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Semiannual Report on Currency and Monetary Control (Summary)
First Half of Fiscal 2009 (April-September 2009)

The semiannual report, which includes this summary, was submitted to the Diet in December 2009.

Bank of Japan

Economic Developments

1. Japan's economic conditions headed toward a pickup in the first half of fiscal 2009 following a rapid and significant downturn in the second half of fiscal 2008.

Public investment continued to increase, and exports and production rose substantially. Meanwhile, business fixed investment continued to decline significantly due mainly to weak corporate profits. Private consumption remained generally weak and housing investment decreased as the employment and income situation became increasingly severe.

2. The year-on-year decline in domestic corporate goods prices accelerated, mainly reflecting the fall in international commodity prices since the autumn of 2008, amid the easing of supply and demand conditions for products. The year-on-year rate of decline in consumer prices (excluding fresh food) accelerated, mainly due to the prices of petroleum products, which were lower than their high levels a year ago, amid the substantial slack persisting in the economy as a whole.

Financial Developments

3. Japanese money markets regained stability partly because of the Bank of Japan's continued provision of ample liquidity, and interest rates remained low and stable. Nevertheless, some strains remained as witnessed by the continued low volume of transactions, particularly longer-term ones.

In this situation, the Bank sought to ensure stability in financial markets by continuing to make effective use of various operations to provide ample liquidity. The Bank also continued to carry out outright purchases of CP and corporate bonds as well as special funds-supplying operations to facilitate corporate financing in order to improve the functioning of the financial markets and to facilitate corporate financing, and extended the period for these temporary measures to remain in effect from the end of September to the end of December. Partly due to these measures, issuing conditions in the CP market turned favorable. In addition, the Bank continued to conduct U.S. dollar funds-supplying operations against pooled collateral, and extended the period for it to remain in effect to February 1, 2010. In this situation, dollar funding conditions continued to improve.

Long-term interest rates were on an upward trend amid increasing expectations for the economy to bottom out, and hovered above 1.5 percent in mid-June. Thereafter, interest rates declined partly reflecting cautious views concerning the outlook for economic activity and prices, and moved around 1.3 percent toward the end of September.

Stock prices trended upward from early spring against the backdrop of expectations for the economy to bottom out on a global basis and abatement of excessive concern over financial system soundness. The Nikkei 225 Stock Average recovered the 10,000 yen level in late July and, although the pace of increase slowed toward the end of September, continued to move in the range of 10,000-10,500 yen.

The yen remained more or less unchanged against the U.S. dollar until July, albeit with some fluctuations. It started to increase, however, from August and temporarily reached the range of 88-89 yen against the dollar toward the end of September.

4. In terms of credit supply, although many firms still saw financial institutions' lending attitudes as severe, the situation improved compared with the end of fiscal 2008. Issuing conditions for CP and corporate bonds turned favorable, except for low-rated corporate bonds, as reflected in the narrowing of credit spreads and the increased number of firms issuing corporate bonds.

The pace of growth in firms' demand for external funds slowed, because demand for both working capital and business fixed investment declined and some firms reduced the on-hand liquidity that they had accumulated.

In this situation, in terms of firms' funding, the year-on-year rate of change in the amount outstanding of lending by private banks (after adjustment for special items) increased to above 3 percent in the April-June quarter, but declined thereafter due to the firms' reduced need to fund both working capital and fixed investment. The amount outstanding of CP issued declined significantly from the previous year, partly because of the decline in firms' need to fund working capital, while the year-on-year rate of change in the amount outstanding of corporate bonds issued increased partly reflecting improvement in issuing conditions.

5. The monetary base (currency in circulation plus current accounts at the Bank) continued to show a relatively high increase from the previous year. The year-on-year rate of growth in the money stock (M2) increased in the first half of 2009 compared with the second half of 2008, and reached around 2.5-3 percent.

Monetary Policy Meetings (MPMs)

6. Seven MPMs were held in the first half of fiscal 2009.

In April 2009, the Policy Board was of the view that"economic conditions have deteriorated significantly." Thereafter, in May, the Policy Board took the view that"economic conditions have been deteriorating, but exports and production are beginning to level out against the backdrop of progress in inventory adjustments both at home and abroad." In June, given that exports and production began to turn upward and public investment also increased, the Policy Board judged that"economic conditions, after deteriorating significantly, have begun to stop worsening." Following the assessments that"economic conditions have stopped worsening" in July and August, the Policy Board judged in September that"economic conditions are showing signs of recovery" since public investment continued to increase, and exports and production also rose against the backdrop of progress in inventory adjustments both at home and abroad as well as a recovery in overseas economies, especially emerging economies.

7. With regard to the conduct of monetary policy, the Policy Board decided at the MPMs from April through September to set the guideline for money market operations unchanged:"The Bank of Japan will encourage the uncollateralized overnight call rate to remain at around 0.1 percent." The Policy Board demonstrated the stance that the Bank would, paying attention to the downside risks to economic activity and prices, exert its utmost efforts as the central bank to facilitate the return of Japan's economy to a sustainable growth path with price stability. Meanwhile, at the MPM in July, in order to continue facilitating corporate financing and ensuring market stability, the Policy Board decided to extend the period for which temporary measures would remain in effect; for example, the period for which outright purchases of CP and corporate bonds and special funds-supplying operations to facilitate corporate financing would remain in effect was extended to the end of December from the end of September.

The Bank's Balance Sheet

8. As of the end of September 2009, the Bank's total assets amounted to 116.3 trillion yen, an increase of 3.4 percent from the previous year.