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Semiannual Report on Currency and Monetary Control (Summary)
Second Half of Fiscal 2004

The semiannual report, which included this summary, was submitted to the Diet in June 2005.

Bank of Japan

Economic Developments

1. Japan's economy continued a recovery trend in the second half of fiscal 2004 (October 2004-March 2005), although there were some effects of adjustments in IT-related sectors, mainly in production.

The pace of increase in exports started to slow and industrial production began to show some weakness around the summer of 2004, reflecting the effects of adjustments in IT-related sectors. With progress in the adjustments, however, exports showed movements indicating that they were picking up and production stopped declining from around the beginning of 2005. Business fixed investment continued to be on a rising trend with an improvement in corporate profits. Private consumption was generally steady in a situation where household income had clearly stopped declining.

2. Domestic corporate goods prices continued to increase on a year-on-year basis reflecting the strengthening of overseas and domestic commodity prices and the improvement in supply and demand conditions. On the other hand, consumer prices (excluding fresh food) continued to decline slightly on a year-on-year basis, partly due to the reduction in electricity and telephone charges.

Financial Developments

3. In the money market, the uncollateralized overnight call rate was stable at extremely low levels of 0.001-0.002 percent generally throughout the second half of fiscal 2004. Interest rates on term instruments were also stable at low levels.

Long-term interest rates moved in a relatively narrow range of around 1.3-1.6 percent.

Stock prices were almost flat with some fluctuations until the beginning of 2005, and then began to rise in February, partly because cautious views about the economic outlook had dissipated somewhat reflecting an improvement in Japanese economic indicators, later reaching almost 12,000 yen (the Nikkei 225 Stock Average), which was close to the highest level in fiscal 2004. Thereafter, stocks were traded in the range of 11,500-12,000 yen until the end of fiscal 2004.

The yen appreciated to the 102-103 yen level against the U.S. dollar through early December reflecting such factors as concerns over the U.S."twin deficits." Thereafter it moved in the range of 102-106 yen, and then depreciated to the 107-108 yen level toward the end of fiscal 2004 in a situation where market participants were more conscious of interest rate differentials between Japan and the United States as a factor contributing to the appreciation of the dollar.

4. The pace of year-on-year decline in lending by private banks was on a moderate decreasing trend, and the amount outstanding of CP and corporate bonds issued was above the previous year's level. The lending attitude of private banks became more accommodative on the whole. In a situation where firms continued to reduce their debts to improve their financial strength, the improvement in credit demand in the private sector seemed to have stopped temporarily.

5. The year-on-year growth rate of the monetary base (currency in circulation plus current accounts at the Bank) slowed to 2.0 percent in March 2005. The ratio of the monetary base to nominal GDP remained at an extremely high level.

The year-on-year growth rate of the money stock (M2+CDs) remained at around 2.0 percent.

Monetary Policy Meetings (MPMs)

6. Seven MPMs were held in the second half of fiscal 2004.

In the second half of fiscal 2004, members of the Policy Board revised their assessment from "Japan's economy continues to recover" to "Japan's economy continues a recovery trend, although there seem to be somewhat weak movements mainly in production" toward the end of 2004. In March 2005, the assessment was revised to"Japan's economy continues a recovery trend, albeit with adjustments in IT-related sectors," partly because there were some movements indicating that production had stopped declining.

At the MPM on October 29, 2004, members decided the text of the Outlook for Economic Activity and Prices (the Outlook Report) for fiscal 2004 and 2005. In the outlook for fiscal 2004 and 2005 in this report, members indicated that Japan's economy was expected to continue recovering and gradually move to a sustainable growth path. At the MPM in January 2005, members made an interim assessment in relation to the outlook presented in the Outlook Report released in October 2004. Their assessment was that Japan's economy had deviated slightly below the outlook recently, but was expected to be broadly in line with it.

7. With regard to the conduct of monetary policy, given the above economic and financial developments, members decided, by unanimous vote, to maintain the guideline for money market operations aiming at an outstanding balance of current accounts at the Bank of around 30 to 35 trillion yen at all MPMs during October 2004-March 2005.

The Bank's Balance Sheet

8. As of the end of March 2005, the Bank's balance sheet increased by 0.8 percent from the previous year to 150.5 trillion yen. This was because, in the second half of fiscal 2004, the Bank continued to provide ample liquidity to the market in accordance with the guideline for money market operations, whose main operating target was the outstanding balance of current accounts at the Bank. The amount outstanding of the Bank's loans extended under Article 38 of the Bank of Japan Law (the so-called"special loans") decreased to zero, as compared with 141.2 billion yen as of end-March 2004.