-- The semiannual report was submitted to the Diet in December 2012.
Bank of Japan
1. Looking back at the first half of fiscal 2012, Japan's economic activity started picking up moderately as domestic demand remained firm mainly supported by reconstruction-related demand. From around mid-2012, however, the pick-up came to a pause and the economy started to weaken somewhat as overseas economies moved somewhat deeper into a deceleration phase.
At the beginning of fiscal 2012, exports and industrial production showed signs of a pick-up, albeit at a moderate pace, but became relatively weak from around mid-2012 as overseas economies moved somewhat deeper into the deceleration phase. As for domestic demand, on the other hand, public investment increased, especially in that related to reconstruction following the earthquake disaster, and housing investment continued to generally pick up. Business fixed investment followed a moderate increasing trend, albeit with fluctuations, as corporate profits improved on the whole. Meanwhile, against the background of improvement in consumer sentiment, private consumption increased moderately due to the effects of measures to stimulate demand for automobiles, and was resilient with the employment situation continuing to be on an improving trend.
2. The year-on-year rate of change in the domestic corporate goods price index (CGPI) was negative, mainly due to the effects of the decline in international commodity prices. The year-on-year rate of change in the consumer price index (CPI, all items less fresh food) stayed at 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 on a declining trend following developments in U.S. long-term interest rates, temporarily declining to a level around 0.7 percent in late July. They subsequently rose somewhat and stayed at more or less around 0.8 percent toward the end of September.
The Nikkei 225 Stock Average remained soft toward late July following the decline in U.S. and European stock prices, temporarily falling to as low as the 8,000-8,500 yen level. It subsequently rose, albeit with fluctuations, and was in the range of 8,500-9,000 yen at the end of September, mainly reflecting that investors' risk aversion abated somewhat as concern about the European debt problem subsided to some extent.
In the foreign exchange market, the yen continued to appreciate against the U.S. dollar toward July as U.S. interest rates declined, mainly due to heightened concern about a deceleration in the U.S. economy. Thereafter, it moved within a relatively narrow range of around the 78-79 yen level overall. Amid heightened concern over the European debt problem, the euro depreciated toward late July, with the yen temporarily reaching the 94-95 yen level against the euro. The euro appreciated thereafter, mainly because concern over the European debt problem eased slightly as a result of policy measures taken by the European Central Bank. At the end of September, the yen traded at the 100-101 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. In the CP and corporate bond markets, issuing conditions generally continued to be favorable.
In terms of credit demand, firms showed signs of increasing their demand 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 rose somewhat. The year-on-year rate of change in the amount outstanding of CP stayed positive, while that of corporate bonds, especially electric company bonds, stayed negative.
5. The year-on-year rate of change in the monetary base (currency in circulation plus current accounts at the Bank) registered a marginal decline in April because the year-ago level was high as a result of large liquidity provision immediately after the earthquake disaster. Thereafter, it moved back into positive territory. The year-on-year rate of growth in the money stock (M2) remained at around 2.0-3.0 percent.
Monetary Policy Meetings (MPMs)
6. Seven MPMs were held in the first half of fiscal 2012.
At the April MPM, the Policy Board judged that Japan's economic activity had shown some signs of picking up, although it had remained more or less flat. At the May MPM, the Policy Board judged that it had become increasingly evident that the economy was shifting toward a pick-up phase, although economic activity had remained more or less flat. At the MPMs held in June through August, the Policy Board judged that economic activity had started picking up moderately as domestic demand remained firm mainly supported by reconstruction-related demand. At the September MPM, the Policy Board judged that the pick-up in economic activity had come to a pause.
7. In its conduct of monetary policy, the Policy Board decided at all the MPMs in April through September to maintain the following guideline for money market operations: "The Bank of Japan will encourage the uncollateralized overnight call rate to remain at around 0 to 0.1 percent."
At the MPM on April 9 and 10, the Policy Board decided to establish in detail the special rules for the U.S. dollar lending arrangement to support strengthening the foundations for economic growth, of which a preliminary outline was released at the March MPM.
At the MPM on April 27, the Policy Board decided, as part of its decisions, to (1) increase the total size of the Asset Purchase Program (hereafter referred to as "the Program") by about 5 trillion yen, from about 65 trillion yen to about 70 trillion yen, and (2) complete the increased purchases under the Program by around end-June 2013, so that together with the cumulative effects of earlier policy measures, these decisions would better ensure the return of Japan's economy to a sustainable growth path with price stability.
At the July MPM, the Policy Board decided to adopt measures, including the following, with a view to proceeding with monetary easing in a continuous manner by steadily increasing the amount outstanding of the Program: (1) a reduction of about 5 trillion yen in the maximum outstanding amount of the Bank's fixed-rate funds-supplying operation and an increase of about 5 trillion yen in the outright purchases of treasury discount bills; and (2) the removal of the minimum bidding yield for the outright purchases of treasury discount bills and CP.
At the September MPM, the Policy Board decided to adopt measures, including the following, with a view to further enhancing monetary easing: (1) an increase in the total size of the Program by about 10 trillion yen, from about 70 trillion yen to about 80 trillion yen; (2) the completion of the increased purchases under the Program by around end-December 2013; and (3) the removal of the minimum bidding yield for the outright purchases of Japanese government bonds and corporate bonds.
The Bank's Balance Sheet
8. As of the end of September 2012, the Bank's total assets amounted to 149.9 trillion yen, an increase of 8.9 percent from the previous year.