Semiannual Report on Currency and Monetary Control (Summary)
First Half of Fiscal 2001
The semiannual report, which included this summary, was submitted to the Diet in December 2001.
February 2002
Bank of Japan
The Economy
1. Japan's economy entered an adjustment phase in the first half of fiscal 2001, after the economic recovery had come to a pause toward the end of fiscal 2000 reflecting a decline in exports. Throughout the first half of fiscal 2001, exports and production continued to decline substantially, especially in IT-related industries, and toward the end of the first half of the fiscal year, the state ofthe economy became more severe as evident in the fact that these adjustments in the corporate sector were spreading to employment and income conditions.
As for overseas economies, the U.S. economy slowed further, and consequently, East Asian economies that were heavily dependent on exports to the United States slowed significantly. In the euro area, the slowdown became distinct. Thus, a simultaneous slowdown of the world economy became more evident.
Amid this situation, the terrorist attacks occurred in the United States in September, and this further intensified uncertainty about the economic outlook worldwide.
2. Regarding price developments, demand-side factors were tending to exert downward pressure on prices as the economy entered an adjustment phase. Also, supply-side factors, such as an increase in imported products, and the decline in prices of goods and services associated with deregulation, the streamlining of distribution channels, and technological innovation, continued to exert downward pressure.
Land prices continued to decline overall, with widening differences between prices for highly and less highly marketable properties.
Financial Markets
3. In the money market, the uncollateralized overnight call rate generally remained stable at around 0.01 percent under the guideline decided in March 2001 to conduct market operations aiming at an outstanding balance of current accounts at the Bank of around 5 trillion yen. The rate then declined further following the decision at the Monetary Policy Meeting (MPM) in August to raise the outstanding balance of current accounts to around 6 trillion yen, and the MPM decision in September to provide ample liquidity to the money market by aiming at maintaining the outstanding balance of current accounts at above 6 trillion yen. Short-term interest rates on instruments longer than overnight declined further following the Bank's measures in August and September and then became more or less flat.
Long-term interest rates moved in the range of around 1.1-1.5 percent. Stock prices had been firm until the beginning of May, and they became weak afterward as evident in a substantial decline, toward the end of September, to their lowest levels since the beginning of the calendar year.
In the foreign exchange market, the yen appreciated against the U.S. dollar until the beginning of June. It then depreciated briefly, before rebounding from the middle of July. It appreciated against the euro in April and May, and then followed a downtrend from June until the middle of August, after which it remainedsteady with small ups and downs.
4. Lending by private banks remained sluggish after the turn of the fiscal year, and the year-on-year rate of decline in such lending expanded slightly after the summer. Private banks, while carefully evaluating borrowers' creditworthiness, maintained their stance of increasing lending mainly to firms with good performance. In the meantime, banks' lending attitude as perceived by small firms became somewhat cautious. As for firms' demand for funds, the pace of decline in demand had accelerated since the summer because (1) firms continued to reduce borrowing as part of their efforts to improve their financial position and (2) business fixed investment started to decrease.
5. The year-on-year growth rate of money stock (M2+CDs) continued to increase moderately. Fund-raising in the private sector as a whole continued to contribute negatively to money stock as the continuous negative growth in borrowing from banks outweighed the rise in the growth rate in fund-raising in the capital markets through such instruments as corporate bonds and CP. The shift of funds from postal savings continued to be the main cause of the growth of money stock.
The year-on-year growth rate of monetary base (currency in circulation plus current account balances at the Bank) increased significantly due to an increase in the outstanding balance of current accounts at the Bank associated with the monetary easing measures and in the growth rate of the amount outstanding of banknotes issued reflecting a large amount of maturing postal savings.
Monetary Policy Meetings
6. Eight MPMs were held in the first half of fiscal 2001. At the MPM on April 12 and 13, members agreed that adjustments in economic activity had been under way, as production was declining reflecting a fall in exports, and made the judgment more cautious than that of the previous month, which was that the recovery in Japan's economy was coming to a pause. This judgment was maintained at the MPMs on April 25, and May 17 and 18. The guideline for money market operations decided in March 2001 was maintained at the MPMs in April and May based on the judgment that the Bank should examine the effects of the measures decided in March fora while, since they were decided in anticipation of severe economic developments of this kind.
7. At the MPMs in June and July, members decided to maintain the guideline for market operations. However, members concurred that the Bank would need to take additional policy measures if downside risk to the economy increased further and should carefully examine possible additional easing measures.
8. At the MPM on August 13 and 14, members judged that adjustments in economic activity were intensifying further compared with the previous MPM on July 12 and 13. As for the outlook, it was recognized that downside risk to the economy on the financial front was increasing, as seen in weak stock prices, the increase in the disposal of nonperforming loans (NPLs), and a more cautious lending attitude among financial institutions. Regarding prices, a few members said that the pace of the fall in prices stemming from weak demand was accelerating.
Given these developments, members decided to take an additional easing measure to raise the outstanding balance of current accounts held at the Bank from around 5 trillion yen to around 6 trillion yen. Members shared the view that a positive momentum in the economy brought about by solving the NPL problem and making progress in structural reforms was necessary for the monetary easing to be fully effective. In addition to the above decision, the amount of the outright purchase of long-term government bonds was increased from 400 billion yen to 600 billion yen per month in order to provide liquidity smoothly.
9. At the MPM on September 18, in view of the terrorist attacks in the United States and subsequent developments in financial markets, the schedule of the MPM was shortened from two days to one, and the guideline for money market operations was decided and released in one day.
Members generally agreed that (1) it was still necessary to carefully monitor the effects of the terrorist attacks on financial markets and economic activity; and (2) should any event occur to hamper smooth funds settlement or the functioning of financial markets, it could interrupt the permeation of monetary easing effects of the policy measures taken so far. On this basis, members decided to (1) provide ample liquidity to the money market, aiming at maintaining the outstanding balance of current accounts held at the Bank at above 6 trillion yen; (2) reduce the official discount rate to 0.1 percent; and (3) increase the maximum number of days on which the official discount rate can be applied for use of the Lombard-type lending facility as a temporary measure for the reserve maintenanceperiod for September.
The Bank's Balance Sheet
10. In the first half of fiscal 2001, the Bank's balance sheet continued to exceed the level of the previous year reflecting the year-on-year increase in the amount of banknotes issued, the outstanding balance of current accounts at the Bank, and deposits of the Government and changes in the accounting practice for the Bank's transactions under repurchase/resale agreements. The total assets on the Bank's balance sheet at the end of September 2001 were 115.6 trillion yen, increasing by 35.5 percent from the previous year. The Bank continued to improve the quality of its balance sheet by enhancing both liquidity and the soundness of its assets.