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Semiannual Report on Currency and Monetary Control (Summary)
Second Half of Fiscal 2019 (October 2019-March 2020)

-- The semiannual report was submitted to the Diet in June 2020.

Bank of Japan

Economic Developments

  1. After the turn of the second half of fiscal 2019, Japan's economy maintained its moderate expanding trend, despite being affected mainly by the slowdown in overseas economies and natural disasters. However, it had been in an increasingly severe situation toward the end of the fiscal year due to the impact of the spread of the novel coronavirus (COVID-19) at home and abroad.

    Exports and industrial production had been somewhat weak, mainly affected by the slowdown in overseas economies and natural disasters. Toward the end of the fiscal year, however, with COVID-19 spreading, they had declined due to the decrease in external demand mainly from China and the effects on the global supply chain of weak production activity, also mainly in China. Supported by generally high corporate profits, business fixed investment continued on an increasing trend, albeit with fluctuations. However, the deceleration in its pace of increase had become evident toward the end of the fiscal year. Despite being affected mainly by the consumption tax hike, private consumption maintained its moderate increasing trend on the back of the improvement in the employment and income situation. With the growing impact of the spread of COVID-19, however, it had decreased significantly, mainly in services such as eating and drinking as well as accommodations. Meanwhile, housing investment had been more or less flat and public investment had increased moderately.

  2. On the price front, the year-on-year rate of change in the consumer price index (CPI, all items less fresh food) had been at around 0.5-1.0 percent. Inflation expectations had been more or less unchanged from a somewhat longer-term perspective, but somewhat weak indicators had been observed toward the end of the fiscal year.

Developments in Financial Markets and Conditions

  1. In global financial markets, prices of risky assets generally had followed an uptrend through around mid-February, mainly reflecting a subsiding of uncertainties over political developments such as the progress in U.S.-China trade negotiations. Subsequently, these prices had declined significantly due to a rise in investors' risk aversion that was attributable mainly to the spread of COVID-19. In addition, amid a situation where demand for U.S. dollar cash had increased considerably worldwide due to investors' preference for safe assets, U.S. dollar funding premia had spiked and tension in U.S. money markets had intensified. In response to these market developments, central banks of major economies had implemented measures such as interest rate cuts, ample supply of liquidity, and asset purchases. A global cooperative action to enhance the provision of U.S. dollar liquidity also had been taken by major central banks including the Bank of Japan. Tension in financial markets, therefore, had eased somewhat toward the end of the fiscal year.

  2. Turning to domestic financial markets, money market rates had been at low levels on the whole.

    With regard to developments in the bond market, the long-term interest rate had been at the target level of around zero percent under "Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control." Looking at developments in more detail, the rate had increased somewhat temporarily in mid-March with global financial markets being unstable, due mainly to the spread of COVID-19, but declined toward end-March partly because the Bank had increased the amount and frequency of its Japanese government bond (JGB) purchases. Meanwhile, issuance rates for CP had been at low levels on the whole. Those for corporate bonds had been at extremely low levels.

    The Nikkei 225 Stock Average had increased temporarily, mainly reflecting the progress in U.S.-China trade negotiations, but started to decline since late February, mainly against the background of heightening uncertainties over the outlook for the global economy due to the spread of COVID-19, thereby being in the range of 18,500-19,000 yen at end-March.

    In the foreign exchange market, the yen generally had been more or less flat against the U.S. dollar from October 2019 through February 2020. Subsequently, it had appreciated temporarily in early March, mainly reflecting heightening uncertainties over the global economy and a decline in U.S. interest rates, but started to depreciate since mid-March, due mainly to an increase in demand for U.S. dollar funds, thereby being in the range of 108-109 yen at the end of the month. The yen generally had been more or less flat against the euro throughout the second half of fiscal 2019.

  3. As for corporate financing, growth in demand for funds had been supported thus far by, for example, rises in demand for funds for business fixed investment, as well as that related to mergers and acquisitions of firms. Toward the end of the fiscal year, however, there had been an increase in demand for funds that was mainly brought about by a decline in sales and the need to secure funds, both of which were due to the impact of the spread of COVID-19. In this situation, firms' financial positions had deteriorated, mainly reflecting the decline in sales brought about by the impact of the spread of COVID-19. Meanwhile, in terms of credit supply, financial institutions' lending attitudes as perceived by firms remained accommodative.
  4. 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 3-4 percent. The year-on-year rate of increase in the money stock (M2) had been at around 2-3 percent.

Monetary Policy Meetings (MPMs)

  1. Four MPMs were held in the second half of fiscal 2019.

    The Policy Board judged at the MPM held in October that Japan's economy had been on a moderate expanding trend, with a virtuous cycle from income to spending operating, although exports, production, and business sentiment continued to be affected by the slowdown in overseas economies. At the December and January MPMs, it deemed that the economy had been on a moderate expanding trend, with a virtuous cycle from income to spending operating, although exports, production, and business sentiment had shown some weakness, mainly affected by the slowdown in overseas economies and natural disasters. The Policy Board judged at the March MPM that Japan's economic activity had been weak recently due mainly to the impact of the outbreak of COVID-19.

  2. In the conduct of monetary policy, at all the MPMs held in the second half of fiscal 2019, the Policy Board decided to continue with the following guideline for market operations under "QQE with Yield Curve Control."

    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.

    The Policy Board decided to continue with the following guidelines for asset purchases at the MPMs held in October through January.

    Guidelines for asset purchases

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

    1. (1) 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. 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. (2) 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 March MPM, in light of the impact of the outbreak of COVID-19, the Policy Board decided upon active purchases of ETFs and J-REITs and an increase in purchases of CP and corporate bonds under the following guidelines for asset purchases.

    Guidelines for asset purchases

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

    1. (1) In principle, 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, it may increase or decrease the amount of purchases depending on market conditions. For the time being, the Bank will actively purchase these assets so that their amounts outstanding will increase at annual paces with the upper limit of about 12 trillion yen and about 180 billion yen, respectively.
    2. (2) 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, it will conduct additional purchases with the upper limit of 1 trillion yen for each until the end of September 2020.

    At the October MPM, the Policy Board reexamined economic and price developments as presented in the policy statement of the September MPM and assessed the momentum toward achieving the price stability target. On this basis, it judged that, although there had been no further increase in the possibility that the momentum toward achieving the price stability target would be lost, it was necessary to continue to pay close attention to the possibility. With a view to clarifying this recognition, the Policy Board decided upon a new forward guidance for the policy rates as follows.

    As for the policy rates, the Bank expects short- and long-term interest rates to remain at their present or lower levels as long as it is necessary to pay close attention to the possibility that the momentum toward achieving the price stability target will be lost.

    At the March MPM, in light of the impact of the outbreak of COVID-19, the Policy Board judged it appropriate to enhance monetary easing with a view to doing its utmost to ensure smooth corporate financing and maintaining stability in financial markets, thereby preventing firms' and households' sentiment from deteriorating, and thus decided upon the following.

    (1) Further ample supply of funds

    The Bank will provide more ample yen funds for the time being by making use of active purchases of JGBs and other operations as well as the measures to facilitate corporate financing and active purchases of ETFs and J-REITs.

    As for U.S. dollar liquidity, coordinated with the Bank of Canada (BOC), the Bank of England (BOE), the European Central Bank (ECB), the Federal Reserve, and the Swiss National Bank (SNB), regarding the U.S. dollar funds-supplying operations, the Bank made public today to lower the loan rate by 0.25 percent and offer U.S. dollars weekly with an 84-day maturity, in addition to the 1-week maturity operations currently offered. Thereby, the Bank will do its utmost to provide U.S. dollar liquidity.

    (2) Measures to facilitate corporate financing

    (a) Introduction of the Special Funds-Supplying Operations to Facilitate Corporate Financing regarding the Novel Coronavirus (COVID-19)

    The Bank will introduce a new operation to provide loans against corporate debt (of about 8 trillion yen as of end-February 2020) as collateral at the interest rate of 0 percent with maturity up to one year. Twice as much as the amount outstanding of the loans will be included in the Macro Add-on Balances in current accounts held by financial institutions at the Bank. This operation will be conducted until the end of September 2020.

    (b) Increase in purchases of CP and corporate bonds

    The Bank will increase the upper limit to purchase CP and corporate bonds by 2 trillion yen in total and conduct purchases with the upper limit of their amounts outstanding of about 3.2 trillion yen and about 4.2 trillion yen, respectively. The additional purchases will continue until the end of September 2020.

    (3) Active purchases of ETFs and J-REITs

    The Bank will actively purchase ETFs and J-REITs for the time being so that their amounts outstanding will increase at annual paces with the upper limit of about 12 trillion yen and about 180 billion yen, respectively.

    With regard to the future conduct of monetary policy, including the aforementioned forward guidance for the policy rates, the Policy Board confirmed the following at the MPMs held in October through January: "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 the policy rates, the Bank expects short- and long-term interest rates to remain at their present or lower levels as long as it is necessary to pay close attention to the possibility that the momentum toward achieving the price stability target will be lost. 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. In particular, in a situation where downside risks to economic activity and prices, mainly regarding developments in overseas economies, are significant, the Bank will not hesitate to take additional easing measures if there is a greater possibility that the momentum toward achieving the price stability target will be lost."

    At the March MPM, the Policy Board confirmed the following: "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 the policy rates, the Bank expects short- and long-term interest rates to remain at their present or lower levels as long as it is necessary to pay close attention to the possibility that the momentum toward achieving the price stability target will be lost. The Bank will closely monitor the impact of COVID-19 for the time being and will not hesitate to take additional easing measures if necessary."

The Bank's Balance Sheet

  1. As of end-March, the Bank's total assets amounted to 604.5 trillion yen, an increase of 8.5 percent from the previous year.