1. At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided, by a unanimous vote, to set the following guideline for money market operations for the intermeeting period:
The Bank of Japan will encourage the uncollateralized overnight call rate to remain at around 0 to 0.1 percent.
2. Since the Great East Japan Earthquake occurred, the Bank, with a view to ensuring stability in financial markets, has been providing ample funds sufficient to meet demand in the markets. It further strengthened monetary easing by increasing the amount of the Asset
Purchase Program, mainly of the purchases of risk assets, by about 5 trillion yen. In addition to such measures, at today's meeting, the Bank judged it necessary to introduce a funds-supplying operation that provides financial institutions in disaster areas with longer-term funds in order to support their initial response efforts to meet the future demand for funds for restoration and rebuilding. The Bank accordingly compiled a preliminary framework for the operation as in the Attachment. It also judged it appropriate to broaden the range of eligible collateral for money market operations with a view to securing sufficient financing capacity of financial institutions in disaster areas. The Chairman instructed the staff to examine the specifics of these two measures and report back at the next Monetary
3. Japan's economy is under strong downward pressure, mainly on the production side, due to the effects of the earthquake disaster. Specifically, the earthquake has sharply dampened production in some areas by damaging production facilities, disrupting the supply chain, and constraining electric power supply; exports and domestic private demand have been affected accordingly. The year-on-year rate of decline in the CPI (excluding fresh food) has continued to slow. As for financial developments since the earthquake, the financial intermediation function has been maintained and smooth fund settlement has also been secured. Financial markets have been stable as a whole. Meanwhile, financial conditions have generally continued to ease, while weakness has been observed in the financial positions of some firms, mainly small ones, since the earthquake.
4. According to the Bank's baseline scenario, Japan's economy is likely to remain under strong downward pressure, mainly on the production side, for the time being, but is expected to return to a moderate recovery path -- as supply-side constraints are mitigated and production regains traction -- backed by an increase in exports reflecting the improvement in overseas economic conditions and by a rise in demand for restoring capital stock. The year-on-year rate of change in the CPI is expected to become slightly positive in the near future.
5. In the area of economic activity, there are some upside risks such as faster growth in emerging and commodity-exporting economies due to robust domestic demand and capital inflows from overseas. However, there are downside risks associated with developments in
global financial markets and uncertainties, albeit reduced, about the outlook for the U.S. and European economies. Moreover, there is high uncertainty about the possible effects of the earthquake disaster on Japan's economy. Meanwhile, as for the rise in international commodity prices, the high growth in emerging and commodity-exporting economies that lies behind the price rise would lead to an increase in Japan's exports, while a decline in real purchasing power reflecting deterioration in the terms of trade could reduce private domestic demand in Japan. Regarding the outlook for prices, there is a possibility that inflation will rise more than expected if international commodity prices increase further, while there is also a risk that the rate of inflation will deviate downward from the Bank's baseline sc...