Semiannual Report on Currency and Monetary Control (Summary)
First Half of Fiscal 2004
The semiannual report, which included this summary, was submitted to the Diet in December 2004.
Bank of Japan
Economic Developments
1. Japan's economy continued to recover in the first half of fiscal 2004 (April-September 2004), with the increases in production and corporate profits exerting positive effects on employment.
Exports and industrial production were on a rising trend reflecting the expansion of overseas economies, particularly those of the United States and East Asia. The pace of increase, however, slowed in the second half of the period. Corporate profits continued to improve and business fixed investment continued to increase. Turning to the employment and income situations of households, the number of employees was on an uptrend and the decline in household income was generally coming to a halt. Private consumption showed some positive movements, partly due to an improvement in consumer sentiment.
2. Regarding price developments, domestic corporate goods prices increased reflecting the strengthening of overseas and domestic commodity prices and the improvement in supply and demand conditions, and their year-on-year increase was 1.8 percent in September. On the other hand, consumer prices continued a slight downtrend on a year-on-year basis due to the increase in productivity and the restraint on labor costs by firms, and also to the disappearance of the previous year's upward pressure from institutional factors, such as the increase in medical treatment costs.
Financial Developments
3. 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 first half of fiscal 2004. Interest rates on term instruments were also stable at low levels.
Long-term interest rates rose to the 1.9-2.0 percent level in late June partly reflecting an improved perception of the economy, and moved at around 1.8 percent through early August. They then declined to around 1.4 percent through the end of September reflecting more cautious views about the economic recovery.
Japanese stock prices (the Nikkei 225 Stock Average) were firm at around 12,000 yen in early fiscal 2004, but then fell sharply through mid-May. Thereafter, they moved in a relatively small range above and below 11,000 yen, with some fluctuations.
The yen depreciated to the 114-115 yen level against the U.S. dollar through mid-May partly due to growing market perception that U.S. interest rates would rise, but it was in the range of 107-112 yen for the rest of the period.
4. The pace of year-on-year decline in lending by private banks continued to slow, and the amount outstanding of CP and corporate bonds issued was above the previous year's level. The lending attitude of private banks became more accommodative on the whole, although they remained cautious about extending loans to firms with high credit risks. While firms continued to reduce their debts as part of their efforts to improve their financial strength, the pace of decline of credit demand in the private sector slowed somewhat, since corporate activity was recovering, as seen in the continued increase in business fixed investment.
5. The year-on-year growth rate of the monetary base (currency in circulation plus current accounts at the Bank) slowed to the range of 4.0-5.0 percent. The ratio of the monetary base to nominal GDP remained at an extremely high level.
The year-on-year growth rate of the money stock (M2+CDs) was at around 2.0 percent.
Monetary Policy Meetings (MPMs)
6. Eight MPMs were held in the first half of fiscal 2004.
In the first half of fiscal 2004, members of the Policy Board revised their assessment from"Japan's economy continues to recover gradually" to"Japan's economy continues to recover."
At the MPM on April 28, 2004, members decided the text of theOutlook for Economic Activity and Prices for fiscal 2004. In"Outlook for Fiscal 2004" in this report, members indicated that the economy was expected to continue its recovery as momentum increased gradually. Members also expected that the year-on-year rate of change in domestic corporate goods prices in fiscal 2004 was likely to be slightly above zero percent, while consumer prices were projected to be on a slight downtrend on a year-on-year basis.
At the MPM in July 2004, members made an interim assessment in relation to the"Outlook for Fiscal 2004" presented in theOutlook for Economic Activity and Prices released in April 2004. Their judgment was as follows: Japan's economy and domestic corporate goods prices were expected to deviate above the forecasts, and consumer prices, on the other hand, were projected to basically continue a slight decline, broadly in line with the forecasts.
7. With regard to the conduct of monetary policy, given the above economic and financial developments, members decided, by unanimous vote, to maintain the guideline for money market operations aiming at an outstanding balance of current accounts at the Bank of around 30 to 35 trillion yen, at all MPMs during April-September 2004.
8. At the MPM on April 8 and 9, 2004, members decided to introduce a facility which provided the markets with Japanese government securities (JGSs) held by the Bank as a temporary and secondary source (the so-called securities lending), expecting this facility to contribute to enhancing liquidity and maintaining the smooth functioning of JGS markets.
The Bank's Balance Sheet
9. As of the end of September 2004, the Bank's balance sheet increased by 4.1 percent from the previous year to 139.5 trillion yen. This was because in the first half of fiscal 2004 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 Bank started to purchase stocks held by private banks from November 2002 and wound up this program at the end of September 2004. The amount outstanding of pecuniary trusts (stocks held as trust property) was 2,028.9 billion yen as of end-September 2004, an increase of 9.6 percent from the previous year. The Bank started to purchase asset-backed securities (ABSs) in July 2003, and the amount outstanding was 112.8 billion yen as of end-September 2004, an increase of 81.8 billion yen from end-September 2003.