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Semiannual Report on Currency and Monetary Control (Summary)
First Half of Fiscal 2010 (April-September 2010)

The semiannual report, which includes this summary, was submitted to the Diet in December 2010.

Bank of Japan

Economic Developments

1. Japan's economy continued to show signs of a recovery mainly due to the improvement in overseas economic conditions and the effects of various policy measures, but the pace of recovery slowed through the end of the first half of fiscal 2010.

Exports and production increased from the preceding fiscal half, despite remaining more or less unchanged from the summer. Business fixed investment showed signs of picking up. The employment and income situation remained severe, but the degree of severity eased somewhat. Against this backdrop, private consumption, notably durable goods consumption, continued to pick up, mainly due to various policy measures. Housing investment leveled out. Meanwhile, public investment decreased.

2. Domestic corporate goods prices, amid a persistent slack in supply and demand conditions for products, slightly increased in the April-June quarter on a year-on-year basis, reflecting the rise in commodity prices. They decreased somewhat in the July-September quarter, mainly due to the drop in commodity prices and the appreciation of the yen. Consumer prices (excluding fresh food) declined on a year-on-year basis due to the substantial slack in the economy as a whole, but the moderating trend in the pace of decline continued.

Financial Developments

3. In the money market, short-term interest rates remained at low levels against the backdrop of the Bank of Japan's continued provision of ample funds. Compared with the preceding fiscal half, interest rates -- especially longer-term ones, which, in contrast with short-term interest rates, still had some room to fall -- decreased, albeit slightly.

In the bond market, yields on 10-year government bonds temporarily fell to levels below 0.9 percent in late August for the first time since fiscal 2003, due mainly to weak stock prices and the general downtrend in interest rates overseas. Yields subsequently rose briefly on the back of profit-taking by investors but then declined to a range of 0.90-0.95 percent again toward the end of September.

In the stock market, stock prices were somewhat sluggish on the whole, with the Nikkei 225 Stock Average temporarily falling below 9,000 yen, due mainly to the appreciating trend of the yen as well as concern about fiscal problems in some European countries and the future of the global economy.

In the foreign exchange market, the yen was generally on an upward trend against the U.S. dollar. In this situation, foreign exchange intervention was conducted in September for the first time in six and a half years.

4. In terms of credit supply, financial institutions' lending attitudes as perceived by firms improved to the extent that the number of firms that saw financial institutions' lending attitudes as"accommodative" exceeded the number of firms that saw them as"severe." Meanwhile, issuing conditions for low-rated corporate bonds became favorable, and those for CP and other corporate bonds remained favorable.

Firms' demand for external funds continued to decline on a year-on-year basis, because demand for both working capital and business fixed investment declined and some firms reduced the on-hand liquidity that they had accumulated.

In these circumstances, in terms of firms' funding, the amount outstanding of lending by domestic commercial banks (adjusted to exclude special factors) continued to decline. The amount outstanding of CP issued remained below the previous year's level, partly because of the decline in firms' need to fund working capital. On the other hand, the amount outstanding of corporate bonds issued remained above the previous year's level under the favorable issuing conditions.

5. The monetary base (currency in circulation plus current accounts at the Bank) continued to exceed the level of the previous year. Specifically, current account balances at the Bank continued to register high rates of year-on-year growth reflecting the Bank's provision of ample funds. The year-on-year rate of growth in the money stock (M2) was around 3.0 percent.

Monetary Policy Meetings (MPMs)

6. Nine MPMs were held in the first half of fiscal 2010.

At the MPM held on April 6 and 7, 2010, the Policy Board judged that Japan's economy had been picking up mainly due to improvement in overseas economic conditions and to various policy measures, although there was not yet sufficient momentum to support a self-sustaining recovery in domestic private demand. At the MPMs from May through September, the Policy Board judged that Japan's economy showed further signs of a moderate recovery.

7. In the conduct of monetary policy, the Policy Board decided at all the MPMs from April through September to maintain the guideline for money market operations unchanged:"The Bank of Japan will encourage the uncollateralized overnight call rate to remain at around 0.1 percent."

In addition, at all the MPMs, the Policy Board expressed its recognition that Japan's economy faced the critical challenge of overcoming deflation and returning to a sustainable growth path with price stability, and explained that, to that end, the Bank would continue to consistently make contributions as the central bank. On that basis, at the MPM held on September 6 and 7, the Policy Board reaffirmed and clearly stated that the Bank would carefully examine the outlook for economic activity and prices, and, if judged necessary, take policy actions in a timely and appropriate manner.

Meanwhile, at the MPM held on April 30, based on the recognition that the foundations for economic growth would need strengthening given the current economic conditions, the Policy Board members shared the view that the Bank should take a new step to achieve such a strengthening of the foundations for economic growth. In light of those discussions, and with a view to strengthening the foundations for economic growth, the Chairman instructed the staff to examine and report back to the Policy Board possible ways to support private financial institutions in terms of fund provisioning. At the MPM held on May 20 and 21, based on a report from the staff, the Bank decided to compile and announce a preliminary framework for the fund provisioning, and to proceed with the examination of its operational details. At the MPM held on June 14 and 15, the Policy Board decided to introduce a fund-provisioning measure to support strengthening the foundations for economic growth to further stimulate the efforts of firms and financial institutions to foster economic growth in Japan.

At the unscheduled MPM held on May 10, the Policy Board decided, in view of the reemergence of strains in U.S. dollar short-term funding markets in Europe, and as part of the coordinated central bank actions, to reestablish a temporary U.S. dollar swap agreement with the Federal Reserve Bank of New York and resume U.S. dollar funds-supplying operations against pooled collateral.

At the unscheduled MPM held on August 30, in light of the further heightening of uncertainty about the economic outlook, especially for the United States, and of the continued instability in the foreign exchange and stock markets, the Policy Board decided to newly introduce a six-month term in the fixed-rate funds-supplying operation against pooled collateral and substantially increase the amount of funds to be provided through the operation, thereby encouraging a decline in market interest rates and further enhancing easy monetary conditions.

The Bank's Balance Sheet

8. As of the end of September 2010, the Bank's total assets amounted to 120.3 trillion yen, an increase of 3.4 percent from the previous year.