This article presents a quantitative analysis of the impact of the Bank of Japan's relaxation measures for Securities Lending Facility requirements on government bond supply and demand in the repo market, using daily panel data by issue from April 2013 to March 2025.
Key Points
Overview and Background of Securities Lending Facility
- Bank of Japan introduced the Securities Lending Facility in April 2004 to temporarily and supplementarily supply government bonds it holds to market participants
- Since the start of Quantitative and Qualitative Monetary Easing (QQE) in April 2013, relaxation measures were implemented to prepare for tightening bond supply and demand due to large-scale government bond purchases
- From mid-2022 to early 2023, Securities Lending Facility usage increased to over 8 trillion yen per day
- For issues where the Bank of Japan's holdings exceed 80%, GC-SC spreads tend to widen non-linearly
Effects of Major Relaxation Measures
- Reduction of minimum lending fee (April 2013: 1.0% → 0.5%, June 2019: 0.5% → 0.25%) contributed to easing supply and demand in repo market
- Increase in maximum consecutive usage days (March 2015: 5 days → 15 days, January 2016: 15 days → 50 days) demonstrated easing effects
- Analysis revealed that easing effects from relaxation measures increase non-linearly as Bank of Japan's government bond holdings ratio rises
- For cheapest-to-deliver issues, consecutive usage days were increased from 50 to 80 days in June 2022
Empirical Analysis Results
- Analysis conducted using issue-specific daily panel data for government bonds from April 2013 to March 2025
- Confirmed that reduction in minimum lending fee and increase in maximum consecutive usage days significantly narrowed GC-SC spreads
- Demonstrated that relaxation measures have significantly larger effects for issues with higher Bank of Japan holdings ratios
- Consistent results confirmed in both panel fixed effects and panel random effects models
Reduction Measures for Cheapest-to-Deliver Issues
- Since June 2019, reduction measures implemented for cheapest-to-deliver issues where Bank of Japan holdings exceed 80%
- Reduction measures involve financial institutions purchasing government bonds lent by the Bank of Japan, contributing to market liquidity improvement
- Approximately 2.1 trillion yen in reduction measures implemented in fiscal 2022, approximately 1.4 trillion yen in fiscal 2024
- Empirical analysis confirmed that reduction measures narrow GC-SC spreads for relevant issues
Future Outlook and Considerations
- Securities Lending Facility usage has been declining since summer 2024 following reduction in government bond purchases
- Analysis has limitations in not fully identifying effects of environmental changes from QQE and Yield Curve Control
- Securities Lending Facility continues to play important role in improving government bond market liquidity and maintaining smooth market functions
- This research represents the first comprehensive study quantitatively demonstrating effects of central bank Securities Lending Facility relaxation measures
The article concludes that the Bank of Japan's Securities Lending Facility relaxation measures have played a significant role in improving repo market liquidity and maintaining smooth market functions while large-scale government bond purchases continued, providing important insights for considering the future framework of the Securities Lending Facility.