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Semiannual Report on Currency and Monetary Control (Summary)
Second Half of Fiscal 2010 (October 2010-March 2011)

The semiannual report was submitted to the Diet in June 2011.

Bank of Japan

Economic Developments

1. Looking back at the second half of fiscal 2010, before the Great East Japan Earthquake, Japan's economy was gradually emerging from a pause in recovery experienced through the end of 2010, against the backdrop of the improvement in overseas economies. Exports and production weakened somewhat temporarily through the end of 2010, but then showed signs of resuming their uptrend. Business fixed investment and housing investment started to pick up. The employment and income situation remained severe, but the degree of severity eased somewhat. Private consumption remained weakened through the end of 2010 due to a reverse following the earlier rush in demand, and showed signs of picking up after the turn of the year. Meanwhile, public investment continued to decline.

After the earthquake on March 11, however, Japan's economy faced strong downward pressure, mainly on the production side, due to damage to production facilities, supply chain disruptions, and electricity supply constraints; exports as well as domestic shipments and sales suffered accordingly.

2. Domestic corporate goods prices remained on an uptrend through the end of fiscal 2010, mainly due to the increase in international commodity prices. The year-on-year rate of decline in consumer prices (excluding fresh food) continued to slow.

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. The market temporarily experienced some turbulence immediately after the earthquake, but then regained stability amid the Bank's provision of a large amount of funds, including those through same-day funds-supplying operations.

Long-term interest rates rose through December 2010 on the back of the rise in U.S. interest rates and investors' adjustments of their positions. Long-term interest rates generally stayed in a narrow range thereafter.

Stock prices generally remained firm prior to the earthquake, partly due to buoyant U.S. stock prices and increased demand from foreign investors. After the earthquake, the Nikkei 225 Stock Average temporarily plunged below 8,500 yen, and recovered to around 9,500 yen at the end of March 2011.

In foreign exchange markets, the yen had appreciated against the U.S. dollar until October 2010. Since November, however, mainly because market expectations of further monetary easing in the United States receded, the yen followed a depreciating trend and temporarily reached the range of 84-85 yen. The yen then continued to be traded in the range of 80-84 yen against the dollar, but hit the range of 76-77 yen, a historical high, after the earthquake. In this situation, the authorities of the United States, the United Kingdom, Canada, and Japan, together with the European Central Bank, undertook concerted intervention in exchange markets.

4. In terms of credit supply, financial institutions' lending attitudes as perceived by firms continued to improve. Issuing conditions for CP generally remained favorable. Meanwhile, in the corporate bond market, issuing conditions had become more favorable before the earthquake, but new issuances paused thereafter.

Firms' demand for external funds declined before the earthquake, because demand for both working capital and business fixed investment declined and some firms reduced the on-hand liquidity that they had accumulated. After the earthquake, there were signs at some firms of increased demand for working capital and of the build-up of on-hand liquidity.

In terms of firms' funding, the amount outstanding of lending by domestic commercial banks continued to decline. On the other hand, the amount outstanding of corporate bonds issued remained above the previous year's level, and the pace of decline in the amount outstanding of CP issued followed a decelerating trend.

5. The monetary base (currency in circulation plus current accounts at the Bank) continued to exceed the level of the previous year. The year-on-year growth rate rose sharply after the earthquake reflecting the Bank's provision of ample funds. The year-on-year rate of growth in the money stock (M2) remained in the range of 2.0-3.0 percent.

Monetary Policy Meetings (MPMs)

6. Seven MPMs were held in the second half of fiscal 2010.

At the MPM held on October 4 and 5, 2010, the Policy Board judged that, although Japan's economy still showed signs of a moderate recovery, the pace of recovery was decelerating partly because of the slowdown in overseas economies and the effects of the yen's appreciation on business sentiment. Subsequently, at the MPMs from November 2010 through January 2011, the Policy Board judged that Japan's economy still showed signs of a moderate recovery, but the recovery seemed to be pausing. At the February MPM, the Policy Board judged that Japan's economy was gradually emerging from the deceleration phase. At the March MPM, while maintaining the baseline scenario presented in the February MPM, the Policy Board noted that the damage caused by the earthquake had been geographically widespread, and thus, for the time being, production was likely to decline and there was concern that business and household sentiment might deteriorate.

7. In the conduct of monetary policy, at the MPM held on October 4 and 5, in order to further enhance monetary easing, the Policy Board decided to implement a comprehensive monetary easing policy composed of three measures: (1) a change in the guideline for money market operations; (2) clarification of the policy time horizon based on the "understanding of medium- to long-term price stability"; and (3) establishment of the Asset Purchase Program.

The Policy Board decided at all the subsequent MPMs through March 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 to 0.1 percent."

At the MPMs held on October 28 and in November, the Policy Board decided the principal terms and conditions for operational details of the Asset Purchase Program, such as the total amount of the Program, the maximum outstanding amount for each asset to be purchased, and the method of purchase.

At the March MPM immediately after the earthquake, the Policy Board decided to further enhance monetary easing. First, it confirmed that the Bank would provide ample funds sufficient to meet demand in financial markets and would do its utmost to ensure financial market stability. Moreover, with a view to preventing any deterioration in business sentiment and heightening of risk aversion in financial markets from adversely affecting economic activity, the Policy Board decided that the Bank would increase the amount of the Asset Purchase Program, mainly of the purchases of risk assets, by about 5 trillion yen to about 40 trillion yen in total.

Meanwhile, at the December MPM, in response to the proposal by the Federal Reserve Bank of New York to extend its temporary U.S. dollar liquidity swap arrangements with several central banks including the Bank through August 1, 2011, the Policy Board decided to extend the effective period as proposed and to take necessary steps.

The Bank's Balance Sheet

8. As of the end of March 2011, the Bank's total assets amounted to 142.4 trillion yen, an increase of 16.9 percent from the previous year.