Skip to main content

Semiannual Report on Currency and Monetary Control (Summary)
Second Half of Fiscal 2000

The semiannual report, which included this summary, was submitted to the Diet in June 2001.

The full text of"The Economy" and"Financial Markets" below is included in the"Annual Review 2001" published in October 2001.

June 2001
Bank of Japan

The Economy

1. Japan's economy continued to recover gradually throughout most of 2000, but the pace started to slow from the year-end as exports decreased due to a slowdown in overseas economies. The recovery came to a pause toward the end of fiscal 2000.

Domestic demand led by business fixed investment remained relatively firm, while net exports (exports minus imports in real terms) decreased significantly reflecting the slowdown in overseas economies, such as those of the United States and East Asia. Following the above developments, the pace of growth of industrial production slowed and started to decline after the turn of the year. Corporate profits continued to improve, but the pace slowed significantly. Given these developments, business sentiment of firms deteriorated after the turn of the year, particularly in manufacturing industry. The household income situation remained firm as a whole, but some of the indicators related to employment were negatively affected by the decrease in production.

2. Domestic prices were generally somewhat weak in the second half of fiscal 2000. While the depreciation of the yen that started in the fall of 2000 pushed up prices, many other factors pushed them down. As the pace of economic recovery slowed, the imbalance between supply and demand in the domestic market tended to exert downward pressure on prices after the year-end. Crude oil prices and international semiconductor prices declined following the slowdown in overseas economies. In addition, factors such as technological innovations, the streamlining of distribution channels, and progress in deregulation continued to exert downward pressure on prices.

Land prices continued to decline overall, with widening differences between prices for highly and less highly marketable properties.

3. Overseas economies slowed, mainly those of the United States and East Asia. The U.S. economy slowed sharply from the fall of 2000 after strong growth over a long period. Given the U.S. economic slowdown, the East Asian economies that were heavily dependent on exports to the United States decelerated. In the euro area, there were signs of an economic slowdown.

Following the sharp slowdown in the U.S. economy, the Federal Reserve lowered the policy interest rate a number of times in succession from the beginning of 2001, which led to a decline in both long- and short-term interest rates. In the euro area, the European Central Bank raised the policy interest rate in October 2000, and it remained unchanged until March 2001. Long- and short-term interest rates followed a declining trend as concern about inflation abated. Stock prices in the United States and the euro area followed a downward trend in the second half of fiscal 2000, especially those related to information technology. In some East Asian economies, policy interest rates were lowered reflecting the slowdown in the economies.

Financial Markets

4. In the money market, the uncollateralized overnight call rate generally stayed steady around 0.25 percent, and declined to close to zero percent toward the fiscal year-end following the Bank's monetary easing measures decided on February 28 and March 19, 2001. Interest rates on term instruments declined considerably from the beginning of 2001 due to a series of monetary easing measures taken by the Bank.

Long-term interest rates followed a declining trend during most of the second half of fiscal 2000 due to the growing uncertainty about Japan's economic outlook. Stock prices continued to be on a decreasing trend reflecting a decline in U.S. stock prices and downward revisions to forecasts of Japanese firms' earnings.

The yen depreciated considerably against the U.S. dollar and the euro in the second half of fiscal 2000.

5. Lending by private banks remained sluggish throughout the second half of fiscal 2000. They continued to be active in extending loans, mainly to companies with good business performance, while carefully evaluating the borrowers' creditworthiness. However, firms' demand for funds continued to be weak on the whole as the level of their outlays such as business fixed investment was lower than the level of their cash flow, and they continued to reduce their debts as part of their balance-sheet adjustments.

6. The year-on-year rate of growth of money stock (M2+CDs) slightly increased during the second half of fiscal 2000. While lending by private banks continued to decrease year on year, firms' direct financing through corporate bonds and commercial paper increased at a higher rate year on year. This increase in direct financing slightly reduced the negative effect private-sector fund-raising as a whole had on the growth rate of money stock. Meanwhile, a major factor responsible for an increase in money stock was a shift of funds from postal savings to financial instruments included in money stock, which occurred when a large volume of postal savings matured in the spring of 2000 onward.

The year-on-year growth of the monetary base (currency in circulation plus current account balances at the Bank) returned to positive, after declining in December 2000 and January 2001 from the high level in the same period in the previous year which resulted from a large increase in demand for liquidity stemming from the Year 2000 problem.

Monetary Policy Meetings

7. Nine Monetary Policy Meetings (MPMs) were held in the second half of fiscal 2000. At these meetings, members generally shared the above views on the changes in the economic and financial situation. In light of these changes, the Bank adopted monetary easing measures in a timely and flexible manner after the turn of the year.

8. Throughout the MPMs in October and November 2000, the guideline for market operations, that the Bank would"encourage the uncollateralized overnight call rate to move on average around 0.25 percent," was maintained. This decision was based on the assessment that the gradual economic recovery led by the corporate sector was being sustained. At the same time, members acknowledged the following aspects as downside risks to the economic outlook. First, the global economy, including the U.S. economy, showed signs of a slowdown. And second, unstable developments were being observed in the financial and capital markets at home and abroad. These risk factors were also pointed out in the"Outlook and Risk Assessment of the Economy and Prices" released at the end of October.

9. Economic indicators released after the MPMs suggested that the pace of the slowdown in the U.S. economy was faster than had been expected, and this slowdown was affecting Japan's exports and the global economy, including some economies in East Asia, such as Korea and Taiwan. At the MPM on December 15, it was confirmed that the pace of recovery of Japan's economy was slowing. However, the guideline for market operations was maintained based on the assessment that the momentum of recovery led by the corporate sector was being sustained.

10. At the MPM on January 19, members' judgment attached more importance to the slower pace of recovery of Japan's economy given the fact that the slowdown in the U.S. economy was more pronounced than previously expected, and was also having a much stronger effect on Japan's exports and production. As a result of the discussion, while members decided on the maintenance of the guideline for market operations, the chairman instructed the staff to examine possible measures to improve the way of liquidity provision and to report the results to the Policy Board by the following MPM. The instruction took into account the slowdown in overseas economies and the greater volatility in financial and capital markets, and was made with a view to ensuring the smooth functioning and stability of the financial market.

11. At the MPM on February 9, responding to the staff's report on ways to improve liquidity provision to financial markets, the Bank decided to introduce a"Lombard-type" lending facility through which the Bank would extend loans at the request of financial institutions at the official discount rate. The Bank also decided to reduce the official discount rate by 15 basis points to 0.35 percent, giving due consideration to the fact that it was becoming clear that the pace of the economic recovery was slowing and downside risks to the economy were increasing.

12. At the MPM on February 28, members became more cautious about the economic outlook on the following grounds. First, the pace of the economic recovery was slowing further and uncertainty over economic prospects had increased. And second, prices were showing weak developments, and there was renewed concern that downward pressure on prices stemming from weak demand might intensify. The Bank thus decided to reduce the uncollateralized overnight call rate target to around 0.15 percent and the official discount rate to 0.25 percent.

13. At the MPM on March 19, members examined the economic indicators released after the previous meeting, and judged that the economy had come to a pause. Production had started to show a clear decline mainly due to a decrease in exports, and this was having a negative impact on corporate sentiment and business fixed investment.

Based on such cautious views of the economic situation, it was judged necessary that the Bank should introduce monetary easing measures as drastic as were unlikely to be taken under ordinary circumstances, with a view to preventing prices from declining continuously as well as preparing the basis for sustainable economic growth. Based on this judgment, the following monetary easing measures were determined. First, the main operating target for market operations was changed from the uncollateralized overnight call rate to the outstanding balance of current accounts of financial institutions at the Bank. Second, the new procedures for market operations would continue to be in place until the consumer price index registered stably a zero percent or an increase year on year. Third, the balance outstanding of current accounts at the Bank was increased to around 5 trillion yen. And fourth, the Bank would increase the amount of its outright purchases of long-term Japanese government bonds, subject to a designated limit, in case it considered this necessary for the smooth provision of liquidity.

14. In the discussions at the MPMs in the second half of fiscal 2000, members became strongly convinced that the resolution of structural problems of the Japanese economy was essential. This was mainly due to the fact that market participants continued to be cautious about the economic outlook, and that despite the implementation of extensive fiscal and monetary measures to support the economy since the bursting of the economic bubble, it had failed to return to a sustainable growth path and was faced again with a threat of deterioration.

On this basis, members decided to add a note expressing their concern in the public statements released after the MPMs on February 28 and March 19, 2001. It was noted that progress in structural reform with respect to the financial system as well as in the area of economy and industry was essential to ensure a full-fledged recovery, and that the Bank strongly hoped that such reform efforts would accelerate further in a variety of fields.

Examination on the Issue of Price Stability

15. At the MPM on October 13, 2000, members decided and released a report,"On Price Stability," summarizing the comprehensive examination of price stability that had been ongoing since the spring of 2000.

In the examination of the issue of price stability, it was an important issue whether it was possible to enhance the transparency of the conduct of monetary policy by presenting the Bank's view on the economic outlook and prices to the public. As one way of doing this, it was decided that the Bank would release the"Outlook and Risk Assessment of the Economy and Prices" twice a year in April and October.

The Bank's Balance Sheet

16. In the second half of fiscal 2000, the Bank's balance sheet continued to exceed the level of the previous year reflecting the continued provision of ample funds by the Bank. The total assets on the Bank's balance sheet at the end of March 2001 marked 115.1 trillion yen, a record high for the end of the month, and an increase of 8.4 percent from the previous year. The Bank improved the quality of its balance sheet by enhancing both liquidity and the soundness of its assets.