Semiannual Report on Currency and Monetary Control (Summary)
Second Half of Fiscal 2008
The semiannual report, which includes this summary, was submitted to the Diet in June 2009.
Bank of Japan
Economic Developments
1. Japan's economic conditions deteriorated significantly in the second half of fiscal 2008 (October 2008-March 2009).
Exports decreased substantially mainly due to the deterioration in overseas economic conditions. Corporate profits decreased at a faster pace, and business sentiment deteriorated significantly. Given these conditions, business fixed investment declined substantially. Private consumption weakened as the employment and income situation became increasingly severe. Housing investment started decreasing again. Public investment, meanwhile, generally remained sluggish. Reflecting these developments in demand both at home and abroad and increased adjustment pressures on inventories, production decreased at a faster pace.
2. The three-month rate of change in domestic corporate goods prices fell significantly, mainly due to the fall in international commodity prices since the autumn of 2008. The year-on-year rate of change became negative in the January-March quarter of 2009 for the first time in over five years. The year-on-year rate of increase in consumer prices (excluding fresh food), which rose to around 2.5 percent in the summer of 2008, declined to around 0 percent in the January-March quarter, mainly reflecting the declines in the prices of petroleum products and the stabilization of food prices.
Financial Developments
3. Japanese money markets remained under strain as a whole. In this situation, the Bank made efforts to ensure stability in financial markets by making effective use of various operations to provide liquidity as necessary. The Bank also introduced measures such as outright purchases of CP as steps to facilitate corporate financing. Partly due to these measures, Japanese money markets regained stability to some extent after the beginning of 2009, as seen in, for example, the declines in interest rates on term instruments and in CP issuance rates. In addition, in order to accommodate demand in short-term U.S. dollar funding markets, the Bank continued to conduct the U.S. dollar funds-supplying operations against pooled collateral introduced in September 2008.
Long-term interest rates were on a downward trend toward the end of 2008 reflecting deterioration in the outlook for the world economy, but were relatively stable at around 1.3 percent thereafter.
Stock prices plunged toward October 2008, mainly reflecting the deterioration in the economic outlook and the ongoing appreciation of the yen. Thereafter they fluctuated, with the Nikkei 225 Stock Average falling to the 7,000-7,500 yen range in early March 2009 but rebounding to the 8,000-9,000 yen range toward the fiscal year-end.
The yen rose to the 87-88 yen level against the U.S. dollar in December 2008 amid heightened concern about the downturn in the U.S. economy. It started to decrease toward the fiscal year-end, however, with the yen being traded in the range of 95-100 yen to the dollar, mainly reflecting significant deterioration in Japan's economic conditions and the expansion of trade deficits.
4. The amount outstanding of CP and corporate bonds issued had been substantially below the previous year's level as the risk-taking capacity of financial institutions and investors fell significantly in a situation where global financial markets remained under growing strain, but increased somewhat after the end of 2008. The amount outstanding of lending by private banks (after adjustment for special items) increased more rapidly than in the first half of fiscal 2008 on a year-on-year basis.
Meanwhile, firms' demand for credit increased due to their stance of holding ample liquidity and their need to cover the decline in cash inflow. Regarding lending attitudes of private banks as perceived by firms, however, an increasing number of small firms reported that lending attitudes of private banks were severe. An increasing number of medium-sized and large firms also began to report lending attitudes of private banks as severe. In this situation, firms' liquidity positions deteriorated substantially on the whole, as seen in the fact that an increasing number of large firms had begun to report that their financial positions were weak.
5. The year-on-year rate of increase in the monetary base (currency in circulation plus current accounts at the Bank) was higher than in the first half of fiscal 2008. The year-on-year rate of growth in the money stock (M2) continued to be around 2 percent.
Monetary Policy Meetings (MPMs)
6. Nine MPMs were held in the second half of fiscal 2008.
At the MPM on October 6 and 7, 2008, the Policy Board was of the view that"economic growth has been sluggish due to the effects of earlier increases in energy and materials prices and weaker growth in exports." The Policy Board revised its assessment at the MPM on October 31 to state that economic activity had been increasingly sluggish, mainly reflecting the fact that exports had started decreasing; it maintained the assessment at the MPM on November 20 and 21. At the MPM on December 18 and 19, the Policy Board revised its assessment again as domestic demand had become weaker and financial conditions had deteriorated sharply on the whole: it was of the view that"economic conditions have been deteriorating and are likely to increase in severity for the immediate future." Given that exports and production had been decreasing substantially, the Policy Board revised its assessment further at the MPM on January 21 and 22, 2009, being of the view that"economic conditions have been deteriorating significantly and are likely to continue deteriorating for the time being." The Policy Board maintained its assessment thereafter at the MPMs on February 18 and 19 and on March 17 and 18.
7. With regard to the conduct of monetary policy, the Policy Board decided at the MPM on October 6 and 7, 2008 to maintain the guideline for money market operations unchanged and thereby encourage the uncollateralized overnight call rate to remain at around 0.5 percent. The Policy Board then lowered the Bank's target for the uncollateralized overnight call rate at the MPM on October 31, and encouraged it to remain at around 0.3 percent. After lowering the target further at the MPM on December 18 and 19 and encouraging the uncollateralized overnight call rate to remain at around 0.1 percent, the Policy Board maintained the guideline for money market operations unchanged in the remaining MPMs of the fiscal year. In addition, the Policy Board deliberated on and implemented various measures during the second half of fiscal 2008 in order to ensure stability in financial markets and as part of the steps to facilitate corporate financing: for example, it introduced U.S. dollar funds-supplying operations whereby funds are provided at a fixed interest rate with no explicit ceiling on the total, increased the amount of outright purchases of Japanese government bonds (JGBs), introduced and expanded special funds-supplying operations to facilitate corporate financing, and conducted outright purchases of CP and corporate bonds.
The Bank's Balance Sheet
8. As of the end of March 2009, the Bank's total assets amounted to 123.9 trillion yen, an increase of 9.2 percent from the previous year.