Semiannual Report on Currency and Monetary Control (Summary)
First Half of Fiscal 2008
The semiannual report, which includes this summary, was submitted to the Diet in December 2008.
Bank of Japan
Economic Developments
1. Japan's economic activity became increasingly sluggish in the first half of fiscal 2008 (April-September 2008), mainly due to increases in energy and materials prices and the leveling-off of exports.
Exports began to level off as overseas economies slowed. Corporate profits continued to decrease mainly due to the deterioration in the terms of trade, and business sentiment became more cautious. Given these conditions, business fixed investment started to decline. Private consumption gradually weakened somewhat due to sluggish growth in household income and increases in energy and food prices. Housing investment was more or less flat. Public investment, meanwhile, remained sluggish. With these developments in demand both at home and abroad, production continued to decrease.
2. The three-month rate of increase in domestic corporate goods prices continued to be positive, and the year-on-year rate of increase in domestic corporate goods prices reached 7-8 percent, reflecting developments in international commodity prices. The year-on-year rate of increase in consumer prices (excluding fresh food) rose to 2.0-2.5 percent, reflecting increases in energy and materials prices.
Financial Developments
3. Japanese money markets remained nervous, influenced by tightened supply and demand conditions for funds in the markets' U.S. and European counterparts. From September, in particular, strains intensified significantly, reflecting growing concerns about the financial soundness of U.S. and European financial institutions. However, fluctuations in Japanese money markets remained relatively small compared to those in the U.S. and European markets, and the uncollateralized overnight call rate was generally stable at around 0.5 percent, which was the target level for the Bank of Japan's money market operations. The Bank monitored developments in overseas financial markets closely in cooperation with other central banks, and provided liquidity flexibly by means of various operational tools to ensure the stability of money market rates. On September 18 and 29, the Bank, in conjunction with other central banks, announced coordinated measures designed to address the continued elevated pressures in U.S. dollar short-term funding markets.
Long-term interest rates increased toward mid-June, mainly reflecting a rise in market participants' inflation expectations, but started to decline thereafter, reflecting concerns about the economic outlook and about the financial condition of U.S. and European financial institutions.
With regard to stock prices, the Nikkei 225 Stock Average rose to the 14,000-15,000 yen range in mid-June, but fell to the 11,000-11,500 yen range in September, its lowest level since June 2005, against the background of concerns about the financial condition of U.S. and European financial institutions.
The value of the yen against the U.S. dollar was on a downward trend until mid-August, when it temporarily fell to the 110-111 yen level. From September, however, it started to increase, the turning point being the failure of a major U.S. financial institution: the yen reached the 103-104 yen level temporarily and was thereafter traded in the range of 104-107 yen to the dollar.
4. The amount outstanding of lending by private banks (after adjustment for special items) continued to increase. The amount outstanding of CP issued was above the previous year's level, while that of corporate bonds issued was below the level of a year ago. Lending attitudes of private banks as perceived by firms continued to be generally accommodative, but the number of small firms that reported lending attitudes of private banks as severe surpassed the number of small firms that reported them as accommodative. Meanwhile, firms' demand for credit, particularly for operating funds, increased moderately. Firms' liquidity positions were favorable on the whole, although the situation for small firms and firms in certain industries had deteriorated.
5. The monetary base (currency in circulation plus current accounts at the Bank) generally remained at the previous year's level.
The year-on-year rate of growth in the money stock (M2) was around 2 percent.
Monetary Policy Meetings (MPMs)
6. Nine MPMs were held in the first half of fiscal 2008.
At the MPMs from April through June 2008, the Policy Board was of the view that"Japan's economic growth is slowing, mainly due to the effects of high energy and materials prices." Thereafter, given the deceleration in the pace of increase in business fixed investment and private consumption due to the elevated energy and materials prices, the Policy Board revised its assessment: at the MPM in July, it was of the view that"Japan's economic growth is slowing further reflecting weaker growth in business fixed investment and private consumption against the backdrop of high energy and materials prices." At the MPMs in August and September, the Policy Board revised its assessment again as world economic growth had decelerated and as a result a slowdown in exports had become pronounced: the Policy Board was of the view that"Japan's economic growth has been sluggish against the backdrop of high energy and materials prices and weaker growth in exports."
At the unscheduled meeting held on September 18, the Bank decided to introduce U.S. dollar funds-supplying operations against pooled collateral as part of coordinated measures by central banks in major economies designed to address the continued elevated pressures in short-term U.S. dollar funding markets. At the unscheduled meeting held on September 29, the Bank decided to take measures to enhance its provision of U.S. dollar funds, given that the effects of liquidity pressures in the U.S. dollar money markets on liquidity conditions in the yen money market had become more evident.
7. With regard to the conduct of monetary policy, given the above economic and financial developments, the Policy Board decided at the MPMs from April through September to maintain the guideline for money market operations unchanged as follows:"The Bank of Japan will encourage the uncollateralized overnight call rate to remain at around 0.5 percent."
The Bank's Balance Sheet
8. As of the end of September 2008, the Bank's total assets amounted to 112.5 trillion yen, an increase of 1.3 percent from the previous year.