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Semiannual Report on Currency and Monetary Control (Summary)
First Half of Fiscal 2016 (April-September 2016)

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

Bank of Japan

Economic Developments

  1. Looking back at the first half of fiscal 2016, Japan's economy 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.

    Exports were more or less flat, due mainly to the effects of the slowdown in emerging economies. Turning to domestic demand, the decline in public investment leveled off. 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, although relatively weak developments were seen in some indicators. Housing investment continued to pick up. 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) became slightly negative. Inflation expectations remained in a weakening phase since summer 2015 as an adaptive component played a large role in their formation, with the observed inflation rate being about 0 percent or slightly negative.

Financial Developments

  1. Money market rates declined further on the whole.

    Turning to developments in the bond market, long-term interest rates moved further into negative territory through end-July. Thereafter, the rates turned to an increase, mainly on the back of rises in U.S. and European long-term interest rates. Through the end of the first half of fiscal 2016, the rates were slightly below 0 percent under "Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control," which was introduced at the September Monetary Policy Meeting (MPM).

    The Nikkei 225 Stock Average temporarily fell to a level below 15,000 yen, with a drop in stock prices globally prompted by the United Kingdom's June referendum in which the majority voted to leave the European Union (EU). Thereafter, it rose to around 16,500 yen amid the situation of rises in U.S. and European stock prices.

    In the foreign exchange market, through July, the yen appreciated against the U.S. dollar, mainly due to expectations that the pace of the policy interest rate hikes in the United States would be more moderate and to market participants' concern over the impact of the United Kingdom's vote to leave the EU. Thereafter, the U.S. dollar/yen rate was more or less flat, albeit with some fluctuations, and was in the range of 100-101 yen at end-September. The yen also appreciated against the euro and was in the range of 112-113 yen at end-September.

  2. As for corporate finance, in terms of credit supply, financial institutions' lending attitudes as perceived by firms were highly accommodative.

    Firms' credit demand increased moderately, mainly for funds related to mergers and acquisitions and funds for business fixed investment. With regard to firms' funding, the year-on-year rate of increase in the amount outstanding of lending by domestic commercial banks was around 2 percent. The year-on-year rate of change in the amount outstanding of corporate bonds turned positive and rose. In addition, the year-on-year rate of change in that of CP turned positive on average.

  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 in the range of 20-30 percent. The year-on-year rate of growth in the money stock (M2) was in the range of 3.0-4.0 percent.

MPMs

  1. Four MPMs were held in the first half of fiscal 2016.

    At all the MPMs held in the first half of fiscal 2016, the Policy Board judged that Japan's 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 the conduct of monetary policy, at the July MPM, the Policy Board decided upon the following measures to enhance monetary easing.

(1) An increase in purchases of exchange-traded funds (ETFs)

The Bank will purchase ETFs so that their amount outstanding will increase at an annual pace of about 6 trillion yen (almost double the previous pace of about 3.3 trillion yen).

(2) Measures to ensure smooth fund raising in foreign currencies by Japanese firms and financial institutions

  1. a) Increasing the size of the Bank's U.S. dollar lending program to support growth
    The Bank will increase the size of its U.S. dollar lending program to support growth (the Special Rules for the U.S. Dollar Lending Arrangement to Enhance the Fund-Provisioning Measure to Support Strengthening the Foundations for Economic Growth Conducted through the Loan Support Program) to 24 billion USD (about 2.5 trillion yen; double the previous size of 12 billion USD). Under this lending program, the Bank provides its U.S. dollar funds for a period of up to 4 years to support Japanese firms' overseas activities through financial institutions.
  2. b) Establishing a new facility for lending securities to be pledged as collateral for the U.S. Dollar Funds-Supplying Operations
    The Bank will establish a new facility in which it lends Japanese government securities (JGSs) to financial institutions against their current account balances with the Bank so that these JGSs can be pledged as collateral for the U.S. Dollar Funds-Supplying Operations.

Moreover, at the September MPM, the Policy Board conducted a comprehensive assessment of the developments in economic activity and prices under "QQE" and "QQE with a Negative Interest Rate" as well as their policy effects. Based on this, with a view to achieving the price stability target of 2 percent at the earliest possible time, the Bank decided to introduce "QQE with Yield Curve Control" by strengthening the two previous policy frameworks mentioned earlier.

(1) Yield curve control

  1. a) Guideline for market operations
    The guideline for market operations specifies a short-term policy interest rate and a target level of a long-term interest rate. The Bank decided to set the following guideline for market operations for the intermeeting period. The Bank will cut the interest rates further if judged necessary.
    The short-term policy interest rate:
    The Bank will apply a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank.
    The long-term interest rate:
    The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain more or less at the current level (around zero percent). With regard to the amount of JGBs to be purchased, the Bank will conduct purchases at more or less the current pace -- an annual pace of increase in the amount outstanding of its JGB holdings of about 80 trillion yen -- aiming to achieve the target level of the long-term interest rate specified by the guideline. JGBs with a wide range of maturities will continue to be eligible for purchase, while the guideline for the average remaining maturity of the Bank's JGB purchases will be abolished.
  2. b) New tools for market operations to facilitate yield curve control
    The Bank decided to introduce the following new tools for market operations so as to control the yield curve smoothly.
    1. (i)  Outright purchases of JGBs with yields designated by the Bank (fixed-rate purchase operations)
    2. (ii)  Fixed-rate funds-supplying operations for a period of up to 10 years (extending the longest maturity of the operations from the previous period of 1 year)

(2) Guidelines for asset purchases

With regard to asset purchases other than JGB purchases, the Bank decided to set the following guidelines.

  1. a) The Bank will purchase ETFs and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 6 trillion yen and about 90 billion yen, respectively.
  2. b) 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.

(3) Inflation-overshooting commitment

The Bank will continue with "QQE with Yield Curve Control," 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 continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds the price stability target of 2 percent and stays above the target in a stable manner, while the pace of increase in the monetary base may fluctuate in the short run under market operations that aim at controlling the yield curve.

The Bank will make policy adjustments as appropriate, taking account of developments in economic activity and prices as well as financial conditions, with a view to maintaining the momentum toward achieving the price stability target of 2 percent.

The Bank's Balance Sheet

  1. As of end-September, the Bank's total assets amounted to 456.8 trillion yen, an increase of 24.8 percent from the previous year.