Semiannual Report on Currency and Monetary Control (Summary)
Second Half of Fiscal 2003
The semiannual report, which included this summary, was submitted to the Diet in June 2004.
Bank of Japan
Economic Developments
1. Japan's economic activity started to recover gradually in the second half of fiscal 2003 (October 2003-March 2004) led by an increase in exports and a recovery in business fixed investment, after remaining virtually flat until then.
Exports continued to increase markedly reflecting the recovery in overseas economies, especially in the United States and East Asia, and industrial production also increased. The recovery trend in business fixed investment gradually became stronger, partly reflecting the steady improvement in corporate profits. Private consumption, after being nearly flat, started to show some positive movements.
2. Regarding price developments, the year-on-year rate of decline in domestic corporate goods prices slowed to close to zero percent, reflecting the rise in rice prices and the strengthening of overseas and domestic commodity prices. The year-on-year rate of change in consumer prices was close to zero percent partly due to upward pressure from institutional factors, such as the increase in medical treatment costs and the rise in tobacco tax, and to the rise in rice prices owing to the cool summer.
Financial Developments
3. The outstanding balance of current accounts at the Bank generally moved at around 29-31 trillion yen from October 2003 to mid-January 2004. From late January, it moved at around the 31-35 trillion yen level. As of the end of March, the outstanding balance stood at 36.4 trillion yen.
In the money market, the uncollateralized overnight call rate was stable at extremely low levels of around 0.001-0.002 percent generally throughout the second half of fiscal 2003. Short-term interest rates on instruments with relatively longer maturities were also stable at low levels.
Long-term interest rates were around 1.2-1.5 percent, albeit with some fluctuations due partly to effects of stock prices.
Japanese stock prices were generally on an upward trend reflecting expectations for recovery of Japan's economy, although they declined temporarily due partly to developments in U.S. stock prices and concerns about possible appreciation of the yen against the U.S. dollar. From the beginning of March 2004, they recorded the highest levels since the beginning of fiscal 2003.
The yen appreciated from 111-112 yen against the U.S. dollar at the beginning of October to the 105-106 yen level through mid-February, reflecting concerns about the"twin deficits" in the United States and geopolitical risks. The yen then depreciated to the 112-113 yen level partly reflecting growing market concern about possible intervention, but thereafter appreciated to the 103-104 yen level through the end of fiscal 2003.
4. The pace of year-on-year decline in lending by private banks slowed slightly, and the amount outstanding of CP and corporate bonds issued was above the previous year's level. While firms continued to reduce their debts, the pace of decline of credit demand in the private sector became somewhat moderate, since corporate activity started to recover, as seen in the increase in business fixed investment. The lending attitude of private banks became slightly more accommodative on the whole, although they remained cautious about extending loans to firms with high credit risks.
5. The year-on-year growth rate of the monetary base (currency in circulation plus current accounts at the Bank) slowed and was in the range of 10-20 percent. However, the ratio of the monetary base to nominal GDP continued to rise and was at a high level.
The year-on-year growth rate of the money stock (M2+CDs) slowed somewhat through October, and thereafter was at the 1.5-2.0 percent level.
Monetary Policy Meetings (MPMs)
6. Eight MPMs were held in the second half of fiscal 2003.
In the second half of fiscal 2003, members of the Policy Board gradually revised their assessment upward from economic activity being"virtually flat" to"recovering gradually." At the MPM in January 2004, members made an interim assessment of the standard scenario for Japan's economy and prices in theOutlook and Risk Assessment of the Economy and Prices released in October 2003. They judged that developments in Japan's economy and prices were expected to be basically in line with the standard scenario.
7. With regard to the conduct of monetary policy, the Bank made efforts to further ensure economic recovery by continuing with its quantitative easing policy. In addition, the Bank deliberated and decided on measures to strengthen the transmission mechanism of monetary easing and measures in the area of money market operations, as well as measures to enhance the transparency of monetary policy.
8. At the MPM on October 9 and 10, 2003, members decided to raise the upper limit of the target balance of current accounts at the Bank, and the target balance was changed to"around 27 to 32 trillion yen" from"around 27 to 30 trillion yen." This action was taken to provide scope for conducting money market operations in a more flexible manner. In addition, with the aim of enhancing the flexibility of monetary operations the Bank extended the maximum maturity of the purchase of Japanese government securities (JGSs) with repurchase agreements from six months to one year.
Furthermore, to enhance the transparency of monetary policy, the Bank decided to make available a more detailed description of its commitment to maintaining the quantitative easing policy and improve the way in which its evaluation of the developments in the economy and prices was communicated.
9. At the MPM on January 19 and 20, 2004, members decided to raise the target balance of current accounts at the Bank to"around 30 to 35 trillion yen" from"around 27 to 32 trillion yen" to reaffirm its policy stance to overcome deflation and ensure a continued recovery.
The Bank also decided to amend the terms and conditions for its outright purchases of asset-backed securities (ABSs) in order to encourage the permeation of the effects of monetary easing through the economy and from the viewpoint that it would contribute to the long-term development of the ABS market.
10. At the MPM on February 26, the chairman instructed the Bank's staff to study the introduction of a facility to provide the markets with JGSs held by the Bank (the so-called securities lending) and report back to the MPM promptly.
The Bank's Balance Sheet
11. As of the end of March 2004, the Bank's balance sheet increased by 5.8 percent from the previous year, marking a record high of 149.4 trillion yen. This was because in the second half of 2003 the Bank continued to provide ample liquidity to the market in accordance with the guideline for money market operations, whose main operating target was the outstanding balance of current accounts at the Bank. 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-March 2004, an increase of 66.8 percent from the previous year. The Bank started to purchase ABSs in July 2003, and the amount outstanding was 120.4 billion yen as of end-March 2004, an increase of 89.4 billion yen from end-September 2003.