BOJ to Accept Foreign Sovereign Bonds as Collateral

Earlier today the Bank of Japan indicated that it will accept government bonds of the other G5 countries (US, UK, Germany and France) as collateral for their money market operations.

The immediate reaction was that this will help enhance liquidity conditions on ideas that Japanese banks will be able to use their foreign bond holdings as collateral. However, the Japanese branches of foreign banks also seem likely to benefit from the new collateral rules. Some foreign institutions, according to press reports, have faced difficulty raising yen and some have reduced their investment assets in Japan as a consequence.

Other central banks have been reluctant to accept foreign bonds as collateral. Recall that last week, the ECB formally rejected a request by central and east European countries that it accept their local currency bonds, though of course there is a big rating difference between the G5 and the CEE.

It is not immediately clear the extent that foreign bonds will be used for collateral or how much branches of foreign banks will raise yen through the BOJ. It is certainly worth monitoring. And like the currency swaps the Federal Reserve arranged, improving the liquidity or quantity of dollars in the Fed's case and yen in the BOJ's case, may not have an immediate impact on prices. That said, if anything, accepting foreign bonds as collateral, if widely used, may help slow the yen's rise.