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Semiannual Report on Currency and Monetary Control (Summary)
Second Half of Fiscal 2021 (October 2021-March 2022)

-- The semiannual report was submitted to the Diet in June 2022.

Bank of Japan

Economic Developments

  1. During the period from October 2021 through March 2022, Japan's economy continued to pick up as a trend, despite being affected by the novel coronavirus (COVID-19) and other factors. A pick-up in the economy had temporarily become evident in the first half of the October-March period, with the number of confirmed new cases of COVID-19 being contained. Thereafter, however, some weakness had been seen in part, mainly reflecting a resurgence of COVID-19 and a rise in commodity prices.

    Exports and industrial production continued to increase as a trend, despite the remaining effects of supply-side constraints. Corporate profits continued to improve on the whole, but business sentiment had seen a pause in its improvement in the second half of the October-March period, mainly due to the impact of COVID-19 and the rise in commodity prices. Business fixed investment kept picking up, although weakness had been seen in some industries. The employment and income situation remained relatively weak on the whole, although improvement had been seen in some parts. In the first half of the October-March period, a pick-up in private consumption had become evident, with downward pressure stemming from COVID-19, particularly on services consumption, waning. Thereafter, however, the pick-up had paused due to the impact of the resurgence of COVID-19. Housing investment had been more or less flat. Public investment had been relatively weak, albeit at a high level.

  2. Regarding price developments, the year-on-year rate of change in the consumer price index (CPI, all items less fresh food), despite continuing to be affected by a reduction in mobile phone charges, had increased in positive territory, reflecting price rises in energy and other items, and had been in the range of 0.5-1.0 percent at the end of the October-March period. Inflation expectations, particularly short-term ones, had risen.

Developments in Financial Markets and Conditions

  1. In global financial markets, amid concern over acceleration in the pace of reduction in monetary accommodation in advanced economies, long-term interest rates had risen significantly. Risk asset prices had been firm through the end of 2021. Since the turn of the year, however, as long-term interest rates had increased significantly, they generally had declined, with considerable fluctuations due to uncertainties over the situation surrounding Ukraine. Meanwhile, international commodity prices had risen substantially, reflecting factors such as improvement in the outlook for global demand and concern over supply declines associated with geopolitical risks.

  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, 10-year Japanese government bond (JGB) yields 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 been firm until early January, mainly on the back of favorable financial results. Thereafter, reflecting rises in U.S. and European interest rates and heightened uncertainties over factors such as the situation surrounding Ukraine, it had fluctuated significantly, as seen in relatively large declines when investors' sentiment deteriorated globally. The Nikkei Stock Average was in the range of 27,500-28,000 yen at the end of March.

    In the foreign exchange market, the yen had depreciated against the U.S. dollar, mainly due to a widening of the yield differential between Japan and the United States and dollar purchasing by Japanese importers given factors such as the rise in commodity prices. The U.S. dollar was in the range of 121-122 yen at the end of March. The yen had also depreciated against the euro on the whole during the October-March period, reflecting a rise in European interest rates, although it had temporarily appreciated due to a worsening of the situation surrounding Ukraine.

  3. With regard to corporate financing, demand for working capital had risen particularly in the CP market, reflecting raw material cost increases, whereas precautionary demand for liquidity due to the impact of COVID-19 had subsided on the whole. With respect to firms' financial positions, weakness remained -- particularly for firms in industries that are susceptible to the impact of COVID-19, as well as for small and medium-sized ones -- and these positions had been affected by raw material cost increases through the end of the fiscal year; however, they continued on an improving trend on the whole on the back of a pick-up in Japan's economy. 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), while decelerating compared with a while ago, remained at somewhat less than 10 percent. That in the money stock (M2), while also decelerating compared with a while ago, had been in the range of around 3.5-4.5 percent.

Monetary Policy Meetings (MPMs)

  1. Four MPMs were held in the second half of fiscal 2021.

    Regarding economic and financial developments, the Policy Board judged at the October and December MPMs that "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." It then deemed at the January MPM that "a pick-up in Japan's economy has become evident as the impact of COVID-19 at home and abroad has waned gradually." The Policy Board judged at the March MPM that "Japan's economy has picked up as a trend, although some weakness has been seen in part, mainly due to the impact of COVID-19."

  2. In the conduct of monetary policy, the Policy Board decided at all the MPMs held in the second half of fiscal 2021 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 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 to maintain the following guidelines at the MPMs held in October through January.

    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 exchange-traded funds (ETFs) and Japan real estate investment trusts (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 March 2022.

    Based on the decisions made at the December MPM regarding the Special Program to Support Financing in Response to the Novel Coronavirus (COVID-19), as described later, the Policy Board decided at the March MPM 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 March 2022. From April onward, it will purchase these assets at about the same pace as prior to the COVID-19 pandemic, so that their amounts outstanding will gradually return to pre-pandemic levels, namely, about 2 trillion yen for CP and about 3 trillion yen for corporate bonds.

    At the December MPM, the Policy Board confirmed the following with regard to financial conditions.

    Financial conditions in Japan have improved on the whole, despite the continued significant impact of COVID-19 on domestic and overseas economies. With regard to financial conditions surrounding large firms, issuance conditions for CP and corporate bonds have been favorable, and precautionary demand for liquidity has subsided in the loan market. Regarding small and medium-sized firms, their financial positions have been on an improving trend on the whole, but weakness has remained in some segments, such as the face-to-face services industry.

    Given these developments, the Policy Board decided to extend the Special Program to Support Financing in Response to the Novel Coronavirus (COVID-19) in part by six months until the end of September 2022, with a view to continuing to support financing, mainly of small and medium-sized firms. The details of the decisions are as follows.

    1. (1) Special Funds-Supplying Operations to Facilitate Financing in Response to the Novel Coronavirus (COVID-19)
      1. a) Regarding the fund-provisioning against loans that financial institutions make on their own ("non-government-supported loans") in response to COVID-19, mainly to small and medium-sized firms, the Bank will extend the implementation period by six months under the current terms and conditions.
      2. b) Regarding the fund-provisioning against loans that financial institutions make on the back of government support ("government-supported loans") in response to COVID-19, mainly to small and medium-sized firms, the Bank will extend the implementation period by six months under the revised terms and conditions. Specifically, from April 2022 onward, this fund-provisioning will fall under Category III in the Interest Scheme to Promote Lending, for which the applied interest rate is 0 percent, and the amount to be added to the Macro Add-on Balances in current accounts held by financial institutions at the Bank will be the amount outstanding of funds they receive. In accordance with the revised terms and conditions, the Bank will continue to provide funds to financial institutions against government-supported loans they make.
      3. c) The Bank will complete the fund-provisioning against private debt pledged as collateral, which mainly consists of debt issued by large firms and housing loans, at the end of March 2022 as scheduled.
    2. (2) Purchases of CP and corporate bonds
      The Bank will complete its additional purchases of CP and corporate bonds at the end of March 2022 as scheduled. From April 2022 onward, it will purchase about the same amount of CP and corporate bonds as prior to the COVID-19 pandemic, so that the amounts outstanding of these assets will decrease gradually to the pre-pandemic levels, namely, about 2 trillion yen for CP and about 3 trillion yen for corporate bonds.

    With regard to the future conduct of monetary policy, the Policy Board confirmed the following at all the MPMs held in the second half of fiscal 2021: "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 736.3 trillion yen, an increase of 3.0 percent from the previous year.