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Semiannual Report on Currency and Monetary Control (Summary)
First Half of Fiscal 2002

The semiannual report, which included this summary, was submitted to the Diet in December 2002.

January 2003
Bank of Japan

Economic Developments

1. Japan's economy almost stabilized as a whole in the first half of fiscal 2002. Exports increased substantially due to the recovery of overseas economies. Production recovered owing to the increase in exports and partly also to the progress in inventory adjustment. However, domestic private demand remained weak, and uncertainty regarding the global economy increased from the summer. As a result, the economy did not show clear signs of a recovery.

2. Regarding price developments, the weakness in domestic demand placed constant downward pressure on prices, although a rise in capacity utilization rates supported them. In addition, supply-side factors, such as deregulation, streamlining of distribution channels, and technological innovation, especially in machinery, continued to exert downward pressure. Against this background, domestic wholesale prices were almost flat during the first three months of fiscal 2002, but weakened slightly from the summer. Consumer prices remained on a gradual downtrend.

As for land prices, both commercial and residential land prices continued to decline.

Financial Developments

3. The outstanding balance of current accounts at the Bank was generally around 15 trillion yen in the first half of fiscal 2002, excluding the period from April to early May and the last business day of September.

In the money market, the uncollateralized overnight call rate was stable at extremely low levels at around 0.001-0.002 percent due to the Bank's ample provision of funds. Short-term interest rates on instruments with relatively long maturities also moved at low levels throughout the first half of fiscal 2002.

Long-term interest rates stayed in the range of around 1.0-1.4 percent. Stock prices were firm until the end of May, but declined from June with the fall in overseas stock prices, and they recorded a new post-bubble low at the beginning of September.

The yen appreciated against the U.S. dollar in early summer, but depreciated thereafter. It remained steady with small fluctuations against the euro until the end of August, but declined somewhat in September.

4. Lending by private banks continued to decline by 2-3 percent year on year. Firms' demand for funds remained on a downtrend due to the following factors. First, firms were still inclined to reduce borrowing as part of their efforts to improve their financial position. And second, they continued to reduce business fixed investment. Private banks maintained their stance of increasing lending to firms with good performance, while remaining cautious about lending to firms with low creditworthiness. Banks' lending attitude as perceived by small firms continued to be severe.

5. The year-on-year growth rate of the monetary base (currency in circulation plus current account balances at the Bank) slowed slightly after reaching a peak in April, but overall it continued to grow rapidly throughout the first half of fiscal 2002. As a result, the ratio of the monetary base to nominal GDP reached a level higher than at any time except during World War II.

The money stock (M2+CDs) maintained a high year-on-year growth rate relative to economic activity. The inflow of funds, mainly from investment trusts, pushed up the growth rate, despite continued downward pressure from the decrease in bank lending. In detail, M1 (cash currency plus deposit money) increased significantly against the background of extremely low interest rates and the removal of blanket deposit insurance for time deposits.

Monetary Policy Meetings (MPMs)

6. Eight MPMs were held in the first half of fiscal 2002. Members of the Policy Board gradually revised their assessment of the economy upward during April to July, given that exports and production had increased. Thereafter, they maintained their economic assessment unchanged at the MPMs in August and September.

7. At all the MPMs during April-September, members decided unanimously to maintain the guideline for money market operations aiming at an outstanding balance of current accounts at the Bank of around 10 to 15 trillion yen. This was because they considered it necessary that the Bank support the improvement in economic activity by continuing decisive monetary easing measures through provision of ample liquidity to the money market.

8. At the MPM on April 10 and 11, members decided to reinstate the contingency clause in the guideline for money market operations as it was before the meeting on February 28, 2002:"Should there be a risk of financial market instability, such as a surge in liquidity demand, the Bank will provide more liquidity irrespective of the guideline above." This was because there had not been any significant disruption in the money market at the turn of the fiscal year.

9. At the MPM on September 17 and 18, members decided to release a public statement immediately after the meeting because the Bank's conduct of monetary policy was attracting considerable attention both at home and abroad. The public statement explained the factors behind the Bank's policy decision-making, such as its view of the financial and economic situation and its monetary policy stance.

The Bank's Balance Sheet

10. In the first half of fiscal 2002, the size of the Bank's balance sheet continued to exceed that of the previous year. This was because the amount of banknotes issued continued to record high growth, and also the outstanding balance of current accounts at the Bank increased significantly reflecting the Bank's provision of ample funds. Total assets on the Bank's balance sheet at the end of September were 124.5 trillion yen, an increase of 7.7 percent from the previous year. The Bank continued to make efforts to maintain the quality of its balance sheet by enhancing both the liquidity and the soundness of its assets.