Minutes of the Monetary Policy Meeting

on March 13, 1998
(English translation prepared by the Bank staff based on the Japanese original)

April 14, 1998
Bank of Japan

A Monetary Policy Meeting of the Bank of Japan Policy Board was held in the Head Office of the Bank of Japan in Tokyo on Friday, March 13, 1998, from 9:00 a.m. to 11:28 a.m., and from 0:40 p.m. to 2:10 p.m. ¹

Policy Board Members Present Mr. Y. Matsushita, Chairman, Governor of the Bank of Japan ²
Mr. S. Koino, appointed member
Mr. Y. Gotoh, appointed member
Mr. S. Taketomi, appointed member
Mr. T. Nakagawa, representative of the Ministry of Finance
Mr. Y. Fujishima, representative of the Economic Planning Agency

Reporting Staff Mr. T. Fukui, Senior Deputy Governor
Mr. A. Nagashima, Deputy Governor for International Relations
Mr. J. Yonezawa, Executive Director
Mr. Y. Yamaguchi, Executive Director
Mr. T. Kawase, Director, Policy Planning Department
Mr. K. Takeshima, Director, Credit and Market Management Department
Mr. Y. Kawahara, Adviser to the Governor, Credit and Market Management Department
Mr. M. Matsushima, Director, Research and Statistics Department

Secretariat of the Monetary Policy Meeting Mr. T. Mitani, Director, Secretariat of the Policy Board
Mr. S. Watanabe, Associate Adviser, Secretariat of the Policy Board
Mr. K. Yamamoto, Chief Manager, Planning Division, Policy Planning Department
Mr. M. Amamiya, Associate Adviser, Policy Planning Department

The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on April 9, 1998.
Mr. Matsushita was not present from 9:00 a.m. to 11:28 a.m. and from 1:44 p.m. to 2:10 p.m., having gone to appear before the Budget Committee of the House of Representatives. The members with voting rights elected from among themselves Mr. Koino as acting chairman to substitute for Mr. Matsushita during his absence.

I. Election of an Acting Chairman

Before proceeding with the meeting, the three members having voting rights present at the meeting elected from among themselves Mr. Koino as acting chairman to substitute for Mr. Matsushita during the latter's appearance before the Budget Committee of the House of Representatives in response to a request to give his opinion on various issues.

II. Summary of Staff Reports ³

A. Recent Money Market Operations

Market operations in the period since the previous meeting on February 26, 1998 were conducted in accordance with the guideline determined at the previous meeting, which was to encourage the uncollateralized overnight call rate to remain on average slightly below the official discount rate. The Bank supplied ample liquidity to the market, utilizing various market operations instruments. As a result, the uncollateralized overnight call rate remained generally stable, although with some fluctuation.

Interest rates on term instruments trended downward from the end of February, in part because (1) market participants had secured a considerable proportion of the funds necessary for the fiscal-year-end settlement in March, following the Bank's increased provision of funds with relatively long-term maturities, due after the turn of the fiscal year, in the market, and (2) progress was made in the implementation of financial system stabilization measures including the use of public funds. As for the outlook, the view prevailed in the market that rates on term instruments would not continue falling, because of participants' concern about credit risk. However, there was also a view that the rates were likely to decline further due to such factors as relaxed money market conditions resulting from the ample provision of liquidity by the Bank.

B. Recent Developments in the Foreign Exchange Market and Overseas Economic and Financial Conditions

1. Developments in the foreign exchange market

In the period since the previous meeting, the yen depreciated somewhat against the U.S. dollar partly reflecting continuing strong economic growth in the United States. The value of the yen fluctuated against the deutsche mark. East Asian currencies were generally stabilizing, although some currencies such as the Indonesian rupiah remained rather weak. The nominal effective exchange rate of the yen was pushed down slightly by the yen's depreciation against the U.S. dollar.

2. Overseas economic and financial developments

In the United States, economic activity continued to expand firmly, with particular strength in household spending, while the rate of unemployment remained low. Producer prices were weakening slightly, and prices on the whole continued to be stable. Long-term interest rates declined somewhat reflecting the stable price developments, and stock prices continued to show substantial increases reflecting the sustained strength of economic activity. Growth of money supply accelerated.

In Europe, export growth in Germany lost its previous momentum, having only a limited stimulative effect on domestic demand. Economic recovery continued in France, with an upturn in private consumption following a recovery in exports. In the United Kingdom, there were some indications of an economic slowdown such as a reduction in net exports reflecting appreciation of the pound sterling. However, domestic demand expanded steadily and labor market conditions remained tight. As a result, price developments continued to present a delicate situation in relation to the inflation target.

In East Asia, there were signs of improvement in the current account balances of some countries, but domestic demand continued to weaken further. The stock markets showed some fluctuation.

C. Economic and Financial Developments in Japan

1. The real economy

With respect to final demand, net exports continued to increase and underpinned the economy. Business fixed investment, which had been on an upward trend, however, seemed to have peaked out. Meanwhile, private consumption continued to stagnate reflecting cautious household sentiment. Housing investment continued to be weak and public-sector investment decreased. Reflecting such weak final demand, inventory adjustment pressures intensified, and industrial production continued to decline. This consequently exerted a negative influence on corporate profits, employment, and income conditions.

As regards the outlook for the economy, positive effects were expected from the measures to stabilize the financial system and from the special tax-cut measures. However, a conspicuous recovery in domestic final demand was hardly foreseeable for some time, and it was considered that the recent weakening of the income formation could lead to a further deterioration in domestic demand. In addition, downside risks such as adjustments in other Asian economies and the financial developments in Japan (as explained below) should be carefully monitored.

2. Prices

With regard to prices, wholesale prices continued to decline. On the other hand, the year-to-year change in consumer prices, excluding the effects of institutional changes (such as the rise in the consumption tax rate), remained at a level slightly above that of the previous year, although its margin of increase was narrowing. As for the future, prices overall were likely to soften for some time since the output gap in the domestic economy might continue to expand and overseas commodity prices had declined due to the deterioration of market conditions in Asia.

3. Financial developments

Financial markets showed the following developments. In the money markets, interest rates on term instruments clearly started to decline. This was partly due to the Bank's ample provision of funds through contracts that mature after the fiscal year-end and progress toward the implementation of financial system stabilization measures. It was to be noted, however, that the levels of such rates were still high compared to those prevailing before autumn 1997. This could be attributed to the continuing cautious attitudes of market participants toward credit risk. Long-term government bond yields had been on a declining trend since the beginning of February reflecting weak economic indicators, although with some fluctuations caused by market anticipation of an additional economic package. Stock prices were moving in a narrow range reflecting two offsetting factors: the weakness in economic indicators and corporate earnings, and progress in financial system stabilization measures.

With respect to monetary aggregates, growth in money stock picked up further in January partly due to the substantial shift of funds away from investment trusts. Meanwhile, the decline in private bank lending expanded in February. However, corporate financing through channels other than bank lending, such as via the capital market, expanded and total volume of funds raised by firms might have increased. Nevertheless, banks continued to be cautious in extending credits with a view to improving their medium- to long-term profitability and financial soundness, although capital constraints on their lending capacity had recently eased somewhat. In such circumstances, some firms, especially small and medium-sized firms, were facing difficult financing conditions. Moreover, fund-raising costs of firms appeared to have increased amid heightened awareness of credit risk. These financial developments and their influence on the economy continued to warrant careful monitoring.

3Reports were made based on information available at the time of the meeting.

III. Summary of Discussions by the Policy Board on Economic and Financial Developments

In the Policy Board's discussion of recent economic and financial developments in Japan, many of the members pointed out that the January-March quarter of 1998 featured the following developments.

(a) Final demand and industrial production remained weak after falling significantly in the October-December quarter of 1997, but further substantial declines had been averted. This was because (1) a further deterioration of consumer sentiment had been prevented due partly to reduced concern about the stability of the financial system and (2) the upward trend in exports was maintained.
(b) However, inventory and production adjustments persisted and squeezed corporate profits, causing firms to become cautious about fixed investment, and also beginning to adversely affect employment and income. These suggested stronger downward pressures on the economy.
(c) Long-term interest rates continued to decline, which indicated a strong possibility that the business sentiment of market participants was deteriorating further.

As a result of the above, all of the members agreed that the economy remained stagnant, with increasing downward pressures on economic activities.

The members then discussed the outlook for the economy, focusing on developments in private consumption, business fixed investment, and exports.

Many members commented that as the Japanese economy matured, its overall condition was more greatly influenced by household spending such as private consumption. Therefore, in order for overall economic activity to recover, an improvement in household confidence, which would translate into a clearly higher propensity to consume, was essential. In this regard, the members expected that the introduction of the special income tax reduction and financial system stabilization measures should have favorable effects. However, in view of the weak condition of employment and income, the majority of the members saw little possibility over the near term that the propensity to consume would rise significantly.

The majority of the members were also cautious about the outlook for business fixed investment. It was pointed out that firms were abandoning their conventional investment strategy of keeping in line with others in the same industry, and were attaching more importance than before to their profits in determining their fixed investment. Therefore, projection of corporate profits would be a critical factor in projecting developments in business fixed investment.

Many of the members also commented that exports on the whole continued to support the economy, but negative impacts of adjustments in the Asian economies were becoming apparent. Therefore, they considered it necessary to monitor closely future developments in Japan's exports.

With regard to the lending attitude of financial institutions, many members commented that the constraining effect of capital adequacy requirements on financial institutions' lending activity had been alleviated partly due to the introduction of financial system stabilization measures. However, financial institutions continued to take a cautious lending stance, and therefore, it was necessary to watch carefully the effects of such cautiousness on corporate financing and real economic activity.

It was pointed out that from a long-term perspective, financial institutions needed to streamline and increase the efficiency of their activities in order for Japan's financial system to be strengthened. In the process, it was inevitable that the lending stance of financial institutions would become cautious. There was also a remark that in the long term, both lenders and borrowers should establish and adopt lending practices that more reflect credit risk assessments.

In the Board's discussion of price developments, all of the members agreed that prices were likely to remain weak on the whole reflecting relaxed domestic supply and demand conditions and declining international commodities prices.

Members then discussed the effects of weak price developments on economic activity. It was pointed out that a decline in prices would decrease firms' nominal cash flows, and this would reduce firms' capacity to write down excessive plant and equipment and nonperforming assets, delaying progress in balance-sheet adjustment. It was also commented that lower prices would raise real interest rates and squeeze corporate profits, increasing downward pressures on economic activity. On the other hand, the observation was made that the current weakness of price developments in part reflected narrowing of differentials between domestic and overseas prices and reduction of inefficiency in the economy. In this regard, price decreases would have favorable effects on household income and corporate profits through the lowering of living costs and production costs--that is, through improvement of the terms of trade.

As there was little experience of deflationary price developments in the industrialized countries and few analyses had been made in the past, the majority of the members considered it important to assess the effects of recent price developments from a wide perspective, taking into consideration all of the issues mentioned above.

IV. Summary of Discussions on Monetary Policy for the Immediate Future

Based on the Board's discussion of recent economic and financial developments, members first discussed the general issues involved in strengthening the foundation of economic recovery.

Based on the understanding that the influence of household spending on the overall condition of the economy increased, many of the members considered it important to strengthen the households' confidence in future economic developments. In this regard, they expected the special income tax reduction and financial system stabilization measures to have favorable effects. At the same time, they noted the significance of clearly indicating a medium- to long-term economic policy consistent with the much-needed structural reform with a view to minimizing uncertainty about the economy.

It was pointed out that recent weakness in price developments was supporting corporate profits by improving the terms of trade, and that the decrease in profits was attributable to falls in sales volumes. It was suggested that, therefore, economic policy for the immediate future should be aimed at promoting recovery in sales volumes by strengthening consumer confidence.

In the financial markets, money market interest rates on term instruments were clearly declining and the "Japan premium" in international markets was narrowing. Many members considered these to indicate that the Bank's provision of ample funds in the money market and the government's introduction of financial system stabilization measures had begun to bear fruit.

However, members pointed out that while financial institutions' concern about liquidity shortages near the fiscal year-end had been reduced, market participants' concern about credit risk would remain. It was possible that market participants and financial institutions had become more rigorous in their credit risk assessments, and these were being more accurately reflected in the formulation of interest rates. These structural changes in the market, it was suggested, might prevent market interest rates from returning to the levels prevailing before autumn 1997.

Many members commented that although they expected money market conditions to ease after the turn of the fiscal year, the Bank should continue to watch closely the market conditions in its conduct of money market operations. In addition, the members considered it necessary to pay close attention to the market interest rate developments and the effects of such developments on lending rates and real economic activity.

Based on such a discussion, a remark was made that the need for further monetary easing to relax the tightened money market conditions in the run-up to the fiscal-year-end settlement in March had been reduced.

In the Board's discussion of the basic thought behind monetary policy for the immediate future, a member commented that further monetary easing could be an appropriate choice in view of the increasing downward pressure on the economy. However, all of the members, including the above member, shared the view that they needed to examine carefully the necessity and effectiveness of additional monetary easing, taking into due consideration the overall economic condition and the effects of additional economic measures by the government.

Members pointed out that they needed to see whether the strengthening downward pressure on economic activity would come to urge not only a cut in overtime wages and part-time workers, but also a reduction of the regularly employed, and how serious the adjustment in business fixed investment would become. They also considered it important to observe price movements carefully in due consideration of the possible effects of current weak prices on economic activity. The members referred to various other points to be considered before implementing further monetary easing. These included the risk that the confidence of economic entities would be impaired further, and the possibility that the stimulating effects of lower interest rates on business fixed investment would be limited due to the weak business sentiment.

During the Board's discussion, the member representing the Ministry of Finance explained that in order to improve the sentiment of households and firms, it was important to steadily implement the various measures decided by the government, including the supplementary budget for fiscal 1997 and the financial system stabilization measures. The member explained that according to the Ministry's Business Outlook Survey, firms considered that financial institutions continued to display a strict attitude on lending. Therefore, the government intended to take, in addition to the series of financial system stabilization measures, additional measures including expansion of the loan facilities of government financial institutions.

The representative of the Economic Planning Agency explained that, with a view to strengthening the confidence of firms and households, the Agency was working with other ministries and agencies to formulate policies for further deregulation and for invigorating the economy, as part of the fourth emergency economic package proposed by the Liberal Democratic Party. As for a longer-term issue of the Japanese economy, the Cabinet was carrying out six reforms in Japan's economic and social systems, and the Economic Council was working on creating a future vision of the Japanese economy.

V. Votes

At the conclusion of the Board's discussion, all of the members agreed that in the implementation of monetary policy for the intermeeting period ahead, the Bank should maintain the current easy stance of monetary policy and promote the continued permeation of its effects on interest rates on term instruments. In doing so, the Bank should monitor closely economic and financial developments, including the implementation of various measures by the government and their effects.

Based on this agreement, the chairman formulated the following policy proposal, on which votes were taken.

Policy Proposal:

The guideline for money market operations in the intermeeting period would be as follows, and published by the attached press release.

The Bank of Japan would encourage the uncollateralized overnight call rate to remain on average slightly below the official discount rate.

Votes for this proposal:: Mr. Y. Matsushita
Mr. S. Koino
Mr. Y. Gotoh
Mr. S. Taketomi
Votes against this proposal:: None

VI. Approval of the Minutes of the Monetary Policy Meeting Held on February 13, 1998

The Policy Board approved the minutes of the Monetary Policy Meeting held on February 13, 1998, for release on March 18.

VII. Approval of the Bank's View on Recent Economic and Financial Developments

At the end of the meeting, the Policy Board approved "The Bank's View" on recent economic and financial developments, which would be published on March 17, 1998 in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background"). ⁴

4The original full text, written in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on March 17, 1998 together with the English version of The Bank's View. The English version of The Background was published on March 27, 1998.

Attachment

For immediate release

March 13, 1998
Bank of Japan

The Bank today held a Monetary Policy Meeting, a regular meeting of the Policy Board on monetary policy.

By unanimous vote, the Policy Board decided to leave monetary policy unchanged.