Semiannual Report on Currency and Monetary Control (Summary)
Second Half of Fiscal 2009 (October 2009-March 2010)
-- The semiannual report, which includes this summary, was submitted to the Diet in June 2010.
Bank of Japan
1. Japan's economy picked up mainly due to improvement in overseas economic conditions and the effects of various policy measures, although there was not yet sufficient momentum to support a self-sustaining recovery in domestic private demand.
Exports and production had been increasing. Private consumption, notably durable goods consumption that had been stimulated by policy measures, picked up, despite the continued severe employment and income situation. The decline in business fixed investment and housing investment more or less leveled out. Meanwhile, public investment leveled off and started decreasing.
2. Domestic corporate goods prices started to increase on a year-on-year basis, reflecting the increase in commodity prices, in spite of the persistent slack in supply and demand conditions for products. Consumer prices (excluding fresh food) were declining on a year-on-year basis due to the substantial slack in the economy as a whole, but the moderating trend in the pace of decline continued.
3. Money market had been stable, with longer-term interest rates declining moderately due in part to the continuation of the Bank's provision of ample funds. However, the volume of transactions, particularly those of longer term, remained low in some markets.
The Bank continued to make effective use of various operations to provide ample liquidity, including the newly introduced fixed-rate funds-supplying operation against pooled collateral.
Long-term interest rates basically remained more or less unchanged within the narrow range of 1.3-1.4 percent, although from mid-October 2009 they increased temporarily to the range of 1.45-1.50 percent due in part to concerns about deterioration in the supply and demand balance of Japanese government securities (JGSs).
Stock prices declined slightly toward the end of November 2009 due mainly to the appreciation trend of the yen, and the Nikkei 225 Stock Average fell to the range of 9,000-9,500 yen. However, from December the Nikkei 225 Stock Average started to rise due in part to the fact that the yen depreciated slightly and the U.S. and European stock prices became firm, and had been around 11,000 yen toward the end of March 2010.
The yen was generally on an appreciation trend against the U.S. dollar, albeit with some fluctuations, and it temporarily reached the range of 84-85 yen against the dollar in late November. However, the appreciation trend of the yen came to a halt in December and, toward the end of March, the yen depreciated to the range of 93-94 yen against the dollar due in part to the rise in U.S. interest rates.
4. In terms of credit supply, although many firms still saw financial institutions' lending attitudes as severe, their lending attitudes improved. Issuing conditions for CP and corporate bonds remained favorable on the whole, including the period after the Bank wound up its outright purchases of CP and corporate bonds. Issuing conditions even for low-rated corporate bonds showed signs of improvement.
Firms' demand for external funds began to decline on a year-on-year basis, because demand for both working capital and business fixed investment declined and some firms reduced the on-hand liquidity that they had accumulated.
In these circumstances, in terms of firms' funding, the amount outstanding of lending by domestic commercial banks (adjusted to exclude special factors) began to decline on a year-on-year basis, partly due to its high growth a year ago. The amount outstanding of CP issued decreased substantially from the previous year, partly because of the decline in firms' need to fund working capital. On the other hand, the amount outstanding of corporate bonds issued continued to record a relatively high increase on a year-on-year basis, due mainly to the improvement in the issuing conditions.
5. The monetary base (currency in circulation plus current accounts at the Bank) continued to exceed the level of the previous year, although its pace of growth slowed somewhat. The year-on-year rate of growth in the money stock (M2) increased to around 3.5 percent through October 2009, but declined thereafter to the range of 2.5-3.0 percent.
Monetary Policy Meetings (MPMs)
6. Eight MPMs were held in the second half of fiscal 2009.
In October 2009, the Policy Board expressed the view that"Japan's economy has started to pick up" and that this pick-up was likely to continue. From November 2009 through March 2010, the Policy Board judged that Japan's economy was picking up mainly due to various policy measures taken at home and abroad, although there was not yet sufficient momentum to support a self-sustaining recovery in domestic private demand.
7. In the conduct of monetary policy, the Policy Board decided at all the MPMs from October 2009 through March 2010 to maintain the guideline for money market operations unchanged:"The Bank of Japan will encourage the uncollateralized overnight call rate to remain at around 0.1 percent." The Policy Board explained that the Bank would continue to consistently make contributions as the central bank for Japan's economy to overcome deflation and return to a sustainable growth path with price stability, and presented the Bank's thinking that, in the conduct of monetary policy, it would aim to maintain the extremely accommodative financial environment.
At the unscheduled MPM held on December 1, 2009, the Policy Board decided to further enhance easy monetary conditions by introducing a fixed-rate funds-supplying operation against pooled collateral and encouraging a further decline in longer-term interest rates. At the MPM held on March 16 and 17, 2010, the Bank reinforced the measure to encourage a decline in longer-term interest rates by substantially increasing the amount of funds to be provided through the fixed-rate operation. At the MPM held on December 17 and 18, 2009, to strengthen public apprehension of the Bank's thinking on price stability, the Bank clarified the"understanding of medium- to long-term price stability" (hereafter the"understanding") and stated that, in terms of the year-on-year rate of change in the consumer price index (CPI),"each Policy Board member's 'understanding' falls in a positive range of 2 percent or lower, and the midpoints of most Policy Board members' 'understanding' are around 1 percent."
Meanwhile, at the MPM held on October 30, 2009, the Bank decided on how to treat various temporary measures that had been introduced since the autumn of 2008 to address the extreme contraction in financial markets. While Japan's financial environment had been increasingly showing signs of improvement, in order to continue to ensure market stability and thereby facilitate corporate financing, the Bank judged that it should adopt the most effective means for pursuing its market operations consistent with changing conditions in financial markets, and made the following decisions on the temporary measures. First, special funds-supplying operations to facilitate corporate financing would remain in effect until the end of March 2010, and at that point they would be allowed to expire. Second, outright purchases of CP and corporate bonds would expire at the end of 2009 as scheduled. Third, expansion in the range of corporate debt and asset-backed CP eligible as collateral would remain in effect until the end of 2010. And fourth, the complementary deposit facility would remain in effect for the time being.
The Bank's Balance Sheet
8. As of the end of March 2010, the Bank's total assets amounted to 121.8 trillion yen, a decrease of 1.7 percent from the previous year.