Semiannual Report on Currency and Monetary Control (Summary)
First Half of Fiscal 2020 (April-September 2020)

-- The semiannual report was submitted to the Diet in December 2020.

• The full report is available only in Japanese.

Bank of Japan

Economic Developments

1. During the period from April through September 2020, Japan's economy remained in a severe situation due to the impact of the novel coronavirus (COVID-19) at home and abroad. In the first half of the period, the economy became depressed significantly, mainly affected by the spread of COVID-19 and the declaration of a state of emergency. However, it picked up in the second half with economic activity resuming.

   Exports and industrial production, particularly for those related to automobiles, declined substantially in the first half of the period but turned to an increase in the second half, mainly supported by the materialization of pent-up demand. Business fixed investment, which had been more or less flat, turned to a declining trend in the second half of the period against the background of deterioration in corporate profits and an increase in uncertainties over the future. The employment and income situation had been weak with the continuing impact of COVID-19. Private consumption had decreased significantly due to the impact of COVID-19. Thereafter, although consumption of services, such as eating and drinking as well as accommodations, remained at a low level, private consumption as a whole, including consumption of goods, had picked up gradually. Housing investment had declined moderately. Meanwhile, public investment continued to increase moderately.

2. On the price front, the year-on-year rate of change in the consumer price index (CPI, all items less fresh food), which remained at around 0 percent, decelerated at the end of the period, mainly affected by the decline in energy prices and a decrease in hotel charges that reflected a discount through the "Go To Travel" campaign, thereby turning to a slightly negative figure. Inflation expectations had weakened somewhat.

Developments in Financial Markets and Conditions

3. With major central banks taking measures such as ample provision of liquidity and large-scale asset purchases, tension in the U.S. money markets, for example, that mainly stemmed from the spread of COVID-19 had eased gradually, and global financial markets had been stable since May. Prices of risky assets had increased on the whole with investors' risk aversion abating.

4. Turning to domestic financial markets, money market rates had been at low levels on the whole.

   With regard to developments in the bond market, the long-term interest rate had been stable at the target level of around zero percent under "Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control." Issuance rates for CP had risen temporarily at the beginning of the period but had been at low levels thereafter. Those for corporate bonds had been at extremely low levels.

   The Nikkei 225 Stock Average had increased on the back of improvement in investors' risk sentiment that mainly reflected aggressive fiscal and monetary policies and a resumption of economic activity, being in the range of 23,000-23,500 yen at the end of September.

   In the foreign exchange market, the yen had appreciated slightly against the U.S. dollar throughout the period, mainly on the back of the U.S. dollar market becoming stable again, being at the 105 yen level at the end of September. The yen had depreciated against the euro, mainly against the background of an agreement on the establishment of the European Union (EU) recovery fund.

5. As for corporate financing, demand for funds had increased, mainly due to a decline in sales and a rise in precautionary demand, both of which reflected the impact of COVID-19. In this situation, firms' financial positions had deteriorated during the first half of the period, mainly reflecting the decline in sales due to the impact of COVID-19, and had shown weakness thereafter. Meanwhile, in terms of credit supply, financial institutions' lending attitudes as perceived by firms remained accommodative.
6. The year-on-year rate of increase in the monetary base (currency in circulation plus current account balances at the Bank) had accelerated significantly, being in the range of 14.0-14.5 percent in September. That in the money stock (M2) also had accelerated significantly, being at around 9 percent in September.

Monetary Policy Meetings (MPMs)

7. Five MPMs were held in the first half of fiscal 2020.

   The Policy Board judged at the MPM held in April that Japan's economy had been in an increasingly severe situation due to the impact of the spread of COVID-19 at home and abroad, and at the June MPM, it deemed that the economy had been in an extremely severe situation due to the impact of COVID-19 at home and abroad. The Policy Board judged at the July MPM that Japan's economy had been in an extremely severe situation with the impact of COVID-19 remaining at home and abroad, although economic activity had resumed gradually. It deemed at the September MPM that the economy had started to pick up with economic activity resuming gradually, although it remained in a severe situation due to the impact of COVID-19 at home and abroad.

8. In the conduct of monetary policy, the Policy Board decided upon the following guideline for market operations under "QQE with Yield Curve Control" at the April MPM with a view to conducting further active purchases of Japanese government bonds (JGBs) and treasury discount bills (T-Bills), as described later, given the impact of the spread of COVID-19.

   Yield curve control

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

   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 a necessary amount of JGBs without setting an upper limit so that 10-year JGB yields will remain at around zero percent. While doing so, the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices.

   At all the subsequent MPMs, the Policy Board maintained the above guideline for market operations.

   At the April MPM, the Policy Board decided upon an increase in purchases of CP and corporate bonds, as described later, under the following guidelines for asset purchases, given the impact of the spread of COVID-19.

   Guidelines for asset purchases

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

   1. (1) In principle, 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 6 trillion yen and about 90 billion yen, respectively. With a view to lowering risk premia of asset prices in an appropriate manner, it may increase or decrease the amount of purchases depending on market conditions. For the time being, the Bank will actively purchase these assets so that their amounts outstanding will increase at annual paces with the upper limit of about 12 trillion yen and about 180 billion yen, respectively.
   2. (2) As for CP and corporate bonds, the Bank will maintain their amounts outstanding at about 2 trillion yen and about 3 trillion yen, respectively. In addition, until the end of September 2020, it will conduct additional purchases with the upper limit of the amounts outstanding of 7.5 trillion yen for each asset.

   In addition, at the May MPM, the Policy Board decided to extend the duration of additional purchases of CP and corporate bonds by 6 months, as described later, under the following guidelines for asset purchases.

   Guidelines for asset purchases

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

   1. (1) In principle, the Bank will purchase ETFs and J-REITs so that their amounts outstanding will increase at annual paces of about 6 trillion yen and about 90 billion yen, respectively. With a view to lowering risk premia of asset prices in an appropriate manner, it may increase or decrease the amount of purchases depending on market conditions. For the time being, the Bank will actively purchase these assets so that their amounts outstanding will increase at annual paces with the upper limit of about 12 trillion yen and about 180 billion yen, respectively.
   2. (2) As for CP and corporate bonds, the Bank will maintain their amounts outstanding at about 2 trillion yen and about 3 trillion yen, respectively. In addition, until the end of March 2021, it will conduct additional purchases with the upper limit of the amounts outstanding of 7.5 trillion yen for each asset.

   At all the subsequent MPMs, the Policy Board maintained the above guidelines for asset purchases.

   Given the impact of the spread of COVID-19, at the April MPM, the Policy Board judged it appropriate to further enhance monetary easing with a view to doing its utmost to ensure smooth financing, such as of financial institutions and firms, and maintaining stability in financial markets, and thus decided upon the following.

   (1) Increase in purchases of CP and corporate bonds

   The Bank decided to significantly increase the maximum amount of additional purchases of CP and corporate bonds and conduct purchases with the upper limit of the amount outstanding of about 20 trillion yen in total. In addition, the maximum amounts outstanding of a single issuer's CP and corporate bonds to be purchased will be raised substantially, and the maximum remaining maturity of corporate bonds to be purchased will be extended to 5 years.

   (2) Strengthening of the Special Funds-Supplying Operations to Facilitate Financing in Response to the Novel Coronavirus (COVID-19)

   With regard to the Special Funds-Supplying Operations to Facilitate Corporate Financing regarding the Novel Coronavirus (COVID-19), which was introduced and became effective in March, the Bank decided to (1) expand the range of eligible collateral to private debt in general, including household debt (from about 8 trillion yen to about 23 trillion yen as of end-March 2020), (2) increase the number of eligible counterparties (to mainly include member financial institutions of central organizations of financial cooperatives), and (3) apply a positive interest rate of 0.1 percent to the outstanding balances of current accounts held by financial institutions at the Bank that correspond to the amounts outstanding of loans provided through this operation. The Bank decided to strengthen this operation with a view to firmly supporting financial institutions to further fulfill the functioning of financial intermediation for a wide range of private sectors, mainly in terms of firms. This operation has been renamed to the Special Funds-Supplying Operations to Facilitate Financing in Response to the Novel Coronavirus (COVID-19).

   In addition, with the aim of further supporting financing mainly of small and medium-sized firms, the chairman instructed the staff to swiftly consider a new measure to provide funds to financial institutions, taking account, for example, of the government's programs to support financing such as those in its emergency economic measures, and report back at a later MPM.

   (3) Further active purchases of JGBs and T-Bills

   In a situation where the liquidity in the bond market remains low, the increase in the amount of issuance of JGBs and T-Bills in response to the government's emergency economic measures will have an impact on the market. Taking this into account, the Bank will conduct further active purchases of both JGBs and T-Bills for the time being, with a view to maintaining stability in the bond market and stabilizing the entire yield curve at a low level.

   At the May MPM, the Policy Board decided upon the following details of the new fund-provisioning measure, for which the staff were given instructions at the April MPM to swiftly consider in order to further support financing mainly of small and medium-sized firms, with a view to addressing the spread of COVID-19.

   New fund-provisioning measure

   1. (1) Overview
      The Bank will provide funds to eligible counterparties against pooled collateral for up to 1 year at the loan rate of 0 percent with the maximum amounts outstanding of eligible loans reported by those counterparties.
   2. (2) Eligible loans
      1. (a) Loans based on the government's programs
         Interest-free and unsecured loans based on the government's emergency economic measures and loans guaranteed by the credit guarantee corporations in response to COVID-19
      2. (b) Loans equivalent to (2) (a)
         Loans to small and medium-sized firms affected by COVID-19 which are equivalent to (2) (a) in terms of loan conditions (the maximum amount for each eligible counterparty: 100 billion yen)
   3. (3) Addition to the Macro Add-on Balances
      Twice as much as the amounts outstanding of the loans will be included in the Macro Add-on Balances in current accounts held by financial institutions at the Bank.
   4. (4) Application of a positive interest rate to current account balances
      A positive interest rate of 0.1 percent will be applied to the outstanding balances of current accounts held by financial institutions at the Bank corresponding to the amounts outstanding of loans provided through this measure.
   5. (5) Eligible counterparties
      Member financial institutions of central organizations of financial cooperatives will also be included.
   6. (6) Timing of implementation
      The Bank's fund-provisioning through this measure will start in June, taking into account loans made by financial institutions as of end-May.
   7. (7) Others
      This measure and the Special Funds-Supplying Operations to Facilitate Financing in Response to the Novel Coronavirus (COVID-19) will be conducted in an integrated manner.

   The Bank already had implemented the following two measures to support financing mainly of firms: (1) purchases of CP and corporate bonds (maximum amount outstanding: about 20 trillion yen) and (2) the Special Funds-Supplying Operations to Facilitate Financing in Response to the Novel Coronavirus (COVID-19) (fund-provisioning against private debt pledged as collateral: about 25 trillion yen <as of end-April>). As a third measure, a new fund-provisioning measure was introduced (fund-provisioning against eligible loans such as interest-free and unsecured loans made by eligible counterparties based on the government's emergency economic measures: about 30 trillion yen). The Bank decided to refer to these three measures as the Special Program to Support Financing in Response to the Novel Coronavirus (COVID-19) (the Special Program: total size of about 75 trillion yen). The Policy Board decided to extend the duration of these measures by 6 months and continue to conduct them until the end of March 2021.

   With regard to the future conduct of monetary policy, the Policy Board confirmed the following at the April MPM: "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 2 percent and stays above the target in a stable manner. For the time being, the Bank will closely monitor the impact of COVID-19 and will not hesitate to take additional easing measures if necessary, and also it expects short- and long-term policy interest rates to remain at their present or lower levels." At the MPMs held in June through September, the Policy Board confirmed the following: "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 2 percent and stays above the target in a stable manner. The Bank will continue to support financing mainly of firms and maintain stability in financial markets through (1) the Special Program to Support Financing in Response to the Novel Coronavirus (COVID-19), (2) an ample provision of yen and foreign currency funds without setting upper limits mainly by purchasing JGBs and conducting the U.S. dollar funds-supplying operations, and (3) active purchases of ETFs and J-REITs. For the time being, the Bank will closely monitor the impact of COVID-19 and will not hesitate to take additional easing measures if necessary, and also it expects short- and long-term policy interest rates to remain at their present or lower levels."

The Bank's Balance Sheet

9. As of end-September, the Bank's total assets amounted to 690.0 trillion yen, an increase of 21.1 percent from the previous year.