Semiannual Report on Currency and Monetary Control (Summary)
Second Half of Fiscal 2002
The semiannual report, which included this summary, was submitted to the Diet in June 2003.
July 2003
Bank of Japan
Economic Developments
1. Japan's economy remained flat in the second half of fiscal 2002 (October 2002-March 2003) amid substantial uncertainty regarding developments in overseas economies.
Growth in net exports, which had increased substantially in the first half of fiscal 2002 (April-September 2002), slowed in the second half of the fiscal year, while there were no significant changes in overall domestic demand. Reflecting these developments on the demand side, industrial production increased modestly in the second half of 2002.
2. Regarding price developments, the decline in domestic corporate goods prices seemed to come gradually to a halt, reflecting rises in international commodity prices, particularly in crude oil prices. Consumer prices continued their moderate decline of slightly less than 1 percent year on year reflecting persistent downward pressure on prices against the background of weak domestic demand and an imbalance between supply and demand.
Financial Developments
3. The outstanding balance of current accounts held at the Bank stood at around 15 trillion yen in October 2002, but then increased to around 20 trillion yen between the end of October 2002 and early March 2003. At the end of March 2003, the outstanding balance had surpassed 30 trillion yen.
In the money market, the uncollateralized overnight call rate was stable at extremely low levels of around 0.001-0.002 percent due to the Bank's ample provision of funds. Short-term interest rates on instruments with relatively long maturities also continued to move at low levels throughout the second half of fiscal 2002.
Long-term interest rates followed a downtrend during the second half of 2002, and had declined to 0.70 percent at the end of March 2003. Stock prices fell significantly toward mid-November 2002, but were then stable for a while. They started declining again from the beginning of March 2003 partly due to greater geopolitical tension in the Middle East.
The U.S. dollar was weak against the major currencies, as geopolitical tension intensified in the Middle East and concerns grew about the expansion of the current account deficit in the United States. Thus, the yen followed an appreciating trend against the U.S. dollar from mid-December 2002.
4. Lending by private banks continued to decrease by 2-3 percent year on year. Firms' demand for funds remained on a downtrend due to the following factors. First, they continued to reduce borrowing as part of their efforts to improve their financial position. And second, firms restrained business fixed investment. Private banks maintained their stance of increasing lending to creditworthy firms, while remaining cautious about lending to firms with low creditworthiness.
5. The year-on-year growth rate of the monetary base (currency in circulation plus current accounts at the Bank) remained high at 10-20 percent, although the pace of growth had slowed. As a result, the ratio of the monetary base to nominal GDP reached a level higher than at any time except the period during and shortly after World War II.
The year-on-year growth rate of the money stock (M2+CDs) slowed to about 2 percent, as demand for funds in the private sector continued to decline and the effects of a large inflow of funds mainly from investment trusts in the previous year subsided. The money stock, however, maintained a high growth rate relative to economic activity.
Monetary Policy Meetings (MPMs)
6. Eight MPMs including one ad hoc MPM were held in the second half of fiscal 2002.
Members of the Policy Board revised their assessment of the economy slightly downward in November 2002, against the background of greater uncertainty about the economic outlook. Thereafter, they maintained their economic assessment unchanged.
7. At the MPM on October 30, 2002, members decided to raise the target for the outstanding balance of current accounts held at the Bank to around 15 to 20 trillion yen from around 10 to 15 trillion yen, based on the following assessment of Japan's economy. First, the uncertainty of the economic outlook was increasing. Second, there were some unstable developments in financial markets, as evidenced by a modest rise in interest rates on some term instruments, in addition to falls in stock prices. Third, depending on future developments, there was a risk that the severity of corporate financing conditions might intensify. At the same time, the Bank's outright purchases of long-term government bonds were increased from 1 trillion yen per month to 1.2 trillion yen per month, and the maturities of bills purchased by the Bank were extended from six months or less to one year or less.
8. At the MPM on December 16 and 17, 2002, with a view to devising further ways to ensure smooth corporate financing, members decided to accept a broader range of loans on deeds as eligible collateral and to relax some of the eligibility criteria for asset-backed commercial paper (ABCP).
9. At the MPM on February 13 and 14, 2003, members decided to change the contingency clause of the guideline for money market operations in order to state clearly the Bank's intention to secure financial market stability through the end of the fiscal year. The decision was made, in view of the persistence of geopolitical and other unpredictable factors, as well as the risk that the financial environment would deteriorate toward the fiscal year-end.
10. At the MPM on March 4 and 5, 2003, members decided to raise the target for the outstanding balance of current accounts held at the Bank by 2 trillion yen to around 17 to 22 trillion yen effective from April 1, 2003. The decision was made based on the fact that Japan Post would begin maintaining a designated minimum balance at the Bank from April 1, 2003, the day of its establishment.
11. At the ad hoc MPM held on March 25, 2003, the Bank decided on the following. First, to change the contingency clause of the guideline for money market operations taking into account the situation in Iraq. Second, in order to ensure financial market stability, the Bank decided that the complementary lending facility (Lombard-type lending facility) would be available at the official discount rate on any business day, suspending, for the time being, the restriction on the maximum number of days for such use.
In addition, the Bank indicated its intention of further examining the basic framework for the conduct of monetary policy. The chairman then instructed the Bank's staff to examine a wide range of issues related to the enhancement of monetary policy transparency and the strengthening of the monetary policy transmission mechanism, and to report back at the next MPM. The chairman particularly instructed the Bank's staff to explore possible measures for strengthening the transmission mechanism of monetary easing in the areas of corporate finance and money market operations, and to report back at the MPM as soon as possible.
The Bank's Balance Sheet
12. In the second half of fiscal 2002, the Bank's balance sheet increased by 1.9 percent from the previous year, marking a record high of 141.2 trillion yen as of end-March 2003. This was due mainly to the increase in the outstanding balance of current accounts held at the Bank and in the amount of banknotes issued compared with the previous year. The Bank started to purchase stocks held by private banks from November 2002, and the amount outstanding of pecuniary trusts (stocks held as trust property) was 1.2 trillion yen at end-March 2003. The Bank continued its efforts to preserve both the liquidity and the soundness of its assets, and thus to maintain the quality of its balance sheet.