Semiannual Report on Currency and Monetary Control (Summary)
Second Half of Fiscal 2013 (October 2013-March 2014)
The semiannual report was submitted to the Diet in June 2014.
Bank of Japan
Economic Developments
1. Looking back at the second half of fiscal 2013, Japan's economic activity continued to recover moderately in association with a virtuous cycle among production, income, and spending, mainly due to the effects of monetary easing as well as various economic measures. A front-loaded increase in demand prior to the consumption tax hike was observed toward the end of the fiscal year.
Exports had generally picked up on the back of developments in overseas economies until around end-2013, but leveled off more or less thereafter mainly due to temporary downside factors. As for domestic demand, private consumption and housing investment remained resilient with improvement in the employment and income situation. In these segments of the economy, the front-loaded increase in demand prior to the consumption tax hike was also observed. Public investment continued to increase, and the pick-up in business fixed investment became increasingly evident as corporate profits improved, turning to a moderate increase. Reflecting these developments in demand both at home and abroad, industrial production followed a moderate increasing trend and, after the beginning of 2014, increased at a somewhat accelerated pace.
2. The year-on-year rate of change in the domestic corporate goods price index (CGPI) remained positive at around 2 percent, on the back of developments in international commodity prices and foreign exchange markets. The year-on-year rate of change in the consumer price index (CPI, all items less fresh food), after turning positive around mid-2013, accelerated its pace of increase toward around end-2013 and was around 1¼ percent thereafter. Inflation expectations appeared to be rising on the whole.
Financial Developments
3. Money market rates, including longer-term ones, remained stable at low levels.
Long-term interest rates were generally stable in the range of 0.55-0.75 percent, as the Bank of Japan progressed with its Japanese government bond (JGB) purchases under quantitative and qualitative monetary easing (QQE). More concretely, long-term interest rates climbed somewhat toward end-December, on the back of rises in U.S. long-term interest rates and Japanese stock prices, but declined after the beginning of January. After early February, they were more or less flat -- partly because U.S. long-term interest rates were generally unchanged -- and were in the range of 0.6-0.7 percent at end-March.
The Nikkei 225 Stock Average increased toward end-December with the depreciation of the yen, while U.S. stock prices continued to rise, marking their highest levels. After the beginning of January, the Nikkei average declined with the appreciation of the yen, at a time when U.S. and European stock prices fell; thereafter, it fluctuated mainly reflecting the situation in Ukraine and was in the range of 14,500-15,000 yen at end-March.
In the foreign exchange market, the yen depreciated against the U.S. dollar toward end-December mainly on the back of the release of U.S. economic indicators that were stronger than market expectations and the change in U.S. monetary policy, coupled with the rise in Japanese stock prices. After the beginning of January, the yen appreciated, as Japanese stock prices declined in a situation where investors' risk aversion was observed; thereafter, the yen generally leveled off and at end-March it traded at the 102-103 yen level against the U.S. dollar. The yen depreciated against the euro toward end-December mainly due to the release of European economic indicators that were stronger than market expectations. After the beginning of January, the yen temporarily appreciated but depreciated thereafter. At end-March, it traded at the 141-142 yen level against the euro.
4. As for corporate finance, in terms of credit supply, financial institutions' lending attitudes as perceived by firms continued to be on an improving trend. Issuing conditions for CP and corporate bonds continued to be favorable.
Firms' credit demand had increased moderately, mainly for working capital and funds related to mergers and acquisitions. With regard to firms' funding, the year-on-year rate of increase in the amount outstanding of lending by domestic commercial banks was in the range of 2.0-3.0 percent. The year-on-year rate of change in the amount outstanding of corporate bonds had been positive. Meanwhile, the year-on-year rate of change in that of CP had been negative.
5. The monetary base (currency in circulation plus current account balances at the Bank) had increased significantly as asset purchases by the Bank had progressed, and the year-on-year rate of growth was at around 55 percent in March. The year-on-year rate of change in the money stock (M2) continued to register relatively high growth of around 4.0 percent.
Monetary Policy Meetings (MPMs)
6. Seven MPMs were held in the second half of fiscal 2013.
At the MPMs held in October through December, the Policy Board judged that Japan's economy was recovering moderately. At the MPMs held in January through March, it judged that the economy had continued to recover moderately, and a front-loaded increase in demand prior to the consumption tax hike had recently been observed.
7. In its conduct of monetary policy, the Policy Board decided at all the MPMs held in the second half of fiscal 2013 to continue with the following guidelines with regard to money market operations and asset purchases that were determined when the QQE was introduced in April 2013.
Guideline for Money Market Operations
The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen.
Guidelines for Asset Purchases
- (a) The Bank will purchase JGBs so that their amount outstanding will increase at an annual pace of about 50 trillion yen, and the average remaining maturity of the Bank's JGB purchases will be about seven years.
- (b) The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at an annual pace of about 1 trillion yen and about 30 billion yen, respectively.
- (c) As for CP and corporate bonds, the Bank will continue with those asset purchases until their amounts outstanding reach about 2.2 trillion yen and about 3.2 trillion yen, respectively, by end-2013; thereafter, it will maintain those amounts outstanding.
With regard to the future conduct of monetary policy, the Policy Board confirmed at all the MPMs held in the second half of fiscal 2013 the following: "The Bank will continue with quantitative and qualitative monetary easing, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will examine both upside and downside risks to economic activity and prices, and make adjustments as appropriate."
At the February MPM, the Policy Board decided on the extension and enhancement of the Fund-Provisioning Measure to Stimulate Bank Lending as well as the Fund-Provisioning Measure to Support Strengthening the Foundations for Economic Growth, which were due to expire shortly. Specifically, the Policy Board shared the recognition that it was appropriate for the Bank to make the following enhancements and released an outline: (1) the deadlines for new applications under these facilities shall be extended by one year; (2) the maximum amounts of the Bank's fund-provisioning under these facilities shall be doubled; and (3) the duration of its fund-provisioning at a fixed rate of 0.1 percent per annum shall be extended from 1-3 years to 4 years. Based on the outline, at the March MPM the Policy Board approved the amendment to Principal Terms and Conditions for the Loan Support Program.
In addition, at the February MPM, the Policy Board decided to extend the Funds-Supplying Operation to Support Financial Institutions in Disaster Areas affected by the Great East Japan Earthquake and the Temporary Rules regarding the Eligibility Standards for Debt of Companies in Disaster Areas by one year, respectively.
The Bank's Balance Sheet
8. As of end-March 2014, the Bank's total assets amounted to 241.6 trillion yen, an increase of 46.6 percent from the previous year.