The Call Money Market in Japan
Author: Hannan Ezekiel
Publication Date:
01 Jan 1966
eISBN:
9781451956160
Language:
English
Keywords:
SP; price; call money market; rate; central bank; discount rate; long-term credit; penalty rate; trust bank; bank borrowing; Bank credit; Loans; Open market operations
Download PDF (1.4 MB)

THE SHORT-TERM MONEY MARKET in Japan is essentially a call money market in which the participants obtain urgently needed liquid resources or utilize surplus liquid resources in their possession. It is characterized by the absence of trading in acceptances or Treasury bills.1 Since Japanese banks, as a rule, maintain only a very small proportion of liquid resources in the form of cash, balances with the Bank of Japan, and short-term claims on the Government, they rely rather heavily on the call money market for their liquidity. The central bank is for them an important alternative to the call money market both as a source of and as an outlet for funds at the margin. Changes in the Bank of Japan’s policy with regard to the provision of funds to the banking system tend, therefore, to have a rather powerful impact on the call money market.

Abstract

THE SHORT-TERM MONEY MARKET in Japan is essentially a call money market in which the participants obtain urgently needed liquid resources or utilize surplus liquid resources in their possession. It is characterized by the absence of trading in acceptances or Treasury bills.1 Since Japanese banks, as a rule, maintain only a very small proportion of liquid resources in the form of cash, balances with the Bank of Japan, and short-term claims on the Government, they rely rather heavily on the call money market for their liquidity. The central bank is for them an important alternative to the call money market both as a source of and as an outlet for funds at the margin. Changes in the Bank of Japan’s policy with regard to the provision of funds to the banking system tend, therefore, to have a rather powerful impact on the call money market.

THE SHORT-TERM MONEY MARKET in Japan is essentially a call money market in which the participants obtain urgently needed liquid resources or utilize surplus liquid resources in their possession. It is characterized by the absence of trading in acceptances or Treasury bills.1 Since Japanese banks, as a rule, maintain only a very small proportion of liquid resources in the form of cash, balances with the Bank of Japan, and short-term claims on the Government, they rely rather heavily on the call money market for their liquidity. The central bank is for them an important alternative to the call money market both as a source of and as an outlet for funds at the margin. Changes in the Bank of Japan’s policy with regard to the provision of funds to the banking system tend, therefore, to have a rather powerful impact on the call money market.

The Japanese call money market is located at three centers: Tokyo, Osaka, and Nagoya. The major portion of the call money funds passes through the Tokyo market; the market at Osaka is not very big and that at Nagoya is particularly small, having been established in March 1961. The three markets are not fully integrated, and differences between the rates prevailing in different markets for the same kind of transaction frequently persist for considerable periods.2

The participants in the market are banks and other financial institutions. These institutions operate in the market through call loan dealers, who are primarily intermediaries performing the function of bringing borrowers and lenders together. They play only a very small independent part in the market,3 this part being supported to some extent by limited credits extended by the Bank of Japan to some dealers as part of a policy aimed at developing the call money markets.

The Bank of Japan includes four groups of financial institutions under the heading “all banks.” The four groups are city banks, local banks, trust banks, and long-term credit banks. These different types of banks play different roles in the banking system in general and in the call money market in particular.

The city banks, of which there were 13 at the end of 1964, are large banks with branches throughout the country. Their dominating position in the banking system is indicated by the fact that at the end of 1964 the city banks had 61 per cent of the deposits, 57 per cent of the loans and discounts, and 61 per cent of the investments of the system as a whole (Table 1). The city banks play a very active role in making loans and discounting bills. Their owned resources plus their deposits are usually inadequate for carrying on their business. For their liquidity, as well as for the regular financing of a part of their activity, they rely on the Bank of Japan and the call money market, borrowing extensively from both of them, though since November 1962 the Bank of Japan has been endeavoring to reduce the volume of credit provided by it to the banks. Borrowings by the city banks from the Bank of Japan constituted more than 10 per cent of their total liabilities at the end of 1962. By 1964, this proportion had fallen to less than 6 per cent (Table 2).

Table 1.

Japan: Banking System at End of 1964

(Amounts in billions of yen)

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Source: Bank of Japan, Economic Statistics of Japan, 1964.
Table 2.

Japan: Role of Call Money and Borrowings from the Bank of Japan, End of Year, 1951, 1962, and 1964

(Amounts in billions of yen)

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Source: Bank of Japan, Economic Statistics of Japan, 1964.

The call money market has grown in importance as a source of funds for the city banks during the last decade. It provided less than 1 per cent of the resources of the city banks at the end of 1951, more than 3 per cent in 1962, and more than 6 per cent in 1964. The nature and importance of the role that the city banks play in the call money market can be gauged from the fact, brought out in Table 3, that their share of the average balances of lenders in that market in December 1964 was only 0.1 per cent, while their share of the average balances of borrowers was 80.5 per cent.

Table 3.

Japan: Structure of Call Money Market, December 1956, 1962, and 1964

(Amounts in billions of yen)

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Source: Bank of Japan, Economic Statistics of Japan, 1964.

The local banks, of which there were 64 at the end of 1964, operate over prefectures or smaller areas rather than nationally, but like the city banks they have many branches in the areas of their operation. Unlike the city banks, the local banks find it difficult to make full use of their resources through loans and discounts; and investment in debentures yields a lower return than call loans on an asset which is much less liquid. Therefore, the local banks use their surplus resources in the call money market and depend upon withdrawal of these resources from the market—and upon borrowing in it on occasion—to provide them with the necessary liquidity in case of need.4 These banks are, therefore, rather extensive lenders in the call money market. Call loans made by local banks constituted 2.3 per cent of their total assets at the end of 1964. Their share of the average balances of lenders in the call money market in December 1964 was 11.5 per cent, while their share of the balances of borrowers was only 2.4 per cent.

There were 7 trust banks in Japan at the end of 1964. In addition, one city bank and 2 local banks had trust accounts. Since the beginning of 1962, these trust accounts of city and local banks have been combined with the accounts of the trust banks for the purposes of call money statistics. It is thus possible to obtain a clear picture of the important role that trust accounts play in providing funds to the call money market. Their share of average balances of lenders in the market during December 1964 was 18.7 per cent, while their share of borrowers’ balances was only 2.7 per cent. Nearly 4 per cent of their assets and 3 per cent of their liabilities at the end of 1964 consisted of call money.

The long-term credit banks, as their name implies, concentrate on providing long-term finance to industry, primarily through loans and discounts. They are permitted to accept deposits from the Government, local public bodies, and their own borrowers only. Their principal source of funds, apart from their own capital, consists of debenture issues, relatively large proportions of which are taken up by the other banks and by the Government Trust Fund account. At the end of 1964, there were 3 long-term credit banks. These banks participate in the call money market as both borrowers and lenders; their share of both the demand for and the supply of funds on the market is relatively small.

A wide variety of nonbank financial institutions participate in the Japanese call money market. In accordance with the practice of the Bank of Japan, these can be classified into institutions which are not considered to be banks but which are treated as deposit-money creating institutions, and financial institutions which do not create deposit money. Into the former group fall mutual loan and savings banks, credit associations, the central bank for commercial and industrial cooperatives, and the group of agricultural cooperative institutions.5 Into the latter fall the securities corporations and the insurance companies (both life and nonlife), together with a number of miscellaneous financial institutions. For our present purposes, not much is gained by using this classification of nonbank financial institutions; therefore, all these nonbank institutions will be considered together.

The Bank of Japan’s classification of nonbank financial institutions does not include foreign banks in either group, nor are these banks included in the group of “all banks.” These foreign banks do not generally make direct Japanese currency loans to individuals and non-financial businesses. However, they participate in the call money market and are treated here as nonbank financial institutions.

The importance of the nonbank financial institutions as a group in the call money market is evidenced by the fact that they accounted for 67.8 per cent of the average balances of lenders in the call money market and for 12.7 per cent of the average balances of borrowers in that market in December 1964. Among lenders, the mutual loan and savings banks (including credit associations in this category) and the agricultural cooperative group were the most important, accounting, respectively, for 21.3 per cent and 31.4 per cent of the total funds supplied. Among borrowers, the securities corporations were the most important, accounting for 9.5 per cent of the total funds borrowed.

It will thus be seen that the city banks among the banking institutions and the securities corporations among the nonbanking institutions are the most important borrowers, while the local banks and trust banks among banking institutions and the mutual loan and savings banks (including credit associations) and the agricultural cooperative group among the nonbanking institutions are the most important lenders in the market.

This has not always been the case. Two difficulties arise in tracing the changing pattern. One is that until 1961, the trust accounts of the city and local banks were consolidated with their other accounts. When using the statistics for the period until 1961, therefore, allowance has to be made for the probability that almost all the funds supplied by the city banks and relatively large amounts of those supplied by the local banks actually came from the trust accounts of these institutions. The other is that the market classification by lenders and borrowers for the period before 1956 is available only for Tokyo, not for the entire market.

When allowance is made for the change in the treatment of trust accounts, the institutions which expanded their supply of funds to the market most rapidly from 1956 to 1964 were the local banks, the trust banks, the mutual loan and savings banks (including credit associations), and the agricultural cooperative group. The institutions which expanded their use of funds most rapidly over the same period were the securities corporations and the city banks, more particularly the latter.

These institutions expanded their share of the market while it was growing rapidly. In 1950 call money outstanding at the end of the year was 3.2 billion yen. At the end of 1964 it had grown to 1,078.9 billion yen, i.e., it was then 337 times the 1950 balance. To put this growth in perspective, it may be noted that the net total deposits of all financial institutions in 1964 were 22 times such deposits in 1950. The growth of the call money market over this period was thus about 15 times greater than that of the financial system as a whole; its growth has been particularly rapid since 1962.

The call money market is not a homogeneous market for one type of fund. Rather, loans are made on varying terms and conditions. For statistical purposes, the Bank of Japan classifies such funds into four types: (1) overnight, (2) unconditional, (3) with fixed maturity dates, and (4) unconditional overmonth. Overnight loans are made for one day. They are settled the next day, generally before the clearing settlement (1:30 p.m. on Saturdays and 1:00 p.m. on other working days). Unconditional loans are made for two days, after which they can be called or repaid at one day’s notice. Fixed maturity loans are, as the name suggests, loans for a fixed period; the usual practice is to have term loans maturing in the month following the month in which the loan was originally made. Unconditional overmonth loans can be called after the second day of the following month. Thus, only two of these four types of loan are really of the extremely short-term nature which is usually associated with a call money market.

Data on these types of loans are available for the entire call money market from 1956 only; before that date, they are available for the Tokyo market only. As shown in Table 4, the amount of overnight money has remained relatively unchanged since 1956. While unconditional money has increased substantially, the most rapid expansion has been in the two other types of loan. This suggests that the market has become more important as a source and use of finance than as a source and use of liquidity properly understood.

Table 4.

Japan: Call Money Market, Loans by Type, December 1956, 1962, and 1964

(Amounts in billions of yen)

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Source: Bank of Japan, Economic Statistics of Japan, 1964.

A fifth type of loan—the half-day loan—is also made on the call money market. However, because of its nature, data on the volume of such loans are not available. Half-day loans are either morning loans, made in the morning to be settled at the time of the clearing settlement, or afternoon loans made at the time of the settlement until the end of the same day. There is no reason to believe that the market for these loans has developed very differently from that of overnight money.

Factors Affecting Bank Liquidity

The transactions of the banks with the central bank and in the call money market depend upon variations in the banks’ liquidity position resulting from their normal business transactions. In Japan, as in other countries, five main factors affect the liquidity positions of banks: (a) the proportion of currency in circulation to money supply; (b) movements of gold and foreign exchange; (c) Treasury operations; (d) open market operations of the central bank; and (e) minimum reserve requirements.

The proportion of coins and currency notes in the Japanese money supply appears to be relatively small, and it has shown a definite tendency to fall, declining from 30.6 per cent in 1953 to 20.8 per cent in 1964 (Table 5). If the proportion of currency in the total of money and quasi-money is considered, it is found that the fall has been even sharper, from 15.0 per cent in 1953 to 6.9 per cent in 1964. Thus, the currency drain involved in the creation of credit has been relatively small for Japanese banks, and it has become progressively smaller over the last decade.

Table 5.

Japan: Proportion of Currency Outside Banks to Money Supply, 1953-64

(Amounts in billions of yen)

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Source: International Monetary Fund, International Financial Statistics.

Changes in gold and foreign exchange holdings reflecting surpluses or deficits in the over-all balance of payments produce corresponding inflows or outflows of bank liquidity. The impact of the external sector on bank liquidity has been quite powerful in Japan during the postwar period, and its direction has changed frequently. To obtain the net impact of the foreign sector on bank liquidity, changes in the country’s gold and foreign exchange holdings have to be adjusted by the foreign exchange deposits held by the authorities with the banks. The net impact is best measured by the yen transactions of the Foreign Exchange Fund which produce increases or decreases in the currency supply. These transactions are shown in column 2 of Table 6.

Table 6.

Japan: Factors Affecting Supply of Currency, 1952-64

(Amounts in billions of yen)

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Source: Bank of Japan, Economic Statistics of Japan, 1964.

Column 1 plus column 2.

Column 3 plus columns 4, 5, and 6.

During the postwar period, the Government has tried to balance its budget as far as possible. However, there are two elements of Treasury operations which make it necessary to pay some attention to such operations when considering the liquidity position of the banks. First, even if the budget is balanced over the entire year, there may be net inflows into, or outflows from, the Treasury during particular parts of a year. There is, in fact, a definite tendency for funds to flow out of the Treasury during the third quarter of each fiscal year and for funds to flow into the Treasury during the fourth quarter. Treasury operations, therefore, tend to produce seasonal fluctuations in the stock of money. Second, in trying to ensure the maintenance of a balanced budget, the Treasury usually winds up with a surplus. However, since the surplus of one year is carried to subsequent budgets, it is not correct to assume that the Treasury’s operations tend necessarily to have a deflationary impact. It is only after adjusting each year’s budget by any surplus carried forward from previous years that it is possible to measure the contractionary or expansionary impact during the year.

In addition to its general budgetary funds, the Treasury holds funds of the following kinds: (1) money in custody of the Treasury, consisting of nongovernment funds held in custody under the related laws; these are probably not very significant; (2) cash balances of the Trust Fund Bureau fund, consisting of the surplus and accumulated funds in the postal savings account and in various special accounts of the Government—the Bureau invests its funds in designated ways, but its cash balances are held with the Bank of Japan and form part of Treasury funds; (3) deposits of corporations sponsored by the Government—these consist of the operating cash funds of three public corporations6 and five financial corporations;7 and (4) other funds, including the proceeds of Treasury bills and the yen balances of the Fund for Operations of Foreign Exchange and the Fund for Purchase of Staple Foodstuffs. The impact on the money stock of the Fund for Operations of Foreign Exchange has been considered above. However, transactions under all the other heads also affect the Treasury’s position. The net inflows of funds into and outflows of funds from the Treasury, after account is taken of Treasury balances under all these other heads, determine the expansionary or contractionary influence of the Treasury’s domestic operations on money supply. It is clear from column 1 of Table 6 that the over-all impact of these domestic operations of the Treasury on the supply of currency has sometimes been quite large.

Until late in 1962, the primary, though not the only, use made of open market operations in Japan was to offset seasonal variations in the liquidity of the banks. Thus, the Bank of Japan regularly sells securities in the third quarter of each fiscal year to the Central Cooperative Bank for Agriculture and Forestry (since 1954) and to local banks not indebted to itself (since 1958) in order to absorb the seasonal inflows of funds into these institutions. These funds would otherwise have flowed through the call money market to the city banks and the long-term credit banks. Similarly, the Bank of Japan buys securities to offset the inflow of funds into the Treasury which takes place regularly at certain times of the year. The large-scale indebtedness of the city banks to the Bank of Japan reduces the need for the latter to make direct purchases from and direct sales to the city banks. To that extent, perhaps, it could be argued that Japanese open market operations are relatively ineffective. This does not appear, however, to be a correct interpretation of the position, as the open market operations, though affecting only the Central Cooperative Bank for Agriculture and Forestry and the local banks directly, influence the liquidity of the city banks indirectly through the call money market.

Since November 1962, the Bank of Japan has also been carrying out open market operations for the announced purpose of meeting the long-term currency needs of the economy. This change is part of a policy whose aim is to bring about a steady reduction in the volume of bank borrowing from the central bank.8 These operations are carried out with all four types of bank.

When carrying out its open market operations, the Bank of Japan does not operate in an impersonal money market, for the simple reason that no such market exists for the kinds of securities which the Bank could buy or sell. The Bank of Japan has, therefore, to deal direct with the financial institutions concerned. In doing this, the Bank generally subjects the sale (or purchase) to certain restrictive conditions usually involving compulsory repurchase (or resale) on agreed terms and conditions. Moreover, these transactions are carried out in nongovernment securities rather than Treasury bills or medium-term government bonds. The low rate of yield on Treasury bills and the small amount of government debt held by the private sector is responsible for the use of unofficial securities as the instrument for open market operations.

Before 1957, the authorities had no legal powers to fix minimum reserve requirements. A law passed in 1957 gave the Bank of Japan authority to fix minimum reserve ratios, up to a maximum of 10 per cent, for certain financial institutions; different ratios may be set for different classes of institution and for different types of deposit. The penalty for shortfalls is fixed at 3.65 per cent per annum above the basic discount rate. The reserves are to be maintained in interest-free deposits with the Bank of Japan and are exclusive of deposits held for clearing purposes. By this definition, vault cash is automatically excluded from the reserve ratio.

Not until September 1959 did the Bank of Japan use this authority to fix reserve ratios, though certain banks had been holding such reserves by agreement with the Bank since February of that year. The initial ratios fixed in September 1959 were 1.5 per cent for monetary deposits and 0.5 per cent for time deposits for banks whose deposits exceeded 20 billion yen (i.e., primarily the city banks) and 0.75 per cent and 0.25 per cent for these classes of deposits for the other banks. In October 1961, banks were divided into three categories according to the size of their deposits: 100 billion yen or more; 20 billion yen to 100 billion yen; and less than 20 billion yen. The required reserve ratios were also altered at that time so that the largest banks had to hold 3 per cent of their monetary deposits with the Bank of Japan. Other changes in rates have been made subsequently. On April 1, 1963, mutual loan and savings banks and credit associations having deposits of more than 20 billion yen were also made subject, for the first time, to separately prescribed reserve ratios. The various ratios fixed from time to time between September 1959 and December 1964 are given in Table 7.

Table 7.

Japan: Minimum Reserve Ratios, September 1959-December 19641

(In percentages)

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Source: Bank of Japan, Annual Reports, 1959-64.

These are the prescribed minimum ratios of each bank’s demand deposits with the Bank of Japan (exclusive of deposits held for clearing purposes) to its deposit liabilities of the appropriate class.

No change from previous column.

The Official Market for Liquidity

As has been noted above (p. 26), the Bank of Japan is, for Japanese banks, an alternative to the call money market both as a source of and an outlet for funds at the margin. This is particularly true for the city banks, but also, though to a limited extent, for the local banks. The city banks borrow from the Bank of Japan not merely for short periods to meet temporary pressures on their liquid resources but on a more or less continuing basis to supplement the other resources available to them. They are thus in a state of continuous indebtedness to the Bank, and the extent of such indebtedness varies continuously. The direct impact of changes in the Bank of Japan’s policy with regard to bank borrowings falls mainly on the city banks, but as these banks are very large borrowers in the call money market, the central bank’s lending policy plays a very important part in determining the conditions under which the call money market functions.

The official structure of Japanese interest rates for bank borrowing from the Bank of Japan has two dimensions. In one dimension, the rates vary according to the nature of the paper discounted or used as security for the loan or advance from the central bank (Chart 1). In the other dimension, it varies according to the volume of the bank’s indebtedness to the Bank of Japan relative to established ceilings, this variation being brought about through the application of one or more penal rates, expressed as penal additions to the rate applicable to the particular class of transaction under the standard structure of interest rates (Chart 2). However, borrowing in excess of the ceiling is permitted under the present system only in exceptional circumstances. Penalty rates may be applicable even to borrowing within the ceiling when such borrowing exceeds certain prescribed limits.

Chart 1.
Chart 1.

Japan: Structure of Official Interest Rates by Type of Credit, 1955-64

(In per cent per annum)

Citation: IMF Staff Papers 1966, 001; 10.5089/9781451956160.024.A002

Chart 2.
Chart 2.

Japan: Discount Rate, Penal Rates, and Average Level of Call Money Rates,1 1955-64

(In per cent per annum)

Citation: IMF Staff Papers 1966, 001; 10.5089/9781451956160.024.A002

1 Rate for unconditional money.

To illustrate, the standard structure of interest rates on March 20, 1963 was as follows:

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In this group of rates, the discount rate on commercial bills is the official bank rate and the other rates are higher or lower than this, depending on the risk believed to be attached to the kind of security involved or on the desire of the authorities to encourage the particular type of transaction giving rise to the original document. For loans exceeding the Bank’s credit ceiling, the penalty is an addition of 3.65 per cent per annum to the basic rates. At present, no penal rates apply within the ceiling.

Changes in the basic structure of interest rates can be brought about in the form of changes (1) in the basic discount rate with equal changes in the other rates, (2) in the differentials between the various classes of loans and discounts, and (3) in the classes of loans and discounts covered by the structure or in the items included in these classes. Thus, the structure of rates prevailing on March 20, 1963, described above, was the result of a reduction of 0.365 per cent per annum in each of the rates prevailing until that date. Again, rates on five of the seven classes were reduced further, by 0.365 per cent on April 20, 1963, while the discount rate on export bills and the interest rate on loans secured by export trade bills were left unchanged, thus reducing the differentials between these rates on the one hand and the discount rate on commercial bills on the other.

Changes in the ceiling system may be brought about in the form of changes (1) in the level of indebtedness at which the ceiling applies and (2) in the penalty rates added for borrowing in excess of such ceilings, when such borrowing is permitted. The penalty system, apart from that applicable in connection with borrowing in excess of the ceiling itself, may be varied by changes (1) in the penalty rates added to the basic rates and (2) in the tranches within the ceiling to which the penalties apply.

The system as it has been described above has not always been in existence in this form, nor was it introduced at any one time. It evolved slowly over a period of time. The system of ceilings was introduced only in November 1962. Until then, there were no ceilings on bank borrowings from the central bank, but merely a system of penal additions to the basic rates applicable to one or more tranches of a bank’s indebtedness to the central bank. The tranches to which the penal rates became applicable were determined by varying formulas9 and the penal additions were varied from time to time (Chart 2) in an effort to ensure that monetary policy dealt flexibly with the changing needs of the economy.

The introduction of the ceiling system in November 1962 was aimed at reducing the dependence of banks on borrowing from the central bank.10 The Bank of Japan has not made public either the aggregate amount of ceilings fixed by it for the banking system or the formula on the basis of which the ceilings for individual banks are calculated. It is known that the ceilings were reduced in the autumn of 1963,11 but by how much has not been indicated. Since 1962, bank borrowing from the central bank has shown a steady contraction (Table 2). Presumably, this contraction has been the result of the ceiling system.

Formation of Call Money Rates

As pointed out in the preceding section, the Bank of Japan is an alternative to the call money market for the city banks both as a source of and an outlet for funds. However, a large number of other institutions operate in the call money market. Except for the local banks, which borrow from the central bank to only a limited extent, these other institutions do not have access to the central bank. At the end of 1962, slightly less than half the demand for funds and almost the entire supply of funds in the market came from these other institutions. As both the demand for and the supply of funds on the call money market from these institutions are affected by a wide variety of factors, it would seem that, though there is some link between the official market for liquidity and the call money market, one should not expect the link to be very strong.

An examination of the relationship between the two markets is made more difficult by the existence of as many as seven different interest rates in the official liquidity market, apart from the penal additions to these rates which become applicable when a bank’s borrowing from the central bank exceeds prescribed limits. Though it is customary to describe the discount rate on commercial bills as the bank rate, it is clearly only one of the rates relevant for bank borrowing from the central bank, even when such borrowing is within the prescribed limits. The actual rate at which a bank borrows from the central bank depends upon the type of transaction under which such borrowing happens to be carried out. Banks ordinarily try to borrow from the central bank at the lowest possible rate of interest, but they are limited in this respect by the assets in their possession. The same bank might, therefore, borrow from the central bank at different rates at different times, not because the central bank’s lending rates had been changed or even because penal rates had become applicable to its borrowing, but because of changes in the nature of its available assets. Similarly, different banks might borrow from the central bank at different rates at the same time. Their opportunity costs in the official market in relation to the call money rate cannot, therefore, be stated simply in terms of the level of the discount rate.

The system of penal rates, which has been outlined above (p. 42), also helps to weaken the relationship between the basic official rates and the call rates. Even when there were no ceilings as such on bank borrowings, but merely prescribed limits above which borrowing attracted penalties, variations in these limits as well as in the applicable penalties12 influenced the official market conditions, which could be said to determine the conditions in the call money market. Now that the prescribed limits have become ceilings above which bank borrowing from the central bank is possible only in exceptional circumstances and on payment of extremely heavy penalties, the impact on the call money market of a situation in which many banks are at or near these ceilings is likely to be almost explosive. This would suggest the possibility of the link between the discount rate and the call money rate having become less close since the introduction of the ceiling system.

The fragmentation of the call money market complicates the situation further. The three different markets and five different types of transaction have been described above.13 Presumably, each of these different types of transaction carries its own interest rate14 and interrelationships between the demand for and the supply of different types of money on the call money market would undoubtedly influence the rates for all of them. The call money rates themselves are not always freely determined in the open market.15 In Japan, there has always been a strong conventional influence on financial relationships in general and on interest rates in particular. Over the period covered by this study, ceilings on interest rates on particular types of call money transactions have been imposed from time to time. Reported interest rates are very frequently at these ceilings, though it has been officially admitted that actual transactions are often carried out at higher rates.16 Also, the prescribed ceilings on particular interest rates might sometimes have the effect of holding actual interest rates at the ceilings in circumstances in which they would otherwise have sagged far below those levels. As a result, the relationship between the discount rate and the call money rate tends to be weak.

The relationship between the discount rate and the call rates is also affected by other features of the call money market. It is necessary, for instance, to take into account the commissions on transactions in the call money market charged by the brokers through whom these transactions are carried out. There are also the usual imperfections which one might expect to find in a market of this kind. Participants in the market, for instance, are of widely different sizes and rarely have adequate information about the liquidity positions of other institutions on which to base their judgments about the appropriate interest rates to demand or to offer. As the volume of funds flowing through the market fluctuates sharply from day to day, there are bound to be at times some fairly thin markets in which interest rates quoted are either nominal or quite erratic. In any case, the choice between the central bank and the call money market is itself not always a simple one, depending only on costs and benefits. It might well depend upon other characteristics of the respective transactions, e.g., the views expressed by the central bank in the course of so-called window guidance. In Japan, where banks appear to attach great importance to their relations with their clients, costs at the margin may frequently play a less important role in decision making than elsewhere. Nevertheless, call rates are influenced though not determined by the prevailing level of the discount rate.

The Discount Rate and Call Money Rates, 1955-64

For this examination of call money rates in Japan, rates for unconditional money have been used rather than those for overnight money. This choice was due in part to the fact that, until 1957, overnight money rates were subject to ceilings placed at unreasonably low levels and did not, therefore, provide any indication of the underlying conditions in the market. Rates for unconditional money were also subjected to ceilings by agreement during the latter part of the period under consideration. However, these ceilings were generally placed at more reasonable levels. Nevertheless, difficulties arising from the absence of a free determination of rates in the open market operated even for unconditional rates and influenced the results.

The monthly average rates reported by the Bank of Japan are not arithmetical averages, whether weighted or unweighted, of the rates prevalent in the market during the month, but modes, i.e., the most frequently observed value during the month. Interest rates in Japan are quoted in sen per diem, that is, in 0.01 yen per 100 yen a day; and rates usually change by tenths of a sen. As a result, the annual rates tend to be in multiples of 0.365.17

Call money rates within each month show for certain periods a tendency toward quite sharp fluctuations. For other periods, however, the maximum and minimum rates do not differ from the average. In the latter periods, the rate throughout the month is generally at the ceiling fixed by agreement among the banks so that it is not really a reliable indicator of the prevailing conditions of demand for and supply of funds in the market.

For almost the entire period under review, the monthly average call money rate has been above the basic discount rate (Chart 3). During two periods, the rate was so much higher than the basic discount rate that its level attracts special attention. The first such period was in 1957, particularly from May to October, and the second in 1964, particularly from May to December. In both periods, the explanation for the call rates being so much higher than usual relative to the discount rate is to be found in the use by the Bank of Japan of the other instruments at its disposal to force acute stringency in the market.

Chart 3.
Chart 3.

Japan: Discount Rate and Monthly Average Call Money Rates,1 1955-64

(In per cent per annum)

Citation: IMF Staff Papers 1966, 001; 10.5089/9781451956160.024.A002

1 Rate for unconditional money.*Monthly average call money rate, 16.80 per cent for June 1957 and 18.25 per cent for July 1957.

Between March and May 1957, the discount rate was raised in two stages from 7.30 per cent per annum to 8.39 per cent. Simultaneously the two existing penal additions to the basic interest rate applicable to borrowings in excess of the two different prescribed limits were consolidated into a single penal rate. It is important to realize that in 1957 both Treasury operations and the yen operations of the Foreign Exchange Fund tended to produce rather large contractionary effects on the liquidity of the banks, forcing them to bring about a rather sharp expansion in their borrowing from the Bank of Japan. In spite, therefore, of a slight raising of the limits for bank borrowing from the central bank at the basic rate, the banks were probably forced into a position where they were borrowing rather large amounts from the central bank at penal rates. As the demand for credit remained high during this period, and banks were eager to maintain their normal relationship with their clients, they were willing to pay rather high rates for the marginal funds obtained by them in the call money market.

In the summer of 1963, the Bank of Japan lowered the ceilings for bank borrowing from the central bank which had been imposed under the new system of ceilings adopted in November 1962. Call rates, therefore, started rising toward the end of 1963. On December 16, 1963, the required minimum reserve ratios against demand deposits for all institutions covered by these requirements18 were doubled. When the official discount rate was raised from 5.84 per cent to 6.57 per cent in March 1964, call rates shot up to the extremely high levels shown in Chart 3

An examination of the movements of the monthly average call money rate over the entire period shows that this rate has fluctuated from month to month over certain periods, while over other periods it has remained constant for many months at a time. In the latter case, changes in the call money rate have often coincided with and been in the same direction as changes in the discount rate. Even otherwise the call rate has shown a tendency to move in broadly the same direction as the discount rate. The relationship between the discount rate and the monthly average call money rate has, therefore, been subjected in this paper to statistical examination.

The coefficient of determination, adjusted for degrees of freedom (R¯2) for the correlation between the discount rate and the monthly average call money rate for the period from August 1955 to December 1964 was found to be 0.207. However, it was found that there was a significant degree of serial correlation between the residuals. When adjustment was made for this,19 the coefficient of determination fell to only 0.041.

For reasons explained in an earlier paper,20 the discount rate was also correlated with the arithmetical averages of the monthly average call money rate for each of the periods for which the discount rate was constant (Chart 2). The coefficient of determination adjusted for degrees of freedom for the 16 observations thus obtained was 0.251 with no significant serial correlation present between the residuals. The results obtained are summarized in Table 8.

Table 8.

Japan: Discount Rate and Call Money Rates—Regression and Correlation Results1

(August 1955 to December 1964)

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C = a + bD, where C = Call Money Rate and D = Discount Rate.

It was found on the basis of the Durbin-Watson Test that no adjustment for serial correlation was necessary. The period averages are the averages of the monthly average call money rates for each of the periods for which the discount rate was unchanged.

It may be concluded that the relationship between the discount rate and the call money rate is not very close, though it is much closer when the average level of the call money rate prevailing in each period during which the discount rate was constant is taken as the relevant variable rather than the monthly average call rate as such. This rather weak statistical relationship between the discount rate and the call money rate supports the conclusions of the preceding section of this paper.

Le marché de l’argent à vue au Japon

Résumé

Les banques et autres institutions financières du Japon se procurent les ressources liquides dont elles ont un besoin urgent, ou utilisent leurs excédents de ressources liquides, soit sur le marché de l’argent à vue, soit dans des transactions avec la banque centrale. Les banques des villes et les sociétés de portefeuille sont les principaux emprunteurs sur le marché de l’argent à vue, tandis que les banques locales, les banques fiduciaires et quelques institutions financieres non bancaires sont les principaux prêteurs. Le recours des banques au marché de l’argent à vue ou à la banque centrale dépend de leurs positions de base en liquidités, lesquelles sont fonction: 1) de la proportion de monnaie fiduciaire par rapport à la masse monétaire, 2) des mouvements de l’or et des devises, 3) des opérations du Trésor, 4) des opérations d’open market de la banque centrale, 5) des réserves obligatoires minima.

La structure des taux officiels d’intérêt du Japon se présente sous deux dimensions. Tout d’abord, il existe sept taux d’intérêt différents selon la nature de l’effet qui est escompté auprès de la banque centrale ou qui sert à garantir le prêt obtenu. Ensuite, des pénalités viennent majorer le taux d’intérêt si l’endettement d’une banque envers la Banque du Japon dépasse les plafonds fixés. Depuis novembre 1962, il n’est plus possible, en règle générale, d’obtenir du crédit au-delà desdits plafonds. Jusqu’à cette date, aucune restriction ne limitait le montant total de l’endettement.

Pour influencer le marché, la Banque du Japon peut effectuer des opérations d’open market ou modifier les réserves obligatoires, ce qui exerce un effet sur les liquidités des banques. Elle peut modifier les plafonds fixés pour le crédit des banques, limitant ainsi la mesure dans laquelle lesdites banques peuvent avoir recours à elle. Elle peut modifier les pénalités ajoutées aux taux de base, ou les taux de base euxmêmes, ce qui fait varier le coût du crédit qu’elle accorde aux banques. En outre, le taux d’escompte est seulement l’un des sept taux de base. On doit donc s’attendre à ce que le rapport entre ce taux et le taux de l’argent à vue ne soit pas très étroit, ce que confirment les résultats des études de corrélation portant sur la période août 1955-décembre 1964.

El mercado de dinero a la vista en el Japón

Resumen

Los bancos y otras instituciones financieras del Japón obtienen los recursos líquidos que necesitan urgentemente o utilizan sus excedentes de recursos líquidos ya sea en el mercado de dinero a la vista o en sus transacciones con el banco central. Los prestatarios más importantes del mercado de dinero a la vista son los bancos urbanos y las sociedades que comercian en valores, en tanto que los principales prestamistas son los bancos locales y los fiduciarios y algunas instituciones no bancarias. El que los bancos recurran al mercado de dinero a la vista o al banco central depende de sus posiciones básicas de liquidez, las cuales resultan afectadas por (1) la proporción entre la moneda fiduciaria y el medio circulante, (2) los movimientos de oro y divisas, (3) las operaciones de la Tesorería, (4) las operaciones del banco central en el mercado libre y (5) los requisitos sobre reserva mínima.

La estructura de las tasas de interés oficiales en el Japón tiene dos planos. Primero, hay siete tasas diferentes cuya aplicación depende del documento que se descuenta en el banco central o que garantiza el préstamo concedido por éste. Segundo, en caso de que las deudas de un banco frente al Banco del Japón excedan de un límite establecido, se aumenta la tasa del interés agregándole una multa. Desde noviembre de 1962, por lo común no se ha permitido tomar prestado en exceso de ciertos topes. Hasta entonces no había habido limitaciones respecto del monto total de deudas.

Para influir sobre el mercado, el Banco del Japón puede efectuar operaciones en el mercado libre o modificar los requisitos sobre reservas, afectando así la liquidez bancaria. Puede alterar los límites aplicables a los préstamos que los bancos pueden obtener, afectando así las posibilidades de acceso de éstos al propio Banco del Japón. Puede modificar el monto de las multas que se agregan a las tasas básicas o aun estas mismas, afectando por lo tanto el costo de los préstamos que él otorga a los bancos. Además la tasa de descuento es sólo una de las siete tasas básicas. Así pues, es de suponer que no haya una relación muy estrecha entre aquella tasa y la del dinero a la vista. Esta presunción la confirman los resultados de los estudios de correlación relativos al período comprendido entre agosto de 1955 y diciembre de 1964.

*

Mr. Ezekiel, economist in the Research and Statistics Department, is a graduate of the University of Bombay. He taught economics at St. Xavier’s College, Bombay, and at the Department of Economics, University of Bombay, and was Financial Editor of The Economic Times. He has published several articles in economic journals and is the author of The Pattern of Investment and Economic Development, to be published shortly by the University of Bombay.

1

“In Japan, where no markets for short-term government securities or discounted bills exist, the call money rates are the only short-term rates and accordingly the leading indicator of money market conditions.” See Bank of Japan, Money and Banking in Japan (Tokyo, 1964), p. 73.

2

This is somewhat surprising because the call loan brokers through whom call money transactions are carried out are entitled to transfer funds between their offices through the Bank of Japan’s teletype transfer service.

3

Formally, these dealers are now principals, but actually they are still, for the most part, brokers.

4

The local banks borrow very little from the Bank of Japan. At the end of 1962 and of 1964, such borrowings constituted only 0.14 per cent and 0.15 per cent, respectively, of their total liabilities.

5

Included here are the Central Cooperative Bank for Agriculture and Forestry and the Credit Federations for Agricultural Cooperatives.

6

The Japanese Monopoly Corporation, the Japanese National Railways, and the Nippon Telegraph and Telephone Public Corporation. (The funds of the recently established Atomic Fuel Corporation are not treated as Treasury funds.)

7

The Agriculture, Forestry, and Fisheries Finance Corporation; the Small Business Credit Guarantee Corporation; the Housing and Loan Corporation; the Small Business Finance Corporation; and the Hokkaido and Tohoku Development Corporation. The funds of two corporations (the People’s Finance Corporation and the Public Enterprise Finance Corporation) are not treated as Treasury funds. The funds of the Export-Import Bank of Japan and the Japan Development Bank are also not treated as Treasury funds, though these banks are government banks.

8

“The major aim of this new system is to restrain the tendency among financial institutions to excessively rely on borrowings from the Bank of Japan …,” Bank of Japan, Annual Report, 1962, p. 79.

9

A detailed description of these formulas is given in Hugh T. Patrick, Monetary Policy and Central Banking in Contemporary Japan (Bombay, 1962), pp. 121-28.

10

See footnote 8, page 37.

11

Bank of Japan, Annual Report,1963, p. 66.

12

Variations in the penalties brought about from time to time are shown in Chart 2.

13

See pages 26 and 32-33.

14

The Bank of Japan regularly publishes separate quotations for the interest rates prevailing in the Tokyo and Osaka markets for unconditional money, overnight money, and unconditional overmonth loans.

15

In Japan, “Interest rates are subject to a number of artificial controls which hamper the development of the market and distort the pattern of interest rates,” Bank of Japan, Money and Banking in Japan (Tokyo, 1964), p. 79.

16

As a result of extreme tightness in the market, “the call rate actually remains fixed at the ceiling … agreed to by banks, and it is not at all a rare case that the rate soars above this level, especially when the tight money policy is in effect,” Bank of Japan, Money and Banking in Japan (Tokyo, 1961), p. 27.

17

The formula for conversion is (sen per diem×365100=rate per cent per annum.

18

In April 1963, the minimum reserve ratio requirements had been extended for the first time to the mutual loan and savings banks and credit associations with assets of more than 20 billion yen.

19

The existence of serial correlation was determined by applying the Durbin-Watson Test. Adjustment for the presence of serial correlation was made by using the method presented by L. R. Klein, A Textbook of Econometrics (New York, 1956), p. 159.

20

Hannan Ezekiel, “The Call Money Market in France,” Staff Papers, Vol. XII (1965), pp. 385-408.

Same Series

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Cover IMF Staff Papers
IMF Staff papers: Volume 13 No. 1
Author: International Monetary Fund. Research Dept.
Volume/Issue:
Volume 1966: Issue 001
Publisher:
International Monetary Fund
ISBN:
9781451956160
ISSN:
1020-7635
Pages:
166
DOI:
https://doi.org/10.5089/9781451956160.024
  • View in gallery

    Japan: Structure of Official Interest Rates by Type of Credit, 1955-64

    (In per cent per annum)

  • View in gallery

    Japan: Discount Rate, Penal Rates, and Average Level of Call Money Rates,1 1955-64

    (In per cent per annum)

  • View in gallery

    Japan: Discount Rate and Monthly Average Call Money Rates,1 1955-64

    (In per cent per annum)

Japan: Structure of Official Interest Rates by Type of Credit, 1955-64

(In per cent per annum)

Japan: Discount Rate, Penal Rates, and Average Level of Call Money Rates,1 1955-64

(In per cent per annum)

Japan: Discount Rate and Monthly Average Call Money Rates,1 1955-64

(In per cent per annum)