-- The semiannual report was submitted to the Diet in June 2012.
Bank of Japan
1. Looking back at the second half of fiscal 2011, Japan's economic activity continued to pick up following the plunge caused by the Great East Japan Earthquake. Toward the end of 2011, it entered a lull and remained more or less flat, mainly due to the effects of a slowdown in overseas economies and of the appreciation of the yen. As the fiscal year-end approached, signs that conditions would pick up became evident again.
Although exports and production picked up rapidly following the plunge after the earthquake disaster, they stopped increasing and more or less flattened, due in part to the slowdown in overseas economies and the appreciation of the yen against the background of the European debt problem as well as supply constraints caused by the flooding in Thailand. Toward the end of fiscal 2011, however, they began to show signs of a possible pick-up in the coming period. Business fixed investment, private consumption, and housing investment were on an improving trend, mainly reflecting pent-up demand that had been restrained temporarily after the earthquake disaster. Public investment, which had stopped declining after the disaster, mainly reflecting the construction of temporary housing and restoration projects for social infrastructure, started to increase after the turn of the year as the execution of a series of supplementary budgets progressed.
2. The year-on-year rate of increase in the domestic corporate goods price index slowed after peaking in the summer, due to the effects of a decline in international commodity prices toward the end of 2011. The year-on-year rate of change in the consumer price index (CPI, all items less fresh food) stayed around 0 percent.
3. In the money market, short-term interest rates remained stable at low levels against the backdrop of the Bank of Japan's continued provision of ample funds.
Long-term interest rates were generally around 1.0 percent.
The Nikkei 225 Stock Average moved within a range centering around 8,500 yen toward the end of 2011. It subsequently rose to around 10,000 yen toward the fiscal year-end. Behind this was abating risk aversion among investors in light of an improvement in U.S. economic indicators while concern over the European debt problem had somewhat subsided.
In the foreign exchange market, the yen continued to appreciate against the U.S. dollar toward the end of October. After recording a historical high, it depreciated following foreign exchange intervention. The yen subsequently appreciated again, and generally moved within a narrow range of 76-78 yen to the dollar toward the beginning of 2012. The yen's exchange rate against the dollar then fell in February onward, mainly against the background of an abatement of investors' risk aversion. It traded at the 82-83 yen level at the end of March.
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 generally remained favorable. Likewise, issuing conditions in the CP market remained favorable.
As for credit demand, firms' demand for working capital was on a rising trend mainly backed by recovery in production activity after the earthquake, and that for funds related to mergers and acquisitions also showed an increase.
In terms of firms' funding, the amount outstanding of lending by domestic commercial banks stayed above the previous year's level. The amount outstanding of CP issuance stayed more or less above the previous year's level. Meanwhile, that of corporate bond issuance stayed slightly below the previous year's level in December 2011 onward, partly because some issuers shifted to the CP market.
5. The year-on-year rate of change in the monetary base (currency in circulation plus current accounts at the Bank) remained at a high level, but became slightly negative in March. The year-on-year rate of growth in the money stock (M2) remained around 2.5-3.0 percent.
6. Eight MPMs were held in the second half of fiscal 2011.
At the MPMs held in October 2011, the Policy Board judged that Japan's economic activity had continued to pick up, and in November it judged that economic activity had continued to pick up but at a more moderate pace than in October, due mainly to the effects of a slowdown in overseas economies. Subsequently, at the December MPM, the Policy Board judged that the pick-up in economic activity had paused, mainly due to the effects of both a slowdown in overseas economies and the appreciation of the yen. At the MPMs held in January and February 2012, the Policy Board judged that economic activity had been more or less flat mainly due to these effects. At the March MPM, the Policy Board judged that economic activity had remained more or less flat, although it had shown some signs of picking up.
7. In the conduct of monetary policy, the Policy Board decided at all the MPMs from October 2011 through March 2012 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."
At the MPM on October 6 and 7, the Policy Board decided to extend to April 30, 2012 the deadline for new applications for loans under the funds-supplying operation to support financial institutions in disaster areas.
At the MPM on October 27, the Policy Board decided to increase the total size of the Asset Purchase Program by about 5 trillion yen based on its recognition that further enhancement of monetary easing was necessary to better ensure a successful transition to a sustainable growth path with price stability.
At the MPM on November 30, the Policy Board decided to take measures to address pressures in global money markets. Specifically, it reduced interest rates on fixed-rate U.S. dollar funds-supplying operations conducted by the Bank by 0.5 percentage points. In addition, the Bank, together with the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank, agreed to establish liquidity swap arrangements so that liquidity could be provided in each jurisdiction in any of their currencies. At the December MPM, the Policy Board formulated essential points regarding the Bank's temporary bilateral liquidity swap arrangements with the above-mentioned central banks.
At the February MPM, the Policy Board decided to clarify the Bank's monetary policy stance and to further enhance monetary easing in order to overcome deflation and achieve sustainable growth with price stability. Specifically, the Policy Board (1) introduced "the price stability goal in the medium to long term"; (2) decided that for the time being the Bank would aim to achieve the goal of 1 percent inflation in terms of the year-on-year rate of increase in the CPI through the pursuit of monetary easing, and that it would continue with this powerful easing until it judged the 1 percent goal to be in sight; and (3) decided to increase the total size of the Asset Purchase Program by about 10 trillion yen.
At the March MPM, the Policy Board decided to enhance the fund-provisioning measure to support strengthening the foundations for economic growth based on the recognition that the goal of overcoming deflation would be achieved through efforts to strengthen growth potential and via support from the financial side. Regarding the funds-supplying operation to support financial institutions in disaster areas, the Policy Board decided to extend the deadline for new applications for loans to April 30, 2013.
8. As of the end of March 2012, the Bank's total assets amounted to 139.5 trillion yen, a decrease of 2.0 percent from the previous year.