Semiannual Report on Currency and Monetary Control (Summary)
First Half of Fiscal 2003
The semiannual report, which included this summary, was submitted to the Diet in December 2003.
Bank of Japan
Economic Developments
1. Japan's economic activity remained virtually flat as a whole in the first half of fiscal 2003 (April-September 2003), but in the second half of the period, there were signs of recovery in exports and firms' business sentiment improved.
Exports started to increase moderately toward the end of the first half of fiscal 2003, as the effects of geopolitical risks and severe acute respiratory syndrome (SARS) in East Asian economies had gradually subsided. Business fixed investment recovered moderately as corporate profits continued to improve. Industrial production continued to be basically level.
2. Regarding price developments, the pace of decline in domestic corporate goods prices slowed due partly to the rise in crude oil prices. The year-on-year rate of decline in consumer prices diminished due partly to temporary factors, such as the increase in medical treatment costs and the rise in tobacco tax.
Financial Developments
3. The outstanding balance of current accounts at the Bank generally moved at around 25 to 30 trillion yen during April 2003 and was around 25 to 27 trillion yen in early to mid-May 2003. It increased to around 28 to 30 trillion from late May. As of the end of September, the outstanding balance stood at 34.6 trillion yen.
In the money market, the uncollateralized overnight call rate was stable at extremely low levels of generally around 0.001-0.002 percent throughout the first half of fiscal 2003. Short-term interest rates on instruments with relatively longer maturities were also stable at low levels.
Long-term interest rates had been on a steadily declining trend since the beginning of fiscal 2003, and fell to 0.4-0.5 percent by mid-June 2003. They then started to rise, reaching 1.1-1.2 percent in early July before declining somewhat. They resumed their rise in mid-August, reaching 1.6-1.7 percent at the beginning of September, after which they were on a declining trend toward the end of September with some fluctuations.
Stock prices weakened toward the end of April 2003, and then started to rise until early July, after which there was a slight adjustment. They started to rise again from mid-August to mid-September, and then declined slightly toward the end of September.
The yen had generally been traded in the range of 115-120 yen against the U.S. dollar since the beginning of fiscal 2003, but appreciated to around 110-112 yen from mid-September due to market participants' speculation regarding the G-7 statement.
4. The pace of year-on-year decline in lending by private banks slowed somewhat to around 2 percent. Firms' demand for funds remained on a downtrend as they continued to reduce borrowing as part of their efforts to improve their financial position and restrain business fixed investment within their cash flow. Private banks remained cautious in extending loans to firms with high credit risk, while on the other hand they continued to be active in extending loans to blue-chip firms. However, their lending attitude seemed to be becoming slightly more accommodative in areas such as terms and conditions for loans.
5. The year-on-year growth rate of the monetary base (currency in circulation plus current accounts at the Bank) increased further to around 20 percent. As a result, the ratio of the monetary base to nominal GDP continued to rise and reached a level higher than at any time except for the period during and shortly after World War II.
The year-on-year growth rate of the money stock (M2+CDs) slowed through April 2003, but recovered to around 2 percent thereafter, due partly to the inflow of funds to deposits arising from sales of assets by corporate pension funds, which were returning funds entrusted to them in order to discontinue acting on behalf of public pension funds.
Monetary Policy Meetings (MPMs)
6. Eight MPMs were held in the first half of fiscal 2003.
Throughout the first half of fiscal 2003, members of the Policy Board judged that Japan's economic activity remained virtually flat. During the first half of this period, members indicated that there were significant uncertainties over economic prospects due mainly to the situation in Iraq and the effects of SARS. These uncertainties subsided gradually thereafter, and members revised their overall assessment of the economy slightly at the MPMs in July and September.
7. With regard to the conduct of monetary policy, the Bank (1) made efforts to prevent the uncertainties about the prospects for the economy and unstable developments in the stock market from adversely affecting not only financial markets but also economic activity by ensuring financial market stability, and (2) examined measures to strengthen the transmission mechanism of monetary easing and how further effective monetary easing measures could be devised in the area of money market operations.
8. At the MPM on April 7 and 8, 2003, members decided to examine, as a temporary measure, the possible purchase of asset-backed securities (ABSs), including asset-backed commercial paper, mainly backed by assets related to small and medium-sized firms, for money market operations. This was against the background that it was deemed necessary to strengthen the transmission mechanism of monetary easing, for the ample liquidity provision to effectively lead to economic expansion.
9. At the MPM on April 30, 2003, members decided to raise the target balance of current accounts at the Bank to around 22 to 27 trillion yen, taking into account the following uncertainties regarding economic and financial developments. First, the prospect of a recovery in overseas economies was still uncertain to a significant extent reflecting geopolitical risks and the impact of SARS. And second, stock prices remained weak and volatile, and there was a risk that this would negatively affect financial markets and economic activity.
10. At the MPM on May 19 and 20, 2003, members decided to raise the target balance of current accounts at the Bank to around 27 to 30 trillion yen to ensure financial market stability, taking into account the following factors. First, uncertainties about the prospects for Japan's economic activity were increasing. And second, it was decided that injection of capital into Resona Bank was necessary.
11. At the MPMs during June-September 2003, members decided to maintain the guideline for money market operations aiming at an outstanding balance of current accounts at the Bank of around 27 to 30 trillion yen, against the background that Japan's economic activity remained virtually flat.
12. At the MPM on June 10 and 11, 2003, members decided on the outline of the scheme for outright purchases of ABSs and to work on necessary arrangements so that the new scheme would be put in place by the end of July, following the decision to examine the possible purchases of ABSs at the MPM held on April 7 and 8. At the MPM on June 25, the Bank established the Principal Terms and Conditions for the Outright Purchases of Asset-Backed Securities and related guidelines.
13. At the MPM on September 11 and 12, 2003, the chairman instructed the Bank's staff to study the issue of extending the maturity of purchase/sale of Japanese government securities with repurchase agreements and report the result at the next MPM, with a view to conducting money market operations in a more flexible manner.
The Bank's Balance Sheet
14. As of the end of the first half of fiscal 2003, the Bank's balance sheet increased by 7.6 percent from a year ago to 133.9 trillion yen. This was due mainly to the increase in the outstanding balance of current accounts at the Bank and in the amount of banknotes issued compared with the previous year. The amount outstanding of pecuniary trusts (stocks held as trust property)-the Bank started to purchase stocks held by private banks from November 2002-was 1.9 trillion yen as of end-September 2003, an increase of 0.7 trillion yen from end-March 2003. The Bank started to purchase ABSs in July 2003, and the amount outstanding was 31 billion yen as of end-September. 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.