Minutes of the Monetary Policy Meeting

on March 8, 2000
(English translation prepared by the Bank staff based on the Japanese original)

April 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 Wednesday, March 8, 2000, from 9:01 a.m. to 12:30 p.m., and from 1:20 p.m. to 3:37 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 Finance²
Mr. T. Haraguchi, Deputy Vice Minister for Policy Coordination, Ministry of Finance³
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. 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. H. Yamaoka, Manager, Policy Planning Office

The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on April 10, 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 9:01 a.m. to 12:30 p.m.
Mr. Haraguchi was present from 1:20 p.m. to 3:37 p.m.

I. Approval of the Minutes of the Monetary Policy Meeting Held on February 10, 2000

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of February 10, 2000 for release on March 13, 2000.

II. Summary of Staff Reports on Economic and Financial Developments⁴

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 February 24, 2000.⁵

The overnight call rate rose temporarily on February 28 and 29 reflecting the market's concerns over possible disruptions to computer systems on February 29 (hereafter, the February 29 problem). The rise was attributable to the fact that, while Japanese banks refrained from making overnight call transactions, some foreign banks that found it difficult to raise funds in the Euro-yen market turned to the overnight call market and as a result pushed the rate up. These foreign banks had been procuring funds at their normal pace based on the assumption that no disruptions would occur to computer systems on February 29.

To contain the upward pressure on the rate, the Bank increased its "morning projection for reserves" and provided a vast amount of funds from February 25.⁶ Consequently, the overnight call rate stabilized again at 0.02 percent from the beginning of March.

Two notable developments were observed during the intermeeting period.

First, the Bank's fund-providing operations contained upward pressure on the overnight call rate when liquidity of the market decreased. Specifically, when the overnight call rate rose in the morning of February 29, the Bank responded with additional funds provision. This alleviated the market's concerns about the availability of liquidity. As a result, the overnight call rate declined immediately.

Second, Japan was the only industrialized country that saw interest rates rise in anticipation of the February 29 problem. This could be attributed to the fact that Japanese financial institutions tended to secure on-hand liquidity as soon as they perceived the slightest liquidity risk because fund-raising costs were minimal under the zero interest rate policy.

Given these circumstances, interest rates might rise toward the end of the fiscal year on March 31, 2000. Japanese financial institutions were, in fact, avoiding transactions maturing at the fiscal year-end, as was evident in the large under-subscription in market operations maturing on March 31. The Bank would closely watch developments in the money market toward the end of March and conduct appropriate operations.

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 fell against the U.S. dollar until late February, but it rose from the end of February reflecting increased buying of the yen against the euro. The U.S. dollar's effective exchange rate was relatively firm against other currencies.

The euro was recently weak for the following reasons. First, various comments by European monetary authority officials were interpreted by the market as signs of disagreement on policy on the euro. Second, there was speculation that Japanese institutional investors would sell foreign assets, including euro-denominated bonds, to improve their financial statements. Third, European investors were buying Japanese stocks. And fourth, some European companies were acquiring stocks of Japanese firms in order to form business alliances. The second of these factors, selling of foreign assets by Japanese institutional investors, was in fact not that conspicuous. Some institutional investors had sold foreign assets, but apparently market talk about their sales had been exaggerated.

2. Overseas economic and financial developments

In the United States, the financial market appeared to be already anticipating to a large extent that the Federal Open Market Committee would further raise its target for the federal funds rate. In the bond market, the yield curve for Treasury securities was inverted beyond the ten-year maturity, but this did not necessarily mean that the upward trend of long-term interest rates had ended.

In global stock markets, buying was concentrated in stocks of firms engaged in information technology (IT)-related businesses, as seen in the decline in the Dow Jones Industrial Average and the rise in the Nasdaq composite index in the United States. The rise in such stocks was quite rapid recently.

In the intermeeting period, there were no notable changes in economic activities abroad. In the United States, the economy seemed to be slightly overheated; housing investment and new car sales continued to be firm, and consumer confidence remained close to a historically high level. The rise in long-term interest rates seemed to have had little impact. In Europe, a firm economic recovery continued, and prices were gradually rising. In Asia too, economies continued to recover. The Chinese economy appeared to have bottomed out and passed its worst point.

C. Economic and Financial Developments in Japan

1. Economic developments

With regard to economic developments in the intermeeting period, the following two points deserved attention.

First, many of the recently released indicators were strong, such as those for business fixed investment, housing starts, employment, and consumer spending. It should be noted, however, that some of these indicators might have been affected by temporary factors.

And second, consumer prices had been relatively weak recently. It seemed that the impact of the yen's appreciation since last summer was appearing with a time lag as domestic producers of goods such as apparel started reducing prices to compete against imported goods.

Turning to final demand, public investment was falling moderately. Housing investment was on a moderate downward trend. Although housing starts increased in January, this was mainly due to the fact that those based on loans provided by the Housing Loan Corporation under its second and third programs for 1999 were concentrated in January. Private consumption continued to show mixed developments, recovering somewhat in 2000 after weakening toward end-1999. Business fixed investment appeared to have nearly leveled off. Net exports continued to follow an upward trend.

Reflecting such developments in final demand, a positive mechanism for income generation was functioning steadily in the corporate sector, with production continuing to rise since the summer of 1999 and the increase in corporate profits becoming clearer. However, the above positive developments had not yet led to an expansion of business fixed investment. The deterioration in the employment situation was coming to a halt, but firms still restrained personnel expenses, and thus the household income situation remained severe.

As described above, Japan's economy had started to improve. The economic environment surrounding private demand continued to improve, as seen in the 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 as a whole declined somewhat.

As for the outlook, public works were expected to rise in or after the spring due to the implementation of the second supplementary budget for fiscal 1999. Net exports were also likely to remain on an uptrend.

Given the continuing recovery in corporate profits and movements in leading indicators, it had become highly probable that business fixed investment would turn around. However, at this point, business fixed investment was concentrated in IT-related areas, and thus the results of various surveys should be studied as they became available to see how business fixed investment was spreading to other industries and whether the trend was sustainable. Private consumption was highly likely to show mixed developments until information about the size of summer bonuses was available.

Domestic wholesale prices were very likely to remain unchanged or rise marginally in the immediate future. This was because, although prices of electric machinery remained on a long-term downward trend, the improvement in the domestic supply-demand balance and the rise in prices of international commodities, such as crude oil, were expected to have an upward impact. Consumer prices were likely to be weak because prices of imported goods were expected to decline for a while. As can be seen, movements in price indexes varied depending on the sampled goods and services, but prices as a whole were likely to remain flat.

For the time being, the risk was small that the domestic supply-demand balance would deteriorate substantially. Meanwhile, it had become more likely than before that business fixed investment would turn around. However, at this point, it was still not certain whether the driving force of economic recovery would shift smoothly from exogenous demand to private demand. Therefore, attention should still be paid to the risk that prices would start falling again in the event that exogenous demand started decreasing in or after the second half of fiscal 2000.

2. Financial developments

Financial markets were stable in the intermeeting period; interest rates and stock prices moved in a narrow range.

The overnight call rate moved at 0.02 percent, virtually zero percent, except for when it rose temporarily reflecting concerns over the February 29 problem. Interest rates on term instruments were also stable at a low level.

Yields on Japanese government bonds (JGBs) had declined slightly since the end of February due partly to the appreciation of the yen, and recently they were in the 1.7-1.8 percent range. The stability in long-term interest rates at a low level, amid signs of improvement in economic indicators, was attributable to the following factors. First, most market participants remained cautious about the prospect for the economy. Second, they, therefore, held the view that the zero interest rate policy would not be terminated in the near future. And third, demand for JGBs was firm as credit demand remained weak and alternative investment opportunities with better returns were lacking.

Stock prices were relatively firm reflecting active buying of stocks of IT-related firms with growth potential.

With regard to corporate financing, the cautious lending stance of private banks remained basically unchanged. However, major banks, while paying attention to borrowers' creditworthiness, were gradually becoming more willing to increase lending. This was due partly to banks' efforts to increase loans in accordance with their plans for restoring sound management submitted to the Financial Reconstruction Commission.

Demand for credit for economic activities, however, remained weak, and firms still focused on reducing debts. As a result, credit demand in the private sector remained sluggish, and it seemed difficult for banks to find new business opportunities. Therefore, growth in private bank lending and money stock (M2+CDs) remained weak. In this environment, banks were becoming increasingly keen to lend to small and medium-sized firms affiliated with large companies. Reflecting these circumstances, corporate financing conditions continued to be easy.

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

A. The Current Economic Situation

On the current economic situation, the majority of members pointed out that, since the turn of the year, some economic indicators such as those related to business fixed investment, sales, employment, and income had been showing favorable signs.

Based on this, many members expressed the view that the economy was in most respects following the expected path to recovery. Specifically, production had increased reflecting the rise in external and public demand, prompting growth in corporate profits, and in turn stimulating firms' spending activities.

One of these members mentioned that some of these economic indicators confirmed that a self-sustained recovery in private demand, such as business fixed investment, was under way.

Many members, however, expressed the opinion that some of these economic indicators appeared to have been affected by temporary factors. Further, these members stated that the sustainability of the improvement in the economy and the extent to which it would spread throughout the economy should be viewed with more caution than in past economic recoveries considering firms' balance-sheet problems and structural adjustment pressures. Thus, these members shared the view that a self-sustained recovery in private demand had not been confirmed yet.

Based on the above discussions, many members generally agreed with the following view: "Japan's economy has recently started to improve. The economic environment surrounding private demand continues to improve, as seen in the increase in corporate profits. However, clear signs of a self-sustained recovery in private demand have not been observed yet."

A few members noted that expectations were growing that preliminary GDP data for the October-December quarter would show a decline for the second consecutive quarter. However, these members stated that, even if the preliminary GDP data showed negative growth, there was no need to alter the Bank's current view that the economy had started to improve, because (1) various economic indicators had improved since the turn of the year, (2) production continued to increase, and (3) a recovery in corporate profits was becoming evident.

One of these members commented that there was a possibility that the preliminary GDP data might not be adequately reflecting the state of the economy as, for example, they did not give enough weight to consumption by single-member households, which was recently leading private consumption.

Regarding housing investment-, some members noted that a surge in housing starts in January was a temporary phenomenon since (1) construction starts based on loans provided by the Housing Loan Corporation under its second and third programs for 1999 were concentrated in January, a month in which housing starts were usually low, and (2) the extension of the tax measure for housing investment had had a positive effect. One member also pointed out that the total number of loans provided under the second and third programs had decreased from the previous year. Thus, many members expressed the view that housing investment was on a moderate downward trend.

Many members shared the view that exports had maintained their upward trend for the following reasons: (1) overseas economies remained firm; (2) net exports had started rising again after the turn of the year, suggesting that the slowdown in net exports toward the end of 1999 had been due to temporary factors, such as preparations for the Year 2000 problem; and (3) exports for late 1999 were revised upward in the annual revision of Trade Statistics by the Ministry of Finance.

Regarding private consumption, many members pointed out that many indicators related to retail sales, such as sales at department stores and new passenger-car registrations, were recovering after the turn of the year. These members expressed the view that, although consumption had not clearly turned around at present, the sluggishness toward the end of 1999 could be regarded as a temporary phenomenon amid mixed developments in private consumption.

Meanwhile, one member was more cautious than other members, commenting that consumption remained stagnant and was expected to be flat or decrease in the January-March quarter. This member noted that the increase in the index of living expenditure level for January was due to an irregular rise in education expenditure.

Many members shared the view that production had remained on an upward trend even after the turn of the year. They pointed out that the rise in corporate profits was becoming clearer due to an improvement in the supply-demand balance and progress in corporate restructuring, and said this suggested that a foundation for an economic recovery had become firmer.

However, one member stated that the current recovery in corporate profits was largely underpinned by the effects of restructuring and by the reduced interest burden due to the zero interest rate policy, and the basis of firms' profits was still fragile.

Regarding this comment, a few other members referred to the results of a survey conducted by The Nihon Keizai Shimbun, which showed that firms were expecting an increase in profits and a decrease in sales for fiscal 1999, and an increase in both profits and sales for fiscal 2000. The members expressed the view that not only the effects of restructuring but also an increase in sales would contribute to an improvement in profits for fiscal 2000.

Many members shared the view that business fixed investment had nearly leveled off, given that positive signs had become evident in indicators related to fixed investment. For example, shipments of capital goods and construction starts (floor area) had surged in January amid an improvement in the environment for investment as seen in the recovery in corporate profits.

Many members noted that prices showed mixed developments: the year-to-year decline in domestic wholesale prices contracted rapidly while consumer prices were relatively weak.

One member pointed out that the breakdown of domestic wholesale prices showed that the only downward factor was a fall in the prices of machinery due to the effects of technological innovation. Declines in prices of other items had almost ceased, thus price falls due to weak demand had almost stopped at the stage of wholesale prices.

Another member pointed out the recent developments in wholesale prices as follows: (1) the introduction of new products and new technology had contributed to a decline in prices and improvements in the quality of products; (2) prices of materials remained under downward pressure due to corporate restructuring efforts; and (3) industrial commodity prices, which had been under pressure from a deterioration in the supply-demand balance, had stopped falling, and a foundation for sellers to raise prices was being laid.

Many members stated that the weakening of consumer prices was mainly caused by the effects of the appreciation of the yen since the summer of 1999 appearing with a time-lag through reductions in the prices of domestic products competing with imports. Further, they pointed out that "price destruction" was progressing rapidly due to increased efficiency in the distribution system, and that there was a possibility that price statistics were swinging temporarily in a negative direction as a result of changes in the sample items used in the consumer price index (CPI). These members commented that falls in prices caused by the above factors should not be considered as deflationary.

One member pointed out that the following four factors were causing price changes: (1) technological innovation and the rationalization of the distribution system; (2) the domestic supply-demand balance; (3) fluctuations in foreign exchange rates; and (4) changes in international commodity prices, such as those of crude oil. The member continued that downward pressures on wholesale prices caused by factors (2) and (3) were weakening, but factor (4) was pushing them up. This member pointed out that, by contrast, consumer prices were rather weak at present because, compared to wholesale prices, effects of fluctuations in foreign exchange rates took longer to appear and were now materializing, and the impact of changes in international commodity prices was smaller.

Meanwhile, another member expressed the view that downward pressures on consumer prices remained strong because differences still existed between domestic and overseas consumer prices, mainly of non-tradable goods.

B. Financial Developments

Some members noted that long-term interest rates were stable at a low level, although economic indicators were favorable.

One member expressed concern that the zero interest rate policy might be distorting market prices pointing out the possibility that (1) the market was being affected by expectations that the zero interest rate policy would continue for the time being, and (2) the provision of ample liquidity under the policy might be encouraging market participants to take greater risks and invest in bonds and IT-related stocks.

In response to this, another member remarked that, since one of the aims of the zero interest rate policy was to remove uncertainties about the availability of liquidity, such phenomena should be accepted as an unavoidable concomitant.

Some other members emphasized that long-term interest rates needed to be watched carefully to see whether the current trend would continue, and that as a central bank, it was important to communicate well with the markets.

One member made the following comments on foreign exchange rates and stock prices. First, technical analysis showed that the yen maintained upward momentum, and the Nikkei 225 Stock Average was on an uptrend in a medium-term cycle. Second, U.S. stock prices were clearly nearing their ceiling and were very likely to see a substantial correction given that the flow of capital into stock mutual funds had reached a record high in January, and that on Nasdaq, the stocks of only 14 firms accounted for 50 percent of the market's value.

As for the monetary aggregates, one member expressed the view that, even if fixed investment rose in the near future, it might not boost credit demand since many firms had cut their business fixed investment to less than their cash flow, which was increasing due to an improvement of their profits. Further, the member stated the possibility that money stock and bank lending would remain sluggish for a while as precautionary demand for liquidity had declined due to the abatement of concern about the financial system. However, the member pointed out that, under the present circumstances, such developments in the monetary aggregates were compatible with a recovery in business fixed investment, and the financial environment was giving sufficient support to investment activity.

C. The Economic Outlook

On the economic outlook, many members expressed the view that the downside risk associated with the endogenous factors of the economy had subsided, and it was becoming more likely that private demand would recover clearly.

One of these members remarked that deflationary concern had already been dispelled. As reasons for this, the member pointed out the following. First, economic forecasts and anecdotal information suggested an increase in production in the January-March and April-June quarters. Second, some encouraging developments were starting to be observed in industries, such as the service sector, as indicated by a sizable expansion in the volume of advertising. And third, the Survey on Labor Economy Trend by the Ministry of Labor showed that an increasing number of firms, excluding those in the construction sector, felt that the labor surplus had diminished or that the labor shortage had expanded. The member also stated that these developments showed that the increase in corporate profits was starting to have positive effects on employment and household income.

However, many members were of the opinion that a self-sustained recovery in private demand had not been observed to date, and that deflationary concern had not been dispelled yet.

As for public investment, some members stated that the value of public works contracted had begun to increase due to the start of public works based on the second supplementary budget for fiscal 1999, and this would lead to an increase in the value of public works being implemented. Meanwhile, one member noted that the deterioration in the fiscal condition of local governments was a downside risk to public investment.

With regard to exports, many members projected that they would continue to increase due to the continued recovery in economies worldwide.

Based on these discussions, many members agreed that exogenous demand would continue to underpin the economy for a while. One of these members commented that, looking ahead over the next six months, the risk that the supply-demand balance of the economy could deteriorate again had declined substantially.

On the outlook for private consumption, many members noted the following favorable developments: (1) in January, indicators related to employment and income had improved, such as the ratio of job offers to applications and scheduled cash earnings; (2) consumer confidence continued to improve; and (3) indicators related to retail sales had picked up after the turn of the year.

One member pointed out that it might have become increasingly difficult to deduce the trend of consumer spending from existing retail sales statistics, citing the fact that a large proportion of sales of the latest computer game machine were directly via the Internet. Thus, the member suggested that developments of private consumption should be judged not only from retail sales statistics but also from trends in household income.

Looking ahead, many members expressed the view that the downside risk to private consumption from households' income conditions was gradually subsiding, but developments still warranted attentive monitoring.

A few members mentioned that private consumption could increase if the rise in corporate profits led to an increase in summer bonus payments. However, as firms continued to restrain personnel expenses, it was hard to forecast to what extent growth in corporate profits would improve household income. Thus, trends in the labor market this spring and the level of summer bonus payments would need to be watched carefully. Further, a few other members cited as a potential risk factor households' anxieties about the future, reflecting the expansion of the fiscal deficit and deterioration in firms' pension reserves.

One member commented that a sizable increase in private consumption could not be expected when economic growth was likely to be around 1 percent at most. The member added that the propensity to consume remained at a fair level as spending by households was broadly in line with their disposable income, which had decreased, and therefore the current level of consumption could be considered as normal.

Meanwhile, one member expressed a more cautious view on employment conditions than other members. This member commented that the unemployment rate was expected to increase as the number of workers in the construction sector had plummeted since November 1999 and the number of new university graduates, who had not yet found jobs, had increased. Further, the member pointed out that failures of firms, which had been supported by the special loan guarantee system, had increased.

In relation to this point, another member noted that the number of those employed to provide medical and social welfare services and services to firms, such as information, financial, and legal services, had increased while those working in traditional industries had decreased. On these grounds, the member expressed the view that the rise in Japan's unemployment rate over the medium term reflected structural changes, particularly increased mobility of labor. The member added that the improved mobility of labor was favorable in the sense that it reflected progress in structural adjustment.

On the outlook for business fixed investment, many members agreed that there was a strong possibility that business fixed investment would turn around in the near future given that various leading indicators were rising amid an improvement in the investment environment, as seen in the recovery in corporate profits.

Nonetheless, many members also shared the view that, with firms' balance-sheet problems and structural adjustment pressures, the prospect of a recovery in business fixed investment was not clear yet.

Based on these discussions, these members commented that it was important to carefully examine, using information such as the results of various surveys on fixed investment, the sustainability of the current positive movements in business fixed investment and the extent to which they would spread to various industries.

One of these members suggested that when examining the above points, careful attention should be paid to the following: (1) the size of the expected increase in the number of bankruptcies; (2) the possible impact of additional corporate restructuring measures on the overall economy; and (3) the reaction of the financial market to economic indicators suggesting an economic recovery.

Meanwhile, some members commented on the distinct contrast between sectors observed in both the economy and the stock market.

As examples of this phenomenon, one member cited the following: (1) the corporate sector was improving as seen in production and machinery orders, but the household sector remained stagnant; and (2) a breakdown of production, which was relatively firm, showed that output of producer goods was rising steadily while that of final demand goods remained at the level of 1998.

Some other members remarked that since structural reform was essential for a full-scale recovery in Japan's economy, an improvement across all sectors was unlikely. One of these members stated that the focus of attention would be the extent to which growth sectors, such as IT-related sectors, could bolster the economy as a whole.

A few members mentioned that, from the viewpoint of macroeconomic policy, it was vital to understand the state of the entire economy and not pay too much attention to growth sectors or to declining sectors. Further, another member commented that, when the contrast between the two was very pronounced, it could be expected that both growth and declining sectors would voice objections to views based on the entire economy or on the "average" sectors.

Meanwhile, one member remarked that a rise in crude oil prices was a risk factor for Japan's economy. This member said that, even if OPEC decided to increase production, prices would remain high throughout 2000, because of the tight supply-demand balance of gasoline in the United States.

Members discussed the outlook for prices and their judgment on whether deflationary concern had been dispelled.

With regard to the judgment on deflationary concern, many members commented that downward pressures on prices stemming from deterioration in the supply-demand balance required attention. Therefore, the supply-demand balance and the trend of private demand, which together formed the background to price developments, would need to be watched carefully.

A few members noted that the Bank's stance of focusing on the momentum of the recovery in private demand, such as business fixed investment, was gradually coming to be accepted by the market.

On these grounds, many members were of the opinion that prices would be generally flat for the time being, but since a firm recovery in private demand had not been observed, attention should still be paid to the possibility that downward pressures on prices would increase when exogenous demand declined. Based on the above discussion, many members agreed that deflationary concern had not been dispelled yet although encouraging signs had gradually increased.

One of these members remarked that it was likely to become increasingly difficult to make a judgment on whether deflationary concern had been dispelled since (1) wholesale prices were expected to increase from the previous year reflecting the rise in the price of crude oil and other commodities, and (2) some encouraging signs had been observed 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 recently started to improve. Second, the economic environment surrounding private demand continued to improve, as seen in the 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 unchanged for the time being, but attention should still be paid to the downward pressure on prices stemming from weak demand.

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.

Members discussed various issues regarding price stability, which was the objective of monetary policy, continuing from the previous Monetary Policy Meetings on February 10 and 24.

First, some members commented on the downward pressure on prices stemming from technological innovation and the rationalization of the distribution system.

A few members remarked that the decline in prices due to technological innovation and the rationalization of the distribution system enhanced economic welfare, and such declines could be considered as virtuous, not deflationary. Some members commented that, with such structural changes exerting downward pressure on prices, it had become increasingly difficult to determine an inflation rate consistent with a healthy economy.

One of them expressed the view that it was essential to analyze and further discuss the magnitude of such downward pressure on prices.

One member commented on the relationship between prices and the output gap.

The member remarked that the relationship between the two was clearly becoming unstable, given that the decline in wholesale prices had contracted sharply while the estimated output gap remained large. The member attributed this to the overestimation of the output gap caused by the capital stock on firms' balance sheets that was in fact useless due to rapid technological innovation. On these grounds, the member remarked that the relationship between prices and the output gap should be reexamined.

A few members attached importance to reaching a consensus on the following: (1) the optimal rate of medium- to long-term inflation from the viewpoint of a central bank; and (2) measures to deal with supply shocks to prices.

Another member remarked that views on the optimal inflation rate in academic circles fell roughly into two camps--one that called for virtually zero percent and another that called for slightly higher than zero percent. The member continued that the latter was based on the following grounds: (1) price indexes had an upward bias; (2) a margin for maneuvering nominal interest rates in both directions was needed given the zero bound on nominal interest rates; and (3) wages and prices had downward rigidity. The member said that both views on the optimal inflation rate should be carefully examined. In relation to the third point, the member remarked that downward rigidity of wages and prices was less marked in Japan than other countries, that is, they fell more easily, and this fact should be taken into account in judging the optimal inflation rate.

A different member pointed out that, even during the "bubble" period of extremely high economic growth and inflated asset prices, the highest rate of increase in Japan's CPI was around 3 percent. Judging from this experience, a medium- to long-term inflation rate consistent with a healthy economy, in the case of Japan, was most likely to be lower than that of Europe and the United States, and it was therefore dangerous to simply apply the cases of Europe and the United States to Japan.

Some members commented on issues related to releasing projections for prices.

One member expressed the view that it was inappropriate to set a target for prices because there was a high risk that the credibility of the Bank's monetary policy would be impaired. This was because, with the uncollateralized overnight call rate at virtually zero percent and with ample liquidity in the markets, there were hardly any orthodox monetary policy measures that could be taken to achieve a target for prices.

The member, however, added that it might still be worth considering the release of statistical projections. The member continued that, as inflation was extremely detrimental to the sound development of the national economy, such expressions as "inflation targeting" and "projected inflation rates" were misleading and thus should be changed to "projections for prices." On these grounds, the member considered that the optimal rate of change in prices in the medium to long term should be basically zero percent.

In relation to this view, another member commented that inflation projections by various research institutes over the past 20 years had diverged from the actual rate by about 1 percent on average. This showed that errors were unavoidable in inflation projections. The member noted that recent progress in technological innovation would amplify such errors. The member was therefore of the opinion that the Bank should be especially careful in deciding whether to release projections for prices.

On the basis of the above discussion, some members commented that the Bank should examine comprehensively the meaning of price stability from a medium- to long-term perspective.

Taking the above views into account, the chairman expressed the following opinion.

At the Monetary Policy Meeting on February 10, many members supported the idea of discussing in depth, issues regarding price stability from the viewpoint of enhancing the transparency of monetary policy. Nearly two years had passed since the new Bank of Japan Law was enforced, and in this regard, it was a good occasion to comprehensively discuss the meaning of price stability, which was the primary goal of central banks. The discussion could proceed in the following manner.

(1) The Bank's staff would study the following issues taking account of the points discussed at Monetary Policy Meetings: (a) the Bank's basic thinking regarding price stability; (b) issues regarding price indexes; (c) the evaluation of recent price developments in Japan; and (d) issues related to the numerical quantification of price stability (including setting a target and projecting the movement of a specific numerical indicator).
(2) The Board would discuss price stability on the basis of the staff's report, and issue a comprehensive report on its thinking on price stability.
(3) During this process, the Bank could release information compiled by the staff that was appropriate for disclosure.
(4) The Bank would issue a report by around the end of summer 2000.

The chairman proposed announcing this plan at the press conference on March 10.

In response to the chairman's plan, some members pointed out issues that required attention. A few members remarked that it should be explained clearly that the study would be based on a medium- to long-term perspective. This was essential to avoid unnecessary market speculation that, for example, the Bank's study of price stability was in some way connected to the timing of the termination of the zero interest rate policy. A different member stressed that the issue of price stability was extremely deep and broad, and it was highly unlikely that even a thorough study as proposed by the chairman would lead to a complete understanding of its meaning. Another member commented that there were various ways to undertake the study, and therefore each issue should be dealt with in a flexible manner.

All members, including the above members, nevertheless supported the chairman's plan. Thus, the chairman ordered the Bank's staff to proceed with the study on price stability.

Separately, one member suggested that the procedures for Monetary Policy Meetings be reviewed, based on the experience accumulated in the two years since the new Bank of Japan Law was enforced, to enhance the transparency of the Bank's monetary policy. The member suggested reviewing, for example, the schedule for the release of the minutes of Monetary Policy Meetings and the frequency of the Meetings. Another member agreed with this view, saying that such comprehensive revision was meaningful. All members supported this suggestion.

On the basis of the above discussion, the chairman also ordered the Bank's staff to prepare a list of the specific points to be examined.

Meanwhile, two members objected to the maintenance of the zero interest rate policy.

One member proposed changing the guideline for money market operations back to that employed before the zero interest rate policy was adopted 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, recent economic indicators showed that the economy had definitely improved from when the zero interest rate was introduced to counter the risk of a deflationary spiral, and deflationary concern had been dispelled. Second, there was a risk that the prolongation of the zero interest rate policy would impair the private sector's incentive to increase capital productivity, and delay structural reform indispensable for the development of the economy. And third, the prolongation of the zero interest rate policy would allow economic entities to become less sensitive to risks and encourage excessive risk-taking.

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 CPI, and increasing current account balances at the Bank to achieve these targets.

The member gave the following reasons for the proposal. First, GDP for the October-December quarter of 1999 was most likely to have fallen from the previous quarter. This contraction was not a temporary phenomenon but reflected the actual state of the economy. Therefore, for the economy to achieve its potential growth rate, which was considered to be 1.5-2.0 percent, as soon as possible, the adoption of quantitative easing was necessary. Second, quantitative easing should be implemented to pre-empt a rise in the yen. Third, being responsible for price stability, the Bank should set a numerical target for prices so that it could make a self-assessment of its conduct of monetary policy. And fourth, because the Bank's corporate governance was unclear to the external observer, the Bank should take action immediately to avoid the danger of having a target imposed from outside.

V. Remarks by Government Representatives

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

(1) Japan's economy continued to improve moderately due to the influence of various policy measures and the recovery of Asian economies. For example, positive movements were observed in corporate activities. However, weakness remained in private demand--such as private consumption and business fixed investment--which was the key to a self-sustained recovery of the economy. The Government would therefore continue to implement fiscal measures so as to realize a smooth shift in the driving force for an economic recovery from public to private demand and to achieve a full-scale economic recovery led by private demand.

(2) In these circumstances, the Government would promptly implement the second supplementary budget for fiscal 1999 with a view to smoothly carrying out various measures in the Policy Measures for Economic Rebirth decided in November 1999. The Government formulated the fiscal 2000 budget with a view to ensuring an economic recovery. This budget was passed by the House of Representatives on February 29, and was currently being deliberated at the House of Councilors.

Japan's fiscal condition was extremely severe, as seen in the fact that the fiscal 2000 budget relied on debt for 38.4 percent of revenues. The Government therefore considered that it would be necessary 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 toward a recovery.

(3) The Government would like to ask the Bank to continue implementing monetary policy appropriately and in a timely manner, harmonizing its actions with the Government's measures to ensure a recovery of the economy--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 state of the economy was as explained by the representatives from the Ministry of Finance.

(2) In the October-December quarter of 1999, indicators of output and income--i.e., production and corporate profits--rose while many indicators of demand declined. The decline in demand was due mainly to temporary factors: (a) the fall in winter bonuses; (b) concerns over the Year 2000 problem; and (c) the decline in public investment before projects based on the second supplementary budget for fiscal 1999 were launched.

The Government considered that the economy was following its projected recovery path. For example, the following developments had been observed since the turn of the year: (a) output and income continued to increase; (b) consumption was rising; (c) housing starts had increased in January; and (d) public works were picking up. In these circumstances, the Government would aim to realize a smooth shift in the driving force for the economy from public to private demand with a view to achieving an economic recovery, and would strongly promote structural reform. The Government was determined to implement measures to this end, especially those in the Policy Measures for Economic Rebirth.

(3) 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 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 continued to improve, as seen in the 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 unchanged for the time being, but attention should still be paid to the downward pressure on prices stemming from weak demand.

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

However, 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 adopting quantitative targeting by setting a target for the rate of increase in the CPI and the growth rate of 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 CPI (excluding perishables) in the October-December quarter of 2001 as a medium-term target of price stability. In achieving this target, the Bank will raise the average balance of current accounts at the Bank in the intermeeting period ahead to about 7 trillion yen, 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 provide ample funds should there be a risk that financial markets might destabilize, for example, should demand for liquidity surge.

The proposal was defeated with one vote in favor, 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 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.

Mr. Nakahara voted against the chairman's proposal on the following grounds. First, since sentiment could be damaged if GDP for the October-December quarter of 1999 proved to have decreased from the previous quarter, the Bank should terminate the current policy, which was passive, and adopt a proactive policy. Second, in a situation where there was no entity that coordinated monetary and fiscal policy, monetary policy needed to be synchronized with fiscal policy while the effects of the latter continued. In this respect, the Bank should implement further quantitative easing. And third, under the zero interest rate policy, the only policy options were to continue or discontinue it, and therefore, there was no room for further monetary easing.

Ms. Shinotsuka dissented for the following reasons. First, recent economic indicators showed that the economy was improving steadily, and such conditions allowed the termination of the zero interest rate policy. Second, the prolongation of the zero interest rate policy would hamper structural reform, which was indispensable for a full-scale economic recovery. And third, the negative effects of the zero interest rate policy were becoming greater as time went by. For example, an increasing number of market participants were taking action based on the assumption that the policy would be prolonged.

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 March 10, 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 March 10, 2000 together with the English version of "The Bank's View." The English version of "The Background" was published on March 23, 2000.

Attachment

For immediate release

March 8, 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: