Principal Terms and Conditions for the Management of Foreign Currency Assets

Established:

May 11, 2012

1. Objective

These Terms and Conditions prescribe the requisite principles for the management of the Bank of Japan's foreign currency assets (foreign currency and assets denominated in foreign currency as defined in Article 9, Paragraph 2 of the Ordinance for Enforcement of the Bank of Japan Act, Ordinance No.3, 1998, excluding assets used in operations [as defined in Chapter 4 of the Bank of Japan Act, Act No. 89, 1997], hereafter "foreign currency assets") with an emphasis on safety and liquidity.

2. Holding Purpose and Management Principle

The Bank of Japan (Bank) holds foreign currency assets in preparation to conduct the following operations, defined in Chapter 4 of the Bank of Japan Act, while ensuring a high degree of safety and liquidity.

1. (1) International financial cooperation;
2. (2) Emergency liquidity provision in foreign currency to Japanese financial institutions;
3. (3) Loans in the U.S. dollar as a fund-provisioning measure to support strengthening the foundations for economic growth.

3. Composition of Foreign Currency Assets

Foreign currency assets can be composed of the following financial assets denominated in U.S. dollars, euros, and pounds sterling (confined exclusively to those considered appropriate in the light of the principles described in 2, above).

1. (1) Deposits with central banks and other institutions of foreign countries;
2. (2) Securities issued by governments and other institutions of foreign countries with maturity not exceeding 5 years.

4. Management Practices of Foreign Currency Assets

1. (1) Financial assets which the Bank holds in preparation for immediate use can be held in the form of deposits with central banks and other institutions of foreign countries and securities denominated in U.S. dollars with maturity not exceeding 1 year.
2. (2) Foreign currency assets excluding those described in (1) are composed of the financial assets defined in 3, and their composition is managed in the following manner.
   1. (a) The currency composition is adjusted so that it tracks the benchmark currency composition, which is calculated based on the market capitalizations of the government securities with maturity of 1-5 years (1 year or more, and less than 5 years) defined in 3 (2).
   2. (b) The composition is adjusted so that the price volatilities caused by interest rate fluctuations track those of the government securities markets with maturity of 1-5 years (1 year or more, and less than 5 years) defined in 3 (2).
   3. (c) When the Bank adjusts the composition as necessary to accomplish (a) and (b), it shall make transactions with care to avoid disrupting financial and foreign exchange markets.