eligible Collateral

Change in the Guideline for Money Market Operations

December 19, 2001 Bank of Japan

1. At the Monetary Policy Meeting held today, the Bank of Japan decided to raise the main operating target, the outstanding balance of the current accounts at the Bank, and to take measures to strengthen money market operations (Annex). 2. Japan's economy is deteriorating broadly and likely to undergo a severe adjustment phase for the time being. Against this background, looking at the stock market as well as the markets for commercial paper and corporate bonds, price differentials are widening reflecting the credit conditions of each firm. As such, financial institutions and investors are becoming more cautious. 3. To some extent, this deterioration in the financial environment is the inevitable process associated with structural reform in the area of economy and industry as well as the restoration of a robust and sound financial system. Nevertheless, there is concern that, if the deterioration in the financial environment goes too far and adversely affects financing by firms in good condition, it could exert downward pressure on economic activity and prices. 4. With these points in mind, today's decision is intended to secure that the financial markets continue to work in a stable manner and to ensure that economic recovery will be effectively supported from the monetary side. 5. While carefully monitoring developments in economic activity as well as financial markets, the Bank will continue to make every effort as a central bank to prevent a continuous decline in prices and to establish a basis for the stable and sustainable growth of Japan's economy.

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Annex 1. Change in the guideline for money market operations (attachment) The Bank of Japan will conduct money market operations, aiming at the outstanding balance of the current accounts at the Bank at around 10 to 15 trillion yen. Should there be a risk of financial market instability, such as a surge in liquidity demand, the Bank will provide more liquidity irrespective of the guideline above. 2. Increase in outright purchase of long-term government bonds The Bank will increase its outright purchase of long-term government bonds from the current 600 billion yen per month or 7.2 trillion yen per year to 800 billion per month or 9.6 trillion yen per year. 3. Measures to strengthen money market operations 1) Making further use of Commercial Paper (CP) and Asset -backed Securities (ABS) a. For the time being, the Bank will more actively purchase CP under repurchase agreements (CP operations). b. The Bank will immediately examine operational issues to broaden the range of eligible CP for CP operations and collateral uses to include Asset-backed Commercial Paper (ABCP). Upon completing the examination, the Bank will bring it into effect with the approval at the Monetary Policy Meeting. c. The Bank will immediately examine operational issues to broaden the range of eligible ABS as collateral. Upon completing the examination, the Bank will bring it into effect with the approval at the Monetary Policy Meeting. More specifically, the range of eligible ABS, currently limited to those backed by lease receivables and credit receivables as well as collateralized bond obligations (CBO) and collateralized loan obligations (CLO), will be broadened to include those backed by mortgage loans and cash flows generated by real estate. 2) Improvement in the conduct of money market operations a. The Bank will increase the frequency of bill purchasing operations at the Bank's all offices. b. The Bank will allow all eligible counterparties to participate in the outright purchase of JGBs, JGB repo operations, CP operations, and bill selling operations. The current practice of changing participants in rotation within

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eligible counterparties will be abolished. " Attachment is not attached.

Amendments to "Guidelines on Eligible Collateral"

January 16, 2002 Bank of Japan

At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided to amend "Guidelines on Eligible Collateral" (Policy Board Decision on October 13, 2000) as shown in Attachment with a view to strengthen money market operations. The decision was made in accordance with "Change in the Guideline for Money Market Operations", which was decided at the Monetary Policy Meeting held on December 19, 2001 and immediately announced. Following today's decision, the Bank will start to accept, on the date no later than February 28, 2002, asset-backed commercial paper (ABCP) as eligible collateral and as eligible asset for commercial paper (CP) purchasing operations under repurchase agreements. Also, the Bank will start to accept from the middle of March 2002 at the latest asset-backed securities backed by mortgage loans and cash flows generated from real estate as eligible collateral. " Attachment is not attached.

!" Broadening the range of eligible collateral to include loans to the Deposit Insurance Corporation as well as loans to the Government's "Special Account for the Allotment of Local Allocation Tax and Local Transfer Tax." (decided in March 2002)
(Related public statements) !" February 28, 2002: On Todays Decision at the Monetary Policy Meeting !" March 20, 2002: Amendments to Guidelines on Eligible Collateral

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On Today's Decision at the Monetary Policy Meeting

February 28, 2002 Bank of Japan

1. As a result of strong monetary easing by the Bank of Japan, extremely accommodative conditions are being maintained in the financial markets. Short-term interest rates have declined to virtually zero percent while the year-on-year growth rate of monetary base has reached nearly 30 percent. 2. With the end of a fiscal year approaching, however, there is a possibility that liquidity demand will increase further depending on the financial market developments. It is thus extremely important to take all possible measures to secure the financial market stability in order to prevent a deflationary spiral and to pursue a sustainable economic growth. 3. Against this background, the Bank has decided to take the following measures. 1) Providing ample liquidity towards the end of a fiscal year For the time being, to secure the financial market stability towards the end of a fiscal year, the Bank will provide more liquidity to meet a surge in demand irrespective of the target of current account balances, around 10 to 15 trillion yen (attachment). 2) Increasing the outright purchase of long-term government bonds In order to provide liquidity smoothly, the Bank will increase the outright purchase of long-term government bonds from the current 800 billion yen per month (or 9.6 trillion yen per year) to 1 trillion yen per month (or 12 trillion yen per year). 3) Easing the restriction on the use of the Lombard-type lending facility In the period starting March 1st and ending April 15th, the end of the March reserve maintenance period, the Bank will apply the official discount rate to the Lombard-type lending facility on any business day, suspending the current restriction on the maximum number of days for such use, namely five business days in a reserve maintenance period. 4) Examining issues to broaden the range of eligible collateral

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The Bank will immediately examine operational issues to broaden the range of eligible collateral to include loans to the Deposit Insurance Corporation as well as loans to the Government's "Special Account for the Allotment of Local Allocation Tax and Local Transfer Tax." In the process, the Bank will consult with concerned parties to take necessary steps including those for making such loans negotiable. 4. To realize the full permeation of the effects of strong monetary easing, it is essential to strengthen a financial system and ensure its stability by making a swift move to resolve the non-performing loan problem. It is also vital to make progress in structural reform on the economic and industrial fronts through tax reform, streamlining of public financial institutions, and deregulation. The Bank strongly hopes that both the Government and the private sector, in particular financial institutions, will take more determined and effective steps in this regard. 5. The recent price decline reflects the widening output gap in the economy as well as the effects of structural changes in the supply-side including a rise in the import penetration ratio. In order to exit from deflation, it is indispensable to revitalize economic activity and to bring the economy back to a sustainable growth path through decisive steps including those described in paragraph 4. 6. The Bank of Japan is determined to continue its utmost efforts as a central bank by a) providing ample liquidity to the market and b) preventing systemic risk from materializing as the lender of last resort. " Attachment is not attached.

Amendments to Guidelines on Eligible Collateral

March 20, 2002 Bank of Japan

At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided to amend Guidelines on Eligible Collateral (Policy Board Decision on October 13, 2000) as shown in Attachment to broaden the range of eligible collateral to include loans to the Deposit Insurance Corporation as well as loans to the Government's Special Account for the Allotment of Local Allocation Tax and Local Transfer Tax. The decision was made in accordance with the paragraph 3 (4) of On Today's Decision at the Monetary Policy Meeting, which was decided at the Monetary Policy Meeting held on February 28, 2002 and immediately announced. Following today's decision, the Bank will start to accept loans to the Deposit Insurance Corporation as well as loans to the Government's Special Account for the Allotment of

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Local Allocation Tax and Local Transfer Tax on March 26, 2002 as eligible collateral. " Attachment is not attached.

!" Measures to Facilitate Smooth Corporate Financing (acceptance of a broader range of loans on deeds as eligible collateral, and relaxation of standards for ABCP as eligible collateral), and Acceptance of STRIPS government securities as eligible collateral (decided in December 2002)
(Related public statements) !" December 17, 2002: Measures to Facilitate Smooth Corporate Financing !" December 17, 2002: Amendments to Guidelines on Eligible Collateral and establishment of Temporary Rules of Eligibility Standards for Asset-backed Commercial Paper

Measures to Facilitate Smooth Corporate Financing

December 17, 2002 Bank of Japan

1. At the Monetary Policy Meeting (MPM) held today, the Bank of Japan decided to take the following measures to secure smooth corporate financing. These are the outcome of the deliberations to follow up the discussion at the MPM on October 30. a) Acceptance of a broader range of loans on deeds as eligible collateral Loans on deeds with original maturity of more than five years and up to ten years will be accepted as eligible collateral. In addition, collateral value ratios will be raised for loans on deeds with original maturity of three years and less. b) Relaxation of standards for ABCP as eligible collateral As an exceptional and temporary measure effective until the end of March 2005, the asset-backed commercial paper (ABCP) guaranteed by the Bank's counterparty financial institutions will be accepted as eligible collateral and be eligible for Bank's market operations to purchase commercial paper under the repurchase agreement. 2. By providing markets with ample funds, the Bank removes concern about liquidity financing, thereby contributing to the promotion of a favorable environment for financial institutions to extend loans. In addition, the Bank is playing its part in securing smooth corporate financing by accepting corporate debts as eligible collateral and conducting market operations to purchase commercial paper under the

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repurchase agreement. 3. The Bank expects that today's decision will make it easier for financial institutions to refinance ABCP and loans on deeds to business firms, thereby facilitating smooth corporate financing as well as the development of the ABCP market. The Bank also expects that various institutional frameworks will be reviewed to promote the development of markets for securitized products, such as ABCP and asset-backed securities. 4. The Bank will continue to closely monitor developments in corporate financing including the impact of acceleration in the disposal of the non-performing loans.

Amendments to Guidelines on Eligible Collateral and establishment of Temporary Rules of Eligibility Standards for Asset-backed Commercial Paper

December 17, 2002 Bank of Japan

At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided to take following measures to secure smooth corporate financing. 1. Acceptance of a broader range of loans on deeds as eligible collateral and changes in their collateral value ratios (amendments to Guidelines on Eligible Collateral) (1) Loans on deeds with original maturities of more than 5 years and up to 10 years shall be included as eligible collateral. Previously, only those with original maturities of up to 5 years were eligible. (2) Various collateral value ratios (ranging between 50% and 96%) shall be applied to loans on deeds depending on the types of debtors and the lengths of original maturities. Previously, the uniform collateral value ratio (80%) was applied to any types of eligible loans on deeds.

2. Acceptance of a broader range of asset-backed commercial paper as eligible collateral (establishment of Temporary Rules of Eligibility Standards for Assetbacked Commercial Paper) Guidelines on Eligible Collateral stipulate that the debt obligations guaranteed by the Bank's counterparty financial institutions shall be ineligible, making most asset-

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backed commercial paper, which is usually accompanied by a backup line (liquidity/credit enhancement program), excluded from eligible collateral. Temporary Rules of Eligibility Standards for Asset-backed Commercial Paper, which make exceptions to the guidelines above, are established in order to broaden a range of asset-backed commercial paper as eligible collateral. The Policy Board of the Bank also decided to include STRIPS government securities as eligible collateral (amendments to Guidelines on Eligible Collateral). STRIPS government securities are scheduled to be introduced in January 2003 when the laws and regulations concerned become effective. Regarding the amended Guidelines on Eligible Collateral and Temporary Rules of Eligibility Standards for Asset-backed Commercial Paper, see Attachment 1 and 2 respectively. " Attachment 1 and 2 are not attached.

!" Acceptance of Dematerialized Commercial Paper as Eligible Collateral (decided in February 2003)
(Related public statement) !" February 14, 2003: Amendment to Guidelines on Eligible Collateral and Temporary Rules of Eligibility Standards for Asset-backed Commercial Paper (Acceptance of Dematerialized Commercial Paper as Eligible Collateral)

Amendment to Guidelines on Eligible Collateral and Temporary Rules of Eligibility Standards for Asset-backed Commercial Paper (Acceptance of Dematerialized Commercial Paper as Eligible Collateral)

February 14, 2003 Bank of Japan

At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan voted to approve acceptance of dematerialized commercial paper and dematerialized asset-backed commercial paper as eligible collateral (amendment to Guidelines on Eligible Collateral and Temporary Rules of Eligibility Standards for Asset-backed Commercial Paper). The Law Concerning Book-entry Transfer of Corporate Bonds and Other Securities (hereinafter referred to as "the law") has enabled dematerialization and book-entry

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transfers of various types of securities including commercial paper. Under the law, the Japan Securities Depository Center Inc., a designated central securities depository, is scheduled to start operating the book-entry system for dematerialized commercial paper and dematerialized asset-backed commercial paper on March 31, 2003. Regarding the amended Guidelines on Eligible Collateral and Temporary Rules of Eligibility Standards for Asset-backed Commercial Paper, see Attachment 1 and 2 respectively. " Attachment 1 and 2 are not attached.

!" Acceptance of loans on deeds to the Industrial Revitalization Corporation of Japan as Eligible Collateral (decided in April 2003)
(Related public statements) !" April 30, 2003: Change in the Guideline for Money Market Operations !" April 30, 2003: Amendment to Guidelines on Eligible Collateral (Acceptance of loans on deeds to the Industrial Revitalization Corporation of Japan as Eligible Collateral)

Change in the Guideline for Money Market Operations

April 30, 2003 Bank of Japan

1. At the Monetary Policy Meeting held today, the Bank of Japan decided to change the main operating target in the guideline for money market operations. The target balance of current accounts held at the Bank is raised from around 17 to 22 trillion yen to around 22 to 27 trillion yen (see attachment). The Bank also decided to accept loans on deeds to the Industrial Revitalization Corporation of Japan with government guarantee as eligible collateral.

2. Economic activity in Japan remains flat. With respect to overseas economies, the prospect of a recovery in the US and European economies still faces considerable uncertainty. The impact of SARS is becoming a matter of concern for Asian economies, which have maintained robustness as a whole.

3. In financial markets, ample liquidity provided by the Bank has restrained financial institutions' concern over liquidity financing. At the same time, however, stock price developments, especially those of bank stocks, remain weak and volatile. Careful attention is warranted so that the stock price developments will not negatively affect

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financial markets and economic activity.

4. Based on the above described uncertainty regarding the economic and financial situation, the Bank thought it appropriate to raise the target balance of current accounts held at the Bank to maintain financial market stability, thereby strengthening support for economic recovery.

5. For the purpose of promoting the transparency of monetary policy, the Bank also decided to expand the contents of "Outlook and Risk Assessment of the Economy and Prices" released today by adding new sections describing the conduct of monetary policy and a financial environment. " Attachment is not attached.

Amendment to Guidelines on Eligible Collateral (Acceptance of loans on deeds to the Industrial Revitalization Corporation of Japan as Eligible Collateral)

April 30, 2003 Bank of Japan

At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan voted to approve acceptance of loans on deeds to the Industrial Revitalization Corporation of Japan with government guarantee as eligible collateral (amendment to Guidelines on Eligible Collateral). Under the Industrial Revitalization Corporation of Japan Law, the Industrial Revitalization Corporation of Japan was established on April 16, 2003. The Industrial Revitalization Corporation of Japan is scheduled to finance its operation mainly by loans from financial institutions through competitive auctions. Regarding the amended Guidelines on Eligible Collateral, see Attachment. " Attachment is not attached.

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!" Inclusion of Dematerialized Commercial Paper in eligible assets for CPpurchase operation (decided in June 2003)
(Related public statements) !" June 11, 2003: Amendment to Principal Terms and Conditions for the Purchase of Commercial Paper with Repurchase Agreements (Inclusion of Dematerialized Commercial Paper in eligible assets for CP-purchase operation)

Amendment to Principal Terms and Conditions for the Purchase of Commercial Paper with Repurchase Agreements (Inclusion of Dematerialized Commercial Paper in eligible assets for CP-purchase operation)

June 11, 2003 Bank of Japan

At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan, with a view to facilitating the Bank's money market operations, decided to expand the range of eligible assets for CP-purchase operation and to include dematerialized commercial paper and dematerialized asset-backed commercial paper* (amendment to Principal Terms and Conditions for the Purchase of Commercial Paper with Repurchase Agreements). Regarding the amended Principal Terms and Conditions for the Purchase of Commercial Paper with Repurchase Agreements, see Attachment. * In Japan, dematerialized commercial paper was introduced at the end of March 2003, when the Japan Securities Depository Center Inc. started its operation under the Law Concerning Book-entry Transfer of Corporate Bonds and Other Securities. " Attachment is not attached.

!" Purchase of Asset-Backed Securities (decided in June 2003)


(Related public statements) !" April 8, 2003: Examination of Possible Purchase of Asset-Backed Securities !" April 8, 2003: Proposal for a new scheme to promote smooth corporate financing by nurturing the asset-backed securities market (Summary) !" June 11, 2003: Purchases of Asset-Backed Securities

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!" June 25, 2003: Establishment of Principal Terms and Conditions for the Outright Purchases of Asset-Backed Securities !" January 20, 2004: Modification of the Conditions regarding the Purchases of AssetBacked Securities !" January 20, 2004: (Reference) Modification of the Conditions regarding the Purchases of Asset-Backed Securities

Examination of Possible Purchase of Asset-Backed Securities April 8, 2003 Bank of Japan 1. Ample liquidity provision by the Bank of Japan has made a significant contribution to securing financial market stability and upholding the economy and prices. For the ample liquidity provision to effectively lead to economic expansion, however, it is deemed necessary to strengthen the transmission mechanism of monetary easing. 2. The Bank decided the following at today's Monetary Policy Meeting (MPM) of the Policy Board. a) As a temporary measure, the Bank will examine the possible purchase of assetbacked securities (ABSs), including asset-backed commercial papers, mainly backed by those assets related to small and medium-sized enterprises, for money market operations. b) The Bank will seek market participants' views when developing the specific design of a purchasing scheme. c) The specific design of the scheme will be discussed and decided at the MPM. 3. Against the background of banks' weak financial intermediary function, today's decision has the objective to strengthen the effects of monetary easing by nurturing the development of the ABS market, thereby promoting smooth corporate financing. In this respect, it is expected that ABSs will play an important role by diversifying and transferring credit risks. 4. Although private debt including ABSs has already been accepted as eligible collateral for money market operations and purchased under repurchase agreements by the Bank, outright purchase of private debt is an unprecedented measure for a central bank. The Bank will determine the specific design of the purchasing scheme considering the following: to what extent the purchase will strengthen the

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transmission mechanism; whether the purchase will not distort market mechanisms; and how to maintain financial soundness of the Bank. 5. The Bank will continue to review the conduct of monetary policy and take necessary measures in order to strengthen the transmission mechanism of monetary easing and to enhance the transparency of monetary policy.

Proposal for a new scheme to promote smooth corporate financing by nurturing the asset-backed securities market (Summary)

April 8, 2003 Bank of Japan

Intent !" The Bank of Japan proposes to market participants a new scheme to promote smooth corporate financing by nurturing the asset-backed securities market. !" The Bank will, while seeking the views of market participants, review specific arrangements for the case where the Bank would decide to purchase asset-backed securities, including asset-backed commercial papers. The Bank will decide and announce its final decision as soon as possible. Outline of the proposal 1. Framework of the new scheme and the involvement of the Bank of Japan (Framework <please see attachment>) !" The Bank of Japan will encourage the new arrangements of asset-backed securities. The asset-backed securities would be backed mainly by pools of assets related to small and medium-sized enterprises (SMEs) classified as Normal through banks self-assessment process or with equivalent credit standings. Such pools of assets would comprise receivables purchased from SMEs or loans to SMEs. The overall risks of the pooled assets would be restructured into multiple layers representing different degrees of risks. !" For example, the senior and mezzanine tranches would be sold in the markets to investors. Meanwhile, the equity portion would be retained by entities such as originators. (The Bank of Japans involvement) !" The Bank will consider purchasing asset-backed securities of certain credit quality

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issued through the above scheme. The Bank welcomes other public institutions to join with the Bank in purchasing these securities. !" The purchase of asset-backed securities by the Bank would be a temporary measure against the background of (a) the weak financial intermediary function of Japans banking sector, and (b) the fact that the asset-backed securities market for SMEs is still in its infancy. 2. Positive effects expected of the introduction of the scheme !" By transferring the credit risk of SMEs to banks, markets (investors) and the public sector, the funding capabilities of companies will be enhanced, while banks lending capacities will be reinforced. !" Increases the market liquidity of asset-backed securities, thereby reducing funding costs and increasing the availability of funds. !" Paves the way to providing SMEs with a new financing channel, contributing to strengthening the transmission mechanism of monetary easing. 3. Key questions to be addressed by market participants (General points) !" How strong is the potential need for arranging asset-backed securities? Are market participants interested in the above mentioned scheme? Would there be interest among regional financial institutions in developing such schemes in coordination with other financial institutions? !" How strong is investor demand for asset-backed securities? What are the main factors behind the underdeveloped primary market for mezzanine securities? (Purchase of a portion of asset-backed securities by the Bank of Japan) !" Would the possible purchases of asset-backed securities of certain credit quality as presented in section 1. by the Bank of Japan improve the corporate financing for SMEs and support the development of the asset-backed securities market? On the contrary, would there be the possibility that such purchases by the Bank or other public sector institutions may distort pricing in these markets? !" Are there government financial institutions that express interest in this scheme? Are there support programs by government financial institutions which could readily be adapted to this scheme? !" What would be a preferable maturity for the securities to be purchased under this scheme? !" What would be a transparent process for pricing such securities which would produce results close to fair value? (Other issues) !" Are there structural problems (e.g. legal, accounting, tax) or issues related to market practice which could be improved in developing the asset-backed securities markets?

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4. Deadline for comments May 9, 2003 in written format.

(attachment) Example of the proposed scheme

sale of receivables

senior security (low risk portion)

SMEs
loans

sale proceeds

SPC
(Pools of SME risk)

Investors (markets), public sector

mezzanine security (middle risk portion)

loan sales

banks etc
(originators)

sale proceeds

equity (first-loss position)

Note: Depending on the type of security (CPs in the form of bills, short-term corporate bonds, long-term corporate bonds) used within the scheme, the multi-layered structure etc. of the asset-backed security may take various forms.

Purchases of Asset-Backed Securities June 11, 2003 Bank of Japan

1. At the Monetary Policy Meeting (MPM) held today, the Bank of Japan decided the outline of the scheme for outright purchases of asset-backed securities (ABSs) as shown in the Appendix. Based on the outline, the Bank will work on necessary arrangements so that the new scheme be put in place by end-July 2003. The Bank has reached today's decision after it continued to examine the possible purchases of ABSs since the MPM held on April 7-8, taking account of comments received from market participants. 2. ABSs are expected to contribute to promoting smooth corporate financing by reducing credit risks through their diversification as well as by reallocating credit risks to investors with various risk preferences. The Bank judged that it can play an

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important role in encouraging the development of the ABS market by directly taking credit risks through purchases of ABSs as a temporary measure. By encouraging the development of the ABS market through this unprecedented scheme for a central bank, the Bank could strengthen the transmission mechanism of monetary easing against the background of banks' weak financial intermediary function. 3. In designing the scheme, due attention was paid so that the Bank's purchase would contribute to sound development of the ABS market, without distorting market mechanism. In order to make this scheme most effective, the Bank purchases various types of ABSs as eligible assets, including those with relatively higher credit risk. The Bank purchases ABSs with a broad range of underlying assets, including loans and receivables, if they are deemed to contribute to smooth financing of small and medium-sized enterprises. The Bank sets the maximum amount outstanding of purchases at one trillion yen for the time being in order to give maximum support to the development of the ABS market while maintaining the financial soundness of the Bank. 4. The improvement of the market infrastructure is essential for further development of ABSs. The Bank will continue to make efforts in order to improve the infrastructure of the ABS market in cooperation with market participants, taking their comments into account. The Bank will work together with relevant authorities and government financial institutions for supporting the effort of market participants

(Appendix) Outline of the Outright Purchase Scheme for Asset-Backed Securities 1. Eligible assets to be purchased (1) Types of eligible assets !" Asset-backed securities (publicly-offered) !" Synthetic-type securities (publicly-offered credit-link notes) !" Asset-backed commercial paper (including dematerialized commercial paper) (2) Eligibility criteria [1] Characteristics of securities !" Securities shall be denominated in Japanese yen. !" Securities shall be issued in Japan. !" Securities shall be governed by Japanese law. [2] Underlying assets !" Underlying assets* shall be those deemed to contribute to smooth financing of small and medium-sized enterprises. The eligible assets shall not be limited to

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loans or receivables. * In the case of synthetic-type securities, "underlying assets" mean pools of assets whose credit risk is transferred by financial transactions such as credit derivatives. !" 50 % or more of the value of underlying assets shall be composed of assets related to small and medium-sized enterprises (i.e. enterprises with capital of 1 billion yen or less). !" When underlying assets are pools of bank loans, their borrowers shall be those classified as "normal" based on the FSA's examination manual through banks' selfassessment of loan portfolio. [3] Creditworthiness (a) Asset-backed securities and synthetic-type securities !" Securities shall be rated BB or higher by all rating agencies (minimum of two ratings). !" Original maturities shall be up to three years. !" Proceeds raised through the issuance of synthetic-type securities shall be invested in pools of financial assets deemed appropriate by the Bank in terms of their marketability and creditworthiness (e.g. JGBs). (b) Asset-backed commercial paper !" Commercial paper shall be rated a-1 by at least two rating agencies. !" Original maturities shall be up to one year. !" Asset-backed commercial paper fully supported by the financial institutions that have current accounts with the Bank may also be eligible (as prescribed in the temporary rules for eligible collateral). 2. Purchasing procedures (1) Asset-backed securities and synthetic-type securities !" After an initial public offering is closed, the Bank will purchase the requested amount of the securities from the selected counterparties at their request. Purchase prices shall be decided based on those applied for the public offering. !" Eligible counterparties shall be selected in advance from the financial institutions that have current accounts with the Bank's Head Office, mainly based on their creditworthiness. (2) Asset-backed commercial paper !" The Bank purchases eligible commercial paper through competitive auctions. !" Eligible counterparties shall be selected in advance from those for the purchase operations of commercial paper with repurchase agreements. 3. Maximum amount of purchases (1) Total amount outstanding

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!" For the time being, the maximum amount outstanding of the Bank's purchases shall be 1 trillion yen. (2) Limit per issue !" For asset-backed securities and synthetic-type securities, the amount purchased by the Bank shall not exceed 50% of each tranche of an issue. 4. Others !" This purchase scheme shall be valid until end-March 2006. !" The outline mentioned above, including the range of asset-backed securities to be purchased, the purchasing procedures, and the maximum amount of purchases, shall be reviewed and changed, if necessary, depending on factors such as development of the asset-backed securities market as well as the financial soundness of the Bank.

Establishment of Principal Terms and Conditions for the Outright Purchases of Asset-Backed Securities

June 25, 2003 Bank of Japan

At the Monetary Policy Meeting (MPM) held today, the Policy Board of the Bank of Japan decided to establish Principal Terms and Conditions for the Outright Purchases of Asset-Backed Securities. The Bank aims to promote smooth corporate financing by encouraging the development of asset-backed securities (ABSs) market and of strengthening the transmission mechanism of monetary easing. These terms and conditions prescribe the principles for the Bank's outright purchases of ABSs based on "Outline of the Outright Purchase Scheme for Asset-Backed Securities", which was decided at the MPM held on June 10-11, 2003. The Bank also decided to extend the effective period of the temporary measure to accept a broader range of asset-backed commercial paper as eligible collateral, which was decided at the MPM held on December 16-17, 2002, for 1 more year until end-March 2006, the expiration date of the outright purchases of ABSs (Temporary Rules of Eligibility Standards for Asset-backed Commercial Paper and Dematerialized Assetbacked Commercial Paper were amended.). Regarding the full text of Principal Terms and Conditions for the Outright Purchases of Asset-Backed Securities and the amended text of Temporary Rules of Eligibility

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Standards for Asset-backed Commercial Paper and Dematerialized Asset-backed Commercial Paper, see Attachment 1 and 2 respectively. " Attachment 1 and 2 are not attached.

Modification of the Conditions regarding the Purchases of Asset-Backed Securities

January 20, 2004 Bank of Japan

The Bank of Japan, based on the discussion at the Monetary Policy Meeting (MPM) last December, had reviewed the conditions regarding the purchase of asset-backed securities (ABSs). At the MPM held today, the Bank decided, by unanimous vote, to amend the terms and conditions for the outright purchases of ABSs1. To encourage the permeation of the effects of monetary easing through the economy, financial markets must function properly. With such recognition, the Bank has been supporting various efforts of market participants to improve the infrastructure of the ABS market. The Bank's purchase of ABSs is part of such support. This amendment was made in light of experiences of the actual purchase of ABSs as well as the opinions of market participants. The Bank hopes that it will contribute to the long-term development of ABS market.
Regarding the full detail of this amendment, see "Amendment to Principal Terms and Conditions for the Outright Purchases of Asset-Backed Securities."
1

(Reference) Modification of the Conditions regarding the Purchases of AssetBacked Securities

January 20, 2004 Bank of Japan

1. The outline of the amendment is as follows (changes underlined).

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(1) Ratio of underlying assets related to small and medium-sized enterprises [Current] !" The calculation of the ratio should be based on the value of underlying assets. !" Small and medium-sized enterprises are defined as enterprises with capital of less than 1 billion yen. [Amendment] !" The calculation should be based on either the total value or the total number of individual assets in underlying assets. !" Small and medium-sized enterprises are defined as enterprises either with capital of less than 1 billion yen or with employees of 999 or less. (2) Creditworthiness of debtors of underlying assets [Current] !" Debtors of bank loans in underlying assets shall be those classified as "normal" based on the FSA's examination manual. [Amendment] !" This criterion is abolished. (3) Rating requirement for ABCP [Current] !" ABCP shall be rated a-1 by at least two eligible rating agencies. [Amendment] !" ABCP shall be rated a-1 by at least one eligible rating agency. (4) Frequency of selection of counterparties [Current] !" Counterparties of this operation shall be selected, in principle, annually. [Amendment] !" Besides the annual selection, counterparties of this operation can be added once a month. 2. This amendment shall become effective on January 20, 2004.

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(2) Other revisions to Money Market Operations Instruments !" Early introduction of Bill Purchasing Operations at all business offices (decided in February 2001)
(Related public statement) !" February 9, 2001: Improvements in the Way of Liquidity Provision and Reduction in the Official Discount Rate (please see page 299)

!" Measures for facilitating Money Market Operations (extension of the maturity date for bills purchased in Bill Purchasing Operations, expansion of the range of Japanese government bonds in outright purchase of JGBs etc.) (decided in May 2001)
(Related public statement) !" May 18, 2001: Measures for Facilitating Money Market Operations

Measures for Facilitating Money Market Operations

May 18, 2001 Bank of Japan

The Bank of Japan ("the Bank"), with a view to facilitating money market operations, has decided as follows. 1. Extending the maturity date for bills purchased in Bill Purchasing Operations At the Monetary Policy Meeting held today, the Bank decided to revise the "Principal Terms and Conditions Pertaining to the Purchase of Bills". Effective today, the Bank extends the maturity date for bills purchased in such operations from 3 months or less to 6 months or less. (For the revised text of the "Principal Terms and Conditions Pertaining to the Purchase of Bills", see Attachment)

2. Increasing the number of eligible counterparties in Bill Purchasing Operations at the Bank's head office. Many market participants have applied to become eligible counterparties in Bill Purchasing Operations at the Bank's head office in response to the Bank's earlier

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invitation. Meanwhile, the Bank believes that a larger number of eligible counterparties would facilitate its supply of funds to the market. The Bank, therefore, decided to increase the number of eligible counterparties in Bill Purchasing Operations at the Bank's head office from the current 30 to 40. In making this decision, the Bank also decided to extend the invitation until the end of this month.

3. Smaller units for bid rates in competitive yield auctions Currently, in competitive yield auctions for money market operations, the Bank receives bids on every 0.01% (two decimal places) except for outright purchases of JGBs and TBs/FBs. By late July this year, the Bank will start receiving bids on every 0.001% (three decimal places) for every competitive yield auction carried out by the Bank.

4. Expanding the range of Japanese government bonds in outright purchases of JGBs Currently, 10-year and 20-year government bonds are accepted in the Bank's outright purchases of JGBs. The Bank decided to accept 2, 4, 5 and 6-year government bonds in outright purchases of JGBs beginning June this year. " Attachment is not attached.

!" Amendment to the Principal Terms and Conditions for the Outright Purchase/Sale of JGBs (expansion of the range of bonds to be purchased/sold) (decided in January 2002)
(Related public statement) !" January 16, 2002: An amendment to Principal Terms and Conditions for the Outright Purchase/Sale of Japanese Government Bonds

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An amendment to "Principal Terms and Conditions for the Outright Purchase/ Sale of Japanese Government Bonds"

January 16, 2002 Bank of Japan

At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided to amend "Principal Terms and Conditions for the Outright Purchase/Sale of Japanese Government Bonds" (Policy board Decision on March 25, 1999) as shown in Attachment 1. This decision will expand the range of bonds to be purchased/sold, reflecting the recent developments to improve the primary and secondary markets for government bonds. #See Attachment 2 for the full text of the amended "Principal Terms and Conditions for the Outright Purchase/Sale of Japanese Government Bonds".$

Attachment 1

An amendment to "Principal Terms and Conditions for the Outright Purchase/Sale of Japanese Government Bonds" ! Paragraph 4 shall be amended as below. 4. Bonds to be Purchased/Sold Interest bearing Japanese government bonds issued more than a year ago (as for those issued not more than a year ago, the latest 2 issues of each maturity are excluded). (Supplementary Provision) This amendment shall become effective as from January 17, 2002. " Attachment 2 is not attached.

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!" Introduction of the Purchase/Sale of Japanese Government Securities with Repurchase Agreements (decided in September 2002)
(Related public statement) !" September 18, 2002! Introduction of "the Purchase/Sale of Japanese Government Securities with Repurchase Agreements"

Introduction of "the Purchase/Sale of Japanese Government Securities with Repurchase Agreements"

September 18, 2002 Bank of Japan

At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided to introduce a new type of market operation, "the Purchase/ Sale of Japanese Government Securities with Repurchase Agreements", with a view to facilitating the Bank's money market operations (regarding the terms and conditions of the new operation, see Attachment). The new operation is designed to replace the two types of existing operations for Japanese government securities, namely, "the Purchase/Sale of TBs/FBs with Repurchase Agreements" and "the Borrowing of JGBs against Cash Collateral (JGB repo)". As for the selection of counterparties, the Bank also established the selection procedure for the new operations (No English version available). This selection procedure is also applied to "the Outright Purchase/Sale of TBs/FBs". The selection of counterparties in the new operation under the procedure mentioned above is scheduled to take place about eight months after the effective date of the new operation. Until then, as transitional measures, the existing counterparties in "the Purchase/ Sale of TBs/FBs with Repurchase Agreements" and "the Borrowing of JGBs against Cash Collateral (JGB repo)" are entitled to be those in the new operation on condition that they meet certain criteria the Bank requires. " Attachment is not attached.

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!" Extension of maturities for bills purchased in the "Outright Purchases of Bills" operation (decided in October 2002)
(Related public statement) !" October 30, 2002 ! Extension of maturities for bills purchased in the "Outright Purchases of Bills" operation

Extension of maturities for bills purchased in the "Outright Purchases of Bills" operation

October 30, 2002 Bank of Japan

At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan voted to approve an extension of maturities for bills purchased in the "Outright Purchases of Bills" operation from '6 months or less' to '1 year or less', with a view to facilitating the Bank's money market operations (regarding the amended text of the terms and conditions of this operation, see Attachment). " Attachment is not attached.

!" Extension of maturities for the purchase of Japanese government securities with repurchase agreements (decided in October 2003)
(Related public statement) !" October 10, 2003: Extension of maturities for the purchase of Japanese government securities with repurchase agreements

Extension of maturities for the purchase of Japanese government securities with repurchase agreements

October 10, 2003 Bank of Japan

At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan

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voted to approve the extension of maturities for the purchase of Japanese government securities with repurchase agreements from ' within 6 months ' to ' within 1 year ', with a view to facilitating the Bank's money market operations (regarding the amended text of the principal terms and conditions of this operation, see Attachment). " Attachment is not attached.

(3) Others !" Announcement of the Bank of Japans Issue-by-Issue Holdings of JGBs by Amount Outstanding (announced in June 2001), Release of Data on Collateral Accepted by the Bank of Japan (announced in June 2002), and Release of the Amount of the Bank's Purchases of TBs and FBs (announced in July 2003)
(Related public statements) !" May 29, 2001: Measures for Enhancing Liquidity in JGB Markets and Transparency in JGB-Related Money Market Operations !" June 11, 2001: Announcement of the Bank of Japans Issue-by-Issue Holdings of JGBs by Amount Outstanding !" June 4, 2002: Release of Data on Collateral Accepted by the Bank of Japan !" July 2, 2003: Release of the Amount of the Banks Purchases of TBs and FBs (Issue by Issue)

Measures for Enhancing Liquidity in JGB Markets and Transparency in JGBRelated Money Market Operations

May 29, 2001 Bank of Japan

The Bank of Japan ("the Bank"), in an effort to enhance liquidity in the JGB markets and transparency of its money market operations ("operations"), has decided as follows. 1. Announcement of the Bank's issue-by-issue holdings of JGBs by amount outstanding In an effort to enhance information provided in the JGB markets and taking account of suggestions from market participants, the Bank will periodically publish amount outstanding of the Bank's issue-by-issue holdings of JGBs on its Web site. The Bank believes it should make it easier for market participants to estimate tradable amounts

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of JGBs, thereby contributing to enhancing market liquidity. See Annex I for more details on the publication.

2. Release of procedures for delivery failure of JGBs in JGB-related operations In case that transactions for operations are not settled as intended, smooth functioning of operations by the Bank would be compromised. The Bank, therefore, believes that it is essential to avoid such a situation. Settlement of JGBs on real-time gross settlement basis ("RTGS basis") has started this January. Since then, the Bank has received requests from market participants that the Bank should release the procedures to be applied by the Bank, when counterparties of transactions in JGB-related operations cannot deliver JGBs as contracted. In view of these factors, the Bank, aiming at the smooth functioning of operations and enhancing their transparency, decided to announce the procedures applied in the event of delivery failure of JGBs in JGB-related operations. Annex II details the procedures. (This translation is prepared by the Bank staff based on the Japanese original released on May 29, 2001.) " Annex I and II are not attached.

Announcement of the Bank of Japan's Issue-by-Issue Holdings of JGBs by Amount Outstanding

June 11, 2001 Bank of Japan Financial Markets Department

In an effort to enhance information provided in the JGB markets and taking account of suggestions from market participants, the Bank of Japan has decided to periodically publish amount outstanding of the Bank's issue-by-issue holdings of JGBs on its Web site (See "Measures for enhancing liquidity in JGB markets and transparency in JGBrelated money market operations" released on May 29, 2001). The Bank is today releasing the first set of data as of June 8, 2001. Details are as below. The Bank believes it should make it easier for market participants to estimate tradable amounts of JGBs,

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thereby contributing to enhancing market liquidity. Data to be published Amount outstanding of the Bank's issue-by-issue holdings of JGBs excluding TBs and FBs. JGBs held by the Bank consist of those purchased through the outright purchases and those rolled over for matured JGBs. Frequency Monthly Timing of release The evening of the business day following the day of settlement of the first outright purchases of JGBs.

Release of Data on Collateral Accepted by the Bank of Japan

June 4, 2002 Bank of Japan Financial Markets Department

The Bank of Japan, in an effort to enhance the transparency of its business operations, has started releasing data on the amount outstanding of collateral accepted by the Bank1 on its Web site. Details are as follows. 1. Data for Release The amount outstanding of the following, which the Bank accepts as collateral (on a face value basis2 and collateral value basis3): Japanese government bonds (total amount and amount of treasury/financing bills), government-guaranteed bonds, municipal bonds, Fiscal Investment and Loan Program (FILP) agency bonds, corporate bonds, asset-backed securities, foreign government/international financial institution bonds, bills, commercial paper (total amount and amount of asset-backed commercial paper), loans on deeds to companies, loans on deeds to the Government's Special Account for the Allotment of Local Allocation Tax and Local Transfer Tax, and loans on deeds to the Deposit Insurance Corporation with government guarantee. In addition, the amount outstanding of government bonds borrowed by the Bank against cash collateral, treasury/financing bills purchased by the Bank under repurchase agreements, and commercial paper (total amount and amount of assetbacked commercial paper) purchased by the Bank under repurchase agreements are

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also released as reference figures. 2. Frequency of Release Monthly. 3. Release Schedule Month-end figures are released on the evening of the second business day of the following month. The Bank released today data as of the end of March, April, and May 2002.

Notes: 1. Collateral to secure debt incurred as a result of: use of the intraday overdraft facility and the complementary lending facility; purchase of bills; and treasury agent contracts/revenue agent contracts. 2. Outstanding principal balance for bonds, such as pass-through bonds and loans on deeds, whose principal balance may decrease due to prepayments before the final maturity date. 3. Market price adjusted by haircut for bonds (excluding those whose principal balance may decrease before the final maturity date); face value adjusted by haircut for bills; and outstanding principal balance adjusted by haircut for bonds whose principal balance may decrease before the final maturity date and for loans on deeds.

Release of the Amount of the Bank's Purchases of TBs and FBs (Issue by Issue)

July 2, 2003 Bank of Japan Financial Markets Department

The Bank of Japan has decided to release monthly, on its Web site, issue-by-issue data on the amount of treasury bills (TBs) and financing bills (FBs) it purchased, to enhance the information available to market participants regarding its market operations. The Bank is today releasing the first set of data, reflecting purchases as of the end of June 2003. The data to be released will be the issue-by-issue amount of TBs and FBs purchased through outright purchases minus the amount sold through outright sales by the Bank.1

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End-of-month data will be released on the afternoon of the second business day of the following month, under "Bank of Japan" in the Statistics section of the Bank of Japan Web site.
1 Bills underwritten by the Bank are not included. Bills redeemed before maturity or sold to the government are not subtracted.

[Related to Section D] The Banks Lending Operations !" Establishment of Complementary Lending Facility (decided in February 2001)
(Related public statements) !" February 9, 2001: Improvements in the Way of Liquidity Provision and Reduction in the Official Discount Rate !" February 9, 2001: (Chart 1) Improvements in the Way of Liquidity Provision and Reduction in the Official Discount Rate !" February 28, 2001: Establishment of Principal Terms and Conditions for Complementary Lending Facility

Improvements in the Way of Liquidity Provision and Reduction in the Official Discount Rate

February 9, 2001 Bank of Japan

1. At the Monetary Policy Meeting held today, the Bank of Japan has decided both to take measures to improve the way in which liquidity is provided to financial markets and to reduce the official discount rate by 0.15 percentage points to 0.35 percent. !Improvements in the way of liquidity provision a. Introduction of a standby lending facility at the official discount rate In the current framework of monetary policy, the Bank provides the market with liquidity by the monetary operations that the Bank initiates. In addition to these, the Bank will introduce a standby lending facility ('Lombard-type' lending facility) through which the Bank extends loans at the requests of counterparties

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with the conditions pre-specified by the Bank. The Bank will prepare necessary arrangements so that the facility be put in place in March 2001. b. Increase in outright operations of short-term government securities With a view to providing short-term funds without putting repayment pressure on the market, the Bank will make active use of outright operations of short-term government securities. c. Preparation for the introduction of Bill Purchasing Operations at all business offices In order to facilitate stable provision of short-term funds with relatively longer maturities to a wider range of counterparties including local financial institutions, the Bank will expedite its preparation for the Bill Purchasing Operations at all of its business offices, the introduction of which was announced earlier. To initiate the operations by July 2001, the Bank will begin, in March, the procedure for selecting counterparties of the operations. !Reduction in the official discount rate The official discount rate be reduced by 0.15 percentage points to 0.35 percent, effective on February 13, 2001, with a view to enhancing the effectiveness of the newly created lending facility described above in stabilizing short-term interest rates.

2. In light of recent developments in domestic and overseas economies as well as financial and capital markets, the Bank has decided upon these policy measures with a view to both enhancing flexibility of monetary operations and facilitating stable provision of funds widely in the market, thereby strengthening the effects that monetary ease has for supporting economic recovery. The Bank also reaffirms its commitment to providing ample funds through its daily monetary operations as the fiscal-year-end draws nearer.

3. With these policy measures, the Bank is determined to ensure both smooth functioning and stability of financial markets, thereby continuing to support economic recovery.

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Outline of the Lombard-Type Lending Facility

Purpose:

Counterparties:

Location of Operations: Loan Rate:

In order to facilitate monetary operations for smooth functioning and stability of financial market, a standby lending facility be introduced through which the Bank extends loans at the requests of counterparties with the conditions prespecified by the Bank Sufficiently creditworthy financial institutions with which the Bank has loan agreements (including securities companies, tanshi money market dealers, and securities finance companies in addition to banks) The Bank of Japan's head office (Operations Department) and its branches The basic loan rate (the official discount rate) ! A higher rate will be applied to frequent borrowers who use the facility longer than the number of days pre-specified by the Bank. Overnight ! A borrower can roll over the loan at the Basic Loan Rate up to the number of days prespecified by the Bank. Eligible collateral The Bank extends loans at the requests of couterparties. When the Bank specifically deems it necessary, it may reject a borrowing request or set a limit on the amount of credit.

Maturity:

Collateral: Access to the Facility: Exception:

(Chart 1) Improvements in the Way of Liquidity Provision and Reduction in the Official Discount Rate

February 9, 2001 Bank of Japan

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1. Introduction of Lombard-type lending facility " Stabilizing market rates through lending requested amount at the official discount rate 2. Increase in outright operations of TBs and FBs " Providing short-term funds without putting repayment pressure 3. Improved bill purchasing operations " Facilitating stable provision of short-term funds to a wider range of counterparties including local financial institutions by utilizing all BOJ business offices

+
Reduction in the official discount rate " To enhance the effectiveness of Lombard-type lending facility, the official discount rate be reduced by 0.15% to 0.35%

Smooth functioning and stability of financial markets ! Enhancing flexibility of monetary operations ! Facilitating stable provision of funds widely in the market Strengthening the effects that monetary ease has for supporting economic recovery

Establishment of "Principal Terms and Conditions for Complementary Lending Facility"

February 28, 2001 Bank of Japan

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At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided on the following measures. The decision stated in 1 was made in accordance with "Improvements in the Way of Liquidity Provision and Reduction in the Official Discount Rate", which was decided at the Monetary Policy Meeting held on February 9, 2001 and immediately announced. The decisions stated in 2, 3 and 4 were intended, in line with "Establishment of 'Guidelines on Eligible Collateral' " decided on October 13, 2000, to abolish or suspend lending facilities which had been losing significance in the conduct of monetary policy. The decision stated in 5 was aimed at effecting the decisions stated in 1, 2 and 3.

1. The Establishment of Complementary Lending Facility (1) The Bank shall establish "Principal Terms and Conditions for Complementary Lending Facility" (Principal Terms and Conditions) as shown in Attachment 1. (2) The Governor of the Bank shall have the authority to set the maximum number of days stipulated in the proviso of paragraph 5. (2) in Principal Terms and Conditions and to make exceptions stipulated in paragraph 9.

2. Abolishment of Import Bills Refinancing Facility (1) The Bank shall abolish Import Bills Refinancing Facility at the end of June 2001. (2) Even after July 2001, loans extended through Import Bills Refinancing Facility by the end of June 2001 and expected to mature beyond July 2001 shall be dealt with as before.

3. Suspension of Discounting Commercial Bills (1) The Bank shall suspend discounting commercial bills at the end of June 2001. (2) Even after July 2001, commercial bills discounted by the end of June 2001 and expected to mature beyond July 2001 shall be dealt with as before.

4. Abolishment of Lending Facility at a Non-Basic Loan Rate The Bank shall abolish Lending Facility at a Non-Basic Loan Rate today.

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5. Amendments to " Rules on Organization of the Bank of Japan " "Rules on Organization of the Bank of Japan" decided on March 24, 1998 shall be amended as shown in Attachment 2.

Attachment 1

Principal Terms and Conditions for Complementary Lending Facility

1. Purpose With a view to facilitating monetary operations and thus ensuring the smooth functioning and stability of financial markets, these terms and conditions prescribe the fundamental matters concerning a standby lending facility through which the Bank extends loans at the requests of counterparties with the conditions pre-specified by the Bank.

2. Counterparties (1) Counterparties should satisfy all the eligibility criteria as below. (a) To be either financial institutions ( financial institutions as defined in Paragraph 1, Article 37 of the Bank of Japan Law, Law No.89 of 1997, excluding the Resolution and Collection Corporation and the Kii Deposits Management Bank), securities companies (securities companies as defined in Clause 2, Paragraph 1, Article 10 of the Ordinance concerning the Bank of Japan Law and foreign securities companies as defined in Clause 4 in the same paragraph), securities finance companies (securities finance companies as defined in Clause 3 in the same paragraph) or tanshi money market dealers ( those as defined in Clause 5 in the same paragraph) (b) To have concluded loans-on-bills agreements with the Bank (c) To be deemed sufficiently creditworthy in light of their capital condition and other relevant information obtained through the Bank's on-site examinations and so forth. (2) Counterparties should apply for access to the facility and be approved in advance as eligible counterparties by the Bank. In principle, the Bank shall conduct an annual review of these approvals.

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3. Location of Operations (1) The Bank's head office (Operations Department) or its branches. (2) Each counterparty should specify in advance one business office as the place of operations among the Bank's head office (Operations Department) and its branches.

4. Maturity Overnight.

5. Loan Rate (1) The interest rate applied shall be the basic loan rate; provided that a higher rate of the basic loan rate plus 2% shall be applied to counterparties who have used, on a cumulative-business-day basis, the facility longer than the maximum number of days stipulated in (2) during one reserve maintenance period (one month as defined in Paragraph 3, Article 7 of the Law Concerning Reserve Deposit Requirement System, Law No.135 of 1957). (2) The maximum number of days on which counterparties can use the facility at the basic loan rate is 5; provided that when deemed necessary for monetary operations, the Bank can raise the maximum number of days higher than 5, although not exceeding half the number of business days during that reserve maintenance period. In this case, the Bank shall announce this higher maximum number of days in an appropriate manner.

6. Amount of Loans Amounts of loans shall be decided in accordance with the request by counterparties; provided that those amounts shall not exceed the value of collateral submitted by counterparties to the Bank pursuant to paragraph 7.

7. Collateral (1) Counterparties shall submit in advance eligible collateral to the Bank. (2) The management of collateral shall conform to "Guidelines on Eligible Collateral" (Policy Board Decision on October 13, 2000, Attachment 1).

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8. Access to the Facility (1) The Bank shall extend loans at the requests of counterparties. (2) Loans shall be provided in the form of lending on bills.

9. Exception When the Bank specifically deems it necessary for smooth monetary operations, it can make exceptions to the terms and conditions stipulated in paragraphs 2, 3, 6, or 8, such as setting the limits on the amounts of loans or rejecting the requests for loans.

(Supplementary Provisions) (1) These terms and conditions shall become effective on March 16, 2001; provided that the approvals of counterparties stipulated in paragraph 2 (2) can be conducted before March 15, 2001. (2) The first review of the approvals of counterparties stipulated in paragraph 2 (2) shall be conducted around August 2001. (3) Notwithstanding paragraph 7(1), collateral to be submitted for this facility by the counterparties shall be restricted, for the time being, to those deemed appropriate for the Bank's business operations. " Attachment 2 is not attached.

!" Amendments to Principal Terms and Conditions for Complementary Lending Facility (decided in June 2001)
(Related public statements) !" June 28, 2001: Amendments to Principal Terms and Conditions for Complementary Lending Facility !" June 28, 2001: (Reference) Reform of the Complementary Lending Facility

Amendments to " Principal Terms and Conditions for Complementary Lending Facility "

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June 28, 2001 Bank of Japan

At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided to amend "Principal Terms and Conditions for Complementary Lending Facility" (Policy Board Decision on February 28, 2001) as shown in the Attachment with a view to facilitating monetary operations. The objectives of the amendments are to change the form of lending under the Complementary Lending Facility from a loan on bill to an electronic loan (a loan through an electronic lending facility), and to accept its collateral as part of the Bank's pooled collateral that have been used for the Bank's other credits such as bill purchasing operations.

(Reference) Reform of the Complementary Lending Facility

June 28, 2001 Bank of Japan !" With a view to facilitating monetary operations through enhanced convenience for counterparties, the Bank of Japan decided to reform the Complementary Lending Facility introduced in March 2001 as follows.

!" Collateral for the Complementary Lending Facility will be merged with pooled collateral which have been used for bill purchasing operations, daylight overdrafts, and the security of treasury fund operations. !" The form of lending under the reformed Facility will be an electronic loan, a new form of lending extended through BOJ-NET without a bill or a deed accepted. " The Bank will make preparations to implement these measures in the middle of December, 2001. Please see the attachment for the outline of the reformed Complementary Lending Facility. " Prior to effecting the above measures, the Bank will extend the regular deadline for an application for the Facility from 4:00 p.m. to 4:30 p.m. from July 13 on.

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(Attachment)

Outline of the reformed Complementary Lending Facility

Present Form of Lending Loans on bills

After the reform Electronic loans !" In the event that lending through BOJ-NET is not possible due to problems such as computer system troubles, loans on bills can be extended.

Improvements !" Swift and more efficient procedure

Collateral

Collateral pledged in advance for BOJ lending (Only bonds and loans on deeds are acceptable)

Pooled collateral commonly used for bill purchasing operations, daylight overdrafts, Complementary Lending Facility, and the security of the treasury fund operations 4:45 p.m.(*)

!" More efficient use of collateral !" Bills also Acceptable

Deadline for applications

4:00p.m.(*)

!" Later deadline by virtue of computerized procedure %Prior to the introduction of electronic loans, the Bank will extend the deadline for applications from 4:00 p.m. to 4:30 p.m.(*) from July 13 on.

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Extension of Loans

Simultaneous settlement(**) at 5:00 p.m.

More flexibility Real-time settlement !" in extending (time-zone currently loans planned is roughly between 4:00 p.m. and 5:00 p.m.$ Simultaneous settlement(**) at 9:00 a.m. on the next business day !" Collateral will be released on the repayment and made available for other transactions on !" In the event that an the same day. outstanding balance of the current account is insufficient for the repayment of the loan, it shall be repaid through daylight overdrafts.

Repayment

Simultaneous settlement(**) at 5:00 p.m. on the next business day

(*)

On a day when an operating time of BOJ-NET for settlement of funds is extended, the closing time for a request will also be extended by the same amount of time as the extension of operating hours of BOJ-NET. (**) Simultaneous settlement is a form of net settlement whereby individual participants payments to and receipts from the Bank are netted out on a bilateral basis between the Bank and that participant, and the resulting net settlement positions of participants are credited and debited on their BOJ accounts simultaneously at designated times.

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7. Issue relating to Chapter VII (Statistics, Research and Studies, and Public Relations)
[Related to Section A] Compiling and Publishing Statistics !" Revision of the Wholesale Price Index (Switchover to the 2000 Base Corporate Goods Price Index <CGPI>) (announced in December 2002)
(Related public statement) !" December 9, 2002: Revision of the Wholesale Price Index (Switchover to the 2000 Base Corporate Goods Price Index <CGPI>)

Revision of the Wholesale Price Index (Switchover to the 2000 Base Corporate Goods Price Index <CGPI>)

December 9, 2002 Bank of Japan Research and Statistics Department

1. Purpose of the revision The Bank of Japan has revised the 1995 base Wholesale Price Index (WPI) into the 2000 base Corporate Goods Price Index (CGPI). This revision is intended to improve the precision of the price index by incorporating the structural changes in the Japanese economy over the past five years, especially radical changes surrounding prices such as the diversification of commodities and their prices.1 It is also aimed at reducing the burden on correspondent companies who cooperate with the CGPI price survey. Thus, the 2000 base CGPI has become the most aggressive revision in 20 years.
1 From this point of view, the "utilization of provisional prices" and the "periodic retroactive revision of published indexes" were introduced from October 2001. These were adopted a part of the WPI revision concept released in September, and made in advance of this time index revision.

1.1. Improvement of statistical precision First, the selection of commodities in the price index has been reviewed (e.g., expansion of newly selected commodities). Second, the base year for both the index and the weight calculation has been updated from 1995 to 2000. The aims of these changes are

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to incorporate the structural changes in the Japanese economy over the past five years since the previous index revision and to improve the statistical precision of the price index. In addition to these ordinary revisions of the index, the following improvements have been made. (1) In order to cope with the diversification of commodities and their prices without imposing an excessive burden on the price survey correspondent companies, the CGPI sample prices have been comprehensively reviewed. Accordingly, the number of sample prices has been considerably increased and "averaged prices," which are sales divided by the number of units, have been introduced. The averaged prices adopted by the CGPI are the surveyed prices of narrowly defined commodities or commodity groups of constant quality. (2) The commodities to which the hedonic regression method is applied for the quality adjustment of prices have been expanded. This further improves the quality adjustment method for IT-related products, whose commodity cycles are brief and whose quality improves rapidly along with technological innovations. (3) The "Domestic Corporate Goods Price Index using chain-weighted index formula" has been introduced as a Reference index to complement the Basic grouping index, which is compiled using the Laspeyres formula based on the fixed value-based weights for the base period. The "Domestic Corporate Goods Price Index using chain-weighted index formula" was introduced for the purpose of grasping the impacts of changes in Japan's economic structure which are expected to occur over the next five years, by the time of the next revision of the CGPI.

1.2. Publication changes Because of the increase in the number of sample prices and the introduction of "averaged prices," correspondent companies are expected to submit their price correction data later than under the previous index. Accordingly, the release date will be moved, in principle, from the "sixth working day of the following month after the index is compiled" to the "eighth working day of the following month after the index is compiled." Additionally, a new publication system of releasing both preliminary and final figures has been adopted. The preliminary figures will be released the following month after the index is compiled, and the final figures will be released two months after the index is compiled based on revisions to the preliminary figures.

1.3. Change of the name of the index The criteria for price survey stage selection in distribution processes have been

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modified for the purpose of improving the usage of deflators within the scope of the index's primary principle, which is "to survey transaction stage prices which most sensitively reflect the supply and demand conditions of individual goods." Consequently, the name of the index has been changed from the "Wholesale Price Index (WPI)" to the "Corporate Goods Price Index (CGPI)," mainly because the percentage of prices surveyed at the production stage has been increased from that under the previous index.2
2

The name of the index has been changed to the "Corporate Goods Price Index" because this name better reflects the character of the index compared with the previous name "Wholesale Price Index." The index remains focused on the prices of goods traded among companies.

" The full text can be obtained from the Bank of Japans website (http://www.boj.or.jp /en/stat/stat_f.htm).

!" Release of New Statistics on Loans Syndicated and Loans Transferred (released in December 2003)
(Related public statement) !" December 9, 2003: Release of New Statistics on Loans Syndicated and Loans Transferred

Release of New Statistics on Loans Syndicated and Loans Transferred

December 9, 2003 Bank of Japan Financial Markets Department

The Bank of Japan has begun releasing new statistics on loan transactions. The statistics, produced in close cooperation with market participants, aim to trace the growth of loans syndicated and loans transferred. 1. Major Characteristics of the Statistics (1) Contents The statistics released include the following items. 1. Loans syndicated (primary): number of deals and amount1 - Term loans - Commitment lines

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2. Loans transferred (secondary): number of transactions and amount - Performing loans transferred ! Sale (to financial institutions/special purpose companies[SPCs]) ! Trust method ! Loan participation - Nonperforming loans transferred ! Sale ! Trust method ! Loan participation (2) Frequency of release The statistics are released on a quarterly basis. The statistics are compiled in the month following each quarter and released on the last business day of that month (i.e. January, April, July, and October). (3) Reporting institutions City banks2, long-term credit banks, trust banks3, regional banks and regional banks II (a total 129 banks).
Notes: 1. Figures for public/listed and private companies are also released. 2. Including Saitama Resona Bank. 3. Excluding trust subsidiaries and foreign trust banks.

2. Timing of Release and Media (1) Timing of release The statistics are released at 8:50 a.m. on the last business day of January, April, July, and October. (2) Media The statistics are released on the Bank's Web Site. Hard copies are also available in the Information Room at the Bank's Head Office.

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8. Issue relating to Chapter VIII (International Operations and Services)


[Related to Section B] Services Provided as Part of the Banks Cooperation with Foreign Central Banks and International Organizations !" Conclusion of the Swap Arrangement between the Peoples Bank of China and the Bank of Japan (concluded in March 2002)
(Related public statement) !" March 28, 2002! Conclusion of the Swap Arrangement between the People's Bank of China and the Bank of Japan

Conclusion of the Swap Arrangement between the People's Bank of China and the Bank of Japan

March 28, 2002 Bank of Japan

The Bank of Japan has reached an agreement over the terms and conditions for the bilateral yen-renminbi swap arrangement with the People's Bank of China. The maximum amount of the swap arrangement is three billion US dollars equivalent in yen and renminbi. This Agreement is in line with the framework of the Chiang Mai Initiative in pursuit of stabilizing regional financial markets through supplying short-term liquidity. The Bank of Japan believes that the Agreement also serves for the purpose of enhancing mutual cooperation between the two central banks.

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Issue relating to Chapter IX

9. Issue relating to Chapter IX (The Bank of Japan's Treasury Funds Services)


[Related to Section A] Treasury Funds Services !" A New Scheme for Electronic Payment of Government Taxes and Fees (announced in November 2001)
(Related public statement) !" November 2, 2001! A New Scheme for Electronic Payment of Government Taxes and Fees

A New Scheme for Electronic Payment of Government Taxes and Fees

November 2, 2001 Bank of Japan The Bank of Japan1 hereby introduces a scheme for electronic payment of taxes and fees to the government which it plans to make available by the end of March 2004. The Bank has two objectives: to enhance payers' convenience and to streamline the operations at banks, in government offices, and in the Bank itself. The Bank examined various electronic methods for the new scheme in cooperation with related institutions, and has selected the "Multi-Payment Network" system which is now being developed by the banking industry in Japan. The network is designed to enable bank customers to pay electronically every kind of bills including utility, telephone, and credit card charges as well as local government taxes. The pilot stage of the network started last month.
Under the Bank of Japan Law and the Public Accounting Law, the Bank of Japan handles the government's funds.
1

1. Merits for Payers Tax/fee payers will be able to make electronic payments to the government without going to a bank by logging into electronic banking services via PCs, mobile phones, and other means. They will be able to pay from virtually anywhere and at any time of the day or night, and even on bank holidays when the banks are closed. Banks' Automated Teller Machines (ATMs) will be another means for the electronic payment scheme. Using the 24-hour ATMs which are now becoming more widely available, non-PC users too will be able to pay even in the middle of the night.2

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An example of electronic payment would be as follows (see Appendix):3 (a) An individual who requires an online government service4 first accesses the Web site of the ministries and agencies. (b) He or she obtains two unique numbers, i.e., the Identification Number and the Confirmation Number5 from the Web site. (c) To pay for such services, the payer sends these two numbers from his/her Internet banking terminal to his/her bank. (d) The bank transfers them to the government through the "Multi-Payment Network."6 (e) The government sends billing information back to the bank through the "MultiPayment Network." (f) The bank transfers the information to the payer's terminal. (g) The payer then sends a payment instruction with a single "click" on the screen. (h) Upon receiving this instruction, the bank debits the payer's account. (i) The bank then credits its collection account and sends a collection record to the government as well as to the Bank of Japan. (j) The bank sends a notice of payment to the payer's terminal.
2 To participate in the scheme and to offer new electronic banking services to their customers, banks need to upgrade their systems. 3 The message exchanges in (c)-(j) are processed within a few seconds. The payer uses his/her keyboard only in (a), (c), and (g).

Under the "e-Japan Strategy," published by the Japanese government in January 2001, online government services will be widely available by the end of the fiscal year 2003.
5 This dual numbering reduces the risk of intentional reading of others' billing information. This also eliminates the possibilities of unintentional payment of others' bill as a result of mistyping. 6 The participating banks' networks and the "Multi-Payment Network" enable online, realtime, and interactive message exchanges between payers and payee institutions.

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Issue relating to Chapter IX

2. Electronic Processing at the Bank of Japan's Agent Banks Receiving the payment and reporting to both the government and the Bank are the business of the agent banks entrusted to them by the Bank. Hitherto, they have been paper-based and the Bank intends to shift them from paper to electronic processing. In the plan, in (i) above the banks operate as agent banks of the Bank of Japan.

3. The "Multi-Payment Network" (1) Rationales for the "Multi-Payment Network" (a) Cost minimization As noted above, the "Multi-Payment Network" is being designed for various bill payments, and using the same network with the standardized procedures for the collection of government taxes and fees would produce a cost sharing benefit. In other words, the Bank's share of the cost of building and maintaining the network would be much less than that of a single-payment network built and used only by the Bank. This cost saving would be to the taxpayer's benefit. (b) Security Special consideration has been given to the security of the "Multi-Payment Network" to prevent, detect, and reduce potential risks. An external specialized institution has assessed the network's security management framework as adequate at this stage. (c) Reliability of the network management Japan Multi-Payment Network Management Organization (JAMMO) runs the network. It is a banking industry-wide organization, many of whose members are agent banks of the Bank of Japan, and thus the Bank has confidence in JAMMO's network management. (2) Requirements to be met The Bank of Japan considers the following are requirements for using the "MultiPayment Network." (a) The existing services of the "Multi-Payment Network" such as telephone bill payment are operated safely and smoothly. (b) Appropriate contracts are prepared by the institutions involved, and necessary legislation has been established. (c) The cost is fairly allocated among the related institutions.

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Appendix
The Bank of Japan and its agent banks The Bank of Japan Multi Payment Network

Ministries and agencies

The Ministry of Finance Accounting Center

Report2 Agent banks (Private financial institutions) Govt's collection A/C Payment2

Servers of ministries and agencies' Web sites

Confirmation of payment Online Government Services ID number,3 Application amount of payment Processing Server

Revenue processing system

Payment data2

Data processing

Amount of payment

ID number3

Payer's A/C

ID number,3 amount of payment

Government services

Amount of payment

Access to Web site

Payment instruction

Internet

Payment channels Payer of tax/fee


Internet Telephone Mobile phone ATM (Automatic banking banking banking Teller Machine)

1. This picture is based on the Appendix 3 of the document 6 Discussions on the Digital Government --- Solutions for the Common Issues and Tentative Schedule --- which was presented at the meeting of the IT Strategic Headquarters (The Strategic Headquarters for the Promotion of an Advanced Information and Telecommunications Network Society) on March 29, 2001. Numbers in circles show the order of the process. 2. Receipt of payment (&) and reporting to the government (') and to the Bank of Japan (() are the operations entrusted to agent banks by the Bank of Japan. 3. ID numbers will be accompanied by confirmation numbers.

" This new scheme has been gradually implemented since January 19, 2004.

318

Notice of payment

Application form

Application

ID number3

Issue relating to Chapter X

10. Issue relating to Chapter X (The Bank of Japan's Japanese Government Securities Services)
[Related to Section A] Services Related to Japanese Government Securities (JGSs) !" Conversion to the New JGB Book-entry System Based on the New Legal Framework (started in January 2003)
(Related public statements) !" July 18, 2002: Conversion to the New JGB Book-entry System Based on the New Legal Framework !" January 7, 2003: Notice Regarding the Start of Operations of the New JGB Bookentry System Based on the Transfer of Corporate Debt Securities Law and the Abolition of the Current JGB Book-entry System !" January 27, 2003: Start of Operations of the New JGB Book-entry System Based on the Transfer of Corporate Debt Securities Law !" February 17, 2003: Requirements for Establishing Direct Participants Accounts and Customers Accounts and Requirements for Admission as Indirect Participants and Foreign Indirect Participants in the JGB Book-entry System

Conversion to the New JGB Book-entry System Based on the New Legal Framework

July 18, 2002 Bank of Japan

I. Introduction On June 5, 2002, the Law concerning the Establishment of Relevant Laws to Improve Securities Markets through the Reform of the Securities Settlement System (hereafter the "Securities Settlement System Reform Law") was enacted in the 154th Diet session. With the enactment of this law, the Law concerning Book-Entry Transfer of Corporate Debt Securities (hereafter the "Transfer of Corporate Debt Securities Law") will come into effect on January 6, 2003.1 The Transfer of Corporate Debt Securities Law provides for full dematerialization of corporate bonds, Japanese government bonds and bills (JGBs), and other securities, and enables these securities to be transferred by book entries on the accounts at settlement institutions. Following the above changes in the legal framework, the Bank of Japan (hereafter the

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"Bank") decided on June 21, 2002 its plan to convert from the JGB Book-entry System it currently operates (hereafter the "current system") to a new system based on the Transfer of Corporate Debt Securities Law (hereafter the "new system"). Specifically, the Bank has decided to (1) abolish the current system and start the new system based on the Transfer of Corporate Debt Securities Law around January 27, 2003, provided that certain conditions have been met; and (2) initiate preparations for the conversion. The sections below explain the background to the Bank's decision, the reasons for the conversion to the new system, the main changes from the current system, and how the Bank will proceed with the preparations for the conversion. An outline of operational procedures and transaction processing in the new system is available in a document sent to direct participants, indirect participants, and foreign indirect participants in the current system (hereafter all three types of participants are referred to collectively as "participants").2
With the enactment of the Securities Settlement System Reform Law, the Law concerning Book-Entry Transfer of Short-Term Corporate Debt Securities was amended and renamed the Law concerning Book-Entry Transfer of Corporate Debt Securities. For details, see information available in Japanese on the Financial Services Agency's Web site at http://www.fsa.go.jp/.
2 1

"Conversion to the New JGB Book-entry System" prepared in Japanese by the Operations Department of the Bank of Japan and sent to participants on June 21, 2002.

" II. ) V. are not attached. For the full text, please see the Bank of Japans website (http://www.boj.or.jp/en/set/03/set_f.htm).

Notice Regarding the Start of Operations of the New JGB Book-entry System Based on the Transfer of Corporate Debt Securities Law and the Abolition of the Current JGB Book-entry System

January 7, 2003 Bank of Japan

The Bank of Japan decided today to apply for designation as the Transfer Institution of Japanese government bonds and bills (JGBs) under the Law Concerning Book-Entry Transfer of Corporate and Other Debt Securities (Law No. 75 of 2001, hereafter the "Transfer of Corporate Debt Securities Law") and for authorization under the Bank of Japan Law (Law No. 89 of 1997) to conduct business concerning the book-entry transfer of JGBs based on the Transfer of Corporate Debt Securities Law. Provided that its applications are approved by the competent ministers, the Bank of

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Issue relating to Chapter X

Japan will abolish the JGB Book-entry System it currently operates and start operating a new JGB Book-entry System based on the Transfer of Corporate Debt Securities Law on January 27, 2003. The Bank of Japan will issue a public statement when its applications have been approved.

Start of Operations of the New JGB Book-entry System Based on the Transfer of Corporate Debt Securities Law

January 27, 2003 Bank of Japan

On January 27, 2003, the Bank of Japan abolished the existing JGB Book-entry System and started to operate a new JGB Book-entry System based on the Law Concerning Book-Entry Transfer of Corporate and Other Debt Securities (Law No. 75 of 2001, hereafter the "Transfer of Corporate Debt Securities Law"). The Bank of Japan is grateful to the many parties that cooperated in preparing for the new JGB Book-entry System. The Bank of Japan hopes that the new JGB Book-entry System will further improve efficiency in the safekeeping and settlement of JGBs, and it continues to strive to improve the safety and efficiency of JGB settlement.

Requirements for Establishing Direct Participants' Accounts and Customers' Accounts and Requirements for Admission as Indirect Participants and Foreign Indirect Participants in the JGB Book-entry System* * This is an English translation of the Japanese original released on January 20, 2003. February 17, 2003 Bank of Japan

The Bank of Japan (hereafter "the Bank") has decided the attached requirements for establishing Direct Participants' Accounts and Customers' Accounts and for admission as Indirect Participants and Foreign Indirect Participants in the JGB Book-entry System, which the Bank operates as the Book-entry Transfer Institution under the Law

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Concerning Book-Entry Transfer of Corporate and Other Debt Securities (Law No. 75 of 2001, hereafter "the Transfer of Corporate Debt Securities Law"), and has decided to put them into effect on January 27, 2003. Given the establishment of these requirements, the Bank has also decided to abolish on January 27, 2003 the requirements for admission as a participant in the JGB Book-entry System decided by the Bank on March 30, 2001. The participation status on and after January 27, 2003 of entities which are Direct Participants, Indirect Participants, Foreign Indirect Participants, or Customers of the Bank in the current JGB Book-entry System as of January 27, 2003 and wish to continue their participation in the new system shall be determined as follows. (a) If an entity is a Direct Participant or an Indirect Participant and is an entity described in items 1 through 14 of Paragraph 1, Article 44 of the Transfer of Corporate Debt Securities Law, the entity shall become either a Direct Participant that can establish a Customer's Account or an Indirect Participant; (b) If an entity is a Direct Participant other than as described in (a) above, the entity shall become a Direct Participant that cannot establish a Customer's Account; (c) If an entity is a Foreign Indirect Participant and is an entity described in Item 15 of Paragraph 1, Article 44 of the Transfer of Corporate Debt Securities Law, the entity shall become a Foreign Indirect Participant. (d) If an entity is a Customer of the Bank and a counterparty of the Bank in its business under Article 41 of the Bank of Japan Law (Law No. 89, 1997), the entity shall become a Customer of the Bank. Attachment Requirements for Establishing Direct Participants' Accounts and Customers' Accounts and Requirements for Admission as Indirect Participants and Foreign Indirect Participants in the JGB Book-entry System

1. An entity applying to the Bank of Japan (hereafter "the Bank") to become a Direct Participant that can establish a Customer's Account or an Indirect Participant1 shall satisfy the following two requirements to be approved as a Direct Participant that can establish a Customer's Account or an Indirect Participant.
1 An Indirect Participant is an entity which maintains a Customer's Account with a Direct Participant that can establish a Customer's Account and which can itself establish a Customer's Account in Japan.

(a) That the applicant is either an entity described in items 1 through 14 of Paragraph 1, Article 44 of the Law Concerning Book-Entry Transfer of

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Issue relating to Chapter X

Corporate and Other Debt Securities (Law No. 75 of 2001, hereafter "the Transfer of Corporate Debt Securities Law") or a Book-entry Transfer Institution (furikae kikan; other than the Bank) as defined in Paragraph 2, Article 2 of the Transfer of Corporate Debt Securities Law. (b) That participation of the applicant in the JGB Book-entry System does not threaten the credibility of the system or hinder its smooth operation and orderly administration.

2. An entity applying to the Bank to become a Direct Participant that cannot establish a Customer's Account shall satisfy the following two requirements to be approved as a Direct Participant that cannot establish a Customer's Account. (a) That establishment of a Direct Participant's Account for the applicant by the Bank contributes to the achievement of the objective stipulated in Article 1 of the Transfer of Corporate Debt Securities Law and the Bank's objectives stipulated in Article 1 of the Bank of Japan Law. (b) That participation of the applicant in the JGB Book-entry System does not threaten the credibility of the system or hinder its smooth operation and orderly administration. Specifically, based on (a) above, Direct Participants that cannot establish a Customer's Account shall be selected from securities clearing and settlement systems as defined in Section 7 and bankers' associations (operators of payments clearing systems2 that have legal person status).
A payments clearing system is an arrangement that calculates and settles each participant's net settlement position on a multilateral basis.
2

3. An entity applying to the Bank to become a Foreign Indirect Participant3 shall satisfy the following two requirements to be approved as a Foreign Indirect Participant.
A Foreign Indirect Participant is an entity which maintains a Customer's Account with a Direct Participant that can establish a Customer's Account, with an Indirect Participant, or with a Foreign Indirect Participant, and which can itself establish a Customer's Account outside Japan.
3

(a) That the applicant is an entity described in Item 15 of Paragraph 1, Article 44 of the Transfer of Corporate Debt Securities Law. (b) That participation of the applicant in the JGB Book-entry System does not threaten the credibility of the system or hinder its smooth operation and orderly administration. 4. An entity applying to the Bank to become a Customer4 of the Bank that falls into

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either of the following two categories shall be approved as a Customer of the Bank.
4 A Customer of the Bank is an entity which maintains an account with the Bank for the transfer of book-entry Japanese government securities but which is not a Direct Participant.

(a) An entity that needs to maintain a Customer's Account with the Bank under the laws and regulations of Japan. (b) An entity that satisfies both of the following requirements. (i) That establishment of a Customer's Account for the applicant by the Bank contributes to the achievement of the objective stipulated in Article 1 of the Transfer of Corporate Debt Securities Law and the Bank's objectives stipulated in Article 1 of the Bank of Japan Law. (ii) That participation of the applicant in the JGB Book-entry System does not threaten the credibility of the system or hinder its smooth operation and orderly administration. Specifically, based on (i) above, Customers of the Bank shall be selected from entities which are counterparties of the Bank in its business under Article 41 of the Bank of Japan Law.

5. Regarding the requirements in sections 1.(b) and 3.(b), the following two different criteria apply depending on whether the applicant is a securities clearing and settlement system as defined in Section 7. Even if the applicant meets the following criteria, participation in the JGB Book-entry System may not be approved in cases where the Bank considers that the applicant cannot comply with the Transfer of Corporate Debt Securities Law and the rules and procedures of the system. (a) An applicant that is a securities clearing and settlement system shall be deemed to satisfy the requirements in sections 1.(b) and 3.(b) if (i) its clearing and/or settlement business is considered safe in view of its risk management procedures, the arrangements regarding allocation of losses arising from the clearing and/or settlement process, the operational reliability of computer systems provided for its users, and other relevant matters, and (ii) its financial condition is considered sound and its operational capability is adequate. (b) An applicant that is not a securities clearing and settlement system shall be deemed to satisfy the requirements in sections 1.(b) and 3.(b) if its financial condition is considered sound and its operational capability is considered adequate.

6. Regarding the requirements in Section 2.(b), where an applicant is a securities

324

Issue relating to Chapter X

clearing and settlement system as defined in Section 7, the criteria in Section 5.(a) shall apply mutatis mutandis. Even if the applicant meets the criteria in Section 5.(a), participation in the JGB Book-entry System may not be approved in cases where the Bank considers that the applicant cannot comply with the Transfer of Corporate Debt Securities Law and the rules and procedures of the system.

7. A "securities clearing and settlement system" is defined as follows: (a) An entity that engages in clearing of securities transactions for parties including three or more financial institutions based on common rules and procedures, for example, a central counterparty which interposes itself between the members in a system and acts as the exclusive counterparty to these members with regard to their securities transactions; or (b) an entity that executes securities transfer instructions for its members including three or more financial institutions by means of book entries based on common rules and procedures. In addition to the above, the Bank takes the following into account in deciding whether an entity is a securities clearing and settlement system: (i) the procedures for clearing and/or settlement of securities transactions and corresponding funds transfers; and (ii) the existence and nature of arrangements regarding allocation of losses arising from the clearing and/or settlement process.

8. Detailed criteria with regard to requirements concerning an applicant's financial condition in sections 5.(a) and 5.(b) are set out in the appendix. " Appendix is not attached.

325

Index (Chapter I - X, Appendixes)


Accounts of the Bank of Japan Accounting rules Appropriation of net income of the Bank of Japan Balance sheet of the Bank of Japan Capital, subscription certificates Financial soundness Statement of income of the Bank of Japan Archive Asset-backed securities (ABSs) Balance of payments International investment position Bank of Japan Financial Network System (BOJ-NET) BOJ-NET funds transfer system BOJ-NET JGB services Computer center CPU-to-CPU connection Bank of Japan Law 113, 121, 203-206 113, 121, 203 204, 206 26, 203-205 3, 203-206 31, 112, 121 204, 206 144 111 130, 133, 154, 155, 209 154, 155 8, 47-51, 59-65, 68-78, 81, 184, 189, 190 47-51, 59-64, 68-78, 189 51, 65, 68-73, 76-78, 184, 189, 190 60, 69 69, 77 2, 3, 16-18, 20, 21, 26, 29, 31, 44, 51, 83, 90, 93, 95, 96, 102, 108, 120, 122, 123, 137, 138-150, 153, 159, 164, 168, 180, 186, 192, 195, 199, 204, 214, 216-235 18 2, 44 90, 96 199, 218, 220, 233 216 2, 17 216 2, 18-20, 119, 138, 203 2-8, 14, 16, 25-41, 56-58, 67, 105, 113-116 29

Accountability Bank of Japan Act Bank of Japan Law Enforcement Order By-laws Central Bank Study Group Independence of monetary policy and of the Bank's business operations Subcommittee on the revision of the Bank of Japan Law of the Financial System Research Council Transparency of monetary policy and of the Bank's business operations Banknotes Anonymity

327

Banknote custody system 31 Daikoku satsu 38, 40 Damaged banknotes 33, 36, 41 Examination of banknotes 35, 37 Fiat money system 30, 31 Maximum issuance limit system 31 Reserve for banknote issuance system 31 General acceptability 29 General usability 29 Highest settlement finality 4, 6 - 8, 12, 29, 45, 80 Issuance of banknotes 26, 30, 31, 114 Legal tender 14, 29 Security measures of banknotes for counterfeiting and 36, 37 altering Standard money system (gold standard) 30, 31, 39 Convertible notes 30 Inconvertible notes 39 Standard money 30, 31, 40 Tactile marks 28, 36 Withdrawal of banknotes from circulation 33, 34 Yamada Hagaki 39 Banknote examination machine 35 BOJ current accounts (BOJ accounts) 3, 4, 6, 8, 10, 26, 32, 33, 4452, 56-61, 63, 64, 68, 71, 7377, 80, 104, 105, 112, 117, 118, 121, 124, 126, 164, 167, 168, 173, 184, 190, 197 Account deposit slips 47 BOJ checks 47, 48 BOJ-NET funds transfer system 47-51, 59-64, 68-78, 189 Debit transfers 71 Designated-time settlement 47, 60, 61, 64, 73, 74, 76, 77 Payment instruction 46-48, 50 Intraday overdraft facility 77 Real-time gross settlement (RTGS) 47, 51, 60, 61, 63, 64, 73, 76-78, 81, 98, 111-113, 121 Simultaneous processing 77 Third-party transfers 77 Contract for current account services with the Bank 44 Criteria for applying for the Bank's current account 51 services Highest settlement finality 4, 6 - 8, 12, 29, 45, 80

328

Central bank

Central bank money Central banks of the world Bank of England (BOE) European Central Bank (ECB) Federal Reserve System Central Council for Savings Information Public Opinion Survey on Household Savings and Consumption Coins Issuance of coins Consumer price index (CPI) Currency Museum Demand deposits Electronic money (access product, stored-value product) Euro, Euro area Executives of the Bank of Japan Appointed members of the policy board Counsellors Executive auditors Executive directors Governor, Deputy Governor Financial institutions Banks Compliance with relevant laws and accuracy in operational procedures Financial intermediary functions Liquidity management Payment and settlement services Securities companies Sound management of financial institutions Financial system stability Business under Article 38 of the BOJ Law Four principles of conducting business necessary to maintain financial system stability

2-4, 6-14, 16, 17, 27, 30, 37, 43-45, 74, 147-150, 152, 153, 158-162, 164, 168, 180, 181, 195 4, 10, 80, 104 14 14, 27, 30 14, 27, 152, 195 14, 27, 152, 195 139, 145 145 4, 26, 27, 29-31 26 135 142 26, 45, 140 12 14, 27 21, 199, 200 21, 199 199, 200 199, 200 199, 200 22, 199 15, 90 15, 90, 94 88 81, 82, 94 88 81-83, 94 15, 90 81, 83, 89 3, 6, 9, 15, 16, 72-78, 80-99 93, 99 93, 99

329

Lender of Last Resort (LLR) Moral hazard Systemic risk Uncollateralized loans under Article 37 of the BOJ Law Foreign Exchange and Foreign Trade Law Foreign exchange intervention Direct dealing (DD) intervention Foreign Exchange Fund Special Account (FEFSA) Intervention through brokers Releases of the data on foreign exchange intervention operations Intervention entrusted to foreign central banks Foreign exchange markets Financial institutions' customer trades Foreign exchange brokers Foreign exchange rates Interbank trades Monitoring of foreign exchange market Spot transaction Foreign exchange reserves Guidelines for managing the Bank of Japan's foreign currency assets General Managers' Meetings High-powered money Independence of monetary policy and of the Bank's business operations Inflation International financial crises Bridging loans International forums Executives' Meeting of East Asia-Pacific Central Banks (EMEAP) Meeting of Central Bank Governors of the Group of Ten (G-10) Countries Meeting of Finance Ministers and Central Bank Governors of the Group of 20 (G-20) Countries

2, 9, 75, 93, 99 75, 93, 99 9, 50, 51, 72-78, 80-85, 9394, 157-159 93 130, 148, 154, 155 151-156 156 152 156 153 152, 156 136, 151-156 151, 156 151, 154, 156 151-153 151 136, 153 154 152, 153 152

134 4 2, 17 6, 7, 17, 39, 102, 195 79, 82, 148, 157-159 162 158, 160 158, 161 158, 160 160

330

Meeting of Finance Ministers and Central Bank Governors of the Group of Seven (G-7) Countries International operations conducted on behalf of the government International organization Bank for International Settlements (BIS) Basel Committee on Banking Supervision Committee on Payment and Settlement System (CPSS) Committee on the Global Financial System (CGFS) Meeeting of Central Bank Governors of the Group of Ten (G-10) Countries International Bank for Reconstruction and Development (IBRD) International Monetary Fund (IMF) Organisation for Economic Co-operation and Development (OECD) Japanese Government Securities (JGSs)

160 11, 148, 151-156 9, 82, 133, 148-150, 158-162 75, 136, 149, 152, 157-159, 162 159 75, 159 73, 158 158, 160 150 133, 136, 150, 155, 158-162 133

11, 64-66, 67-75, 77, 78, 81, 126, 127, 180-197 Agent system 180, 190 Treasury agents 180, 190, 192 JGS agents 180, 190 JGS paying agents 180, 190 BOJ-NET JGB services 51, 65, 68-73, 76-78, 184, 189, 190 Delivery-versus-payment (DVP) mechanism for 51, 73, 74, 78, 189, 190 JGSs (DVP for JGSs) JGB Message Authentication Code (JGB-MAC) 189 Simultaneous processing of DVP and 78 collateralization (SPDC) Normal processing 78 Priority processing 78 Real-time gross settlement (RTGS) 73, 76, 190 JGB book-entry system 64, 65, 67, 68, 72, 179, 184187 Book-entry transfer 64, 65, 187 Customers books 65, 185, 187 Deletion of registration 186 Depository 64, 65, 68, 179, 180, 187, 190

331

Initial deposit Package registration Participants book Redeposit JGB Registration system

Supplementary registration Transfer registration Trust registration Initial registration Main registration Registrar of JGSs Registration book Registration of physical securities Issuance of JGSs Public auction Competitive auction bidding Noncompetitive tender Multiple price auction (conventional method) Single price auction (Dutch auction method) 184 JGS issuance managing group 196 Special advisory panel on JGS issuance 196 Syndicate underwriting 181-184, 197 Partial competitive auction bidding 182, 197 Underwriting agreement 182, 197 JGSs in paper certificates, Registered JGSs, Book64, 65, 185-188, 190, 192 entry JGSs Law Concerning Government Bonds 180, 185 Payments of principal and interest on JGSs 180, 192 Special Account for Government Debt 192 Consolidation Fund Prohibition against the Bank underwriting JGBs and 181, 195 TBs and extending loans to the government Public Finance Law 181, 195 Rolling settlement 74, 189 Services related to JGSs 11, 64, 65, 67-73, 78, 80, 81, 180-197 Types of JGSs 193 Cash management bills 193 Financing bills (FBs) 193 Deferred bonds 193

187 187 65, 187 187 55, 64, 65, 67, 68, 72, 179, 185-187 186 64, 186, 189 186 186 186 64, 68, 186-188 64, 186 186 180-185, 193-197 180, 182-184 182-184 182-184 184

332

Government compensation bonds Subscription/contribution bonds Discount bonds Treasury Bills !TBs" Interest-bearing bonds Coupon rate Coupons Revenue securities (ordinary government securities) New financial resource securities Refunding securities JGB book-entry system JGB registration system

193 193 182, 194 109, 180, 194 182-184, 193, 194 182 180, 190, 192, 193 193 193 193 64, 65, 67, 68, 72, 179, 184187 55, 64, 65, 67, 68, 72, 179, 185-187 2, 9, 75, 93, 99 120, 121

Lender of last resort Lending operations of the Bank of Japan

Monetary Policy Meeting (MPM) of the Policy Board 18, 21, 102, 103, 106, 108, 116, 117, 119, 120, 136, 137 Government representatives' right to attend MPM 17 Government representatives' right to request the 17 Board postpone a vote on monetary control matters Government representatives' right to submit proposals 17 regarding monetary control matters Minutes, transcripts of the MPMs 18-20, 137, 213 Monthly Report of Recent Economic and Financial 19, 20, 137, 213 Developments Outlook and Risk Assessment of the Economy and 19, 137, 213 Prices Semiannual Report on Currency and Monetary 20, 138, 214 Control The Bank's View of recent economic and financial 19, 21, 137, 213 developments Monetary policy, monetary control 2, 6, 10, 11, 16-20, 102-126, 137 Abolishment of window guidance 124 Guideline for money market operations 21, 102 Lending operations of the Bank of Japan 120, 121 Discounting bills 120

333

Loans collateralized by bills, JGSs and other 121 securities Official discount rates 120 Money market operation 102-119, 124-128 Conventional method of competitive yield 109 auction Funds-absorbing operation 10, 106-108, 113 Outright sales of bills drawn by BOJ 108, 114 Outright sales of TBs/FBs 108, 114 Sales of TBs/FBs under repurchase 108 agreements Funds-supplying operation 10, 106-113 Borrowing of JGBs against cash collateral 107, 114 (JGB repos) Outright purchases of bills 107, 111 Outright purchases of bills collateralized by 107, 111 corporate debt obligations Outright purchases of TBs/FBs 107 Outright purchases of JGBs 107, 112, 119 Purchases of TBs under repurchase 107 agreements Purchases of CP under repurchase 107, 111 agreements Purchases of TBs/FBs under repurchase 107, 109 agreements Operation counterparties 108 Criteria for selecting operation 108, 119 counterparties Principal terms and conditions for money market 119 operation Money market 10, 88, 102, 104-106, 126128, 135 Interbank market 126, 127 Bills market 126, 127 Call market 104, 105, 126, 127 Call rate 10, 104 Collateralized call transactions 126 Overnight call transactions 10, 102-104, 126 Term call transactions 126 Uncollateralized call transactions 10, 104, 126 Open market 126, 127 Bond gensaki market 126, 127 Certificate of deposit (CD) market 126, 127

334

Commercial paper (CP) market Repo market TB/FB market Tanshi companies Collateral Center for Short-Term Money Market Transactions Substitute certificates for registered JGSs for use as collateral in money market transactions Money market operation Monitoring of international financial markets Monitoring of money markets On-site examination Assessment of assets Contract regarding on-site examination Interviews with executives and senior staffs Off-site monitoring Points on which examinations will focus for each fiscal year Risk management of financial institutions Asset-Liability-Management (ALM) Back office, front office, middle office Risks in financial transactions Credit risk Liquidity risk Market risk Stress test Operational risk Sovereign risk Targeted examinations On-site inspections by the government Operations conducted on behalf of the government

126, 127 126, 127 126, 127 128 123, 128 122 102-119, 124-128 82, 136, 148, 158 135 9, 51, 75, 80-98 89, 92 51, 90, 96 91 8, 9, 51, 75, 81-89 91

83, 84, 86-89, 97, 98 87 97 84 84, 86, 97 84, 88, 97 84, 91, 97 97 84, 98 84 91 95 11, 148, 151-156, 164-178, 180-185, 190, 192-197 Organization of the Bank of Japan 21, 22, 199-202 Head office, branches, local offices in Japan, overseas 22, 202 representative offices Internal rules 199 Organization of the Bank's head office 201 Outline of business operations 201 Payment and settlement system 6-9, 15, 48, 50, 56, 57, 5978, 80, 81, 85

335

Clearing system Bill and check clearing systems Clearing house Domestic Fund Transfer System Zengin System Foreign Exchange Yen Clearing System (FXYCS) Correspondent bank Funds settlement (funds transfers) Oversight Payment and Settlement Statistics Securities settlement Depository and book-entry transfer system for stocks DVP system for corporate bonds and other nonJGB bonds JB Net Japan Securities Depository Center (JASDEC) Registration system for corporate bonds and other non-JGB bonds Settlement and clearing SWIFT Payment instruments Cash Deposit money Highest settlement finality Policy Board Monetary Policy Meetings Nippon Ginko Seisaku Iinkai Geppou (Monthly Report of the Policy Board of the Bank of Japan) Price stability Principal terms and conditions for the Bank's transactions with the government Public relations of the Bank of Japan Press conferences, speeches Releases and publications related to public relations activities

46, 59-64 46, 62-64 62-64 46, 59, 60, 74 59 46, 59, 61, 62 61 56, 59-64 74 207 56, 64-66 64, 65 74 65, 74 65 64 46 61 4, 23, 29, 30, 44, 45, 56-58, 67, 94 4-6, 8, 26-30, 38, 44, 45, 5658, 140 4-6, 56, 75, 140 4, 6 - 8, 12, 29, 45, 80 3, 17-22, 91, 102, 103, 138, 152, 199 10, 17-22, 102, 103, 106, 137, 138 18, 20 3, 6, 10, 16, 17, 80, 102, 104 176 18-20, 137-139 18-20, 138, 214 19, 20, 137-139, 213, 214

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Annual Review 20, 138, 214 Nichigin Quarterly 138, 215 Pamphlets of the Bank of Japan 215 Publications related to research and studies of the Bank of 133-139, 211, 212 Japan Bank of Japan Quarterly Bulletin 138, 211 Currency Museum (Catalog) 142, 212 IMES Discussion Paper Series (J-Series [Japanese], 137, 211 E-Series [English]), Working Paper Series (released by 1. Financial Markets Department, 2. Research and Statistics Department, 3. International Department, 4. Financial and Payment System Office, 5. Chief Representative Office in Europe) Kin'yu Kenkyu (Monetary and Economic Studies) 136, 211 Monetary and Economic Studies 137, 211 Nippon Ginko Chousa Geppo (Bank of Japan 138, 211 Monthly Bulletin) Nippon Kahei Nenpyou (Chronological Table of the 212 Japanese Currency) Registered statistics Research on economic developments Reserve requirements Law Concerning Reserve Requirement System Progressive reserve ratios Required reserve ratio Required reserves Reserve maintenance period Special reserve accounts Securities held by the government Securities owned by the government Services provided as part of the Bank of Japan's cooperation with foreign central banks and international organizations Arranged transactions Guidelines for custody services for overseas account holders Overseas account holders Loans to foreign central banks and international organizations Technical assistance 131 134 44, 51-53, 104, 106 51 52 52, 53 52, 53 52, 53, 106 52 192 192 148-150

150 150 149 159 150

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Guidelines on the technical assistance 150 Sources of changes in current account balances at the 105, 106, 113-117, 130, 172, Bank of Japan 173, 207 Changes in current account balances at the BOJ due 114, 115 to banknotes factors Changes in current account balances at the BOJ due 114, 116 to treasury funds factors Funds-shortage factor 105 Funds-surplus factor 105 Sources of Changes in Current Account Balances at 116 the Bank of Japan (Projections) Sources of changes in current account balances at the 114-117 Bank of Japan and money market operations Stability of the value of currency 6 Statistics released by the Bank of Japan 130-133, 140, 141, 207-210 All Enterprises Tankan 130, 131, 209 Average contracted interest rates on loan and 208 discounts Balance of payments 130, 155, 209, 210 Corporate service price index 132, 209, 210 Deposits, Loans and Discounts Outstanding (amount 208 outstanding of deposits by depositor, loans and discounts outstanding by industry, and others) Flow of funds accounts 130, 207 Foreign exchange rates 209 Monetary Base and the Bank of Japan's Transactions 10, 208 Money stock (M2+CDs, quasi-money, broadly140 defined liquidity) Payment and settlement statistics 207 Principal Enterprises Tankan 130, 131, 209, 210 Principal figures of financial institutions (preliminary) 207 Results of consolidated international banking 208 statistics in Japan Results of locational international banking statistics in 208 Japan Results of regular derivatives market statistics in 208 Japan (Yoshikuni Statistics) Statistical publications 133, 210 Balance of Payments Monthly 133, 209, 210 Economic and Financial Data on CD-ROM, 210 Bank of Japan Financial and Economic Data Financial and Economic Statistics Monthly 133, 210

338

Money Stock (preliminary) Price Indexes Monthly Tankan Report-Short-Term Economic Survey of Enterprises in Japan Toukei Binran (Statistics Handbook) Wholesale price index Systemic risk

130, 133, 207 210 210 210 130, 133, 209, 210 9, 50, 51, 72-78, 80-85, 93, 99, 157-159

2, 18-20, 119, 138, 203 Transparency of monetary policy and of the Bank's business operations Accountability 18 Treasury funds 11, 164-178 Treasury funds services 11, 164-178 Agent system 164, 180 Agent contracts 164 Agent inspection 171 Revenue agents 165, 167, 168 Revenue sub-agents 165 Treasury agents 165, 167 Government checks 167 Government deposits 164-178, 192, 197 Domestic designated deposit account 172, 175 Foreign currency designated deposit account 172 Special deposit account for negotiable securities 172 Government expenditures, government revenues 164-168 Government's cash management services 175, 176 Financing bills (FBs) 109, 175, 193 Competitive auction 175 Food bills 175, 193 Foreign Exchange Fund bills 175, 193 Ministry of Finance bills 175, 193 Public auctions 175 Flow of treasury funds 172-174 On-line processing of treasury funds services 172, 178 Public Accounting Law 164, 170, 171, 177 Treasury funds remittances 168 Vault system, deposit system 168 Calculation and matching of treasury funds for 164, 166 government agencies and government accounts Accounting for the government deposits maintained at 164, 166 the Bank

339

Collection and disbursement of funds Web site of the Bank of Japan Web site of the Institute for Monetary and Economic Studies Virtual museum

164, 166 18, 20, 130, 132, 209-214 137, 142, 212 137, 142

340

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