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Semiannual Report on Currency and Monetary Control (Summary)
First Half of Fiscal 2011 (April-September 2011)

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

Bank of Japan

Economic Developments

1. Looking back at the first half of fiscal 2011, Japan's economy continued to face strong downward pressure for some time, mainly on the production side, against the background of supply-side constraints caused by the effects of the Great East Japan Earthquake. The economy headed toward a pick-up thereafter, as efforts to restore damaged facilities and supply chains progressed and supply-side constraints eased.

After declining sharply following the earthquake, production and exports picked up with the easing of supply-side constraints, almost recovering their pre-quake levels toward the summer. In this situation, domestic private demand also weakened after the earthquake, but started picking up partly due to improvement in household and business sentiment.

2. The rate of increase in domestic corporate goods prices rose on a year-on-year basis compared with the second half of fiscal 2010, mainly due to effects of the rise in international commodity prices observed toward spring 2011. The year-on-year rate of decline in consumer prices (all items less fresh food) continued to slow, and was around 0 percent in the July-September quarter.

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 second half of fiscal 2010, the rates declined, albeit slightly, mainly in longer-term interest rates with relative room for a further decline.

Long-term interest rates rose temporarily to around 1.3 percent in early April 2011, partly due to concerns about an increase in the issuance of Japanese government bonds (JGBs). As such concerns had subsided somewhat, they declined moderately thereafter and stayed at around 1.0 percent, due in part to the decline in U.S. interest rates.

The Nikkei 225 Stock Average temporarily recovered to the 10,000 yen level reflecting the faster-than-expected recovery from the earthquake disaster. It fell substantially thereafter, however, temporarily plunging below 8,500 yen in late September. The fall reflected the appreciation of the yen amid sharp adjustments that had been observed in U.S. and European stock prices since August.

In foreign exchange markets, the yen continued to appreciate against the U.S. dollar on the whole, partly due to a decline in U.S. interest rates against the background of rising concern over a slowdown in the U.S. economy. It started to depreciate temporarily triggered by a foreign exchange intervention in early August, but appreciated again with a decline in U.S. interest rates and recorded a historical high in mid-August. The yen's exchange rate against the U.S. dollar moved within a narrow range of 76-77 yen thereafter, due in part to vigilance regarding a possible foreign exchange intervention.

4. In terms of credit supply, financial institutions' lending attitudes as perceived by firms continued to be on an improving trend. In the corporate bond market, issuing conditions were generally favorable, as new issuances resumed after a pause following the earthquake and the variety of corporate bond issuers increased. Meanwhile, issuing conditions for CP generally remained favorable.

As for credit demand, firms' demand for working capital rose.

In terms of firms' funding, the rate of decline in the amount outstanding of lending by domestic commercial banks continued to be on a decelerating trend. The amount outstanding of corporate bonds issued exceeded its previous year's level, and that of CP issued either exceeded or was around its previous year's level.

5. The monetary base (currency in circulation plus current accounts at the Bank) significantly exceeded its previous year's level. The year-on-year rate of growth in the money stock (M2) remained around 2.5-3.0 percent.

Monetary Policy Meetings (MPMs)

6. Seven MPMs were held in the first half of fiscal 2011.

At the MPMs held in April and May, the Policy Board judged that Japan's economy faced strong downward pressure mainly on the production side, due to the effects of the disaster. Subsequently, at the MPM in June, the Policy Board judged that the economy continued to face downward pressure mainly on the production side, due to the effects of the disaster, but was showing some signs of picking up. At the July MPM, the Policy Board judged that economic activity was picking up with an easing of the supply-side constraints caused by the disaster. At the August MPM, while judging that economic activity had been picking up steadily with an easing of the supply-side constraints caused by the disaster, the Policy Board noted that recent developments called for closer attention to downside risks with regard to the outlook. At the September MPM, the Policy Board judged that economic activity had been picking up steadily while the supply-side constraints caused by the disaster had been mostly resolved.

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 to 0.1 percent."

In terms of the Bank's responses to the earthquake, the Policy Board decided to further enhance monetary easing at the March MPM immediately after the earthquake. At the MPM held on April 6 and 7, the Policy Board judged it necessary to introduce a funds-supplying operation that would provide financial institutions in disaster areas with longer-term funds in order to support their initial efforts to meet future demand for funds for restoration and rebuilding. At the same time, the Policy Board judged it appropriate to broaden the range of eligible collateral for money market operations with a view to securing sufficient financing capacity at financial institutions in disaster areas. The chairman instructed the staff to examine the specifics of these two measures and report back at the next MPM. At the MPM held on April 28, based on a report from the staff, the Policy Board decided the necessary measures including the establishment of the "Principal Terms and Conditions for the Funds-Supplying Operation to Support Financial Institutions in Disaster Areas."

At the June MPM, the Policy Board decided to establish a new line of credit for equity investments and the so-called asset-based lending (ABL), with a view to encouraging financial institutions' efforts to strengthen the foundations for economic growth through the use of a wider range of financial techniques.

At the MPM in July, as part of the coordinated central bank actions, the Policy Board decided that the Bank -- with the aim of facilitating money market operations as well as ensuring the smooth functioning and stability of the financial markets -- would extend the temporary U.S. dollar liquidity swap arrangement, together with the effective period of the U.S. dollar funds-supplying operation against pooled collateral, through August 1, 2012.

At the August MPM, the Policy Board decided to enhance monetary easing by increasing the total size of the Asset Purchase Program by about 10 trillion yen, from about 40 trillion yen to about 50 trillion yen. The Policy Board found it necessary to ensure a successful transition from the recovery phase following the earthquake disaster to a sustainable growth path with price stability based on the judgment that the economic outlook entailed high uncertainty, and given the possibility that developments in overseas economies and the ensuing fluctuations in the foreign exchange and financial markets might have adverse effects on business sentiment, and consequently on economic activity in Japan.

The Bank's Balance Sheet

8. As of the end of September 2011, the Bank's total assets amounted to 137.7 trillion yen, an increase of 14.4 percent from the previous year.