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Semiannual Report on Currency and Monetary Control (Summary)
Second Half of Fiscal 2015 (October 2015-March 2016)

-- The semiannual report was submitted to the Diet in June 2016.

Bank of Japan

Economic Developments

  1. Looking back at the second half of fiscal 2015, Japan's economic activity continued its moderate recovery trend, with a virtuous cycle from income to spending being maintained, although exports and production were sluggish, due mainly to the effects of the slowdown in emerging economies.

    The pick-up in exports paused, primarily because of the effects of the slowdown in emerging economies. Turning to domestic demand, public investment was on a moderate declining trend, although it remained at a high level. Business fixed investment followed a moderate increasing trend as corporate profits were at high levels. Against the background of steady improvement in the employment and income situation, private consumption was resilient. The pick-up in housing investment paused. Reflecting these developments in demand both at home and abroad, industrial production continued to be more or less flat.

  2. On the price front, the year-on-year rate of change in the consumer price index (CPI, all items less fresh food) was about 0 percent. Although inflation expectations appeared to be rising on the whole from a somewhat longer-term perspective, they have weakened recently.

Financial Developments

  1. Money market rates declined following the Bank of Japan's decision at end-January to introduce "Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest Rate."

    Turning to developments in the bond market, interest rates on 10-year JGBs were slightly negative from late February.

    The Nikkei 225 Stock Average had temporarily risen at the beginning of December to a level exceeding 20,000 yen, mainly in response to rises in U.S. and European stock prices, but thereafter -- with a drop in stock prices globally prompted mainly by investors' heightening risk aversion against the backdrop of such factors as uncertainty over emerging economies and a further decline in crude oil prices, and also with a further appreciation of the yen -- stock prices fell substantially to a level below 15,000 yen. It then rebounded as investors' risk aversion abated somewhat, and was in the range of 16,500-17,000 yen at end-March.

    In the foreign exchange market, the U.S. dollar/yen rate generally had been exceeding 120 yen until end-December, but after the turn of the year, the yen appreciated against the dollar, due mainly to investors' heightening risk aversion seen globally and to expectations that the pace of the policy interest rate hikes in the United States would be more moderate, and the rate was in the range of 112-113 yen against the U.S. dollar at end-March. The yen also appreciated against the euro to the range of 127-128 yen at end-March.

  2. As for corporate finance, in terms of credit supply, financial institutions' lending attitudes as perceived by firms continued to be on an improving trend.

    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 a positive range of about 2.0-2.5 percent. In contrast, the year-on-year rates of change in the amounts outstanding of corporate bonds and CP were negative.

  3. 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 about 30 percent. The year-on-year rate of growth in the money stock (M2) was in the range of 3.0-4.0 percent.

Monetary Policy Meetings (MPMs)

  1. Six MPMs were held in the second half of fiscal 2015.

    At the MPMs held in October through January, the Policy Board judged that Japan's economy continued to recover moderately, although exports and production were affected by the slowdown in emerging economies. At the MPM held in March, it judged that the economy continued its moderate recovery trend, although exports and production were sluggish, due mainly to the effects of the slowdown in emerging economies.

  2. In its conduct of monetary policy, the Policy Board decided at the MPM held in December to adopt supplementary measures for QQE as follows.

(1) Measures to support firms' investment in physical and human capital

  1. a) Establishing a new program for purchases of exchange-traded funds (ETFs)
  2. b) Enhancing the Fund-Provisioning Measure to Support Strengthening the Foundations for Economic Growth
  3. c) Extending the application periods for the Loan Support Program and other measures

(2) Measures to facilitate smooth implementation of QQE

  1. a) Expanding eligible collateral for the Bank's provision of credit
  2. b) Extending the average remaining maturity of Japanese government bond (JGB) purchases
  3. c) Increasing the maximum amount of each issue of Japan real estate investment trusts (J-REITs) to be purchased

Moreover, at the December MPM, the Policy Board maintained the following guideline for money market operations that was determined at the MPM on October 31, 2014, and decided to set the guidelines for its asset purchases.

(1) Guideline for money market operations

The Bank will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen.

(2) Guidelines for asset purchases

  1. a) The Bank will purchase JGBs so that their amount outstanding will increase at an annual pace of about 80 trillion yen. With a view to encouraging a decline in interest rates across the entire yield curve, the Bank will conduct purchases in a flexible manner in accordance with financial market conditions. The average remaining maturity of the Bank's JGB purchases will be about 7-10 years until the end of 2015 and be extended to about 7-12 years from the beginning of 2016.
  2. b) The Bank will purchase ETFs and J-REITs so that their amounts outstanding will increase at annual paces of about 3 trillion yen and about 90 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.

At the MPM held in January, the Policy Board decided to introduce "QQE with a Negative Interest Rate" as follows.

(1) Interest-Rate Dimension: The introduction of a negative interest rate

The Bank will apply a negative interest rate of minus 0.1 percent to current accounts that financial institutions hold at the Bank. It will cut the interest rate further into negative territory if judged necessary.

Specifically, the Bank will adopt a three-tier system in which the outstanding balance of each financial institution's current account at the Bank will be divided into three tiers, to each of which a positive interest rate, a zero interest rate, or a negative interest rate will be applied.

The Bank will carry out the Loan Support Program, the Funds-Supplying Operation to Support Financial Institutions in Disaster Areas affected by the Great East Japan Earthquake, and the Funds-Supplying Operations against Pooled Collateral at zero interest rates.

(2) Quantity Dimension: The guideline for money market operations

The Bank decided to set the following guideline for money market operations for the intermeeting period:

The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen.

(3) Quality Dimension: The guidelines for asset purchases

With regard to the asset purchases, the Bank decided to set the following guidelines:

  1. a) The Bank will purchase JGBs so that their amount outstanding will increase at an annual pace of about 80 trillion yen. With a view to encouraging a decline in interest rates across the entire yield curve, the Bank will conduct purchases in a flexible manner in accordance with financial market conditions. The average remaining maturity of the Bank's JGB purchases will be about 7-12 years.
  2. b) The Bank will purchase ETFs and J-REITs so that their amounts outstanding will increase at annual paces of about 3 trillion yen and about 90 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.

At the MPM held in March, the Policy Board decided to maintain the aforementioned guideline for money market operations, the guidelines for asset purchases, and the policy rate.

With regard to the future conduct of monetary policy, the Policy Board confirmed the following at the MPMs held in October through December: "the Bank will continue with 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." At the MPMs held in January and March, the Policy Board confirmed that "the Bank will continue with 'QQE with a Negative Interest Rate,' 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 risks to economic activity and prices, and take additional easing measures in terms of three dimensions -- quantity, quality, and the interest rate -- if it is judged necessary for achieving the price stability target."

The Bank's Balance Sheet

  1. As of end-March, the Bank's total assets amounted to 405.6 trillion yen, an increase of 25.4 percent from the previous year.