TONA

August 31, 2024 Fixed Income

TONA is Japan's uncollateralized overnight call rate benchmark, used in yen derivatives, floating-rate contracts, and LIBOR transition.

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TONA, the Tokyo Overnight Average Rate, is the Bank of Japan’s published weighted-average rate for uncollateralized overnight call transactions in the Japanese money market. It is the principal Japanese yen overnight risk-free-rate benchmark used in overnight index swaps, floating-rate products, valuation, and the transition from yen LIBOR.

TONA is an actual overnight transaction rate. It is not the same as TIBOR, a term interbank offered-rate benchmark, or TORF, a forward-looking term reference rate derived from yen overnight-index-swap markets.

Key Takeaways

  • TONA measures uncollateralized overnight call-market transactions in Japanese yen.
  • The Bank of Japan publishes a transaction-volume-weighted average, with provisional and final releases.
  • TONA is an overnight rate; a multi-month contract commonly compounds daily observations or uses another specified rate form.
  • Japan selected TONA as its yen risk-free rate for benchmark-transition purposes.
  • Since the monetary-policy framework change in March 2024, the uncollateralized overnight call rate has also served as the Bank of Japan’s policy-rate focus.
  • The observed TONA fixing and the Bank of Japan’s policy guidance are related but conceptually distinct.
  • TONA, TIBOR, and a term rate derived from TONA can produce different cash flows.
  • A TONA-linked contract still carries basis, liquidity, operational, counterparty, and legal risk.

What TONA Measures

The Japanese call market allows financial institutions to lend and borrow short-term funds. Uncollateralized means the overnight borrowing is not secured by pledged collateral.

TONA reflects the average rate on eligible uncollateralized overnight call transactions. Funds are exchanged on the contract date and repaid on the next business day.

The rate is broader and more precise than the generic phrase “Tokyo interbank rate.” Analysts should use the Bank of Japan’s official uncollateralized overnight call-rate series and definitions.

How TONA Is Calculated

A simplified volume-weighted average is:

$$ \text{TONA} = \frac{\sum_i r_i V_i} {\sum_i V_i} $$

where r_i is an eligible transaction rate and V_i is the transaction amount. The official statistical framework governs reporting institutions, eligible transactions, corrections, and publication.

A volume-weighted average gives larger transactions more influence than smaller ones. Transaction-based methodology reduces reliance on subjective submissions but does not remove concentration, reporting, or operational risk.

Provisional and Final Publication

The Bank of Japan publishes provisional results for the current business day and final results for the previous business day. Under its published schedule, provisional results normally appear around 5:15 p.m. Japan Standard Time, while final prior-day results normally appear around 10:00 a.m.

For contract settlement or an important decision, the Bank of Japan directs users to the official published rate and its terms of use. A system should distinguish a provisional observation from the final rate required by the agreement.

Daily TONA and Compounded TONA

One TONA fixing covers one overnight period. A loan, bond, or derivative lasting several weeks or months needs a method for combining daily observations.

For daily TONA r_i, applicable calendar days d_i, and day-count denominator D, a simplified compounded return is:

$$ \prod_{i=1}^{n} \left(1+r_i\frac{d_i}{D}\right)-1 $$

The contract determines:

  • observation period
  • fixing in advance or in arrears
  • lookback or observation shift
  • weekend and holiday weighting
  • day-count basis
  • rounding and floor
  • payment delay
  • temporary fallback

Published TONA averages or an index can simplify some calculations, but only when the governing document permits that method and source.

Worked Example: TONA-Linked Yen Loan

Assume a JPY 1 billion loan uses compounded TONA plus a 0.75% margin. For a 91-day Actual/365 period, suppose the correctly annualized compounded TONA is 0.55%.

The annualized all-in rate is:

$$ 0.55\% + 0.75\% = 1.30\% $$

Illustrative interest is:

$$ \text{JPY }1{,}000{,}000{,}000 \times 1.30\% \times \frac{91}{365} = \text{JPY }3{,}241{,}095.89 $$

This simplified example assumes the compounded rate is already known. Actual yen contracts may use different day counts, rounding, observation conventions, margins, floors, or payment dates.

TONA and Bank of Japan Monetary Policy

The Bank of Japan influences overnight call-market conditions through its policy framework and market operations. In the framework introduced in March 2024, the Bank set the uncollateralized overnight call rate as the policy-rate focus.

The distinction is important:

  • Policy guidance or target: the level the central bank seeks to encourage through its framework and operations
  • TONA observation: the weighted-average rate actually formed in eligible market transactions

The observed rate can differ slightly from the policy guidance because of reserve conditions, participant access, market segmentation, and trading flows.

TONA Compared With Other Yen Rates

RateMaturity and inputWhen knownMain role
TONARealized uncollateralized overnight call transactionsPublished for the transaction dayYen OIS, compounding, floating-rate and valuation use
TIBORReference-bank term funding submissions under its methodologyNear period startActive yen term benchmark uses
TONA-derived term rateForward-looking derivatives-based benchmarkNear period startSelected cash-product use
Policy guidanceBank of Japan monetary-policy decisionAnnounced by the central bankGuides overnight market conditions

TONA and TIBOR are not merely overnight and term versions of one calculation. Their inputs and economic content differ.

TONA Compared With SONIA and SOFR

BenchmarkCurrencySecured?Administrator
TONAJapanese yenUnsecuredBank of Japan
SONIASterlingUnsecuredBank of England
SOFRU.S. dollarSecured by Treasury collateralFederal Reserve Bank of New York
€STREuroUnsecuredEuropean Central Bank

They occupy similar benchmark roles but are not substitutes across currencies or contracts.

How to Review a TONA Contract

  1. Confirm the official rate source and whether provisional or final data apply.
  2. Identify daily TONA, compounded TONA, an average, index, or term-derived rate.
  3. Check the accrual and observation periods.
  4. Verify Japanese business-day calendars and weekend weighting.
  5. Confirm day count, rounding, margin, and floor.
  6. Determine when the rate becomes known and payment is due.
  7. Read temporary and permanent fallback provisions.
  8. Compare the cash product with any TONA-linked hedge.
  9. Preserve the exact daily observations or index values used.

Risks and Limitations

  • Volume and concentration risk: Market participation and transaction volume can vary.
  • Basis risk: TONA, TIBOR, and term-derived rates can diverge.
  • Timing risk: Compounded-in-arrears interest becomes final near period end.
  • Operational risk: Calendar, provisional-versus-final, and compounding errors can affect settlement.
  • Policy interpretation risk: TONA is influenced by policy but is not identical to a policy announcement.
  • Instrument risk: A TONA-linked security or loan retains credit, liquidity, and market risk.

Common Mistakes

  • Calling TONA a secured repo rate.
  • Defining it only as an estimate of interbank borrowing.
  • Treating one daily fixing as a multi-month rate.
  • Confusing TONA with TIBOR or a forward-looking term rate.
  • Using provisional data when the contract requires the final rate.
  • Assuming the policy-rate guidance and observed TONA must be identical.
  • Saying transaction data makes manipulation or error impossible.
  • Ignoring Japanese calendars, day counts, and hedge conventions.

Authoritative Sources

  • TIBOR: Active Japanese term benchmark with different inputs and timing.
  • Alternative Reference Rates: Broader category that includes TONA.
  • SONIA: Unsecured sterling overnight benchmark.
  • SOFR: Secured U.S. dollar overnight benchmark.
  • Overnight Index Swap: Derivative exchanging a fixed rate for an overnight-index-linked payment.
  • Market Liquidity: Market depth and transaction capacity affecting benchmark formation.

FAQs

Is TONA secured or unsecured?

TONA is based on uncollateralized overnight call transactions, so it is an unsecured yen benchmark.

Is TONA the same as TIBOR?

No. TONA is a transaction-based overnight rate. TIBOR is a term benchmark based on reference-bank submissions under a separate methodology.

Who publishes TONA?

The Bank of Japan publishes provisional and final uncollateralized overnight call-rate data under its official schedule and statistical terms.

This article provides general financial education, not personalized borrowing, investment, accounting, or legal advice. Use the governing contract and current Bank of Japan publications for operational calculations.

SONIA
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