Semiannual Report on Currency and Monetary Control (Summary)
First Half of Fiscal 2005
The semiannual report, which included this summary, was submitted to the Diet in December 2005.
Bank of Japan
Economic Developments
1. Japan's economy continued to recover, having emerged from its temporary pause in the first half of fiscal 2005 (April-September 2005).
Although the momentum of growth in exports to China remained weak through the first quarter of fiscal 2005, exports as a whole continued to increase moderately against the background of the expansion of overseas economies. Industrial production was also on an uptrend with some fluctuations, mainly reflecting the completion of inventory adjustments in IT-related sectors. Business fixed investment continued to increase against the background of high corporate profits. As for the employment and income situation in the household sector, household income rose moderately as the number of employees was increasing and wages had begun to pick up. In this situation, private consumption was generally steady, albeit with some fluctuations.
2. Domestic corporate goods prices continued to increase on a year-on-year basis reflecting the strengthening of commodity prices at home and abroad 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 generally, 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 first half of fiscal 2005. Interest rates on term instruments were also stable at low levels.
Long-term interest rates were on a declining trend from the beginning of fiscal 2005 reflecting weaker-than-expected domestic economic indicators and a fall in interest rates in the United States and Europe, falling to a little over 1.15 percent by the end of June. Thereafter they began to rise, albeit with some fluctuations, reaching the 1.45-1.50 percent level, partly in response to improvement in domestic economic indicators and a rise in stock prices.
The Nikkei 225 Stock Average declined through mid-May, then rose through the end of September, reaching around 13,500 yen for the first time since May 2001, reflecting increased expectations of economic recovery in view of improved domestic economic indicators.
The yen appreciated to the 104-105 yen level against the U.S. dollar through early May, partly due to increasing expectations for an early revaluation of the renminbi. Thereafter it declined to the 113-114 yen level by the end of September 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 (after adjustment for special items) had been slowing moderately, and from August the year-on-year rate of change in their lending turned slightly positive. The amount outstanding of CP and corporate bonds issued was around or above the previous year's level. The lending attitude of private banks became more accommodative on the whole. The pace of decline in firms' credit demand became somewhat moderate in a situation where the economy continued to recover, although firms continued to reduce their debts.
5. After increasing slightly in April 2005, the year-on-year growth rate of the monetary base (currency in circulation plus current accounts at the Bank) decreased somewhat, and was 1.7 percent in September. 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) was generally in the range of 1.5-2.0 percent.
Monetary Policy Meetings (MPMs)
6. Eight MPMs were held in the first half of fiscal 2005.
In the first half of fiscal 2005, members of the Policy Board revised their April assessment,"Japan's economy continues a recovery trend, albeit with adjustments in IT-related sectors," to"Japan's economy continues to recover, with the progress of adjustments in IT-related sectors" in the summer. In September, the assessment was revised again to"Japan's economy continues to recover," as adjustments in IT-related sectors had almost been completed.
At the MPM on April 28, 2005, members decided the text of the Outlook for Economic Activity and Prices (the Outlook Report) for fiscal 2005 and 2006. In the outlook for fiscal 2005 and 2006 in this report, members indicated that Japan's economic recovery was likely to gradually gather momentum from the middle of 2005 as the effects of adjustments in IT-related sectors diminished, and that thereafter the economy was expected to follow a sustainable growth path, albeit at a moderate pace. At the MPM on July 12 and 13, members made an interim assessment in relation to the outlook presented in the Outlook Report released in April. Their assessment was that Japan's economy had been broadly in line with the outlook and was expected to continue to be so.
7. With regard to the conduct of monetary policy, given the above economic and financial developments, members decided 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 April-September 2005.
At the MPM in May, members decided to add a new sentence to the proviso in the guideline for money market operations, stating that when it was judged that liquidity demand was exceptionally weak considering such factors as responses of financial institutions to the Bank's funds-supplying operations, there might be cases where the balance of current accounts temporarily fell short of the target. This decision was made in view of the fact that undersubscription, where financial institutions' bids fell short of the Bank's offers, had occurred frequently in the Bank's funds-supplying operations in a situation where, as concern about financial system stability was abating, financial institutions were feeling more strongly that there was an abundance of liquidity in financial markets.
The Bank's Balance Sheet
8. As of the end of September 2005, the Bank's balance sheet increased by 6.2 percent from the previous year to 148.1 trillion yen.