Semiannual Report on Currency and Monetary Control (Summary)
Second Half of Fiscal 2006
The semiannual report, which includes this summary, was submitted to the Diet in June 2007.
Bank of Japan
Economic Developments
1. Japan's economy expanded moderately in the second half of fiscal 2006 (October 2006-March 2007).
While public investment was on a downtrend, exports continued to increase against the background of the expansion of overseas economies. Business fixed investment also continued to increase, reflecting high corporate profits. Household income continued rising moderately, and in this situation, private consumption was firm. With the rise in demand both at home and abroad, production was also on an increasing trend.
2. Although domestic corporate goods prices increased on a year-on-year basis, reflecting the improvement in supply and demand conditions, the rate of increase declined mainly due to the drop in international commodity prices. The year-on-year rate of change in consumer prices (excluding fresh food) was on a positive trend, but was around 0 percent toward the end of fiscal 2006 due to the drop in crude oil prices.
Financial Developments
3. In the money market, the uncollateralized overnight call rate was at around 0.25 percent before the Monetary Policy Meeting (MPM) in February 2007, when the guideline for money market operations was changed, and at around 0.5 percent thereafter. Interest rates on term instruments rose around the middle of February, and remained more or less at those levels after the February MPM.
Long-term interest rates rose to the 1.80-1.85 percent range in late October 2006. They were in a range of around 1.55-1.75 percent thereafter, albeit with some fluctuations due to the release of Japanese economic indicators, developments in Japanese stock prices, and interest rate movements in the United States.
Stock prices were on an uptrend, reflecting expectations of improvement in corporate profits, and the Nikkei 225 Stock Average reached the 18,000-18,500 yen level in late February. From the end of February to the beginning of March, it temporarily declined to the 16,500-17,000 yen level reflecting the fall in stock prices worldwide, but recovered thereafter to the 17,000-17,500 yen level by the end of fiscal 2006.
The yen generally depreciated moderately against the U.S. dollar as market participants were increasingly sensitive to interest rate differentials between Japanese and overseas markets, and fell to the 121-122 yen level in late January. The yen then appreciated to the 115-116 yen level against the dollar as market participants modified their risk-taking activities amid the fall in global stock prices around the period from the end of February to the beginning of March, and was generally traded in the range of 115-119 yen thereafter.
4. With regard to corporate finance, the lending attitude of private banks continued to be accommodative. Firms' demand for credit continued to rise because outlays for business operations and fixed investment continued to increase as the economy expanded moderately. In this situation, the amount outstanding of lending by private banks (after adjustment for special items) continued to increase.
5. The monetary base (currency in circulation plus current accounts at the Bank) fell sharply from a year earlier due to a decline in the outstanding balance of current accounts at the Bank.
The year-on-year growth rate of the money stock (M 2+CDs) was in the range of 0-2 percent.
Monetary Policy Meetings (MPMs)
6. Seven MPMs were held in the second half of fiscal 2006.
At MPMs during October 2006-March 2007, the Policy Board was of the view that"Japan's economy is expanding moderately" and adopted this expression as their overall assessment of the economy in"The Bank's View" in theMonthly Report of Recent Economic and Financial Developments.
7. With regard to the conduct of monetary policy, given the above economic and financial developments, the Policy Board decided at MPMs in October 2006 through January 2007 to set the guideline for money market operations as follows:"The Bank of Japan will encourage the uncollateralized overnight call rate to remain at around 0.25 percent."
At the MPM in February, the Policy Board made an assessment of Japan's economy that it was likely to continue its moderate expansion with a virtuous circle of production, income, and spending in place. The Policy Board was of the view that it was possible that the rate of change in consumer prices (excluding fresh food) would be around zero in the short run, depending, for example, on developments in the prices of crude oil. From a longer-term perspective, however, the Policy Board was of the view that consumer prices were likely to increase as a trend, since the utilization of resources such as production capacity and labor had been increasing and the economic expansion was expected to continue. The Policy Board judged that it would be appropriate to adjust the level of the policy interest rate at the MPM so that a desirable course of economic activity and prices would be maintained. Accordingly, the Policy Board decided to set the following guideline for money market operations for the intermeeting period:"The Bank of Japan will encourage the uncollateralized overnight call rate to remain at around 0.5 percent."
At the MPM in March, the Policy Board maintained the guideline for money market operations decided in February.
The Bank's Balance Sheet
8. As of the end of March 2007, the size of the Bank's balance sheet had decreased by 22.2 percent from the previous year to 112.7 trillion yen.