TONAR

The TONAR (Tokyo Overnight Average Rate) is a benchmark interest rate that measures the cost of overnight unsecured borrowing in Japanese yen. Calculated as a volume-weighted average of actual overnight lending transactions, TONAR has replaced JPY LIBOR as the primary reference rate for yen-denominated financial instruments.

Introduction and structure

The Bank of Japan introduced TONAR as a transaction-based replacement for JPY LIBOR, following the global movement away from panel-based benchmarks. Like SOFR and SONIA, TONAR is calculated from actual observed overnight lending transactions, making it more reliable and manipulation-proof than LIBOR.

The Bank of Japan collects data on overnight unsecured yen lending from major financial institutions, aggregates the transactions, and publishes a volume-weighted average rate as TONAR each business day.

The Japanese overnight market

The overnight unsecured lending market in yen is relatively active, particularly among major banks and financial institutions in Tokyo. Banks lend excess cash overnight to those with temporary shortfalls, and the market rates reflect credit conditions and central-bank policy.

TONAR captures that market rate, providing a reliable measure of the true overnight cost of borrowing yen. The rate is used as the reference for floating-rate yen-denominated bonds, derivatives, loans, and mortgages.

JPY LIBOR’s discontinuation

JPY LIBOR was discontinued at the end of 2021, after regulators in the UK (which oversaw LIBOR) concluded that the rate no longer reflected real borrowing. TONAR is now the standard for yen floating-rate instruments.

The transition from JPY LIBOR to TONAR has required major financial institutions to amend or refinance legacy contracts, similar to the SOFR and SONIA transitions in other currencies.

See also