BOJ: Semiannual Report on Currency and Monetary Control

Semiannual Report on Currency and Monetary Control (Summary)
Second Half of Fiscal 2017 (October 2017-March 2018)

— The semiannual report was submitted to the Diet in June 2018.

Economic Developments

1. Looking back at the second half of fiscal 2017, Japan’s economy was expanding moderately, with a virtuous cycle from income to spending operating. Exports followed an increasing trend on the back of firm growth in overseas economies. Turning to domestic demand, housing investment weakened somewhat after having been more or less flat, and public investment was more or less flat, remaining at a relatively high level. On the other hand, business fixed investment was on an increasing trend with corporate profits and business sentiment maintaining their improving trend. Private consumption increased moderately, albeit with fluctuations, against the background of steady improvement in the employment and income situation. Reflecting these developments in demand both at home and abroad, industrial production followed an increasing trend.
2. On the price front, the year-on-year rate of change in the consumer price index (CPI, all items less fresh food) was around 1 percent, with the rate of increase accelerating. Inflation expectations were more or less unchanged, after having remained in a weakening phase since summer 2015.

Financial Developments

3. Money market rates were at low levels on the whole. Turning to developments in the bond market, the long-term interest rate was stable at the target level of around zero percent under “Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control.”The Nikkei 225 Stock Average rose to the range of 24,000-24,500 yen in late January, mainly on the back of favorable corporate earnings, amid a rise in stock prices in the United States and Europe. It then temporarily declined substantially with a global fall in stock prices in early February and remained more or less flat thereafter, albeit with fluctuations, being in the range of 21,000-21,500 yen at end-March.In the foreign exchange market, the yen was more or less flat against the U.S. dollar through end-2017, and then appreciated amid the dollar depreciating against many currencies. Thereafter, the yen continued to appreciate against the U.S. dollar, mainly reflecting buying of yen as safe assets with a global fall in stock prices in early February, and was in the range of 106-107 yen at end-March. The yen was more or less flat against the euro, with fluctuations smoothed out.
4. As for corporate finance, in terms of credit supply, financial institutions’ lending attitudes as perceived by firms were highly accommodative. Firms’ credit demand increased, mainly for funds for business fixed investment. 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 around 2.0-2.5 percent. The year-on-year rates of change in the amounts outstanding of CP and corporate bonds were positive at relatively high levels.
5. The monetary base (currency in circulation plus current account balances at the Bank) continued to increase at a high year-on-year growth rate in the range of around 10-15 percent. The year-on-year rate of change in the money stock (M2) was in the range of 3.0-4.0 percent.

Monetary Policy Meetings (MPMs)

6. Four MPMs were held in the second half of fiscal 2017. At all the MPMs held in the second half of fiscal 2017, the Policy Board judged that Japan’s economy was expanding moderately, with a virtuous cycle from income to spending operating.
7. In the conduct of monetary policy, at all the MPMs held in the second half of fiscal 2017, the Policy Board decided to continue with the following guidelines for market operations and asset purchases under “QQE with Yield Curve Control” determined at the MPM held in September 2016.
   

   (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. With regard to the amount of JGBs to be purchased, the Bank will conduct purchases at more or less the current pace — an annual pace of increase in the amount outstanding of its JGB holdings of about 80 trillion yen — aiming to achieve the target level of the long-term interest rate specified by the guideline.

   (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.
   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.

   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 2017: “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. The Bank will 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.”

The Bank’s Balance Sheet

8. As of end-March, the Bank’s total assets amounted to 528.3 trillion yen, an increase of 7.8 percent from the previous year.