Semiannual Report on Currency and Monetary Control (Summary)
Second Half of Fiscal 2007
The semiannual report, which includes this summary, was submitted to the Diet in June 2008.
Bank of Japan
Economic Developments
1. Japan's economy expanded moderately as a trend in the second half of fiscal 2007 (October 2007-March 2008), but the pace of growth slowed gradually mainly due to a drop in housing investment and the effects of high energy and materials prices.
Exports continued to increase against the background of the expansion of overseas economies. Meanwhile, public investment was sluggish. Housing investment dropped substantially, affected by the coming into force of the revised Building Standard Law, but it started to recover in the January-March quarter of 2008. In this situation, corporate profits leveled off, although they remained high, partly due to the effects of high energy and materials prices, and business sentiment gradually became cautious. Against this background, the pace of increase in business fixed investment slowed gradually, although it continued to trend upward. Private consumption was firm in a situation where household income continued rising moderately. With these developments in demand both at home and abroad, production posted a relatively strong gain in the second half of 2007, and was more or less flat in the January-March quarter of 2008.
2. Domestic corporate goods prices continued to increase mainly due to the effects of the rise in international commodity prices, and their year-on-year rate of increase rose to 3-4 percent. The year-on-year rate of increase in consumer prices (excluding fresh food) rose to somewhat over 1 percent, reflecting the rise in prices of petroleum products and food products.
Financial Developments
3. There was some nervousness in the money market, reflecting the fact that supply and demand conditions for funds tightened in U.S. and European counterparts due to the U.S. subprime mortgage problem. However, disruptions in U.S. and European financial markets had limited effects on the Japanese money market as a whole. The uncollateralized overnight call rate was generally stable at around 0.5 percent, which was the target level for the Bank's money market operations. The Bank monitored developments in overseas financial markets closely in cooperation with other central banks, and provided liquidity as appropriate by means of various operational tools to ensure the stability of money market rates.
Long-term interest rates were on a downward trend, falling to 1.2-1.3 percent in mid-March, mainly reflecting a decline in long-term interest rates in the United States and Europe and more cautious views about the Japanese economy.
Stock prices fell substantially, mainly reflecting the worldwide decline in stock prices and the appreciation of the yen. The Nikkei 225 Stock Average fell to the 11,000-12,000 yen range in mid-March, rising to the 12,000-13,000 yen range thereafter and remaining there through the end of the month.
While the value of the dollar against major currencies was declining mainly reflecting heightened uncertainty regarding the outlook for the U.S. economy due to the subprime mortgage problem, the value of the yen was on an upward trend, albeit with some fluctuations. From late February to mid-March, the yen appreciated against the U.S. dollar, reaching the 95-96 yen level temporarily, and was generally traded at around 100 yen thereafter.
4. The amount outstanding of lending by private banks (after adjustment for special items) continued to increase. The amount outstanding of CP and corporate bonds issued was above the previous year's level. Lending attitudes of private banks continued to be generally accommodative. Meanwhile, firms' demand for credit was more or less flat in a situation where corporate demand for external funds was not very strong due to ample cash flow. Firms' liquidity positions were favorable on the whole, although the situation for small firms deteriorated somewhat.
5. The year-on-year rate of change in the monetary base (currency in circulation plus current accounts at the Bank) was slightly over 0 percent because the year-on-year rate of increase in banknotes in circulation, which makes up most of the monetary base, continued to be in the 1-2 percent range while the outstanding balance of current accounts at the Bank was below the previous year's level.
The year-on-year growth rate of the money stock (M 2+CDs) remained around 2 percent.
Monetary Policy Meetings (MPMs)
6. Seven MPMs were held in the second half of fiscal 2007.
At MPMs in October and November 2007, the Policy Board was of the view that "Japan's economy is expanding moderately" and adopted this as their overall assessment of the economy in"The Bank's View" in theMonthly Report of Recent Economic and Financial Developments. Thereafter, given the substantial drop in housing investment and some other factors, the Policy Board revised their assessment: at MPMs in December 2007 through February 2008, the Policy Board was of the view that"Japan's economy is expanding moderately as a trend, although the pace of growth seems to be slowing mainly due to the drop in housing investment." At the MPM in March, the Policy Board revised its assessment again as high energy and materials prices had exerted downward pressure on corporate profits and wages: the Policy Board was of the view that "Japan's economy is expanding moderately as a trend, although the pace of growth has been slowing mainly due to the drop in housing investment and the effects of high energy and materials prices."
7. With regard to the conduct of monetary policy, given the above economic and financial developments, the Policy Board decided at MPMs from October 2007 through March 2008 to maintain the guideline for money market operations unchanged as follows:"The Bank of Japan will encourage the uncollateralized overnight call rate to remain at around 0.5 percent."
The Bank's Balance Sheet
8. As of the end of March 2008, the Bank's total assets amounted to 113.4 trillion yen, an increase of 0.6 percent from the previous year.