This paper is to explain Japan's monetary control techniques and to analyze how they determine short-term money market rates and the money stock. We analyze that interest rates in the short-term call and bill-discount markets, operating variables of the Bank of Japan, are determined mainly through the adjustment of the official discount rate and of the "progress ratio of reserve deposits." We also analyze that the Bank of Japan controls an intermediate target, by relying the transmission of initial changes in the call and bill rates to other financial markets. Finally, we point out some problems that the Bank of Japan has to consider regarding monetary control during the process of financial globalization.
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.