On the Current Monetary Policy
September 21, 1999
Bank of Japan
- At the Monetary Policy Meeting held today, the Bank of Japan decided to continue the zero interest rate policy.
- The contents of discussions during Monetary Policy Meetings are usually published approximately one month after each Meeting as "Minutes." However, in view of the fact that the conduct of monetary policy has attracted unusually high attention, both domestically and overseas, against the backdrop of such developments as the rapid and large fluctuation in the foreign exchange rate, we considered it appropriate to explain the main points of contention in today's discussion immediately after the meeting.
(Zero interest rate policy and quantitative easing)
- Since the launch of the zero interest rate policy in February, the Bank has continued to provide the financial market with ample funds to guide the overnight call rate as low as possible, currently at virtually zero percent, as exhibited by the following:
- To keep the call rate at virtually zero percent in a stable manner, the Bank is continuing to provide funds in the amount of some 1 trillion yen more than the required reserve (on average about 4 trillion yen daily). However, since sentiment has permeated among financial institutions that they can always obtain almost cost-free funds, the incentive to hold funds has diminished. As a result, 70 to 80 percent of excess funds provided by the Bank is accumulating at such institutions as Tanshi companies (fund brokers).
- Even when the Bank tries to provide almost cost-free funds through its open market operations, there are cases where actual subscription by financial institutions falls short of the announced amount.
(Effects of providing additional funds)
- Recently we have heard some arguments that the Bank should provide more ample funds in order to stabilize the foreign exchange rate. However, given the current financial market situations, any additional injection of liquidity would only result in further accumulation of excess funds at institutions such as Tanshi companies. In such a situation, it is difficult to envisage any visible effects on interest rates, the behavior of financial institutions and non-financial institutions, and asset prices including the foreign exchange rate.
- There is a view that the Bank should take advantage of the market's perception that "additional fund provision" would work. However, material effects are not likely expected and at best temporary, if any. Furthermore, we as a central bank will not take a measure that is not accountable with regard to its purpose and effects.
(Foreign exchange rate and monetary policy)
- The Bank believes it desirable that the foreign exchange rate should move in a stable fashion reflecting economic fundamentals. Excessive volatility is very likely to have an adverse impact on the economy and prices. The recent appreciation of the yen has been too rapid and its effects on corporate profits, among other things, is a matter of concern. We believe this view is shared with the government.
- The foreign exchange rate in itself is not a direct objective of monetary policy. One of the precious lessons we learned from the experience of policy operations during the bubble period is that, monetary policy operations linked with control of the foreign exchange rate runs a risk of leading to erroneous policy decisions. Having said this, it does not mean that monetary policy is pursued without any consideration to the development of the foreign exchange rate. The Bank considers it important to carefully monitor the development of the foreign exchange rate from the viewpoint of how it affects the economy and prices.
- Since the recent appreciation of the yen has been rapid, we should carefully monitor its adverse impact on corporate profits, exports, and the overall economy. At the same time, however, we are seeing some signs of positive developments such as emerging effects of various policy measures already taken and the recovery of Asian economies. We believe that we are now at a stage to carefully focus attention on what effects these various factors exert on the economy.
- In relation to the foreign exchange rate policy, we have heard arguments in favor of non-sterilized intervention. In the reserve market, however, there are various flows of funds such as currency in circulation and Treasury funds other than those resulting from the intervention. The Bank conducts its daily market operations taking into account all the money flows, in order to create ample reserves to such an extent as described above. This strong commitment of fund provision is consistent with the government's current foreign exchange rate policy.
(Monetary policy for the periods ahead)
- The Bank of Japan has been pursuing an unprecedented accommodative monetary policy and is explicitly committed to continue this policy until deflationary concerns subside. The Bank views the current state of the Japanese economy as having stopped deteriorating with some bright signs, though a clear and sustainable recovery of private demand has yet to be seen. In pursuing the zero interest rate policy, we need to carefully examine its adverse side-effects, but deem it important to support the economic recovery by continuing easy monetary policy for the periods ahead.
- In the past few days, the market has substantially fluctuated by speculations on monetary policy. What should be clear is that the conduct of monetary policy is exclusively decided by majority vote at the Monetary Policy Meeting, a regular meeting of the Policy Board. It is never the case that our policy is determined in advance or in consultation with outside bodies. We would like to emphasize this point. The Bank will continuously endeavor to explain the policy decision-making framework under the new Bank of Japan Law and the thinking behind the conduct of monetary policy.