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New Procedures for Money Market Operations and Monetary Easing

March 19, 2001
Bank of Japan

(For immediate release)

  1. Japan's economic recovery has recently come to a pause after it slowed in late 2000 under the influence of a sharp downturn of the global economy.Prices have been showing weak developments and there is concern about increase in downward pressures on prices stemming from weak demand.
  2. In retrospect, both monetary and fiscal policies have taken considerably strong actions during the past decade in Japan.Whereas fiscal policy has repeatedly implemented expansionary measures, the Bank of Japan has adopted a policy of maintaining interest rates at levels unprecedentedly low during the history of central banking at home and abroad, thereby providing ample liquidity.All this notwithstanding, Japan's economy has failed to return to a sustainable growth path, and is now faced again with a threat of deterioration.
  3. In light of this, the Bank has come to a conclusion that the economic conditions warrant monetary easing as drastic as is unlikely to be taken under ordinary circumstances.Accordingly, the Bank decided at its Monetary Policy Meeting of today to take the following policy actions.
    1. a) Change in the operating target for money market operations
      The main operating target for money market operations be changed from the current uncollateralized overnight call rate to the outstanding balance of the current accounts at the Bank of Japan.Under the new procedures, the Bank provides ample liquidity, and the uncollateralized overnight call rate will be determined in the market at a certain level below the ceiling set by the Lombard-type lending facility.
    2. b) CPI guideline for the duration of the new procedures
      The new procedures for money market operations continue to be in place until the consumer price index (excluding perishables, on a nationwide statistics) registers stably a zero percent or an increase year on year.
    3. c) Increase in the current-account balance at the Bank of Japan and declines in interest rates
      For the time being, the balance outstanding at the Bank's current accounts be increased to around 5 trillion yen, or 1 trillion yen increase from the average outstanding of 4 trillion yen in February 2001 (see Attachment).As a consequence, it is anticipated that the uncollateralized overnight call rate will significantly decline from the current target level of 0.15 percent and stay close to zero percent under normal circumstances.
    4. d) ncrease in outright purchase of long-term government bonds
      The Bank will increase the amount of its outright purchase of long-term government bonds from the current 400 billion yen per month, in case it considers that increase to be necessary for providing liquidity smoothly.The outright purchase is, on the other hand, subject to the limitation that the outstanding amount of long-term government bonds effectively held by the Bank, i.e., after taking account of the government bond sales under gensaki repurchase agreements, be kept below the outstanding balance of banknotes issued.
  4. The Bank of Japan has decided to implement these policy measures with firm determination with a view to preventing prices from declining continuously as well as preparing a basis for sustainable economic growth.
  5. In order to make this monetary easing fully effective in restoring Japan's economy on a sustainable growth path, progress in structural reforms with respect to the financial system, e.g., resolution of the non-performing asset problem, as well as in the area of economy and industry is essential.Structural reform may be accompanied by painful adjustments.Without such adjustments, however, neither improvement in productivity nor sustainable economic growth can be obtained.The Bank of Japan strongly hopes that decisive actions be taken to address fundamental problems both with a clear support of the nation for structural reform and under a strong leadership of the government of Japan.

Attachment

March 19, 2001
Bank of Japan

At the Monetary Policy Meeting held today, the Bank of Japan decided, by majority vote, to change the guideline for money market operations for the inter-meeting period into the following:

The Bank of Japan will conduct money market operations, aiming the outstanding balance of the current accounts at the Bank at around 5 trillion yen.

Should there be a risk of financial market instability, e.g., a rapid surge in liquidity demand, the Bank will provide ampler liquidity irrespective of the guideline above.

Reference

Meeting hours :
9:01 a.m. to 5:27 p.m.

Members present :
Masaru Hayami (Chairman, Governor)
Sakuya Fujiwara (Deputy Governor) *
Yutaka Yamaguchi (Deputy Governor)
Susumu Taketomi
Toshio Miki
Nobuyuki Nakahara
Eiko Shinotsuka
Kazuo Ueda
Teizo Taya

  • Mr. Fujiwara was absent from 9:27 a.m. to 10:55 a.m. due to his attendance at a Diet meeting.

(Others present)

From Ministry of Finance :
Seiichiro Murakami, Senior Vice Minister (from 9:01 a.m.)

From Cabinet Office :
Kazumasa Iwata, Director General for Economic Assessment and Policy Analysis (9:01 a.m. to 12:12 p.m.)
Takanori Sakai, Senior Vice Minister (from 1:01 p.m.)

Release of Monthly Report of Recent Economic and Financial Developments:
(Consisting of "The Bank's View" and "The Background")

Japanese version of the entire report and English version of "The Bank's View"
2:00 p.m. on Wednesday, March 21, 2001

English version of "The Background"
With in a few business days from the release of "The Bank's View"

Release of minutes :,br> 2:00 p.m. on Tuesday, May 1, 2001