Semiannual Report on Currency and Monetary Control (Summary)
First Half of Fiscal 2013 (April-September 2013)
The semiannual report was submitted to the Diet in December 2013.
Bank of Japan
Economic Developments
1. Looking back at the first half of fiscal 2013, Japan's economic activity returned to a moderate recovery path around mid-2013 as domestic demand remained resilient mainly due to the effects of monetary easing as well as various economic measures and as overseas economies gradually headed toward a pick-up.
Exports had generally been picking up on the back of the aforementioned development in overseas economies. As for domestic demand, public investment continued to increase and the pick-up in housing investment had become evident. Private consumption remained resilient as consumer sentiment turned favorable, with some improvement also observed in the employment and income situation. Business fixed investment, which had continued to show some weakness until the first half of fiscal 2013, picked up gradually as corporate profits improved. Reflecting these developments in demand both at home and abroad, industrial production returned to a moderate increasing trend.
2. The year-on-year rate of change in the domestic corporate goods price index (CGPI) turned positive at the beginning of fiscal 2013 and moderately picked up its pace of increase thereafter, on the back of developments in international commodity prices and foreign exchange markets. The year-on-year rate of change in the consumer price index (CPI, all items less fresh food) turned positive around mid-2013, and its pace of increase accelerated thereafter. Inflation expectations appeared to be rising on the whole.
Financial Developments
3. Money market rates, including longer-term ones, remained stable at low levels.
Long-term interest rates rose toward late May mainly against the background of rises in U.S. long-term interest rates and Japanese stock prices. Thereafter, they declined moderately, even in a situation where U.S. and European long-term interest rates increased, as the Bank of Japan progressed with its Japanese government bond (JGB) purchases under quantitative and qualitative monetary easing (QQE), and were in the range of 0.6-0.7 percent at end-September.
The Nikkei 225 Stock Average continued to go up toward mid-May mainly in response to the rise in U.S. stock prices and the depreciation of the yen, but declined thereafter mainly on the back of profit-taking sales by investors. After mid-June, it fluctuated mainly on the back of movements in U.S. stock prices and was around 14,500 yen at end-September.
In the foreign exchange market, the yen depreciated against the U.S. dollar toward mid-May mainly due to the release of U.S. economic indicators that were stronger than market expectations and speculation about the direction of U.S. and Japanese monetary policy, but thereafter the yen appreciated in view of the decline in Japanese stock prices. After mid-June, the yen fluctuated mainly reflecting speculation about the direction of U.S. monetary policy and developments in Japanese stock prices, and at end-September it traded at the 97-98 yen level against the U.S. dollar. The yen depreciated against the euro toward mid-May but fluctuated thereafter, and at end-September it traded at the 132-133 yen level against the euro.
4. As for corporate finance, in terms of credit supply, financial institutions' lending attitudes as perceived by firms continued to be on an improving trend. In the CP market, issuing conditions remained favorable. Likewise, issuing conditions generally continued to be favorable in the corporate bond market.
Firms' credit demand had increased moderately, mainly for working capital and funds related to mergers and acquisitions. With regard to firms' funding, the year-on-year rate of increase in the amount outstanding of lending by domestic commercial banks had risen somewhat, and was in the range of 2.0-2.5 percent in September. The year-on-year rate of change in the amount outstanding of corporate bonds had been positive. Meanwhile, the year-on-year rate of change in that of CP had been negative.
5. The monetary base (currency in circulation plus current account balances at the Bank) had increased significantly as asset purchases by the Bank had progressed, and the year-on-year rate of growth was at around 45 percent in September. The year-on-year rate of growth in the money stock (M2) had risen somewhat and was in the range of 3.5-4.0 percent in September.
Monetary Policy Meetings (MPMs)
6. Seven MPMs were held in the first half of fiscal 2013.
At the MPMs held on April 3 and 4 and on April 26, the Policy Board judged that Japan's economy had stopped weakening and had shown some signs of picking up. At the MPM held in May, it judged that the economy had started picking up. At the June MPM, it judged that the economy had been picking up. At the MPMs held in July and August, it judged that the economy was starting to recover moderately. At the September MPM, it judged that the economy was recovering moderately.
7. In its conduct of monetary policy, the Policy Board decided at the MPM held on April 3 and 4 to introduce the QQE as follows.
Namely, the Bank will achieve the price stability target of 2 percent in terms of the year-on-year rate of change in the CPI at the earliest possible time, with a time horizon of about two years. In order to do so, it will enter a new phase of monetary easing both in terms of quantity and quality. Upon changing the main operating target for money market operations from the uncollateralized overnight call rate to the monetary base, the Bank will double the monetary base and the amounts outstanding of JGBs as well as exchange-traded funds (ETFs) in two years, and more than double the average remaining maturity of JGB purchases. The specifics of the QQE are as follows.
- (a) The adoption of the "monetary base control"
With a view to pursuing quantitative monetary easing, the main operating target for money market operations was changed from the uncollateralized overnight call rate to the monetary base. The guideline for money market operations was set as follows: "The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen." - (b) An increase in JGB purchases and their maturity extension
With a view to encouraging a further decline in interest rates across the yield curve, the Bank will purchase JGBs so that their amount outstanding increases at an annual pace of about 50 trillion yen. In addition, JGBs with all maturities including 40-year bonds will be made eligible for purchase, and the average remaining maturity of the Bank's JGB purchases will be extended from slightly less than three years to about seven years -- equivalent to the average maturity of the amount outstanding of JGBs issued. - (c) An increase in ETF and J-REIT purchases
With a view to lowering risk premia of asset prices, the Bank will purchase ETFs and Japan real estate investment trusts (J-REITs) so that their amounts outstanding increase at an annual pace of about 1 trillion yen and about 30 billion yen, respectively. - (d) The continuation of the QQE
The Bank will continue with the QQE, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will examine both upside and downside risks to economic activity and prices, and make adjustments as appropriate.
In addition, with the introduction of the QQE, the Policy Board decided on the following: (1) the termination of the Asset Purchase Program; (2) the temporary suspension of the "banknote principle"; and (3) in order to facilitate the massive JGB purchases and significantly large-scale provision of the monetary base, the Bank will set forums for enhanced dialogue with market participants in order to exchange views pertaining to money market operations and market transactions more generally.
As for the funds-supplying operation to support financial institutions in disaster areas, the Policy Board decided to extend by one year the periods for which both (1) the funds-supplying operation to support financial institutions in disaster areas and (2) the amendment to temporary rules regarding the eligibility standards for debt of companies in disaster areas remain effective.
At all the subsequent MPMs, the Policy Board decided to maintain the aforementioned guideline for money market operations, specified as (a), and continued its purchasing policies based on (b) and (c) under the QQE. It also confirmed the continuation of the QQE, specified as (d).
The Bank's Balance Sheet
8. As of end-September 2013, the Bank's total assets amounted to 208.9 trillion yen, an increase of 39.3 percent from the previous year.