Semiannual Report on Currency and Monetary Control (Summary)
Second Half of Fiscal 2014 (October 2014-March 2015)
The semiannual report was submitted to the Diet in June 2015.
Bank of Japan
Economic Developments
1. Looking back at Japan's economy during the second half of fiscal 2014, the effects of the decline in demand following the front-loaded increase prior to the consumption tax hike waned and exports increased. These helped production pick up. In this situation, a virtuous mechanism for generating income kept on working and Japan's economy continued its moderate recovery trend, additionally supported by other favorable conditions, such as a decline in crude oil prices.
Exports picked up against the backdrop of developments in overseas economies. As for domestic demand, public investment remained at a high level but entered a moderate declining trend toward the end of the fiscal year. Business fixed investment followed a moderate increasing trend as corporate profits improved. With the decline in private consumption following the front-loaded increase prior to the consumption tax hike gradually subsiding, private consumption was resilient against the background of steady improvement in the employment and income situation, although recovery in some areas was sluggish. Housing investment, which had continued to decline following the front-loaded increase prior to the consumption tax hike, gradually bottomed out and showed some signs of picking up toward the end of the fiscal year. Against the backdrop of these developments in demand both at home and abroad, industrial production started to pick up.
2. On the price front, excluding the direct effects of the consumption tax hike, the producer price index (PPI) relative to three months earlier declined, reflecting the significant fall in international commodity prices. The year-on-year rate of increase in the consumer price index (CPI, all items less fresh food) narrowed, mainly due to the effects of the decline in energy prices, and was about 0 percent through the end of the fiscal year. Inflation expectations appeared to be rising on the whole from a somewhat longer-term perspective.
Financial Developments
3. Money market rates, including longer-term ones, remained stable at low levels.
Long-term interest rates remained at low levels, 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 had followed a declining trend from the second half of the fiscal year, reflecting the Bank's expansion of QQE at end-October and declines in U.S. and European long-term interest rates, and temporarily declined to about 0.2 percent in mid-January. Thereafter, they adjusted on rises in crude oil prices and in the U.S. long-term interest rates, and were about 0.4 percent at end-March.
The Nikkei 225 Stock Average fell at one point in October, owing to the heightening of investors' risk aversion that reflected cautious view on overseas economies, but increased thereafter, against the background of the Bank's expansion of QQE at end-October, robust business performance, and depreciation of the yen against the U.S. dollar; it was in the range of 19,000-19,500 yen at end-March.
In the foreign exchange market, the yen depreciated against the U.S. dollar from end-October, due in part to market participants' awareness of the difference in the direction of monetary policy between Japan and the United States, reflecting the Bank's expansion of QQE, and was about 120 yen against the U.S. dollar at end-March. The yen temporarily depreciated against the euro, due to the Bank's expansion of QQE at end-October, but thereafter appreciated against the euro following additional monetary easing by the European Central Bank (ECB), and it traded at the 129 yen level against the euro at end-March.
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 remained favorable.
Firms' credit demand 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 a positive range of about 2.5-3.0 percent. In contrast, the year-on-year rate of change in the amount outstanding of corporate bonds was negative. Meanwhile, the year-on-year rate of change in that of CP was positive.
5. The monetary base (currency in circulation plus current account balances at the Bank) increased significantly as asset purchases by the Bank progressed, and the year-on-year rate of growth was in the range of around 35-40 percent. The year-on-year rate of growth in the money stock (M2) was in the range of around 3.0-3.5 percent.
Monetary Policy Meetings (MPMs)
6. Seven MPMs were held in the second half of fiscal 2014.
At the MPM held in October, the Policy Board judged that Japan's economy continued to recover moderately as a trend, although some weakness particularly on the production side was observed due mainly to the effects of the subsequent decline in demand following the front-loaded increase prior to the consumption tax hike, and at the November MPM, it deemed that the economy continued to recover moderately as a trend, although some weakness particularly on the production side remained due mainly to the effects of the subsequent decline in demand following the front-loaded increase prior to the consumption tax hike. At the MPMs held in December and January, the Policy Board judged that Japan's economy continued to recover moderately as a trend, and effects such as those of the decline in demand following the front-loaded increase prior to the consumption tax hike had been waning on the whole, and at the February and March MPMs, it deemed that the economy continued its moderate recovery trend.
7. In its conduct of monetary policy, the Policy Board decided at the MPM held on October 31 to expand QQE as follows. At all the subsequent MPMs, the Policy Board decided to maintain the guidelines for money market operations and asset purchases.
(1) Accelerating the pace of increase in the monetary base.
The Bank will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen (an addition of about 10-20 trillion yen compared with the past).
(2) Increasing asset purchases and extending the average remaining maturity of JGB purchases.
- a) The Bank will purchase JGBs so that their amount outstanding will increase at an annual pace of about 80 trillion yen (an addition of about 30 trillion yen compared with the past). With a view to encouraging a decline in interest rates across the entire yield curve, the Bank will conduct purchases in a flexible manner in accordance with financial market conditions. The average remaining maturity of the Bank's JGB purchases will be extended to about 7-10 years (an extension of about 3 years at maximum compared with the past).
- 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 3 trillion yen (tripled compared with the past) and about 90 billion yen (tripled compared with the past), respectively. The Bank will make ETFs that track the JPX-Nikkei Index 400 eligible for purchase.
With regard to the future conduct of monetary policy, the Policy Board confirmed the following at all the MPMs held in the second half of fiscal 2014: "the Bank will continue with QQE, 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."
The Bank's Balance Sheet
8. As of end-March, the Bank's total assets amounted to 323.6 trillion yen, an increase of 33.9 percent from the previous year.