Bank of Japan : Semiannual Report on Currency and Monetary Control (Summary)

• The full report is available only in Japanese.

Bank of Japan

Economic Developments

1. Looking back at the first half of fiscal 2019, Japan's economy had been on a moderate expanding trend, with a virtuous cycle from income to spending operating, although exports, production, and business sentiment had been affected by the slowdown in overseas economies.

   Exports continued to show some weakness, reflecting the effects of the slowdown in overseas economies. On the other hand, with corporate profits staying at high levels on the whole, business fixed investment continued on an increasing trend. Private consumption had been increasing moderately, albeit with fluctuations, against the background of steady improvement in the employment and income situation. Meanwhile, housing investment and public investment had been more or less flat. Reflecting these developments in demand both at home and abroad, industrial production also had been more or less flat.

2. On the price front, the year-on-year rate of change in the consumer price index (CPI, all items less fresh food) had narrowed gradually within positive territory from the range of 0.5-1.0 percent, being at around 0.0-0.5 percent in the second half of April-September 2019. Inflation expectations had been more or less unchanged.

Financial Developments

1. Money market rates had been at low levels on the whole.

   Turning to developments in the bond market, the long-term interest rate had been at the target level of around zero percent under 'Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control.'

   The Nikkei 225 Stock Average had fallen temporarily, mainly reflecting heightening uncertainties over U.S.-China trade negotiations, but started to rise from early September, mainly on the back of expectations for progress in U.S.-China trade negotiations and a resultant rebound in U.S. and European stock prices, and was in the range of 21,500-22,000 yen at end-September.

   In the foreign exchange market, the yen had appreciated against the U.S. dollar temporarily, mainly reflecting heightening uncertainties over U.S.-China trade negotiations, but depreciated somewhat from early September and was in the range of 107-108 yen at the end of that month. The yen also had appreciated against the euro temporarily, but depreciated somewhat from early September.

2. As for corporate finance, in terms of credit supply, financial institutions' lending attitudes as perceived by firms remained highly accommodative.

   Firms' credit demand had increased, mainly for funds for business fixed investment, as well as those related to mergers and acquisitions of firms. With regard to firms' funding, the year-on-year rate of increase in the amount outstanding of lending by domestic commercial banks had been in the range of 2-3 percent. The year-on-year rates of increase in the amounts outstanding of CP and corporate bonds had been at relatively high levels.

3. The monetary base (currency in circulation plus current account balances at the Bank) continued to increase at a year-on-year growth rate of around 3-4 percent. The year-on-year rate of increase in the money stock (M2) had been at around 2.0-2.5 percent.

Monetary Policy Meetings (MPMs)

1. Four MPMs were held in the first half of fiscal 2019.

   The Policy Board judged at the MPMs held in April and June that Japan's economy had been on a moderate expanding trend, with a virtuous cycle from income to spending operating, although exports and production had been affected by the slowdown in overseas economies. At the July and September MPMs, it judged that the economy had been on a moderate expanding trend, with a virtuous cycle from income to spending operating, although exports, production, and business sentiment had been affected by the slowdown in overseas economies.

2. In the conduct of monetary policy, at all the MPMs held in the first half of fiscal 2019, the Policy Board decided to continue with the following guidelines for market operations and asset purchases under 'QQE with Yield Curve Control.'

   (1) Yield curve control

   The Bank decided to set the following guideline for market operations for the intermeeting period.

   The short-term policy interest rate:
   The Bank will apply a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank.

   The long-term interest rate:
   The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain at around zero percent. While doing so, the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices. With regard to the amount of JGBs to be purchased, the Bank will conduct purchases in a flexible manner so that their amount outstanding will increase at an annual pace of about 80 trillion yen.

   (2) Guidelines for asset purchases

   With regard to asset purchases other than JGB purchases, the Bank decided to set the following guidelines.

   1. a) The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 6 trillion yen and about 90 billion yen, respectively. With a view to lowering risk premia of asset prices in an appropriate manner, the Bank may increase or decrease the amount of purchases depending on market conditions.
   2. b) As for CP and corporate bonds, the Bank will maintain their amounts outstanding at about 2.2 trillion yen and about 3.2 trillion yen, respectively.

   At the April MPM, with a view to making clearer its policy stance to persistently continue with powerful monetary easing, the Policy Board decided upon the following.

   (1) Clarification of forward guidance for policy rates

   The Bank intends to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, at least through around spring 2020, taking into account uncertainties regarding economic activity and prices including developments in overseas economies and the effects of the scheduled consumption tax hike.

   (2) Implementation of measures contributing to the continuation of powerful monetary easing

   The Bank will implement measures contributing to the continuation of powerful monetary easing as follows.

   1. (a) Expanding eligible collateral for the Bank's provision of credit
      1. (i) The Bank will relax the eligibility standards concerning creditworthiness regarding debt of companies based on the following principal policy.
         • With regard to debt of companies that have obtained an external credit rating, the companies should be rated BBB or higher by an eligible rating agency.
         • With regard to debt of companies that have not obtained an external credit rating, the companies should be classified as 'normal' borrowers in the self-assessment by financial institutions.
      2. (ii) With respect to loans on deeds to municipal governments, the Bank will not require any procedures such as auction as the method of determining lending conditions. Regarding privately-placed municipal bonds, the Bank will not impose spread requirements on the coupon rates and issue prices in terms of differences from those of publicly-offered municipal bonds.
      3. (iii) The Bank will accept collateral such as loans on deeds to the government that financial institutions have acquired in the secondary market as eligible collateral.
   2. (b) Improving and promoting the use of the Fund-Provisioning Measure to Support Strengthening the Foundations for Economic Growth
      1. (i) Regarding the Fund-Provisioning Measure to Support Strengthening the Foundations for Economic Growth, financial institutions will be able to receive the yen fund-provisioning within the limit set for each financial institution based on the amount of fund-provisioning in the past.
      2. (ii) Regarding the Fund-Provisioning Measure to Support Strengthening the Foundations for Economic Growth and the Fund-Provisioning Measure to Stimulate Bank Lending, the deadline for new loan disbursements will be extended to June 30, 2021.
   3. (c) Relaxation of the terms and conditions for the Securities Lending Facility (SLF)
      The Bank will relax the terms and conditions for the SLF, including the reduction of the minimum fee rate and abolition of the upper limit on the amount of sales per issue.
   4. (d) Introduction of ETF Lending Facility
      The Bank will consider the introduction of ETF Lending Facility, which will make it possible to temporarily lend ETFs that the Bank holds to market participants.

   With regard to the future conduct of monetary policy, the Policy Board confirmed the following at all the MPMs: 'the Bank will continue with 'QQE with Yield Curve Control,' 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 continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds 2 percent and stays above the target in a stable manner. As for policy rates, the Bank intends to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, at least through around spring 2020, taking into account uncertainties regarding economic activity and prices including developments in overseas economies and the effects of the scheduled consumption tax hike. It will examine the risks considered most relevant to the conduct of monetary policy and make policy adjustments as appropriate, taking account of developments in economic activity and prices as well as financial conditions, with a view to maintaining the momentum toward achieving the price stability target.' In addition, the Policy Board confirmed the following at the July and September MPMs: 'in particular, in a situation where downside risks to economic activity and prices, mainly regarding developments in overseas economies, are significant, the Bank will not hesitate to take additional easing measures if there is a greater possibility that the momentum toward achieving the price stability target will be lost.'

The Bank's Balance Sheet

1. As of end-September, the Bank's total assets amounted to 569.8 trillion yen, an increase of 4.4 percent from the previous year.