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Semiannual Report on Currency and Monetary Control (Summary)
First Half of Fiscal 2014 (April-September 2014)

The semiannual report was submitted to the Diet in December 2014.

Bank of Japan

Economic Developments

1. Looking back at the first half of fiscal 2014, Japan's economic activity continued to recover moderately as a trend with a virtuous cycle from income to spending having been maintained in both the household and corporate sectors, although effects such as those of the decline in demand following the front-loaded increase prior to the consumption tax hike were observed and some weakness on the production side was protracted somewhat.

Exports were somewhat weak or more or less flat, particularly in reflection of the sluggishness in emerging economies and the effects of the expansion of overseas production, mainly in automobiles. As for domestic demand, public investment more or less leveled off at a high level. Business fixed investment followed a moderate increasing trend as corporate profits improved. Private consumption remained resilient as a trend with the employment and income situation improving steadily, and the effects of the decline in demand following the front-loaded increase waned on the whole toward end-September, albeit unevenly. As for housing investment, the decline following the front-loaded increase continued. Industrial production declined clearly in the April-June quarter due to the effects of the decline in demand following the front-loaded increase, and thereafter continued to show some weakness with continued inventory adjustments.

2. On the price front, excluding the direct effects of the consumption tax hike, the producer price index (PPI) relative to three months earlier followed a moderate uptrend. The year-on-year rate of increase in the consumer price index (CPI, all items less fresh food) was around 1¼ percent, but gradually slowed toward end-September. 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 were generally stable in the range of 0.45-0.65 percent, as the Bank of Japan progressed with its Japanese government bond (JGB) purchases under the quantitative and qualitative monetary easing (QQE). More concretely, long-term interest rates as a whole had been in a narrow range of around 0.6 percent since April, and toward end-August, they temporarily declined to the range of 0.45-0.50 percent on the back of declines in U.S. and European long-term interest rates. Thereafter, with the U.S. long-term interest rates rising again and the yen depreciating, long-term interest rates in Japan temporarily increased and were in the range of 0.50-0.55 percent at end-September.

The Nikkei 225 Stock Average fell at one point, reflecting the situation in Ukraine, but increased since August with a rise in U.S. stock prices and the depreciation of the yen, and was in the range of 16,000-16,500 yen at end-September.

In the foreign exchange market, the yen had been in a narrow range of 101-103 yen as a whole against the U.S. dollar since April. Since late August, the yen depreciated against the U.S. dollar, reflecting, in part, market participants' awareness of the difference in the direction of monetary policy between Japan and the United States. The yen was in the range of 109-110 yen against the U.S. dollar at end-September. The yen somewhat appreciated against the euro, due mainly to the release of European economic indicators that were weaker than market expectations and to additional monetary easing by the European Central Bank (ECB), and it traded at the 138-139 yen level against the euro at end-September.

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. Issuing conditions for CP and corporate bonds remained favorable.

Firms' credit demand 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 was in the range of 2.0-3.0 percent. In contrast, the year-on-year rate of change in the amount outstanding of corporate bonds was negative. Meanwhile, the year-on-year rate of change in that of CP was negative, but recently turned positive.

5. The monetary base (currency in circulation plus current account balances at the Bank) increased significantly as asset purchases by the Bank progressed, and the year-on-year rate of growth was at around 40 percent. The year-on-year rate of growth in the money stock (M2) continued to be in the range of 3.0-4.0 percent.

Monetary Policy Meetings (MPMs)

6. Seven MPMs were held in the first half of fiscal 2014.

At the MPM held in April, the Policy Board judged that Japan's economy continued to recover moderately as a trend, albeit with some fluctuations due to the consumption tax hike. At the MPMs held in May through September, it judged that the economy continued to recover moderately as a trend, although a subsequent decline in demand following the front-loaded increase prior to the consumption tax hike was observed.

7. In its conduct of monetary policy, the Policy Board decided at all the MPMs held in the first half of fiscal 2014 to continue with the following guidelines with regard to money market operations and asset purchases that were determined when the QQE was introduced in April 2013.

Guideline for Money Market Operations

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.

Guidelines for Asset Purchases

  1. (a) The Bank will purchase JGBs so that their amount outstanding will increase at an annual pace of about 50 trillion yen, and the average remaining maturity of the Bank's JGB purchases will be about seven years.
  2. (b) The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 1 trillion yen and about 30 billion yen, respectively.
  3. (c) As for CP and corporate bonds, the Bank will maintain their amounts outstanding at about 2.2 trillion yen and about 3.2 trillion yen, respectively.

With regard to the future conduct of monetary policy, the Policy Board confirmed the following at all the MPMs held in the first half of fiscal 2014: "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."

The Bank's Balance Sheet

8. As of end-September, the Bank's total assets amounted to 277.1 trillion yen, an increase of 32.7 percent from the previous year.