The Tokyo Overnight Average Rate (TONAR) is the risk-free unsecured interbank overnight interest rate for the Japanese Yen – it’s also known as TONA.
It was created in 2016 in the move to risk-free reference rates. TONAR is the replacement for LIBOR, which is expected to be completely phased out by June 2023.
How is TONAR calculated?
The TONAR interest rate is calculated by taking a volume-weighted average of all uncollateralised overnight transactions settled on the same day as the trade date, but that mature the following business day. The final figure is expected to be calculated in the same way as new benchmarks such as SONIA and SOFR, using historical transactions from financial institutions.
The Bank of Japan announced that Quick Corp would be the company in charge of calculating and publishing longer-term rates, in theory by mid-2021. However, the progress of adopting TONAR has been slow due to disagreement over whether TONAR or the popular TIBOR rate should be used.
Many Japanese lenders and borrowers (approximately 57%) thought the TIBOR would be a better alternative to LIBOR given that it’s already widely used, and the methodology is similar to that of the original LIBOR rate. It is based on bankers’ estimates of market interest rates instead of historic transactions. But like LIBOR, the TIBOR rate had been subjected to manipulation by banks, including Citigroup and UBS, in 2011.