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Semiannual Report on Currency and Monetary Control (Summary)
First Half of Fiscal 2018 (April-September 2018) -- The semiannual report was submitted to the Diet in December 2018.

Bank of Japan

Economic Developments

  1. Looking back at the first half of fiscal 2018, Japan's economy was expanding moderately, with a virtuous cycle from income to spending operating.

    Exports followed an increasing trend on the back of overseas economies having continued to grow firmly on the whole. Turning to domestic demand, housing investment was more or less flat; public investment also was more or less flat, remaining at a relatively high level. On the other hand, business fixed investment continued on an increasing trend, with corporate profits following their improving trend and business sentiment staying at a favorable level. Private consumption increased moderately, albeit with fluctuations, against the background of steady improvement in the employment and income situation. Reflecting these developments in demand both at home and abroad, industrial production followed an increasing trend.

  2. On the price front, the year-on-year rate of change in the consumer price index (CPI, all items less fresh food) was around 1 percent at the end of the first half of fiscal 2018. Inflation expectations were more or less unchanged.

Financial Developments

  1. Money market rates were at low levels on the whole.

    Turning to developments in the bond market, the long-term interest rate was stable at the target level of around zero percent under "Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control," although it temporarily fluctuated somewhat around the time of the July Monetary Policy Meeting (MPM).

    The Nikkei 225 Stock Average rose to the range of 22,500-23,000 yen in mid-May, mainly reflecting the yen's depreciation against the U.S. dollar. It then temporarily declined somewhat, due in part to uncertainties over protectionist trade policies and concerns regarding political developments in Europe, but rose since mid-September, partly reflecting the yen's depreciation against the dollar amid such uncertainties dissipating somewhat, and was in the range of 24,000-25,000 yen at end-September.

    In the foreign exchange market, the yen depreciated against the U.S. dollar through mid-May amid a rise in U.S. interest rates. Thereafter, it temporarily appreciated against the dollar, due in part to uncertainties over protectionist trade policies and concerns regarding political developments in Europe; however, at end-September, the yen depreciated as such uncertainties dissipated somewhat and was in the range of 113-114 yen to the dollar. The yen was more or less flat against the euro, with fluctuations smoothed out.

  2. As for corporate finance, in terms of credit supply, financial institutions' lending attitudes as perceived by firms were highly accommodative.

    Firms' credit demand increased, mainly for funds for business fixed investment. With regard to firms' funding, the year-on-year rate of increase in the amount outstanding of lending by domestic commercial banks was at around 2 percent. The year-on-year rates of change in the amounts outstanding of CP and corporate bonds were positive at relatively high levels.

  3. The monetary base (currency in circulation plus current account balances at the Bank) continued to increase at a year-on-year growth rate of around 6-8 percent. The year-on-year rate of increase in the money stock (M2) was at around 3 percent.

MPMs

  1. Four MPMs were held in the first half of fiscal 2018.

    At all the MPMs held in the first half of fiscal 2018, the Policy Board judged that Japan's economy was expanding moderately, with a virtuous cycle from income to spending operating.

  2. In the conduct of monetary policy, at the MPMs held in April and June, the Policy Board decided to continue with the following guidelines for market operations and asset purchases under "QQE with Yield Curve Control" determined at the MPM held in September 2016.

    (1) Yield curve control

    The Bank decided to set the following guideline for market operations for the intermeeting period.

    The short-term policy interest rate:
    The Bank will apply a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank.

    The long-term interest rate:
    The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain at around zero percent. With regard to the amount of JGBs to be purchased, the Bank will conduct purchases at more or less the current pace -- an annual pace of increase in the amount outstanding of its JGB holdings of about 80 trillion yen -- aiming to achieve the target level of the long-term interest rate specified by the guideline.

    (2) Guidelines for asset purchases

    With regard to asset purchases other than JGB purchases, the Bank decided to set the following guidelines.

    1. a) The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 6 trillion yen and about 90 billion yen, respectively.
    2. b) As for CP and corporate bonds, the Bank will maintain their amounts outstanding at about 2.2 trillion yen and about 3.2 trillion yen, respectively.

    At the July MPM, with a view to persistently continuing with powerful monetary easing, the Policy Board decided to strengthen its commitment to achieving the price stability target by introducing forward guidance for policy rates, and to enhance the sustainability of "QQE with Yield Curve Control," as follows.

    (1) Forward guidance for policy rates

    The Bank intends to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, taking into account uncertainties regarding economic activity and prices including the effects of the consumption tax hike scheduled to take place in October 2019.

    (2) Yield curve control

    The Bank decided to set the following guideline for market operations for the intermeeting period.

    The short-term policy interest rate:
    The Bank will apply a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank.

    The long-term interest rate:
    The Bank will purchase JGBs so that 10-year JGB yields will remain at around zero percent. While doing so, the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices. With regard to the amount of JGBs to be purchased, the Bank will conduct purchases in a flexible manner so that their amount outstanding will increase at an annual pace of about 80 trillion yen.

    (3) Guidelines for asset purchases

    With regard to asset purchases other than JGB purchases, the Bank decided to set the following guidelines.

    1. a) The Bank will purchase ETFs and J-REITs so that their amounts outstanding will increase at annual paces of about 6 trillion yen and about 90 billion yen, respectively. With a view to lowering risk premia of asset prices in an appropriate manner, the Bank may increase or decrease the amount of purchases depending on market conditions.
    2. b) As for CP and corporate bonds, the Bank will maintain their amounts outstanding at about 2.2 trillion yen and about 3.2 trillion yen, respectively.

    In addition, at the July MPM, the Policy Board decided to make the following adjustments in accordance with the measures described above.

    (1) Change in the size of the Policy-Rate Balance

    The Bank, under the condition that yield curve control can be conducted appropriately, will reduce the size of the Policy-Rate Balance in financial institutions' current account balances at the Bank -- to which a negative interest rate is applied -- from the current level of about 10 trillion yen on average. This Balance is calculated assuming that arbitrage transactions take place in full among financial institutions.

    (2) Change in the amount of each ETF to be purchased

    The Bank will revise the purchase amount of each ETF and increase that of ETFs which track the Tokyo Stock Price Index (TOPIX).

    At the September MPM, the Policy Board decided to continue with the guidelines for market operations and asset purchases determined at the July MPM.

    With regard to the future conduct of monetary policy, the Policy Board confirmed the following at the MPMs held in April and June: "the Bank will continue with 'QQE with Yield Curve Control,' aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds 2 percent and stays above the target in a stable manner. The Bank will make policy adjustments as appropriate, taking account of developments in economic activity and prices as well as financial conditions, with a view to maintaining the momentum toward achieving the price stability target."

    In addition, the Policy Board confirmed the following at the MPMs held in July and September: "the Bank will continue with 'QQE with Yield Curve Control,' aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds 2 percent and stays above the target in a stable manner. As for policy rates, the Bank intends to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, taking into account uncertainties regarding economic activity and prices including the effects of the consumption tax hike scheduled to take place in October 2019. It will examine the risks considered most relevant to the conduct of monetary policy and make policy adjustments as appropriate, taking account of developments in economic activity and prices as well as financial conditions, with a view to maintaining the momentum toward achieving the price stability target."

The Bank's Balance Sheet

  1. As of end-September, the Bank's total assets amounted to 545.7 trillion yen, an increase of 6.3 percent from the previous year.