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Semiannual Report on Currency and Monetary Control (Summary)
Second Half of Fiscal 2020 (October 2020-March 2021)

-- The semiannual report was submitted to the Diet in June 2021.

Bank of Japan

Economic Developments

  1. During the period from October 2020 through March 2021, Japan's economy continued to pick up as a trend, although it remained in a severe situation due to the impact of the novel coronavirus (COVID-19) at home and abroad.

    Exports and industrial production continued to increase. Corporate profits and business sentiment had improved on the whole, reflecting a pick-up in economic activity. Business fixed investment had turned to a pick-up, although weakness had been seen in some industries. The employment and income situation remained weak due to the impact of COVID-19. Private consumption had picked up gradually from the bottom observed at the beginning of the period from April through September 2020, but the pick-up paused in the second half of the October-March period because downward pressure on consumption of services, such as eating and drinking as well as accommodations, had increased along with a resurgence of COVID-19. Housing investment had declined moderately and then almost bottomed out. Meanwhile, public investment continued to increase moderately.

  2. Regarding price developments, the year-on-year rate of change in the consumer price index (CPI, all items less fresh food) had been negative, mainly affected by COVID-19, the past decline in crude oil prices, and a decrease in hotel charges through the "Go To Travel" campaign. However, toward the end of the October-March period, the rate of decline decelerated due to the suspension of the campaign and the dissipation of the effects of the decline in crude oil prices. Inflation expectations had weakened somewhat and thereafter were more or less unchanged.

Developments in Financial Markets and Conditions

  1. In global financial markets, stock prices and long-term interest rates had risen on the whole, reflecting heightened expectations for an economic recovery, mainly on the back of an anticipated early vaccine rollout and the conduct of the additional economic measures in the United States. However, stock prices had declined and the currencies of emerging economies had depreciated, such as at the time when U.S. long-term interest rates had risen to a somewhat large degree.
  2. 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 and corporate bonds had been at extremely low levels.

    The Nikkei 225 Stock Average had increased due to improvement in investors' risk sentiment, mainly on the back of expectations for a recovery in the global economy owing to such factors as aggressive fiscal and monetary policies. It was in the range of 29,000-29,500 yen at the end of March.

    In the foreign exchange market, the yen had depreciated against the U.S. dollar on the whole during the period, mainly on the back of the rise in U.S. long-term interest rates, and was at the 110 yen level at the end of March. The yen had also depreciated against the euro due to improvement in investors' risk sentiment that mainly reflected expectations for a recovery in the global economy.

  3. With regard to corporate financing, demand for funds that stemmed mainly from a decline in sales and a rise in precautionary demand, both affected by COVID-19, remained at a high level, although an increase in demand by large firms in particular had leveled off. In this situation, although firms' financial positions had improved moderately, they continued to show weakness, mainly reflecting the decline in sales due to the impact of COVID-19. Meanwhile, in terms of supply of funds, financial institutions' lending attitudes as perceived by firms remained accommodative.
  4. The year-on-year rate of increase in the monetary base (currency in circulation plus current account balances at the Bank) continued to accelerate, and was at around 20 percent in March. That in the money stock (M2) also continued to accelerate and thereafter was at around 9.5 percent toward the end of fiscal 2020.

Monetary Policy Meetings (MPMs)

  1. Four MPMs were held in the second half of fiscal 2020.

    The Policy Board made the following judgement on economic and financial developments at the MPM held in October: "Japan's economy has picked up with economic activity resuming, although it has remained in a severe situation due to the impact of COVID-19 at home and abroad." It then deemed at the December MPM as follows: "Japan's economy has picked up, although it has remained in a severe situation due to the impact of COVID-19 at home and abroad." At the January and March MPMs, the Policy Board judged as follows: "Japan's economy has picked up as a trend, although it has remained in a severe situation due to the impact of COVID-19 at home and abroad."

  2. In the conduct of monetary policy, the Policy Board decided at the MPMs held in October through January to maintain the following guideline for market operations under QQE with Yield Curve Control.

    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 Japanese government bonds (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 the March MPM, the Assessment for Further Effective and Sustainable Monetary Easing was conducted, as described later, and the Policy Board decided upon the following guideline for market operations.

    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.

    With regard to asset purchases, the Policy Board decided at the October MPM to maintain the following guidelines.

    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 March 2021, it will conduct additional purchases with the upper limit of the amounts outstanding of 7.5 trillion yen for each asset.

    At the December MPM, the Policy Board extended the duration of the Special Program to Support Financing in Response to the Novel Coronavirus (COVID-19) and made adjustments to the program, as described later. It also decided upon 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 September 2021, it will conduct additional purchases with an upper limit on the amount outstanding of these assets of 15 trillion yen in total.

    At the January MPM, the Policy Board maintained the above guidelines for asset purchases.

    At the March MPM, the Assessment for Further Effective and Sustainable Monetary Easing was conducted, as described later, and the Policy Board decided upon 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) The Bank will purchase ETFs and J-REITs as necessary with upper limits of about 12 trillion yen and about 180 billion yen, respectively, on annual paces of increase in their amounts outstanding.
    2. (2) The Bank will purchase CP and corporate bonds with an upper limit on the amount outstanding of about 20 trillion yen in total until the end of September 2021.

    At the December MPM, the Policy Board judged it appropriate to extend the duration of the Special Program to Support Financing in Response to the Novel Coronavirus (COVID-19) by 6 months and make adjustments to the program, with a view to continuing to support financing, mainly of firms, given that such financing was likely to remain under stress for the time being while vigilance against COVID-19 continued. To this end, the Policy Board decided upon the following. In addition, it announced that, depending on the future impact of COVID-19, it would consider further extension of the program if necessary.

    Additional purchases of CP and corporate bonds

    The Bank will extend the duration of additional purchases of CP and corporate bonds by 6 months until the end of September 2021. It will continue conducting purchases of these assets with an upper limit on the amount outstanding of about 20 trillion yen in total. Out of 20 trillion yen, 15 trillion yen will be for the additional purchases of CP and corporate bonds and it will be distributed between each asset depending on market conditions.

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

    The Bank will extend the duration of the Special Funds-Supplying Operations to Facilitate Financing in Response to the Novel Coronavirus (COVID-19) by 6 months until the end of September 2021. In addition, in order to further actively encourage private financial institutions to make loans on their own in response to COVID-19 mainly to small and medium-sized firms, the Bank will remove the upper limit of funds it provides to each eligible counterparty (i.e., 100 billion yen) against loans that private financial institutions make on their own, which are part of eligible loans under this operation.

    In addition, given that economic activity and prices were projected to remain under downward pressure for a prolonged period due to the impact of COVID-19, the Policy Board decided to conduct the Assessment for Further Effective and Sustainable Monetary Easing, with a view to supporting the economy and thereby achieving the price stability target of 2 percent. In doing so, since the framework of QQE with Yield Curve Control had been working well thus far, the Policy Board judged that there was no need to change it. The Policy Board decided to assess various measures conducted under this framework and make public its findings, likely at the March 2021 MPM.

    At the March MPM, the Assessment for Further Effective and Sustainable Monetary Easing was conducted. Based on the findings, the Policy Board judged that the following basic stance on monetary policy was important: with a view to achieving the price stability target of 2 percent, the Bank will continue with monetary easing in a sustainable manner and make nimble and effective responses without hesitation to counter changes in developments in economic activity and prices, as well as in financial conditions.

    In this regard, the Policy Board decided upon the following actions.

    1. (1) With a view to enabling the Bank to cut short- and long-term interest rates nimbly while considering the impact on the functioning of financial intermediation, the Bank will establish the Interest Scheme to Promote Lending. In this scheme, interest rates, which will be linked to the short-term policy interest rate, will be applied to a certain amount of financial institutions' current account balances.
    2. (2) In order to conduct yield curve control flexibly during normal times, the Bank will make clear that the range of 10-year JGB yield fluctuations would be between around plus and minus 0.25 percent from the target level. At the same time, it will introduce "fixed-rate purchase operations for consecutive days" as a powerful tool to set an upper limit on interest rates when necessary.
    3. (3) The Bank will purchase ETFs and J-REITs as necessary with upper limits of about 12 trillion yen and about 180 billion yen, respectively, on annual paces of increase in their amounts outstanding. While these upper limits were originally set as a temporary measure in response to the impact of COVID-19, the Bank will maintain them even after COVID-19 subsides.

    With regard to the future conduct of monetary policy, the Policy Board confirmed the following at the MPMs held in October through January: "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." At the March MPM, 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) purchases of ETFs and J-REITs with upper limits of about 12 trillion yen and about 180 billion yen, respectively, on annual paces of increase in their amounts outstanding. 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

  1. As of end-March, the Bank's total assets amounted to 714.6 trillion yen, an increase of 18.2 percent from the previous year.