Minutes of the Monetary Policy Meeting

on September 24, 1998
(English translation prepared by the Bank staff based on the Japanese original)

November 2, 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 Thursday, September 24, 1998, from 9:02 a.m. to 12:24 p.m., and from 1:02 p.m. to 3:02 p.m.¹

Policy Board Members Present
Mr. M. Hayami, Chairman, Governor of the Bank of Japan
Mr. S. Fujiwara, Deputy Governor of the Bank of Japan
Mr. Y. Yamaguchi, Deputy Governor of the Bank of Japan
Mr. Y. Gotoh
Mr. S. Taketomi
Mr. T. Miki
Mr. N. Nakahara
Ms. E. Shinotsuka
Mr. K. Ueda

Government Representatives Present
Mr. S. Tanigaki, State Secretary for Finance, Ministry of Finance²
Mr. E. Kawade, Director-General of the Coordination Bureau, Economic Planning Agency

Reporting Staff
Mr. I. Kuroda, Executive Director
Mr. M. Matsushima, Executive Director
Mr. I. Yamashita, Director, Financial Markets Department
Mr. T. Murakami, Director, International Department
Mr. S. Murayama, Director, Research and Statistics Department
Mr. H. Hayakawa, Research and Statistics Department
Mr. K. Yamamoto, Adviser and Chief Manager, Planning Division 1, Policy Planning Office

Secretariat of the Monetary Policy Meeting
Mr. K. Koike, Director, Secretariat of the Policy Board
Mr. S. Hida, Manager, Secretariat of the Policy Board
Mr. K. Momma, Manager, Policy Planning Office

The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on October 28, 1998, as "a document which contains an outline of the discussion at the meeting" stipulated in Article 20, Paragraph 1 of the Bank of Japan Law of 1997. Those present are referred to by their titles at the time of the meeting.
Mr. Tanigaki was present from 9:02 a.m. to 12:24 p.m.

I. Approval of the Minutes of the Monetary Policy Meeting Held on August 11, 1998

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting held on August 11, 1998, for release on September 29, 1998.

II. Summary of Staff Reports on Economic and Financial Developments³

A. Money Market Operations in the Intermeeting Period

Market operations in the period since the previous meeting on September 9 were conducted in accordance with the following eased guideline determined at the meeting:

The Bank of Japan will encourage the uncollateralized overnight call rate to move on average around 0.25%.

Regardless of the above guideline for the call rate, the Bank of Japan will provide more ample funds, if judged necessary, to maintain the stability of the financial markets.

As a result, the weighted average of the uncollateralized overnight call rate from the day after the monetary policy change (September 10) to the last day of the reserve maintenance period (September 15) was 0.26 percent. The weighted average in the reserve maintenance period from September 16 to October 15 stood at 0.25 percent as of the day before the meeting, September 23.

The Bank's market operations since the policy change featured the following: (1) on September 10, the day after the policy change, the Bank expanded the amount of excess reserves as of the morning to 1.4 trillion yen, and this contributed to the smooth downward shift of the uncollateralized overnight call rate to the new target level; (2) on September 14, the last business day in the reserve maintenance period, upward pressure on the uncollateralized overnight call rate intensified, and in response, the Bank made an exceptional announcement in the morning that the Bank would not absorb excess reserves that afternoon; and (3) on September 16, the first day of the following reserve maintenance period, the Bank expanded the excess reserves as of the morning to counter the unstable market conditions observed on September 14, and as a result, the rate settled at 0.24 percent.

Meanwhile, interest rates on term instruments declined by almost 0.2 percent across the board, reflecting the easing of monetary policy. However, interest rates on term instruments with maturities of less than a month followed an upward trend, reflecting increasing demand of some financial institutions that had not procured funds needed for the semiannual settlement at the end of September.

Under these circumstances, the Bank intended to inject ample funds into the market toward the end of September, forecasting increase in demand for overnight funds. The Bank also intended to continue supplying ample term funds even after September, in anticipation of an increase in demand for yen for conversion into foreign-currency funds necessary toward the end of 1998.

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

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

1. Developments in foreign exchange markets

The yen dropped from the 133-134 yen to the 138-139 yen level against the U.S. dollar on European markets immediately after the Bank's announcement of monetary easing on September 9. On September 11, the yen shot up against the U.S. dollar to touch the 128-129 yen level, reflecting turmoil in the financial markets in Latin America and also related developments in the U.S. markets, such as falls in stock prices and rising expectation of monetary easing. However, there were also many factors placing downward pressure on the yen, such as the prolonged dispute in the Diet over financial revitalization bills and a decline in the Nikkei 225 Stock Average. As a result, the yen once again depreciated against the U.S. dollar to around the 135-136 yen level.

Meanwhile, the deutsche mark appreciated against the U.S. dollar reflecting expectation of monetary easing in the United States. As for East Asian currencies, the Indonesian rupiah appreciated against the U.S. dollar, reflecting the markets' presumption that the Indonesian government would impose restrictions on short-term capital flow, while the Korean won weakened due to increased demand for U.S. dollars at Korean firms to repay external debts.

2. Overseas economic and financial developments

The U.S. economy in general continued to expand steadily. However, stock prices continued to decline reflecting concern that corporate earnings of U.S. firms might be affected by the turmoil in the financial markets in Latin America. In the Beige Book of September 16, 1998, some Federal Reserve Banks reported a sharp deterioration in the economic prospects in their districts for the year-end into 1999. Meanwhile, the Producer Price Index (PPI) for August slid 0.4 percent from the previous month, showing a substantially larger fall than the 0.1 percent the markets had projected. Amid these economic and price developments, anticipation of interest rate declines grew in the markets, partly influenced by remarks by Mr. Clinton, president of the United States, and Mr. Greenspan, chairman of the Board of Governors of the Federal Reserve System, hinting at the possibility of monetary easing. Reflecting such expectation and "flight to quality," yields on 30-year U.S. treasury bonds moved at the 5.1-5.2 percent level, the lowest since the bonds were first issued in the 1970s.

In Europe, Germany and France continued to exhibit moderate economic expansion in general, particularly in domestic demand. In the United Kingdom, private consumption showed signs of weakening, mainly in durable goods.

In East Asia, economic conditions remained stagnant in the Newly Industrializing Economies (NIEs) and the Association of South East Asian Nations (ASEAN). Under these circumstances, China and Malaysia were implementing economic stimulative measures.

C. Economic and Financial Developments in Japan

1. Economic developments

Economic indicators released in the period since the previous meeting showed that public-sector investment had firmly hit bottom, while also showing an intensification of the cautiousness of consumer sentiment and a significant decrease in business fixed investment, confirming the weakness in the procyclical components of final demand.

In particular, the GDP statistics and the Ministry of Finance's Financial Statements Statistics of Corporations for the April-June quarter indicated unequivocally a further drop in business fixed investment and corporate profits. According to the GDP statistics, business fixed investment for the April-June quarter declined significantly by 5.5 percent from the previous quarter on a seasonally adjusted basis. Together with the January-March quarter, the decline totaled 10.4 percent, marking the largest two-quarter decline since the statistics were first compiled in 1955. Business fixed investment by sector showed conspicuous weakness at small and medium-sized nonmanufacturers. The significant decline in business fixed investment in this sector, which relied on bank loans more than any other sector, suggested that the financial developments since the autumn of 1997 had contributed through various channels to declines in investment activity.

Corporate profits also showed an across-the-board deterioration. Particularly at small and medium-sized nonmanufacturers, personnel expenses squeezed corporate profits, because these firms had continued to take on more workers even after the collapse of the economic "bubble," making it all the more difficult for them to deal with a serious fall in sales since the spring of 1997. This fixed-cost burden could be considered to be causing unprecedented employment adjustments in this sector in addition to reductions in business fixed investment.

Although private consumption-related indicators remained level, consumer confidence, as indicated by the Consumer Sentiment Index of the Nippon Research Institute, deteriorated to the worst level since the index was first compiled.

2. Financial developments

Since the easing of monetary policy on September 9, the uncollateralized overnight call rate had stayed at around 0.25 percent, in line with the new guideline for market operations, and interest rates on term instruments declined more or less in proportion to the fall in the uncollateralized overnight call rate. In view of these developments, large banks such as city banks lowered their short-term prime lending rates by 0.125 percent.

As for the credit risk premium on short-term interest rates, the Japan premium and the interest rate spread between Euro-yen Tokyo Interbank Offered Rate (TIBOR) and TBs remained generally stable. This might have resulted from two factors that worked to offset each other: (1) the Bank's commitment to provide ample funds, which caused the risk premium to shrink; and (2) the slide in stock prices, which made the markets more alert to the credit risks of financial institutions.

Yields on long-term government bonds declined, reflecting not only the fall in short-term interest rates, but also heightened concern over the ongoing economic deterioration and speculation about a possible increase in the Bank's outright purchase of government bonds. The decline in the yields, therefore, was faster than that in short-term interest rates.

Stock prices dropped significantly from the level before the monetary easing, affected by the prolonged uncertainty regarding financial revitalization bills and by the falls in the U.S. stock markets reflecting concern over the outlook for the U.S. economy.

With respect to monetary aggregates, the year-to-year growth in M2+CDs in August registered 3.9 percent on a preliminary basis, showing a slight recovery from the 3.5 percent registered in July. Demand for funds to be put into economic activities remained weak, but firms, mainly large firms, became more active in securing at an early stage large amounts of on-hand liquidity for the semiannual settlement in view of the cautious lending attitude of financial institutions.

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

A. The Current Economic Situation

In the Board's discussion of the current economic situation, members agreed that many economic indicators released after the previous meeting on September 9 confirmed that overall economic conditions had continued to deteriorate, although there were clearer signs than heretofore that public-sector investment had bottomed out.

On public-sector investment, a few members commented that it was good news that there was clear evidence that the decline had halted. These members, however, were cautious about whether the effects would permeate throughout the private sector, and recognized the need for continued close monitoring. One stated that the degree of contribution by public-sector investment in pushing up GDP might merely be enough to compensate for the decrease in private-sector business fixed investment seen in the January-March and April-June quarters. Another member observed that the delay until only recently in the bottoming out of public-sector investment had allowed the negative cycle in the private sector to gather further momentum. However, a third member noted some favorable consequences of this delay. The member argued that, with the supplementary budgets for fiscal 1998 adopted by many local governments in September, public works orders were certain to increase. As a result, implementation of public works would continue uninterrupted in the January-March quarter, when they otherwise would have undergone a seasonal decline, and produce a smooth transition to fiscal 1999 by creating the effects of a "15-month budget."

With regard to developments in the private sector, many members expressed strong concerns about decreasing corporate profits, falling business fixed investment, and strengthening employment adjustment pressure, based on GDP statistics and the Financial Statements Statistics of Corporations for the April-June quarter.

One member pointed out that business fixed investment on a GDP basis decreased at an appalling annual pace of over 20 percent for two consecutive quarters in 1998, in January-March and April-June. The member added that business fixed investment as a percentage of nominal GDP had declined considerably to 14.4 percent, and if this trend continued, it would drop to about 11 percent, falling below the record low (for the period since the 1970s) of 13.5 percent marked in the first quarter of 1978.

A few members attributed this reduction in business fixed investment to deterioration in corporate profits. These members commented that the business results for the first half of fiscal 1998 were expected to be very poor reflecting the sluggishness of stock prices. The analysis of a different member, based on the business fixed investment function, was that the precipitous decrease in business fixed investment in the manufacturing sector in the first half of 1998 could be more or less explained by declines in sales and corporate profits, but that these factors could not sufficiently account for the sizable drop in the nonmanufacturing sector. The member, citing these results, suggested that financial constraints and/or structural adjustments were putting downward pressure on business fixed investment in the nonmanufacturing sector, mainly in small and medium-sized firms. In relation to this point, a member expressed the view that even some industries in the manufacturing sector such as electric furnaces and semiconductors, in particular DRAM (dynamic random access memory) manufacturing, had entered a structural adjustment phase.

Many members noted the fact that adjustment pressures in the corporate sector were making themselves felt strongly in employment, and that the burden of personnel expenses was increasing especially in small firms. One member expressed a concern that the recent strength of employment adjustment pressure, as indicated by the personnel cost-to-sales ratio, suggested that the unemployment rate in the future would rise to a level unprecedented in Japan. Based on such a prospect, the member remarked that labor market issues, such as reform of the employment structure and unemployment insurance, were becoming increasingly important. Another member also pointed out that, comparing various indicators between the recession following the bursting of the economic "bubble" and the current adjustment phase, employment-related indicators were substantially worse for the present phase. A third member added that, although the year-to-year growth in scheduled cash earnings for July was revised upward from minus 0.3 percent on a preliminary basis to 0 percent, this should not be a cause for relief, predicting that scheduled cash earnings would soon undergo year-to-year declines.

B. The Economic Outlook

On the economic outlook, while there were slight differences of opinion among members, they generally shared the view that (1) fiscal measures would contain the downturn in the economy, at least temporarily, in the second half of fiscal 1998; but (2) the weakness of the private sector made it uncertain whether the halt would be followed by a self-sustained economic recovery, and there were substantial downside risks to the economy associated with developments abroad and Japan's financial system. On the basis of this judgment, members commented that it was important that the government present a long-term plan for revitalizing the Japanese economy when implementing fiscal policies and structural reforms.

Specifically, one member remarked that it was favorable that uninterrupted public investment could be expected in the October-December and January-March quarters, and therefore presumed that, at this point, few firms were anticipating a further deterioration in economic conditions in the second half of fiscal 1998. Another member mentioned that, because the current account surplus was unlikely to decrease, although this was subject to some uncertainty, and consumer sentiment could improve to some extent, a moderate economic recovery was possible in the second half of fiscal 1998 into fiscal 1999.

By contrast, a third member commented that two developments indicated that the economy was in a self-sustained contraction process: (1) the personnel cost-to-sales ratio was rising while scheduled cash earnings showed no increase; and (2) the current account surplus was expanding while exports decreased. This member projected that the momentum of contraction would not subside for some time. Another member also expressed a very gloomy view of the economic outlook. This member, citing a fall of more than 15 percent in coincident indicators from their peak in March 1997, pointed out that the present pace of economic deterioration was as fast as that during the recession following the bursting of the economic "bubble," and the current downturn had not been contained yet. The member further suggested that a definite reversal of the decline was not likely before or even during the April-June quarter of 1999, as two leading indicators running eight and eleven months ahead of economic developments were still declining.

This member also made cautious predictions on the individual components of final demand, as follows. Business fixed investment was likely to decrease further. The prospects for exports, although the staff and some members projected an increase, did not warrant optimism because of a possible additional decline in exports to Asia and a slowdown in those to the United States and Europe. As for household spending, housing investment could not be expected to recover in the immediate future in view of the fall in the ratio of monthly condominium sales to supply, and accordingly, there was no prospect of an upturn in consumption of durable goods. Based on these judgments, the member concluded that, although the economy might show a temporary rebound boosted by public-sector investment, there was the risk that it would subsequently fall back as it did in 1993, and that the economy would not bottom out until the October-December quarter of 1999.

Of those members who did not have as gloomy a view of the outlook, many expressed a strong concern about the downside risks to the economy. For instance, the member who stated earlier that a moderate economic recovery was probable in the second half of fiscal 1998 into fiscal 1999 stressed that this was subject to substantial risk. The member pointed out two risk factors: (1) a possible conspicuous slowdown of the U.S. economy before any recovery in Asian economies; and (2) the lack of any immediate prospect of credit contraction being reversed.

In the discussion on the risks related to net exports, a member expressed the view that the world might be on the verge of a global recession in view of growing apprehension about the U.S. economy due to the situation in Russia and Latin America in addition to the continued instability in Asian economies. There was also an argument that, with Japan's current account surplus already at about 3 percent of nominal GDP, there was increased risk of trade friction. Specifically, one member was concerned that, although a sizable current account surplus might not be made an issue when the U.S. economy was robust, it might become a major issue in Japan-U.S. relations once the U.S. economy started to slow. Another member pointed out that the automobile, semiconductor, and iron and steel industries would have to restrain exports in the second half of fiscal 1998 in view of the potential issues in international trade in addition to weakening demand. As a result, the member predicted a decrease in exports overall.

On this point, one member noted that net exports, or exports minus imports, could continue to be regarded as a supporting factor for Japan's economy, because imports were likely to continue declining substantially considering the weakness of demand in Japan and the exchange rate of the yen. In relation to this argument, another member remarked that protracted declines in imports of manufactured and semi-manufactured goods from other Asian countries were a concern in the sense that such developments in Japan might nullify any momentum for a recovery in other Asian economies.

In relation to this discussion on the external balance, another member commented that the current exchange rate of the yen and the large current account surplus reflected economic fundamentals, and therefore, they should not be made an issue nor should they be taken into consideration in deciding monetary policy.

Regarding other risks to the economic outlook, as in previous meetings, many members commented on the risks associated with the financial system.

One member pointed out that the problems in the financial system would be a particularly large drag on the economy in the immediate future. The member noted that, although recent discussions on the financial system tended to focus on issues pertaining to a specific case, the important issue was to address the capital inadequacy of the banking sector as a whole, and injection of public funds was indispensable to promote restructuring of the industry. Another member commented that, with a negative cycle in which the deterioration in economic conditions increased corporate failures and nonperforming assets and this in turn further depressed the economy, revitalization of the financial system was a battle against time. The member expressed the view that it was therefore necessary to set out measures promptly to recapitalize the entire financial system. A third member expressed a concern that Japanese financial institutions as a whole, including those that had enough financial strength to survive, might be seen as having inadequate capital. The member emphasized that it was therefore important that financial institutions expeditiously dispose of bad assets according to their self-assessment of assets, restructure their businesses, and reorganize their industry, while with regard to policy measures, it was essential that a national consensus be reached soon on the injection of public funds.

Most of the other members also mentioned the importance of promptly establishing a scheme for the use of public funds.

At the same time, however, many members warned that the lending attitude of financial institutions could become even more cautious in the immediate future, even with implementation of financial system revitalization measures including the use of public funds. One member stated that it was necessary to acknowledge the possibility that the "credit crunch" would intensify in the early stages of rehabilitating the financial system. Another member made a similar comment that it should be borne in mind that the process of bad-asset disposal could involve an intensification of the "credit crunch," a slowing of economic growth, and an increase in the unemployment rate, as observed in the experiences of other countries. Another member remarked that the monetary easing adopted at the previous meeting, which would ensure liquidity in the interbank market, was only the first step to an economic recovery. The second step was to exert a positive influence on firms through financial intermediary functions, and this could not be taken without measures to revitalize the financial system.

A member made detailed comments on the impact of the "credit crunch" on corporate financing, referring also to developments in inter-company financing. The member pointed out that anxiety about firms' fund management toward the end of September had been generally resolved, with large firms such as trading companies providing overall support for firms in the same corporate group. According to this member, however, many firms were concerned that the lending attitude of financial institutions would become increasingly cautious in the second half of fiscal 1998. Therefore, independent firms not belonging to a corporate group, especially small nonmanufacturers, were likely to face severer financing conditions, one result of which would be an increase in bankruptcies. Moreover, trade credits extended by trading companies and other large firms were approaching their limits, and these companies had started to select the firms they would continue to support. Further, the member stated that progress in Diet deliberations toward injecting public funds into financial institutions with inadequate capital was a step in the right direction. This member noted, however, that (1) the move could have negative consequences, prompting financial institutions to collect substantial amounts of Category II loans in an attempt to restore their capital adequacy ratio so that they could avert a capital injection that would require stockholders and managers to bear responsibility for the situation; and (2) firms, aware of this possibility, were strongly concerned that the "credit crunch" would intensify.

Meanwhile, one member referred to the national land price survey of the National Land Agency for July, and expressed a concern that the continued fall in land prices would impede liquidation of problem assets and thereby the revitalization of the financial system.

C. Financial Developments

Discussions on financial developments focused on the financial markets' and firms' reaction to the monetary easing decided at the previous meeting. Many members considered that the action was appropriate and had in general been favorably received by the markets and firms.

One member expressed the view that the latest monetary easing was well received by the financial markets partly because it came before the release of the preliminary GDP figures for the April-June quarter of 1998. Another member remarked that the interest rate reduction had brought about a sizable decline in long-term interest rates and a faster than expected lowering of lending rates. Therefore, this interest rate cut could be expected to make some contribution to corporate profits and be evaluated positively, even though it might not give much impetus to firms' investment activity. Some of the other members also appreciated the significant decline in long-term interest rates. One member pointed out that, before the monetary easing, firms had requested only provision of liquidity, not expecting a lowering of interest rates to have much impact. However, firms in fact appreciated the lowering of interest rates once it had occurred. Further, regarding the frequently heard argument favoring monetary expansion while disapproving of an interest rate reduction, one member stressed that it was usually difficult to expand money without lowering interest rates.

Many members noted that the markets were highly appreciative of the fact that the Bank declared its strong commitment to provide ample liquidity in addition to lowering the call rate when announcing its policy change on September 9. A member, who expressed doubts about the effects of the lowering of interest rates as outlined later, also evaluated positively the Bank's indication of its commitment to supply liquidity.

Comments from somewhat different viewpoints were also made on the significance of the policy action. One member pointed out that the policy action might have had the additional effect of drawing attention to the need for appropriate global measures to counter the present situation, in which the turmoil in the emerging economies, which spread from Asia to Latin America, led to heightened awareness of credit risks worldwide. If this was indeed the case, the action could be considered to have been additionally beneficial. Another member expressed the view that the monetary easing might also have had the effect of stimulating efforts toward solving the problems in Japan's financial system. A third member remarked that there were appraisals abroad that the Bank's policy had underlined its determination to address the current economic and financial situation. A fourth member expressed the view that the Board was learning the effects on the markets of and problems arising from lowering interest rates that were already at a very low level, and the current experience might become a useful reference in monetary policy management in the future.

Few comments were made on how the monetary easing on September 9 would influence money stock and economic activity, as members considered that it was too early to discuss the issue. One member, however, stated that calculation based on past data showed that evident effects could be expected to appear in money stock and real economic growth toward the end of fiscal 1998 into fiscal 1999, although it would take about six months to assess the actual impact.

Concerning the relation between the Bank's monetary easing and developments in the foreign exchange markets, a few members commented that it was fortunate that the Bank's action had not pushed other Asian currencies into a chain of devaluation, partly due to the change in conditions pertaining to the U.S. dollar.

Meanwhile, one member questioned the effects of the monetary easing from various points of view. In outline the member's comments were as follows.

(1) Although firms thought favorably of the monetary easing in general in that it would promote financial system revitalization, they considered that it would not provide any substantial support for businesses, and therefore doubted its effectiveness in bringing about an economic recovery. This view was based on corporate managers' claims that, because large firms invested funds as well as raising them, a reduction in interest rates from an already low level led to a further deterioration in the net financial income.
(2) Because lending rates had declined by a larger margin than interest rates on deposits, the lowering of interest rates had not brought benefits even to financial institutions.
(3) There had in fact been more criticisms from the public than when monetary policy was eased in September 1995, such as that the Bank's view on the effects of the interest rate cut was unclear.
(4) There was a possibility that the policy action might be distorting the flow of funds by, for example, bringing about a contraction of the call market. That is, investment returns on money market transactions had become extremely small considering the commissions paid to money market dealers and the administration consignment fees paid by investment trusts, the largest investors in the call market, and this might make providers of funds reluctant to lend.

Concerning this member's opinion on firms' financial income, a member argued that, although there were indeed a number of firms having financial assets in excess of liabilities, it was evident that Japan's corporate sector as a whole had a significant amount of net liabilities. Therefore, the interest rate reduction should have positive effects on overall corporate profits.

Different opinions were also expressed on the argument that the monetary easing might be distorting the flow of funds. One member commented that, although the member had been concerned that the lowering of interest rates might trigger a shrinking of the interbank money markets, or provoke more serious problems of depositors becoming more selective about financial institutions or of funds shifting from deposits to foreign currency-denominated assets, such anxieties had proved unfounded, the only palpable outcome so far having been a shift in the interbank market from uncollateralized to collateralized transactions. Another member also claimed that no significant distortion in the flow of funds had occurred. This member expressed the view that the reduction of the call rates to an extremely low level was essentially expected to promote a little more risk-taking by investors, and therefore it was important for the immediate future to monitor and analyze carefully any changes in the flow of funds, including this aspect. A different member claimed that the shift of funds at issue here represented a normalization of flows rather than a distortion, and therefore, it should not be considered a problem.

As described above, the Board as a whole had a generally positive view about the markets' reaction so far to the monetary easing. The members who expressed such a view, however, also acknowledged that the action had its limits, based on the fact that it had not eliminated the risk premium or brought about a recovery in the confidence of economic entities in the economic outlook.

One member, observing that the risk premium on interest rates remained unchanged or had increased slightly and that stock prices continued to decline, expressed disappointment that the positive impacts of the monetary easing had not reached these areas, although that had been anticipated to some extent. Another member pointed out that the policy action was effective in the sense that it indicated to the markets the Bank's determination to prevent deflation. However, the member noted that it had not led to a recovery in the confidence of households, firms, or the markets, as seen in the continued decline in stock prices despite the considerable fall in long-term interest rates.

Members shared the view that the delay in the establishment of financial system revitalization measures was a major factor behind the limits to the effects of monetary easing. Many members also generally agreed that it was necessary to examine the effects of the policy action based on forthcoming economic data, and that it would be six months' to a year's time before they would be able to make an overall judgment.

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

Based on the Board's assessment of the economic and financial situation, the members discussed the basic thought on monetary policy for the immediate future.

The member who doubted the effects of the monetary easing on September 9 acknowledged that it was appropriate to retain the Bank's widely supported commitment to provide liquidity. However, the member claimed that the reduction in interest rates had been unnecessary, questioning whether the current low level of interest rates should be sustained. The member took this position on the grounds that (1) the call rate had declined to an extremely low level and this was causing a distortion in the flow of funds; (2) the latest interest rate cut was not effective in bringing about a recovery in corporate and household confidence; (3) there was now even less room to implement further monetary easing when it became truly necessary; and (4) the present situation in Japan was beyond the stage where it could be dealt with by a lowering of interest rates. Regarding the fourth point, the member, acknowledging that monetary policy was easy enough already, asserted that it was now best to expect fiscal policy to encourage an economic recovery, and that the greatest contribution the Bank could make was to support the formulation and implementation of financial system revitalization measures.

As outlined earlier, various opinions were expressed on the first point made by this member. On the latter three arguments, one member objected as follows: (1) it would require some time before any effects of the monetary easing appeared in corporate confidence, but many firms had, for the present, gained some relief from the policy action; (2) there was still room to implement additional monetary easing, although it had become more limited; and (3) it was important that the Bank implement whatever possible measures to address the current situation in Japan.

Based on these discussions, most members agreed that the Bank should maintain the current easy stance of monetary policy considering that it had only been two weeks since the policy change was adopted at the previous meeting. They also agreed that the Bank should observe and analyze carefully forthcoming evolvements in economic indicators and financial system revitalization measures in addition to the effects of the monetary easing.

With regard to some members' view that there still was room for further monetary easing, the member against the September 9 easing questioned whether the uncollateralized overnight call rate could actually be further reduced significantly, and what effects it would have. The member also claimed that those members who were positive about the feasibility of additional policy moves should have a common understanding on these issues. In response to this, some members commented that the possibility and the effects of further monetary easing should be judged by each member based on the fundamental thinking shared by the Board members.

Meanwhile, all of the members agreed that the Bank should retain its exceptional commitment made at the previous meeting to supply liquidity. Various supplementary comments were made in relation to this point.

One member attempted to clarify the Board's understanding of when the Bank was to provide exceptionally large amounts of liquidity to allow the call rate to fall below the target level of 0.25 percent. This member mentioned two possibilities. The first case was when financial institutions' demand for liquidity increased reflecting, for example, heightened concern about the stability of the financial system. In such a situation, the Bank's efforts to maintain the call rate at around 0.25 percent should essentially provide sufficient liquidity in the markets, but there might also be instances where dispelling the markets' concerns would require further injection of liquidity to the extent that the call rate declined below the target. The second case was when the risk premium on interest rates increased and interest rates on term instruments surged, which could be effectively countered only by allowing the call rate to decline. Another member agreed to these cases, but added that contingencies, by their nature, could be beyond the members' anticipation, and therefore the Board should allow for flexible responses instead of adhering only to the cases discussed above. Other members also agreed to these views.

Some opinions were also expressed regarding the prospect that firms would face more difficult financing conditions in the second half of fiscal 1998. One member stressed that the Bank's task for the immediate future was to ensure that the ample liquidity provided by the Bank was used to support all firms in normal financial condition, and emphasized the need to place priority on fostering the CP market, which would contribute to smooth corporate financing. Another member expressed a concern that, with financing conditions of banks and firms anticipated to become even severer, there might be some anxiety in the markets about whether the Bank would maintain its firm stance on providing liquidity after the semiannual settlement at the end of September. The member suggested that the Bank clearly convey to the markets its commitment to continue supplying ample liquidity even after the end of September in view of year-end demand by, for example, clearly adding such an indication to the guideline for money market operations. Most of the other members objected to modifying the guideline in any way for the reason that changes in the wording might invite misunderstanding of the Bank's policy stance. They, however, agreed that the Bank should show on every possible opportunity its resolution to provide liquidity even after the end of September.

Another member noted that the increasingly conspicuous risk premium differentials between individual banks suggested that provision of ample liquidity on a market-wide basis might not rule out the possibility that certain banks would become unable to raise funds in the markets. The member remarked that it was therefore necessary to carefully prepare possible policy responses in case the Bank needed to provide liquidity support for individual financial institutions. Further, a few members mentioned the importance of deliberating ways to diversify and improve market operations means.

V.Remarks by Government Representatives

Government representatives also gave their comments during the meeting. The representative from the Ministry of Finance made the following remarks.

(1) The government placed top priority on revitalizing the financial system and realizing an economic recovery. Regarding the financial revitalization bills, the head of the ruling Liberal Democratic Party, also Prime Minister, met individually with the leader of each opposition party to pave the way for a basic agreement, based on which further efforts would be made to have the bills passed in the present Diet session. The government considered prompt passage of the bills to be essential for revitalizing and stabilizing the financial system.
(2) The government would do its utmost to achieve a recovery of confidence in the financial system, which served functions vital to the entire economy. Such efforts would include promotion of a fundamental solution of the bad-loan problem of financial institutions, protection of depositors, ensuring of the stability of the financial system, and due consideration for sound, bona fide borrowers.

The representative from the Economic Planning Agency made the following remarks.

The preliminary GDP figures for the second quarter of 1998 confirmed that the economy was in a very severe situation. While fiscal policy effects were expected to appear fully in the near future, there were various sources of concern, such as the income and employment conditions, the bad-loan problem, and developments abroad. The government was determined to implement fiscal measures uninterruptedly under the 1999 budget to realize an economic recovery at the earliest possible time, and the Economic Strategy Council was to deliberate measures that would strengthen the public's confidence in Japan's future.

VI. Votes

At the conclusion of the above discussions, members agreed strongly that the Bank needed to remain fully committed to providing ample liquidity, in view of the persistently unstable financial markets and a possible further deterioration in firms' financing conditions. Members also generally agreed that the Bank should maintain the current easy stance of monetary policy, while keeping a close watch on the effects of fiscal policy measures already implemented as well as implementation of any additional ones, developments in financial system stabilization measures, and the effects of the latest monetary easing. On the other hand, there was also an opinion that the current interest rate level was inappropriate. Therefore, two policy proposals were put to the vote.

Ms. Shinotsuka was in favor of retaining the Bank's exceptional commitment to provide liquidity agreed on September 9, but proposed raising interest rates back to the level before September 9, claiming that the interest rate reduction had not been necessary. Based on this view, she made a proposal to adopt a guideline for money market operations in the intermeeting period ahead consisting of two elements: (1) the Bank encourage the uncollateralized overnight call rate to be, on average, 0.4-0.5 percent; and (2) the Bank retain its commitment to provide more ample liquidity when necessary by leaving the latter part of the policy decision at the previous meeting unchanged. The proposal was defeated with one vote in favor and eight against.

To reflect the majority view, the chairman formulated the following proposal.

Chairman's Policy Proposal:

The guideline for money market operations in the intermeeting period would be as follows, and publicized by the attached press release (see Attachment 1).

The Bank of Japan would encourage the uncollateralized overnight call rate to move on average around 0.25 percent.

Regardless of the above guideline for the call rate, the Bank of Japan would provide more ample funds, if judged necessary, to maintain the stability of the financial markets.

Votes for this proposal:: Mr. M. Hayami
Mr. S. Fujiwara
Mr. Y. Yamaguchi
Mr. Y. Gotoh
Mr. S. Taketomi
Mr. T. Miki
Mr. N. Nakahara
Mr. K. Ueda
Votes against this proposal:: Ms. E. Shinotsuka.

Ms. Shinotsuka dissented because she believed that the uncollateralized overnight call rate should be restored to the level before the previous meeting. This was based on the thinking that (1) the decline in interest rates following the easing of monetary policy decided at the previous meeting was distorting the flow of funds; (2) the lowering of interest rates was not likely to bring about a recovery in corporate and household confidence; and (3) monetary policy was already so easy that no additional measure could be taken, and the Bank could only await additional implementation of effective fiscal measures.

VII.Approval of the Scheduled Dates of Monetary Policy Meetings in October 1998-March 1999

At the end of the meeting, members approved the dates of Monetary Policy Meetings in October 1998-March 1999, for immediate release (see Attachment 2).

Attachment 1

For immediate release

September 24, 1998
Bank of Japan

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

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

Attachment 2