Semiannual Report on Currency and Monetary Control (Summary)
First Half of Fiscal 2007
The semiannual report, which includes this summary, was submitted to the Diet in December 2007.
Bank of Japan
Economic Developments
1. Japan's economy expanded moderately in the first half of fiscal 2007 (April-September 2007).
Public investment was sluggish. Exports continued to increase against the background of the expansion of overseas economies. Business fixed investment also continued to trend upward, reflecting high corporate profits. Housing investment was more or less flat in the April-June quarter, but fell in the July-September quarter. Private consumption was firm in a situation where household income continued rising moderately. Production, which was temporarily flat due partly to adjustments in inventories of electronic parts and devices, posted a robust gain in the July-September quarter with the rise in demand both at home and abroad.
2. The year-on-year rate of change in domestic corporate goods prices continued to be positive, reflecting the rise in international commodity prices and a tightening of supply and demand conditions. The year-on-year rate of change in consumer prices (excluding fresh food) was around 0 percent.
Financial Developments
3. In the money market, the uncollateralized overnight call rate was at around 0.5 percent as a result of money market operations conducted by the Bank in accordance with its guideline. In early August and thereafter, whenever upward pressure on the uncollateralized overnight call rate increased against the background of U.S. and European money market developments reflecting the U.S. subprime mortgage problem, the Bank flexibly provided funds to the market to stabilize money market rates.
Long-term interest rates rose to around 1.95 percent in the middle of June, reflecting a perception that the economy had improved. They then decreased, in response to the decline in long-term interest rates in the United States and Europe, and were in a range of around 1.50-1.75 percent from the middle of August.
Stock prices increased moderately until the middle of July, reflecting the rise in U.S. and European stock prices and the depreciating trend of the yen, with the Nikkei 225 Stock Average rising to the range of 18,000-18,500 yen. It fell temporarily from late July, to the 15,000-15,500 yen range, in response to the drop in global stock prices, and recovered somewhat thereafter, moving in the range of 16,000-17,000 yen around the end of September.
The yen depreciated moderately until late June, to the 124-125 yen level against the U.S. dollar, as market participants were increasingly sensitive to interest rate differentials between Japanese and overseas markets. From July to mid-August, the yen appreciated temporarily to the 112-113 yen level against the U.S. dollar due to the U.S. subprime mortgage problem, and was generally traded in 114-117 yen range thereafter.
4. The amount outstanding of lending by private banks (after adjustment for special items) continued to increase. The amount outstanding of CP and corporate bonds issued was above the previous year's level. The lending attitude of private banks continued to be accommodative. Meanwhile, firms' demand for credit was more or less flat, since ample cash flow slowed the increase in corporate demand for external funds and some weakness in credit demand was observed in, for example, consumer finance companies.
5. The monetary base (currency in circulation plus current accounts at the Bank) taken on a year-on-year basis decreased at a slower pace and in August started to increase. While the year-on-year rate of increase in banknotes in circulation, which makes up most of the monetary base, continued to be in the 1-2 percent range, the negative contribution of the outstanding balance of current accounts at the Bank decreased.
The year-on-year growth rate of the money stock (M2+CDs) was in the range of 1-3 percent.
Monetary Policy Meetings (MPMs)
6. Seven MPMs were held in the first half of fiscal 2007.
At MPMs during April-September 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.
The Policy Board assessed that, although the year-on-year rate of change in consumer prices (excluding fresh food) was around 0 percent, it would"continue to follow a positive trend, as the output gap continues to be positive."
7. With regard to the conduct of monetary policy, given the above economic and financial developments, the Policy Board decided at MPMs from April through September 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 0.5 percent."
The Bank's Balance Sheet
8. As of the end of September 2007, the Bank's total assets amounted to 111.0 trillion yen, a decrease of 5.5 percent from the previous year.