In a bid to reinforce its monetary control, the Bank of Japan will adopt a new tool to open market operations as early as this month by using the expanding market for bond repurchase agreements, the BOJ announced Friday.
Under the new scheme, the BOJ can provide funds to commercial financial institutions as collateral for government bonds that the BOJ will borrow from them. This system is already used extensively by the U.S. Federal Reserve Fund and comes as the operation of bills in the market is shrinking as private firms use fewer bills for settlements.
At the beginning of a repo operation, when the bank sees liquidity tightening, it will borrow government bonds from commercial financial institutions and in return send cash as collateral to cap rises in interest rates. The amount of collateral will be decided by multiplying net market prices of bonds by a predetermined rate.
At the end of the operation, the bank will return the bonds with borrowing fees and receive the collateral cash and interest from the financial institutions. The period set for such operations is a maximum of six months, and the BOJ assumes actual operations will take up to two months.
The BOJ is choosing about 30 banks and securities firms for such dealing purposes and operations will begin as soon as an appropriate situation arises, according to Yoshihito Kawahara of the bank's credit and market management department.