Minutes of the Monetary Policy Meeting

on February 10, 2000
(English translation prepared by the Bank staff based on the Japanese original)

March 13, 2000
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, February 10, 2000, from 9:00 a.m. to 12:37 p.m., and from 1:30 p.m. to 4:01 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. S. Taketomi
Mr. T. Miki
Mr. N. Nakahara
Ms. E. Shinotsuka
Mr. K. Ueda
Mr. T. Taya

Government Representative Present
Mr. Y. Ohno, Senior State Secretary for Finance, Ministry of Finance ²
Mr. T. Haraguchi, Deputy Vice Minister for Policy Coordination, Ministry of Finance ³
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. S. Nagata, Executive Director
Mr. I. Yamashita, Director, Financial Markets Department
Mr. S. Murayama, Director, Research and Statistics Department
Mr. E. Hirano, Director, International Department
Mr. N. Inaba, Advisor, Policy Planning Office
Mr. M. Amamiya, Chief Manager, Planning Division 1, Policy Planning Office
Mr. T. Yoshida, Research and Statistics Department

Secretariat of the Monetary Policy Meeting
Mr. K. Koike, Director, Secretariat of the Policy Board
Mr. T. Murayama, Advisor to the Governor, Secretariat of the Policy Board
Mr. S. Hida, Manager, Secretariat of the Policy Board
Mr. T. Kurihara, Manager, Policy Planning Office
Mr. S. Uchida, Manager, Policy Planning Office

The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on March 8, 2000 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. Ohno was present from 9:00 a.m. to 12:37 p.m.
Mr. Haraguchi was present from 1:30 p.m. to 4:01 p.m.

I. Approval of the Minutes of the Monetary Policy Meeting Held on December 17, 1999

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of December 17, 1999 for release on February 16, 2000.

II. Summary of Staff Reports on Economic and Financial Developments ⁴

A. Money Market Operations in the Intermeeting Period

Market operations in the intermeeting period were conducted in accordance with the guideline determined at the previous meeting on January 17, 2000. ⁵The Bank's"morning projection for reserves" was an excess of 1 trillion yen almost every day, and the overnight call rate moved stably at 0.02 percent. ⁶

Four conspicuous developments were observed during the intermeeting period.

First, major banks delayed the accumulation of required reserves, and the current account balances at the Bank held by institutions not subject to reserve requirements increased. This was because money market conditions eased considerably again due to the drop in demand for funds given the waning of anxiety about the Year 2000 problem.

Second, interest rates on term instruments and yields on short-term Japanese government securities (JGSs) fell as the market's anticipation of an early termination of the zero interest rate policy faded following the release of the G-7 statement on January 22. Yields on short-term JGSs were generally flat up to four-month maturity, revealing the market's view that the zero interest rate policy would continue at least until then.

Third, under-subscription in money market operations--that is, bids from financial institutions not reaching the amount offered by the Bank--had been observed recently. This was because financial institutions' anxiety about fund-raising was relieved significantly by the eased market conditions and the reduced anticipation of an early termination of the zero interest rate policy. In view of the prospect that money market conditions would tighten significantly in early March, the Bank had been conducting operations maturing beyond the end of March, the fiscal year-end.

And fourth, interest rates on term instruments maturing beyond February 29 were rising reflecting active fund-raising by some financial institutions driven by concerns that disruptions might occur to computer systems on February 29 for reasons similar to the Year 2000 problem. However, the rates had increased only marginally, and the market's concern did not seem serious.

With a view to enhancing the Bank's accountability for money market operations, the staff planned to revise the formula for the"Supply and Demand of Funds and Market Operations" table (hereafter, the funds-table), based on discussions at Monetary Policy Meetings. Specifically, two changes would be made to reduce the large differences, which had been observed since the implementation of the zero interest rate policy, between projections and actual results for the fund surplus/shortage in the money market. First, the basis for the funds-table would be changed to current account balances from reserve balances. Second, instead of the"morning projection for reserves," the Bank would announce projections of the daily increase/decrease in current account balances as a result of money market operations during the day. These revisions would also contribute to removing the misapprehension that the"morning projection for reserves" was an indicator of the Bank's monetary policy stance. The changes would be made public on February 14, and they would come into effect from March 16.

4Reports were made based on information available at the time of the meeting.
5The guideline was as follows:"The Bank of Japan will flexibly provide ample funds and encourage the uncollateralized overnight call rate to move as low as possible."
6The"morning projection for reserves" is defined as a projection of the"daily excess/shortfall of reserves" announced by the Bank each morning. The"daily excess/shortfall of reserves"--which is affected by the Bank's market operations of the day--is the amount by which reserves exceed/fall short of the"remaining required reserves" (the daily average of reserves that should be deposited in the remaining days of the reserve maintenance period) at 5:00 p.m., when reserves are officially calculated.

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

1. Developments in foreign exchange markets

The yen depreciated against the U.S. dollar from late January to early February and was recently moving in the range of 107-110 yen. This seemed to reflect the following factors. First, U.S. economic growth was stronger than expected. Second, expectation of economic recovery in Japan decreased due partly to the anticipation that Japan's GDP would turn out to have declined in the October-December quarter of 1999 and concern over the deterioration in Japan's fiscal condition. And third, the interest rate differential between Japan and the United States had become more pronounced since the Federal Open Market Committee (FOMC) raised the target for the federal funds rate on February 2. In the meantime, there was a net inflow of cross-border securities investment again in January. It could be said that the lifting of hedges against foreign securities holdings by Japanese institutional investors and establishment of short-yen positions in the futures market brought about the depreciation of the yen. However, it should be noted that these activities would easily change when the market's sentiment altered.

The euro plunged to a historical low against the U.S. dollar in late January, and rebounded somewhat thereafter. The market saw that the fall could be attributed to the robust U.S. economy, a revision of the overvaluation of the euro at the time of its launch, and anticipation of a delay to structural reforms in the euro area.

2. Overseas economic and financial developments

There were no fundamental changes in the worldwide economic recovery. In the United States, robust economic expansion continued as shown by an estimated 5.8 percent annualized increase in real GDP in the October-December quarter of 1999. In the euro area also, the economy was expanding given firm exports and growing private consumption. In East Asia, recovery in business fixed investment in addition to private consumption was observed reflecting a continuing increase in exports and the permeation of the effects of economic stimulus measures.

Financial market developments after interest rates were raised in the United States and Europe were as follows. In the United States, long-term interest rates fell given abatement of concern about possible inflation, and stock prices remained generally firm. In Europe, long-term interest rates were more or less flat, and stock prices in Germany and France marked a new record high.

C. Economic and Financial Developments in Japan

1. Economic developments

Public investment and housing investment had started to decrease moderately. With regard to private consumption, both the results of the Family Income and Expenditure Survey and sales at chain stores for December 1999 were relatively poor. However, various other statistics and anecdotal evidence showed that, even though private consumption on the whole was somewhat stagnant, the situation was not as bad as the two indicators suggested. Therefore, it was not necessary to change the Bank's view of private consumption ("recovery in private consumption continues to be weak").

It could be judged that business fixed investment was starting to level off based on the fact that (1) leading indicators continued to improve, and (2) major electronics companies had announced plans to increase investment in production lines for electronic devices in fiscal 2000. Net exports (exports minus imports) remained on an upward trend, although they had fallen temporarily due to a rise in imports.

Reflecting such developments in final demand, a positive mechanism for generating income was functioning steadily in the corporate sector, with a continued rise in production leading to a clearer recovery in corporate profits. However, at many firms, the recovery in corporate profits had not yet stimulated business fixed investment.

As described above, Japan's economy had started to improve. The economic environment surrounding private demand was gradually improving, as seen in the continuing increase in corporate profits. However, clear signs of a self-sustained recovery in private demand had not been observed yet.

Domestic wholesale prices remained generally unchanged, and consumer prices also continued to be flat. In the meantime, corporate service prices were still falling moderately.

As for the outlook, public works were expected to follow a moderate downward trend for some time, but they were likely to recover in or after spring due to the effects of the second supplementary budget for fiscal 1999. Net exports were expected to keep rising.

Business fixed investment could be expected to start increasing gradually sooner or later given the continuing rise in corporate profits. However, it was still difficult to predict at this point when business fixed investment would start to show a clear improvement, since firms still took a cautious view about the possibility of an increase in sales. Meanwhile, private consumption was likely to move in line with income conditions for the following reasons. First, the ratchet effect--a temporary increase in the propensity to consume resulting from an unexpected fall in income--was not observed when winter bonuses decreased in 1999, and therefore concern about a possible reaction was unnecessary. And second, improvement in consumer sentiment had been marginal.

Under these economic conditions, it had become more likely than before that domestic wholesale prices would remain generally unchanged until around the middle of 2000. It was expected that consumer prices would remain almost flat and corporate service prices would continue to decline moderately. Prices on the whole were thus expected to remain generally unchanged for the time being. However, attention should still be paid to the downside risk to prices.

2. Financial developments

Long-term interest rates declined toward late January to the 1.60-1.65 percent level, reflecting the fading of market expectations of an early termination of the zero interest rate policy after the release of the G-7 statement. Thereafter, they recovered somewhat due to a weakening of the yen and a rise in stock prices, and were currently moving around 1.85 percent.

The Nikkei 225 Stock Average had been firm and was moving at 19,500-20,000 yen. The salient features of the rise in stock prices since the turn of the year were a pause in the rise of electronics and telecommunications, which had been leading prices up, and a climb in the prices of other industries' stocks. However, the latter seemed to reflect to some extent the formation of many investment trusts, and thus it was premature to conclude that the increase in stock prices in a wider variety of industries reflected expectations of a recovery in corporate profits.

Meanwhile, credit demand in the private sector continued to be stagnant, and private banks' lending was still sluggish. Corporate bond and commercial paper (CP) issuance had been weak. Reflecting the low credit demand in the private sector, the growth of money stock (M2+CDs) continued to slow. It could be said that this situation indicated that the recent improvement in the economy had been led by the restructuring of the corporate sector.

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

A. The Current Economic Situation

On the current economic situation, many members assessed the state of the economy as follows:"Japan's economy has recently started to improve. The economic environment surrounding private demand is gradually improving, as seen in the continuing increase in corporate profits. However, clear signs of a self-sustained recovery in private demand have not been observed yet."

As for public investment, some members expressed the view that it was decreasing at a moderate pace, taking a breather. One member stated that housing investment was decreasing because the effects of the tax measure for housing investment had played themselves out.

Some members remarked that statistics for the October-December quarter showed exports were relatively weak. However, they judged that exports continued to be on an upward trend since (1) the weakness was a temporary phenomenon partly due to the intentional accumulation of electronic parts inventory by some manufacturers who were concerned about the Year 2000 problem, and (2) the world economy continued to recover.

Many members shared the view that production continued to increase after the turn of the year. However, one member pointed out that such a trend had been observed only in certain industries, such as the information technology (IT) and export-related sectors, and the variety of items whose production was expanding was less than in past economic recoveries. Another member stated that, to date, production had been underpinned by exogenous demand such as public investment and exports, and domestic private demand as a whole lacked strength.

Members generally shared the view that, judging from the leading indicators, business fixed investment was starting to level off, but there were no clear signs that it had turned around and started to increase. Meanwhile, many members noted that, although limited, some positive developments had been observed, such as the announcement by major electronics manufacturers of plans to increase investment in semiconductor production lines. One of these members added that IT- and telecommunications-related demand was increasing as the Internet became accessible using a wider variety of devices: the first such devices had been personal computers followed by mobile phones, and they were likely to expand further to various telecommunications-related household electric appliances and digital television. Against this background, both manufacturers of semiconductors and machines to produce them anticipated that demand would continue to grow, and had started to take a positive stance toward business fixed investment since summer 1999. Another member remarked that work had started on several large-scale redevelopment projects in the metropolitan area, and these could be expected to have a positive effect.

Regarding private consumption, many members commented that some indicators related to retail sales had been weak, with workers' households in particular having spent less due to the reduction in winter bonuses. A few members remarked that the severe income conditions had strengthened households' preference for lower-priced items and made their living styles more defensive. However, one of these members commented that it was better to judge the current condition of consumption as neither good nor bad but normal because structural changes were occurring, such as the saturation of consumption. Some members noted that statistics might have not been able to accurately reflect the trend of consumption, pointing out the shift of consumers from chain stores to new large-volume retail stores for goods such as clothing, and a possible sample bias in the Family Income and Expenditure Survey. Further, one member remarked that some bright signs had been observed, such as an increase in imports of consumption goods. On these grounds, most members were of the view that consumption was not as damp as indicated by various statistics, but its recovery continued to be weak.

One member who took a cautious view on the economy pointed out that the seasonally adjusted index of living expenditure in the December 1999 Family Income and Expenditure Survey had marked its lowest level of the decade, indicating the serious state of consumption.

Most members agreed that prices were generally flat. One member pointed out that the wholesale price index was decreasing year to year, but this was mainly due to the fall in prices of machinery, which was a long-term trend due to progress in technology and independent of the business cycle. Another member commented that it was a little too early to judge that overall prices had stopped falling considering the fact that (1) the consumer price index was declining year to year despite the upward bias, and (2) the GDP deflator had also been declining from a year earlier.

Meanwhile, some members noted that, judging from various indicators, the quarter-on-quarter real GDP growth rate in the October-December quarter of 1999 could turn out to be negative for the second consecutive quarter. They raised the question how, if this actually happened, it should be considered in regard to consistency with the Bank's current view that the economy had started to improve.

The staff gave the following explanation in reply to this question.

First, the scenario of the economic recovery was as follows: (1) corporate profits would improve underpinned by corporate restructuring and exogenous demand, such as public investment and exports; (2) this would stimulate spending by firms, and an increase in private demand would start led by business fixed investment; and (3) the resulting improvement in employment and income conditions would bring about a recovery of private consumption. Therefore, it was not surprising that private consumption, which accounted for a large part of GDP, tended to be weak until this process reached the final stage. Naturally, an extreme decrease in private consumption would ruin this scenario through a reduction of production, but no such movement had been observed to date.

Second, it was important to explain the limitations of statistics. There had been cases in the past where real GDP declined for two consecutive quarters even though the economy was recovering.

Many members expressed similar views. One member was of the opinion that the corporate sector's recovery based on improving profits had continued given the upward trend in production, the stability of wholesale prices, and the depreciating trend of the yen, and thus, the scenario of an economic recovery remained unchanged. Another member stated that GDP would not continue to decline, noting that (1) the fall in GDP in the second half of 1999 was largely due to the decrease in public investment, which was likely to increase again in the first half of 2000 or in the first half of fiscal 2000, and (2) the weakness in private consumption reflected a decrease in household income due to corporate restructuring, and the propensity to consume was not decreasing.

Some members referred to the limitations of statistics. A few members pointed out that the Family Income and Expenditure Survey might be showing consumption as weaker than it actually was, and this should be kept in mind when analyzing GDP data (Quick Estimates), which are compiled using the survey. Another member commented that, from the experience of the first half of 1999, the trend of GDP statistics should be evaluated rather than their figure for each quarter. Meanwhile, one member explained that GDP figures were relatively weak in the second half of 1999 despite improvements in the statistics for production. The member pointed to the following factors as responsible for this phenomenon: (1) exports, which had increased in the second half of 1999, had a stronger tendency to boost production than public investment; and (2) public works ordered in the first half of 1999 had continued to contribute to improving production in the second half. However, the member commented that the causes of the phenomenon should be examined further as the apparent discrepancy could not be explained by these factors alone.

Further, many members mentioned the gap between GDP statistics and business sentiment. One member remarked that policy-related demand was at a pause and the positive movements that had started to appear in the private sector had not been clearly reflected in macroeconomic statistics yet. Thus, the discrepancy between the statistics and business sentiment was unsurprising at this stage. A few members commented that it was therefore important in judging the economy to analyze information obtained from firms and statistics compiled by individual industries. One member introduced the following encouraging movements at the corporate level: (1) judging from the amount of traffic and statistics of the distribution sector, the flow of goods had been active since autumn 1999; (2) spending on advertising had started to increase; and (3) firms' consultations with business consultants had been changing from the backward-looking corporate restructuring to constructive new business plans.

The member who took a more cautious view of Japan's economic condition than other members stated that, if GDP for the October-December quarter of 1999 proved to have decreased by about 1.2 percent from the previous quarter in line with the market's forecast, it would have fallen back to almost the same level as in the October-December quarter of 1998. Even taking the problems of statistics into account, this would mean that the economy was back where it was before it started to improve.

B. Financial Developments

On the financial front, members shared the view that conditions continued to be favorable for an economic recovery--i.e., stock prices were firm, long-term interest rates were low and stable, and the yen was gradually depreciating against the U.S. dollar.

Many members judged that the risk of the exchange rate of the yen to the U.S. dollar having a downside impact on the economy was smaller than at one time. A few members also pointed out that the abatement of uncertainty about the prospects for the U.S. economy was a positive factor for the world economy.

A few members remarked that the recovery in stock prices to around 20,000 yen reflected the recent improvements in the economy. One member pointed out that firms had previously announced very severe restructuring plans, some of which seemed too ambitious, due partly to concerns about their stock prices and credit ratings. The member continued that recently, however, some firms were setting out more rational plans for restructuring, and this seemed to have convinced investors that an improvement in firms' profits could be realized. In relation to this view, one member commented that a further rise in stock prices was unlikely, given that not all stocks were on the rise and the results of technical analyses did not suggest a further climb. The member also pointed out that there were some signs of a bubble-like phenomenon in the over-the-counter market. In addition, this member referred to the U.S. stock market, and commented that it had not renewed its historical high since the latest raising of the target for the federal funds rate by the FOMC. This seemed to indicate that the effects of the four quarter-point increases in the federal funds rate had started to materialize.

Members next discussed the fact that long-term interest rates were low and stable. A few members commented that, while stock prices reflected developments at individual firms, bond prices seemed to mainly reflect macroeconomic developments. A different member pointed out that financial institutions' purchases of Japanese government bonds (JGBs) were conspicuous while the private sector's demand for funds for investment in real assets was weak. In relation to this view, one member cited two points that still required close attention. The first was the possible impact on the financial system of large losses arising from a plunge in prices of JGBs when long-term interest rates started to rise. And the second was the possibility of an undesirable rise in long-term interest rates, fueled by, for example, growing concern about the country's fiscal condition. The risk of such a rise was one of the important factors in deciding monetary policy. Another member, noting that the developments in foreign exchange markets partly reflected the market's view on Japan's fiscal condition, expressed concern that, if risk premiums reflecting anxiety about future fiscal policy emerged in the bond market, it would be difficult to deal with the situation by monetary policy measures.

Some members commented on the weakness in the monetary aggregates, such as money stock and private banks' lending. One member pointed out that precautionary demand for liquidity had declined due to the abatement of firms' concern about financing, and this should be taken into account in evaluating the weakness in the monetary aggregates. On this basis, the member raised a question about whether it was possible to produce an indicator that was adjusted for fluctuations in precautionary demand for funds arising from anxiety about the stability of the financial system, and thus reflected developments in the economy more accurately. Another member presented an analysis of the factors underlying the sluggishness in the monetary aggregates as follows. Various surveys showed that corporate financing conditions had eased considerably. However, the monetary aggregates were sluggish mainly because firms continued to reduce excess liabilities under the favorable circumstances brought about by the abatement of concern about financing and the increase in cash flow. Furthermore, since many firms had cut their business fixed investment to less than their cash flow, even if fixed investment rose slightly, it might not necessarily boost borrowing. Therefore, the growth of lending and money stock might continue to be stagnant, but this did not mean that such developments were incompatible with economic recovery or a bottoming out of business fixed investment. A few members, including this member, pointed out that adequate explanation should be given on the actual state of the economy because market participants, especially abroad, could become pessimistic if data released for Japan's GDP and the monetary aggregates were weak.

C. The Economic Outlook

On the economic outlook, many members generally agreed that deflationary concern had not been dispelled yet.

With regard to exports, some members projected that they would start increasing again underpinned by the recovery in economies worldwide although they had slowed at one time in the October-December quarter of 1999. One member remarked on developments in the U.S. economy, which had been pointed out as a risk factor for Japan's economy. The member predicted that the robust expansion in the U.S. economy was likely to continue for some time, given that there were no signs of a slowdown in the U.S. economy or a surge in risk premiums on U.S. stocks. As for public investment, some members stated that it would continue to decline moderately for the time being, but would start to recover in spring 2000 due to the implementation of public works associated with the second supplementary budget. One member commented that housing investment might recover briefly due to the continuation of the tax measure for housing investment, but it was most likely to stay on a moderate decreasing trend.

On the outlook for business fixed investment, many members expressed the view that the improvement in corporate profits would eventually boost business fixed investment, but it was still uncertain when and to what degree the effect would appear. Some members focused on the positive stance toward investment in some sectors such as electrical appliances, and commented that business fixed investment could start increasing especially in IT-related areas. One of the members remarked that the ratio of long-term debt outstanding to cash flow showed that there were great differences between industries in the pace of disposal of excess liabilities. The member therefore considered that fixed investment would start to increase first in industries and firms that had a relatively light burden of debt and were swiftly adapting themselves to rapid technological innovation. The member pointed out that such movements were already being observed. A few other members, however, commented that fixed investment in such growth sectors still accounted for a small proportion of the total and a reduction was expected in other sectors. They concluded that it was difficult to foresee at this point an overall recovery in business fixed investment. Taking account of the above discussion, members generally agreed that it was necessary to pay close attention to the results of various business surveys for more definite business fixed investment plans for fiscal 2000.

Meanwhile, one member who took a cautious view of the outlook for business fixed investment remarked that the lowest ratio of business fixed investment to nominal GDP in the high economic growth era had been 14-15 percent, but this level was likely to be the maximum in the future due to the structural problems of conventional industries.

As for private consumption, many members expressed the view that, with firms proceeding with restructuring, the recovery would continue to be weak. One member commented that the rise in stock prices could have some positive impact on consumer sentiment. However, some members including this member noted that, to achieve a full-fledged recovery in private consumption, improvement in employment and income conditions was essential, and therefore attention should be paid to future developments in employment and wages. One of them remarked that firms' stance on wages should be watched closely given increasing profits and the need for further restructuring.

On the outlook for prices, one member remarked that the environment surrounding prices was changing, as observed in (1) the distinct uptrend in international commodity prices, such as crude oil prices, reflecting the worldwide economic recovery, and (2) the depreciation of the yen. The member pointed out that the deliberation concerning deflationary concern would therefore become very important toward spring 2000. Another member considered that crude oil prices could rise further if OPEC decided to maintain its restrictive stance on output at its meeting in late March 2000, since the stocks of crude oil in the member countries of the OECD were declining. In relation to this point, the member added that the price of gasoline in the United States could climb to around US$2 per gallon toward summer 2000, reflecting the low level of stocks there and restraints on refining capacity due to environmental considerations.

Members next discussed how they should view the decline in prices due to structural changes in the distribution system--the so-called price destruction--and that due to technological innovation. One member pointed out that positive supply shocks to prices could continue if growth in IT-related investment and a resulting increase in productivity became widespread across industries. Another member cited the possibility that wholesale prices could decline if firms demanded further reduction in purchase prices to cut costs to an internationally competitive level in the process of restructuring. A few members commented that, because there was still room for restructuring in the distribution sector, consumer prices could fall due to the lower prices offered by new growth firms entering this sector, such as large-volume retail stores for clothing, and the consequent intensification of competition. They concluded that such falls in consumer prices were no bad thing. With regard to the above view, one member analyzed consumer price developments in relation to economic recovery. The member pointed out that slight declines in consumer prices achieved through firms' efforts to improve services to consumers could boost consumption somewhat, which would in turn underpin production and other business activity. Taking account of the above points, many members shared the view that a decline in price statistics could be consistent with an economic recovery that was accompanied by structural adjustment, and further examination of price developments was necessary.

One member summarized the above discussion on the outlook for prices as follows. There was both upward and downward pressure on prices--i.e., upward pressure from the depreciation of the yen and the increase in international commodity prices, and downward pressure from price destruction. However, deflationary risk arising from the supply-demand balance could not be ruled out because the prospect of a recovery in private demand remained extremely uncertain. In conclusion, the majority of members expected prices to remain unchanged for the time being, but considered that downward pressure on prices continued to warrant attention because there were still no clear signs of a self-sustained recovery in private demand.

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

Based on the above assessment of the economic and financial situation, members discussed the monetary policy stance for the immediate future.

Many members' view of the economic and financial situation was as follows. First, Japan's economy had started to improve. Second, the economic environment surrounding private demand was gradually improving, as seen in the continuing increase in corporate profits. Third, financial conditions continued to be favorable. Fourth, however, clear signs of a self-sustained recovery in private demand had not been observed yet. And fifth, prices were expected to remain generally unchanged for the time being, but continued attention should be paid to downward pressure on prices.

Based on the above assessment, many members judged that deflationary concern had not been dispelled yet. Therefore, with regard to monetary policy for the immediate future, the majority of members considered it appropriate to continue the zero interest rate policy.

One member commented that, since the implementation of the zero interest rate policy a year earlier, the pace of decline in prices had moderated and fears of deflation had eased considerably. The member pointed out that, in such an environment, it was possible that the effect of the zero interest rate policy had grown stronger. This member and many other members, however, expressed the view that, with regard to private demand, uncertainty remained although bright signs had started to emerge, and thus a little more time was needed to determine whether a self-sustained recovery would start.

Another member raised a question about the"morning projection for reserves." The member remarked that the Bank had continued to announce a projection of an excess of 1 trillion yen for a long time, aiming at providing enough funds to guide the overnight call rate to virtually zero, and stressed that the projection implied nothing about future monetary policy. This member suggested that the Bank consider lowering the"morning projection for reserves" in light of the fact that (1) in recent market operations, bids from financial institutions were falling short of the Bank's offers, and (2) the current account balances at the Bank held by institutions not subject to reserve requirements were increasing. A few members were wary of the idea on the grounds that (1) some market participants incorrectly believed that the size of the"morning projection for reserves" reflected the Bank's stance on monetary policy, and thus, changing it might influence interest rates, and (2) if the Bank reduced the size and at the same time stopped announcing the"morning projection for reserves" as the staff had reported, the purpose of the revision of the announcement might be misunderstood. After discussion, the member who suggested lowering the"morning projection for reserves" came to the conclusion that it was too early to lower it as some market participants interpreted the amount as signaling the Bank's policy stance. The member told the staff to make sure the above points were taken into consideration in carrying out daily market operations.

Furthermore, one member commented that the Bank's releases of the supply and demand for funds were too detailed, and this was causing a kind of moral hazard among market participants.

Members next discussed inflation targeting.

A few members commented that the topic had been debated at previous Monetary Policy Meetings and that the consensus among most members could be summarized as follows. First, they were against inflation targeting that aimed at creating a certain level of inflation--a reflation policy--and had no intention of adopting such a policy. And second, inflation targeting that aimed at making monetary policy more transparent and expressing a strong commitment to price stability was worth considering, although it had some technical difficulties. Other members agreed with these views.

Many members shared the opinion that, in deliberating inflation targeting in the latter sense, it was necessary to go over in further depth the various points of consideration that had been revealed at previous Monetary Policy Meetings. Also, it was important to examine not only the pros and cons of inflation targeting but also various issues related to enhancing the transparency of monetary policy--for example, what was meant by price stability and whether to disclose the Bank's forecasts of prices and the economy.

One member was cautious about adopting inflation targeting for the following reasons. First, it could pave the way for a policy that aimed at creating a certain level of inflation as hopes were strong that inflation would lighten the burden of debts. And second, the degree of the upward bias of price indexes changed as structural reform progressed. The member continued that it was preferable to enhance transparency by disclosing economic forecasts and thereby realize constructive dialogue with financial markets. In this case, it might be a good idea to disclose several forecasts so that attention did not concentrate too heavily on a single economic indicator. In response to this, another member pointed out that the release of forecasts involved a number of issues, such as the uncertainty surrounding economic projections and the selection of indicators to be released. Therefore, it would be more constructive to first create a concrete basis for discussion.

With regard to the Bank's commitment to maintain the zero interest rate policy until deflationary concern had been dispelled, one member said that the Bank's explanation to the public that it would make a comprehensive judgment in assessing whether or not such concerns had been dispelled was not clear enough. The member suggested that, in order to increase the Bank's accountability, the Bank consider whether it could set numerical criteria or make the phrase more concrete by providing details on the basis of the Bank's judgment. The member added that, as a first step, it should be made clear that this phrase, which had a broad meaning, placed emphasis on prices, and efforts should be made to gain the public's understanding of the Bank's view of various economic developments that were behind price movements.

On the idea of setting numerical criteria, another member commented that changes in economic variables could not be directly linked to the conditions for terminating the zero interest rate policy because there was a time lag between the implementation of monetary policy and the surfacing of its effects. Thus, the member continued, a comprehensive judgment of various developments was indispensable, and this point should be made clear to the public to avoid misunderstandings. A different member added that, because of the uncertainty regarding the prospects for the economy, it would be unrealistic to set numerical criteria--such as a certain percentage change in prices or GDP--as the condition for changing monetary policy or terminating the zero interest rate policy. Therefore, even if financial markets wanted such numerical criteria, the Bank would not be able to satisfy their needs. The member stressed that discussions should be centered on measures to enhance the transparency of monetary policy.

A few other members also commented that, although focus tended to concentrate on whether or not inflation targeting should be adopted, or on the conditions for ending the zero interest rate policy, it was important to consider what was meant by price stability in order to enhance transparency.

On the basis of the above discussion, the chairman suggested that the Bank examine more thoroughly measures to further enhance the transparency of monetary policy. Members supported this idea, and it was decided that the chairman would consider how the Bank should proceed.

Two members objected to the maintenance of the zero interest rate policy.

One member stated that the guideline for money market operations should be changed back to that employed before the adoption of the zero interest rate policy on February 12, 1999--i.e., the overnight call rate target should be raised to 0.25 percent.

The reasons for this were as follows. First, the economy was no longer at risk of falling into a deflationary spiral. And second, the negative effects of the zero interest rate policy had increased as time went by. The member commented that, on the member's recent visits to regional areas, business leaders there had expressed the view that the economy was now at a stage where the private sector should make efforts, and that firms would be weakened if they were given too many"shots in the arm." The member went on to say that the proposal to raise the overnight call rate target was aimed at terminating the extraordinary zero interest rate and giving flexibility to policy management, and that it was not the first step of monetary tightening. The member added that it was important to make these points clear so as not to shock financial markets.

The other member who objected to the zero interest rate policy advocated adopting monetary base targeting accompanied by a target for the rate of increase in the consumer price index (CPI), and increasing excess reserves to achieve these targets.

The member gave the following reasons for the proposal. First, the momentum of economic recovery was weak. For example, GDP seemed to have returned to the level at the end of 1998. Second, traditional industries, the so-called old Japan, were still struggling with excess capacity, excess debt, and excess labor. Third, the risk of a decline in prices outweighed that of a rise. Fourth, to enable Japan to grow at its potential growth rate, which the member considered was 1.5 to 2.0 percent, further monetary easing was necessary. Fifth, the Bank should show clearly its responsibility for achieving price stability by introducing inflation targeting, which had been adopted by some other central banks and supported by academics around the world. Sixth, the Bank would be unable to gain the public's understanding without demonstrating its accountability by setting a numerical target. And seventh, by setting a target for the CPI, the Bank would have to provide its forecasts of GDP growth and other economic indicators, and this would make monetary policy more forward-looking and preemptive.

V. Remarks by Government Representatives

The representatives from the Ministry of Finance made the following remarks.

(1) Japan's economy was improving moderately due to the effects of various policy measures and the recovery in Asian economies. However, private demand remained weak. In these circumstances, the Government would continue to implement fiscal measures so that a smooth shift in the driving force for an economic recovery from public to private demand would be realized and a full-scale recovery led by private demand could be achieved. Based on this understanding, the Government would promptly implement the second supplementary budget for fiscal 1999. The budget for fiscal 2000 was being deliberated in the Diet.
(2) Japan's fiscal condition was extremely severe. For example, the Government would have to rely on debt for 38.4 percent of revenues in the fiscal 2000 budget. The Government realized that it would have to undertake measures for fiscal reform when the economy was back on a full-fledged recovery path, with a view to achieving an ideal economy and society in the 21st century. However, as the economy remained in a severe situation, the Government would continue to place top priority on steering the economy to a recovery.
(3) The Government explained its basic thinking on economic policy outlined above at the G-7 meeting on January 22.
(4) The Government would like to ask the Bank to continue implementing monetary policy appropriately and in a timely manner to ensure a recovery of the economy, synchronizing its actions with the Government's measures, for example by flexibly providing ample funds in the market giving due consideration to developments in financial markets, including the foreign exchange markets.

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

(1) The Government's policy goal in 2000 was to realize a smooth shift from public to private sector led growth and to achieve a full-fledged recovery driven by private demand in the latter half of fiscal 2000. In order to achieve this goal, the Government was steadily implementing the Policy Measures for Economic Rebirth, decided in November 1999, to do its utmost to support the economy. The Government considered it essential to promptly implement the budget for fiscal 1999, as well as to have the fiscal 2000 budget passed as soon as possible.
(2) The Government would like to ask the Bank to continue implementing monetary policy appropriately and in a timely manner to ensure a recovery of the economy, for example by flexibly providing ample funds in the market giving due consideration to developments in the financial markets, including the foreign exchange markets.

VI. Votes

The views of many members of the economic and financial situation were summarized as follows. First, Japan's economy had started to improve. Second, the economic environment surrounding private demand was gradually improving, as seen in the continuing increase in corporate profits. Third, the financial environment remained favorable. Fourth, however, clear signs of a self-sustained recovery in private demand had not yet been observed. And fifth, prices were expected to remain generally flat for the time being, but attention should still be paid to the downward pressure on prices, and deflationary concerns had not been dispelled yet.

Based on this understanding, the majority of members considered it appropriate to maintain the zero interest rate policy.

One member proposed changing the guideline for money market operations back to that employed before the adoption of the zero interest rate policy on February 12, 1999. Another member proposed implementing quantitative easing by setting a target for the rate of increase in the CPI and the monetary base.

As a result, three policy proposals were put to the vote.

Ms. Shinotsuka proposed the following as the guideline for money market operations for the intermeeting period ahead:

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

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

The proposal was defeated with one vote in favor, eight against.

Mr. Nakahara proposed the following as the guideline for money market operations for the intermeeting period ahead:

The Bank of Japan will aim at realizing a 0.5 to 2.0 percent annual increase in the consumer price index (excluding perishables) in the October-December quarter of 2001 as a medium-term target. In achieving this target, the Bank will increase the amount of excess reserves by about 500 billion yen in the current reserve maintenance period from February 16 through March 15 (change in the average amount outstanding from the previous reserve maintenance period to the current maintenance period), and by continuing to increase the amount thereafter, induce approximately 10 percent annual growth of the monetary base (change from the average for the July-September quarter of 1999 to the average for the same quarter of 2000) to realize quantitative easing (expansion of the monetary base). Regardless of the above target for the monetary base, the Bank will expand money further should the financial markets destabilize, for example, should the uncollateralized overnight call rate rise substantially.

The proposal was defeated with one vote in favor, seven against, and one abstention.

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 ahead would be as follows, and publicized by the attached statement(see attachment).

The Bank of Japan will flexibly provide ample funds and encourage the uncollateralized overnight call rate to move as low as possible.

Votes for the proposal: Mr. M. Hayami, Mr. S. Fujiwara, Mr. Y. Yamaguchi, Mr. S. Taketomi, Mr. T. Miki, Mr. K. Ueda, and Mr. T. Taya.

Votes against the proposal: Mr. N. Nakahara and Ms. E. Shinotsuka.

Ms. Shinotsuka voted against the chairman's proposal on the following grounds. First, the time was ripe to terminate the zero interest rate policy as the economy had started to improve. Second, the zero interest rate policy could hinder structural reform if it was maintained for a long period of time. And third, the negative effects of the zero interest rate policy had become more pronounced as time went by--for example, an increasing number of market participants were taking action based on the assumption that the zero interest rate policy would continue for some time.

Mr. Nakahara dissented for the following reasons. First, the zero interest rate policy had not been effective enough in promoting an economic recovery. Second, the Bank should not take a wait-and-see stance but should synchronize its actions with fiscal policy. Third, policy options under the zero interest rate policy were restricted--that is, it could only be terminated or continued. Therefore, the monetary policy regime should be changed to quantitative targeting, which offered greater flexibility. And fourth, with regard to the Bank's commitment to maintain the zero interest rate policy until deflationary concern had been dispelled, this kind of commitment to a certain level of interest rate for such a long time was unprecedented.

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

The Policy Board discussed"The Bank's View" of recent economic and financial developments, and put it to the vote. The Board unanimously determined"The Bank's View," for publication on February 15, 2000 in the Monthly Report of Recent Economic and Financial Developments (consisting of"The Bank's View" and"The Background"). ⁷

7The original full text, written in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on February 15, 2000 together with the English version of"The Bank's View." The English version of"The Background" was published on February 25, 2000.

Attachment

For immediate release

February 10, 2000
Bank of Japan

At the Monetary Policy Meeting held today, the Bank of Japan decided, by majority vote, to maintain its"zero interest rate policy" to assure permeation of the effects of monetary easing.

The guideline for money market operations in the inter-meeting period ahead is as follows: