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The Bank of Japan decides and implements monetary policy under the price stability target of 2 percent in terms of the year-on-year rate of change in the consumer price index CPI , with the aim of achieving price stability and thereby contributing to the sound development of the national economy, as stipulated in Article 2 of the Bank of Japan Act hereafter the Act.

Monetary policy is decided by the Policy Board at Monetary Policy Meetings MPMs , and market operations -- the Bank's day-to-day provision and absorption of funds in the market -- are carried out based on the guideline decided at each MPM. The Bank held eight MPMs in fiscal In the Outlook Report, the Bank presents its outlook for developments in economic activity and prices, assesses upside and downside risks, and outlines its views on the future conduct of monetary policy.

For MPMs other than the above, the Policy Board members' assessment of the economic and financial situation is expressed in the statement on monetary policy released after each MPM. In order to make appropriate policy decisions, the Bank conducts research and analysis on economic and financial developments at home and abroad. The Bank, pursuant to Article 54, paragraph 1 of the Act, prepares the Semiannual Report on Currency and Monetary Control approximately every six months, covering matters related to the conduct of monetary policy those listed in the items of Article 15, paragraph 1 of the Act and business operations that the Bank has conducted based thereon, and submits it to the Diet through the Minister of Finance.

In the most recent two issues of this report, the Bank explains in detail economic and financial developments as well as the Bank's conduct of monetary policy and market operations during fiscal One of the core purposes of the Bank, as stipulated in Article 1, paragraph 2 of the Act, is to ensure smooth settlement of funds among banks and other financial institutions, thereby contributing to the maintenance of financial system stability. To this end, the Bank provides safe and convenient settlement assets in the form of deposits in current accounts that financial institutions hold at the Bank, and takes measures to enhance the safety and efficiency of payment and settlement systems.

In order to ensure financial system stability, the Bank also takes various measures to make sure that a financial institution's inability to complete settlement of a transaction does not result in a chain of settlement failures at other institutions and thus disrupt the overall functioning of the financial system. Specifically, the Bank may provide financial institutions suffering a shortage of liquidity with the following: In order to be ready to act effectively as the lender of last resort, the Bank strives to gain an accurate grasp of the business conditions at financial institutions and to encourage the maintenance of sound financial conditions, offering guidance and advice as necessary, through the conduct of on-site examinations examinations that the Bank carries out by visiting the premises of financial institutions pursuant to Article 44 of the Act as well as off-site monitoring monitoring that is conducted through meetings with executives and staff of financial institutions, as well as through analysis of various documents submitted by these institutions Tables 1 and 2.

In addition, through activities such as seminars and workshops organized by the Bank's Center for Advanced Financial Technology CAFT , the Bank encourages financial institutions' efforts to improve their risk management and business management. The Bank conducts research and analysis assessing risks in the financial system as a whole, i. The findings of this research and analysis are published in various forms -- for example, the Financial System Report -- and the Bank draws on them when taking part in initiatives with relevant parties to ensure the stability of the financial system.

These findings are also made use of in developing and implementing policy. The Bank has also been participating in international initiatives to maintain the stability of the global financial system. These include discussions held by the Basel Committee on Banking Supervision, which comprises central banks and supervisory authorities from major countries. The Bank, as and when necessary, conducts business requisite to maintaining financial system stability, including the provision of loans, pursuant to Article 38 of the Act hereafter the term "special loans" covers all such business.

The Bank decides on the extension of special loans based on the following four principles, taking into account the nature and purpose of the lender-of-last-resort function: Principle 1 There must be a strong likelihood that systemic risk will materialize. Principle 2 There must be no alternative to the provision of central bank money. Principle 3 All relevant parties are required to take clear responsibility to avoid moral hazard.


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Principle 4 The financial soundness of the Bank of Japan itself must not be impaired. The Bank provides safe and convenient settlement assets in the form of banknotes and deposits in current accounts that financial institutions hold at the Bank. The Bank conducts oversight of payment and settlement systems, monitoring their safety and efficiency and inducing improvements where necessary. Moreover, the Bank participates with other central banks in various international discussions and initiatives related to payment and settlement systems, including those of the Committee on Payments and Market Infrastructures CPMI at the Bank for International Settlements BIS.

In addition, in order to strengthen and improve the efficiency of the functioning of markets as well as to support more robust risk management and innovation in financial services and market transactions, the Bank, with an eye on international developments, takes initiatives to reinforce the infrastructures of financial and capital markets -- exchanging views with market participants, supporting the formulation of additional rules on and revisions of market practices, and compiling and releasing statistics on market transactions.

As part of its initiatives, the Bank has continued to enhance its business continuity arrangements in preparation for times of disaster or other emergency, and has provided active support to market participants in developing effective business continuity planning BCP in financial markets, payment and settlement systems, and the financial system.

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In order to effectively implement measures to enhance payment and settlement systems and market infrastructure, the Bank conducts research and analysis on the safety and efficiency of payment and settlement systems as well as on the financial system and financial markets, in addition to fundamental research on related issues.

Major findings are reflected in the Bank's releases including the Payment and Settlement Systems Report. The Bank conducts operations in the field of international finance, such as foreign exchange transactions, including those executed as part of the Bank's management of its foreign currency assets, as well as business related to assisting other central banks and international organizations in their investment in yen. The Bank also handles government affairs that relate to international finance, such as the compilation and dissemination of Japan's balance of payments statistics and foreign exchange intervention.

In addition, the Bank takes part in international discussions on the state of the world economy as well as on measures to ensure the stability and improve the structure of financial markets. With regard to Asia, the Bank engages in various activities including the following: The Bank, as the country's sole issuer of banknotes Bank of Japan notes , ensures the stability of banknote supply and maintains public confidence in banknotes through the conduct of the following operations at its Head Office and branches in Japan.

First, the Bank receives banknotes from and pays banknotes to financial institutions that hold current accounts at the Bank BOJ account holders. Second, the Bank counts the banknotes it receives from BOJ account holders, examines them to verify their authenticity, and checks their fitness for recirculation. As for coins, they are delivered to the Bank by the government, which is the authorized issuer of coins, and then put into circulation.

As part of its measures to secure confidence in banknotes and coins, the Bank works to maintain the cleanliness of banknotes in circulation by preventing damaged or worn banknotes from being returned to circulation. In addition, the Bank remains active in advancing research and promoting public understanding regarding counterfeit deterrence and the smooth circulation of currency, in cooperation with relevant institutions at home and abroad, including other central banks. The Bank provides various services relating to the government, such as treasury funds and JGS services.

Specifically, these are 1 receipt, disbursement, and accounting of treasury funds the Bank classifies receipts and disbursements of treasury funds by the specific government account as well as by the individual government agency , 2 management of the deposits of the Japanese government, 3 custody of securities acquired by or submitted to the government, 4 issuance of, and principal and interest payment on, JGSs, and 5 operations relating to its role as the book-entry transfer institution in the JGB Book-Entry System.

For the convenience of the public, the Bank designates certain branches and offices of financial institutions throughout the country as its agents and entrusts them with some of the services relating to treasury funds and JGSs. Besides the above operations, the Bank engages in various transactions with the government, such as purchasing and selling of JGSs.

With a view to satisfying the requirements of public accountability, the Bank releases in a timely manner a document that contains a summary of the opinions presented at each MPM Summary of Opinions , the minutes of MPMs, and public statements on most of the Policy Board decisions.

The Bank actively provides information through a variety of channels including the following: Transcripts of MPMs held more than 10 years previously are also released. To promote better understanding of the policies and business operations of the Bank, not only in the eyes of financial professionals but also of the public as a whole, the Bank endeavors to tailor its publications and releases to the diverse needs and interests of their users. It also works to promote financial literacy among the public. The Bank compiles and releases various statistics to be widely shared with the public and takes steps to refine its statistics to improve their user-friendliness.

The Bank conducts and makes public performance reviews of measures taken under the Strategic Priorities every fiscal year. This section provides a brief review of economic and financial developments and decisions made at Monetary Policy Meetings MPMs in fiscal , followed by performance reviews of measures taken under the Strategic Priorities. Each performance review is divided into two parts: The Bank's performance with regard to the strategic objectives for its organizational management is described in " The Bank's Organizational Management in Fiscal The Strategic Priorities states that the Bank shall conduct an interim review of the content of the Strategic Priorities during the five-year period in order to address any changes in its environment and revise the content flexibly in response to any significant such changes.

In fiscal , the Bank conducted the interim review and decided to maintain the current content. A thorough review of the entire content of the Strategic Priorities will be conducted separately. Looking back at the first half of fiscal , Japan's economy was expanding moderately, with a virtuous cycle from income to spending operating. Exports followed an increasing trend on the back of growth in overseas economies.

Turning to domestic demand, public investment increased, and housing investment was more or less flat. Business fixed investment was on a moderate increasing trend, with corporate profits improving. Private consumption increased its resilience 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. On the price front, the year-on-year rate of change in the consumer price index CPI, all items less fresh food was in the range of 0.

Inflation expectations remained in a weakening phase, although some indicators showed an uptrend in such expectations, after hitting bottom around summer 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 Stock Average rose, mainly on the back of favorable corporate earnings, amid a rise in stock prices in the United States and Europe, and was in the range of 20,, yen at end-September.

In the foreign exchange market, the yen was more or less flat against the U. The yen continued to depreciate against the euro with uncertainties regarding political situations in Europe abating, and was in the range of yen at end-September. 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 related to mergers and acquisitions and 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 accelerated at a moderate pace, and was at around 3 percent as of September. The year-on-year rates of change in the amounts outstanding of CP and corporate bonds were positive at relatively high levels.

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 percent. The year-on-year rate of change in the money stock M2 was at around 4 percent. At the MPMs held in July and September, it judged that the economy was expanding moderately, with a virtuous cycle from income to spending operating. In the conduct of monetary policy, at all the MPMs held in the first half of fiscal , 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 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. The long-term interest rate: 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.

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With regard to asset purchases other than JGB purchases, the Bank decided to set the following guidelines. With regard to the future conduct of monetary policy, the Policy Board confirmed the following at all the MPMs held in the first half of fiscal 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. Looking back at the second half of fiscal , 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. On the price front, the year-on-year rate of change in the 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 Turning to developments in the bond market, the long-term interest rate was stable at the target level of around zero percent under QQE with Yield Curve Control. The Nikkei Stock Average rose to the range of 24,, 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,, yen at end-March. Thereafter, the yen continued to appreciate against the U. The yen was more or less flat against the euro, with fluctuations smoothed out. 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. The monetary base continued to increase at a high year-on-year growth rate in the range of around percent. The year-on-year rate of change in the M2 was in the range of 3. At all the MPMs held in the second half of fiscal , the Policy Board judged that Japan's economy was expanding moderately, with a virtuous cycle from income to spending operating.

In the conduct of monetary policy, at all the MPMs held in the second half of fiscal , 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 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 The Bank communicated its research findings to the public through the release of research papers and presentations at academic conferences both at home and abroad.

With a view to contributing to monetary policy conduct, the Bank conducted research and analysis from multiple perspectives regarding economic and financial conditions both at home and abroad; it also carried out multi-perspective analysis on the effects and impacts of monetary policy. In light of its analysis, the Bank planned and formulated monetary policy measures flexibly. In addition, the Bank enhanced dialogue with market participants through, for example, the "Meeting on Market Operations" and the "Bond Market Group," and made steady adjustments to its operational arrangements so as to ensure that monetary policy continued to be conducted appropriately.

Based on the above, the Bank considers that, in fiscal , it achieved its intended objectives in implementing measures and provided a firm underpinning for monetary policy conduct. In fiscal , the Bank will continue to work to have the necessary arrangements in place to conduct research and analysis that appropriately reflects changes in economic and financial conditions, to plan policy measures flexibly, and to conduct market operations properly.

Under this policy, the Bank carried out examinations of financial institutions. It conducted thorough assessments, for example, of financial institutions' business operations and asset quality as well as their profitability and resilience against risks, including the actual business conditions of their financial group as a whole and the risk management of their overseas branches and subsidiaries. It also gained a better grasp of the effects and impacts on financial institutions of QQE with Yield Curve Control and continued to deepen its understanding of their business conditions, such as business operations, risk management, and profitability.

In addition, the Bank sharpened its focus on business conditions at systemically important financial institutions by taking into account the systemic implications of, for example, the active expansion of their global business and the accompanying risks such as those associated with the need to ensure foreign currency liquidity.

It also encouraged such institutions' efforts to improve their risk management, for example, through exchanging views with them. In addition, the Bank continued to share awareness of challenges and risks, particularly with financial institutions, through the following initiatives in fiscal It also held, for example, a series of workshops on utilizing IT to advance financial technology and various regional workshops. The Bank conducted thorough assessments particularly of business operations and risk management at financial institutions and facilitated necessary improvements through the following: In addition, the Bank deepened dialogue with regional financial institutions on the key management issues and challenges facing them, such as strengthening their core profitability in an environment of low interest rates and population decline.

Moreover, it sharpened its focus on business conditions at systemically important financial institutions, taking into account the extent of their systemic implications, and facilitated necessary improvements. The Bank carried out, in an efficient and appropriate manner, the selection of financial institutions with which to conduct transactions as well as business operations relating to the provision of loans. It also further strengthened cooperation on the macroprudential front with the relevant authority. During fiscal , there were no circumstances that required the Bank to provide loans pursuant to Articles 37 and 38 of the Bank of Japan Act.

Based on the above, the Bank considers that it steadily tackled challenges in maintaining and improving the stability and functioning of the financial system in the face of financial institutions' macro risks and structural changes in the financial system, and that its intended effects were thereby achieved. In fiscal , the Bank will work strenuously to identify challenges and risks faced in maintaining and improving the stability and functioning of the financial system, and to deepen its understanding of the situation on the ground, for example, regarding business operations and risk management at financial institutions.

This holds in particular for industries which face strong information asymmetries. Financing through financial intermediaries is an effective solution to adverse selection and moral hazard problems that exist between lenders and borrowers. Banks in particular have developed expertise to distinguish between good and bad borrowers.

Economies that have both well-developed banking sectors and capital markets thus have an advantage. Furthermore, in times of crisis in either system, the other system can perform the function of the famous spare wheel. The financial system is also particularly important in reallocating capital and thus providing the basis for the continuous restructuring of the economy that is needed to support growth.


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  • In countries with a highly developed financial system, we observe that a greater share of investment is allocated to relatively fast growing sectors. When we look back more than one century ago, during the Industrial Revolution, we see that England's financial system did a better job in identifying and funding profitable ventures than other countries in the mids. This helped England enjoy comparatively greater economic success. The banker and former editor of "The Economist" Walter Bagehot expressed this in as follows. Nowadays, the lack of a well-developed stock market would be a particularly serious disadvantage for any economy.

    Equity is essential for the emergence and growth of innovative firms. Today's young innovative high-technology firms will be the main drivers of future structural change essential for maintaining a country's long-term growth potential. The contribution of financial markets in this area is a necessity for maintaining the competitiveness of an economy today given the strongly increased international competition, rapid technological progress and the increased role of innovation for growth performance.

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    In recent years, "new markets", for stocks of young and growing companies, have become a growing market segment in the euro area. Equity financing is particularly advantageous for these companies and their investors given the uncertainties of the economic return. As the term "shares" suggests, with equity financing you get your share of the outcome, whether it is positive or negative. Banks, on the other hand, may be reluctant to provide loans owing to the risk profile of these firms, and the greater exposure to a negative result in a loan contract.

    Total market capitalisation of the new markets in five euro area countries grew from EUR 7 billion at the beginning of to EUR billion in December While some of this increase can be attributed to the overall rise in share prices during this period, it is important to note that the number of listed companies continued to increase in almost every month. The total number of companies listed on these new markets in the euro area increased from 63 at the beginning of January to at the end of Developments over the last year have admittedly been dismal.

    However, it is the nature of new markets, given the uncertainties attached to future developments for the companies listed on these markets, to exhibit more volatility than established markets. Bank-based finance has a special role to play for many companies in need of funds, and thus helps to ensure a well-balanced growth process. The economic literature on "relationship banking" has demonstrated that banks can contribute to alleviating the impact of sudden economic shocks on their clients.

    Banks stand ready to provide many customers with funds even in adverse circumstances, e. The banking sector also has an essential role to play with respect to the allocation of funds to the most profitable investment opportunities. Banks are, as mentioned before, financial intermediaries that by nature add cost to the allocation of capital. Thus in order for banks to survive in a market economy they need to provide added benefits. It is difficult to compete with the debt securities market, if a bank loan is of a size where the fixed costs of accessing debt markets become negligible.

    However, securities markets are not always sufficiently liquid and some, especially small and medium, enterprises cannot cover their liquidity needs via securities markets owing to significant fixed costs of access.

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    An additional benefit of bank-based finance relates to the intrinsic nature of the banking business: Banks can bridge this gap thanks to their comparative advantages in the assessment and monitoring of investment projects, which contributes to overcoming information asymmetries. Let me now turn to the major changes of the financial system in the euro area after two years with the euro.

    The launch of the euro on 1 January was a historic event.

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    Eleven national currencies were converted into one single currency overnight. The newly created currency area of the twelve participating European Union Member States has a considerable weight in the world economy. The successful launch of the euro, which is a key element in the creation of a stable and prosperous Europe, has boosted the integration of financial markets in the euro area.

    This process of integration in European financial markets coincided with the trends towards globalisation and securitisation. Other factors, among a wide range, which shape the financial system are historically determined characteristics, technological innovations, monetary and fiscal policies and specific legal and accounting systems that differ from country to country. Evidence of integration can be found, to varying degrees, in all parts of the financial system.

    The euro area money market is among the most integrated parts of the financial system. The conduct of one common monetary policy in the euro area brought about immediate integration of the unsecured segments of the money market, mainly the interbank market and the short-term derivatives market. The secured segments of the money market, that is the repo market and the markets for short-term securities, are also increasingly integrated, but they still suffer from underlying problems with the management of collateral.

    Nonetheless, the outlook is promising. The euro area bond market has also developed rapidly. Notably, the private segments of the euro area bond market have flourished since the introduction of the euro. Probably the most significant development has been the rapid growth in the euro-denominated corporate bond market, which has increased several-fold in size since the launch of the euro and is now characterised by issues of above EUR 1 billion.

    EMU has also stimulated integration in the stock markets in the euro area, where structural developments have been dominated by a series of high-profile mergers and attempted mergers. The rapid growth achieved by European securities markets has taken place notwithstanding remaining regulatory obstacles to their integration. The European authorities are fully aware of the need to address this problem.

    Several obstacles have been identified in the recent Report of the Committee of Wise Men, chaired by Alexandre Lamfalussy. The Committee proposes to speed up the removal of impediments through the institutionalisation of two new regulatory committees for securities markets, which should allow for an increased harmonisation of securities regulation and less burdensome procedures for adapting Community rules to rapidly changing financial markets.

    Another essential European initiative was the adoption by the Commission, in May , of a programme for the completion of the Single Market for financial services. Strahan Corporate Governance: An Overview by Lawrence J. Navigating a Copernican Shift by Michael R. Phillips Short Selling by Adam V. Reed Law and Finance: Fleming Efficient Markets and the Law: Measurement and Interactions by Dale F.

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