Minutes of the Monetary Policy Meeting

on October 13, 2000
(English translation prepared by the Bank staff based on the Japanese original)

November 22, 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 Friday, October 13, 2000, from 9:00 a.m. to 12:27 p.m., and from 1:15 p.m. to 3:32 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. Murata, 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 Agency⁴
Mr. T. Komoda, Deputy Director-General of the Coordination Bureau, Economic Planning Agency⁵

Reporting Staff
Mr. M. Matsushima, Executive Director
Mr. M. Masubuchi, Executive Director
Mr. S. Nagata, Executive Director
Mr. M. Shirakawa, Advisor to the Governor, Policy Planning Office
Mr. M. Samejima, Associate Director, Policy Planning Office⁶
Mr. M. Amamiya, Chief Manager, Planning Division 1, Policy Planning Office
Mr. I. Yamashita, Director, Financial Markets Department
Mr. S. Murayama, Director, Research and Statistics Department
Mr. T. Yoshida, Senior Manager, Research and Statistics Department

Secretariat of the Monetary Policy Meeting
Mr. I. Yokota, 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. H. Tanaka, Chief Manager, Planning Division 2, Policy Planning Office⁷
Mr. H. Yamaoka, Senior Economist, Policy Planning Office
Mr. S. Uchida, Senior Economist, Policy Planning Office
Mr. J. Iwasaki, Manager, Financial Markets Department⁸

1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on November 17, 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.
2. Mr. Murata was present from 9:00 a.m. to 11:38 a.m.
3. Mr. Haraguchi was present from 11:38 a.m. to 3:32 p.m
4. Mr. Kawade was present from 9:00 a.m. to 12:17 p.m.
5. Mr. Komoda was present from 1:15 p.m. to 3:32 p.m.
6. Mr. Samejima was present from 9:00 a.m. to 9:32 a.m.
7. Mr. Tanaka was present from 9:00 a.m. to 9:32 a.m.
8. Mr. Iwasaki was present from 9:00 a.m. to 9:32 a.m.

I. Approval of the Minutes of the Monetary Policy Meeting Held on September 14, 2000

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of September 14, 2000 for release on October 18, 2000.

II. Decisions concerning Establishment of Guidelines on Eligible Collateral and Revision of Principal Terms and Conditions Pertaining to the Purchase/Sale of Bills

A. Staff proposal

1. Establishment of Guidelines on Eligible Collateral

The Bank's staff proposed establishing the Guidelines on Eligible Collateral in view of the change to real-time gross settlement (RTGS) for funds transfers among current accounts held at the Bank and the launch of a credit and collateral system, both of which were scheduled for the beginning of next year. The Guidelines would prescribe the principles governing collateral eligible for the Bank's provision of credit as a means of monetary control. Specifically, the categories and prices of collateral and eligibility standards for it, all of which vary at present according to the type of credit, would be unified. Furthermore, the publication of the Guidelines on Eligible Collateral would enhance the efficiency of processing of eligible collateral, and increase the transparency of the Bank's business operations.

The Bank's staff also proposed replacing the system of two official discount rates depending on the type of collateral with one using one rate for all collateralized lending, and reconsidering loan schemes that favor bills based on specific types of transactions, such as bills corresponding to commercial bills, with a view to abolishing such schemes.

2. Revision of Principal Terms and Conditions Pertaining to the Purchase/Sale of Bills

The Bank's staff proposed revising the Principal Terms and Conditions Pertaining to the Purchase/Sale of Bills in view of the planned introduction of RTGS for funds transfers among current accounts held at the Bank. The revision would be based on the Principles regarding the Revision of Bill Purchasing/Selling Operations adopted at the Monetary Policy Meeting on April 27, 2000. Under the revised system, the Bank would (1) conduct bill purchasing/selling operations directly with counterparties instead of through tanshi companies (money market broker-cum-dealers), (2) accept eligible collateral as part of pooled collateral, (3) introduce bill purchasing operations at all branches, and (4) integrate bill purchasing operations utilizing corporate bonds and loans on deeds into bill purchasing operations.

B. Members' Discussion and Votes

Members unanimously approved the proposals and decided to publicize the decision.

III. Decisions regarding "On Price Stability" and "Release of Outlook and Risk Assessment of the Economy and Prices"

A. Discussions by Policy Board Members

Policy Board members discussed "On Price Stability" and a statement titled "Release of Outlook and Risk Assessment of the Economy and Prices" following explanation by the Bank's staff.

The majority of members expressed the view that they both summarized well the findings from the eleven meetings held by Policy Board members and that the most appropriate conclusion that was possible at this point in time had been drawn.

One member said that the new framework explained in the report and the statement would help make discussions on monetary policy within and outside the Bank more analytical and would enhance transparency in the conduct of monetary policy. Another member said that the framework would help stabilize market expectations as it provided members' views of the longer-term economic outlook and risks, complementing fixed-point observations for the short term made at each Monetary Policy Meeting. Some members said that public interest might be focused on the numerical values in the forecasts. They continued that the significance of the framework lay not in the numerical values in the forecasts but in using the framework to show the risk assessment of future developments in the economy and prices. Thus, many members emphasized that it was important to show the limitations and constraints of numerical values in the forecasts as well as their implications for the conduct of monetary policy.

Based on the above, members discussed various points, and many members commented that it was important to continue examining issues related to price stability.

On the report "On Price Stability," discussions centered on the issue of expressing price stability by a numerical value. A few members expressed the view that the optimal rate of increase in price indexes over the medium and long term was small but positive considering issues such as the upward bias of price indexes and the zero constraint on nominal interest rates. However, many members including those above agreed with the conclusion of the report that it was not appropriate to define price stability by numerical values at this point for the following reasons. First, supply-side factors such as technological innovation were exerting downward pressure on prices at present. And second, the available orthodox monetary policy measures were limited. At the same time, these members shared the view that the Bank should continue to explore whether price stability could be expressed by numerical values, taking account of actual changes in the market and the economy.

Some members made specific comments on issues that needed to be studied further. After pointing out that the Bank's objective was to achieve not only price stability but also financial system stability, one member said that there had been cases of problems arising in the financial system while prices were stable, such as during the period of the economic bubble. Therefore, it could be said that the relationship between price stability and financial system stability was not completely clear and required further research. Another member commented that there was a need for further study of whether it would be inappropriate to use numerical values to express price stability as long as downward pressure on prices from the supply side remained. A different member raised two issues for further study. First, ways to improve data on the supply side that were essential for assessing prices. And second, ways that countries that had adopted inflation targeting would deal with issues related to technological innovation, which made compilation of reliable price statistics more difficult, and asset prices, which were becoming increasingly important for the conduct of monetary policy.

At the same time, another member said that it would be difficult to define price stability in terms of numerical values in view of structural changes that Japan was undergoing, bias in price indexes, and Japan's economic situation which was subject to strong influence from external developments. Therefore, the member thought that the issue should be studied further and would, at this point in time, prefer to give only a qualitative or conceptual definition of price stability. The member further commented as follows. The discussions on the issue of quantifying price stability had been initiated in response to public criticism that the goal of monetary policy was unclear. Therefore, the discussion started from the very fundamental question of the significance of price stability, but some issues required further study. In that sense, the member would like to emphasize that the conclusion was not fully satisfactory.

One member, while supporting the Bank's plan to make public its thinking on price stability, disagreed with the contents of the report as the member believed that the Bank should immediately set a numerical target for the inflation rate. The member expressed the following opinions. First, without a numerical target, the Bank would not be able to assess its performance and would not be accountable to the public as a central bank. Second, it was natural that an inflation target should be adjusted in line with structural changes and this would make the adoption of an inflation target viable. And third, the European Central Bank (ECB) had defined price stability as year-on-year price increases of below 2 percent, and some central banks in industrialized countries, such the United Kingdom and New Zealand, had adopted inflation targeting. In view of this, the report should explain convincingly and in depth why Japan did not have a numerical target for prices.

On the release of "Outlook and Risk Assessment of the Economy and Prices," several opinions were expressed concerning the time frame of the forecasts of Policy Board members. Some members said that the time frame should be a little longer because of a time lag of about one to two years for monetary policy to have a visible impact on the economy and it was important that monetary policy was forward-looking. They agreed, this time, to the release of forecasts for only fiscal 2000 to see the reaction of financial markets and the public, but they thought the Board should review the time frame in a flexible manner. Another member said some scope for flexibility should be allowed with regard to such matters as the time frame of forecasts, the way they were released, and the contents of the "Outlook and Risk Assessment of the Economy and Prices."

One member welcomed the release of the outlook and risk assessment as a step forward. The member, however, argued that the Bank should release the forecasts of the Bank's staff approved by the Policy Board.

In response, a few members said they supported the idea of releasing the range of members' forecasts. One member expanded on the issue as follows. At Policy Board meetings, the nine members discussed issues based on their differing views, and after the discussions the guideline for monetary policy was decided by majority vote. It was not appropriate to have a vote on members' forecasts based on different views and settle on a single number. Rather, it would be more informative to disclose the range of members' forecasts. The public would prefer to know the views of Policy Board members, who have the right to vote at Monetary Policy Meetings. Another member would welcome the adoption of the framework because members were expected to construct their arguments based on their own forecasts, and this framework would enhance the effectiveness of members' discussions. A different member said the forecasts on prices based on discussion among members should be added to the "Outlook and Risk Assessment of the Economy and Prices." The "Outlook and Risk Assessment of the Economy and Prices" should then be put to the vote at Monetary Policy Meetings and be made public.

B. Remarks by Government Representatives

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

The release of forecasts of important economic indicators by the Bank's Policy Board was basically a favorable development as it would enhance the transparency of monetary policy decisions. The Government released its medium- and long-term economic outlook and annual economic projections after approval by the Cabinet. Given the Bank's decision, the Government would like to have a full exchange of views with the Bank on the issue.

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

The Bank's decision to release a comprehensive report on its thinking on price stability was positive from the viewpoint of improving transparency in the conduct of monetary policy. It was hoped that the release of the report would promote further discussion on price stability from various angles.

C. Votes

The report "On Price Stability" and the statement "Release of Outlook and Risk Assessment of the Economy and Prices" both won a majority in the votes, and it was decided that they would be released later in the day.

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

Vote against the proposal: Mr. N. Nakahara.

Mr. Nakahara dissented on "On Price Stability" for the following reasons. First, the Bank should use numerical values to express its objective and assess its performance, because of its responsibility for ensuring price stability and from the standpoint of corporate governance. Second, there was a need to set a specific target on prices, especially when the Japanese economy was trying to free itself from deflationary pressures. Third, a numerical target could at times help the delicate relationship with politics. Fourth, the view that the downward trend of prices in the 1990s was caused by insufficient monetary easing was prevalent, particularly overseas. And fifth, the report placed too much emphasis on the influence of technological innovation on prices without providing quantitative estimates.

He also gave three reasons for opposing the release of "Outlook and Risk Assessment of the Economy and Prices." First, the Bank should release the forecasts by the staff, who had ample manpower, after the forecasts had been discussed and approved by the Policy Board. Second, the number of staff allocated to each Policy Board member needed to be increased if members were to make their own forecasts. And third, "Outlook and Risk Assessment of the Economy and Prices" should include forecasts of quarter-by-quarter developments of the economy, and the outline of the model and estimation method used.

IV. Summary of Staff Reports on Economic and Financial Developments⁹

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 September 14, 2000.¹⁰ As a result, the overnight call rate was generally steady at 0.25 percent.

1. 9Reports were made based on information available at the time of the meeting.
2. 10The guideline was as follows:
   The Bank of Japan will encourage the uncollateralized overnight call rate to move on average around 0.25 percent.

B. Recent Developments in Financial Markets

In domestic financial markets, long- and short-term interest rates and the credit spread were steady on the whole, while stock prices fell sharply.

The drop in stock prices could be attributed in part to the following factors. First, a decline in Nasdaq stocks in response to the downward revisions to U.S. high-tech corporations' earnings. Second, the filing by Chiyoda Mutual Life Insurance Company for rehabilitation procedures under the Special Law concerning Reorganization of Financial Institutions. And third, concern about a deterioration in the supply-demand balance of stocks following the announcement by the Government that it would sell more of its holdings of Nippon Telegraph and Telephone Corporation (NTT) shares. However, the floor of the recent range of stock prices was firm, because the view on Japan's economy was improving and part of the massive amount of matured postal savings was expected to flow into the market. At present therefore, market participants generally seemed to expect stock prices to recover gradually toward the year-end after the market digested the negative factors such as the decline in Nasdaq stocks and tensions in the Middle East.

Interest rates on term instruments maturing beyond the year-end edged upward partly because market participants were preparing for the introduction of RTGS. Neither lenders nor borrowers, however, had yet formed a clear idea on the appropriate level of interest rates. The Bank started to supply funds maturing beyond the year-end from October 10, 2000 in order to maintain stable market conditions.

In foreign exchange markets, the euro had fallen to a historical low by mid-September, but rebounded following coordinated intervention by G-7 countries. Subsequently, it weakened slightly due to speculation that Denmark would not adopt the euro and concern that the increase in interest rates by the ECB would hurt the region's economy. The euro still required close attention, since the recent stability of the euro was supported partly by concern about possible market intervention.

C. Overseas Economic and Financial Developments

The U.S. economy continued to expand led by domestic demand, especially business fixed investment related to information technology (IT). However, growth in household expenditure such as housing investment and consumption of durable goods was moderating, indicating a slowdown of the economy. Both producer prices and consumer prices were stable. Under these circumstances, the Federal Open Market Committee (FOMC) decided at its meeting on October 3 to keep its target for the federal funds rate unchanged for the third consecutive meeting since that in June. The statement released after the meeting suggested that the FOMC would continue to pay close attention to the risk of heightened inflation pressures.

In the euro area, although both domestic and external demand continued to expand, some economic indicators started to weaken from the summer onwards. However, producer prices and consumer prices continued trending moderately upward reflecting the rise in crude oil prices and the depreciation of the euro. Against this background, the Governing Council of the ECB decided on October 5 to raise interest rates by 0.25 percentage point.

In NIEs and ASEAN countries, exports of IT-related goods to countries such as the United States and Japan remained high and private consumption and business fixed investment continued to pick up. Consumer prices were rising at a somewhat faster pace due to the tighter supply-demand balance brought about by the sustained robustness or recovery in domestic demand as well as the rise in crude oil prices.

Stock prices were weak worldwide. It was unlikely that this trend would immediately lead to a sharp slowdown in the global economy as there was scope for European countries and the United States to take macroeconomic policy measures. The weakness in stock prices should be kept in mind as a potential risk factor for the global economy.

D. Economic and Financial Developments in Japan

1. Economic developments

Japan's economy was recovering gradually, with corporate profits and business fixed investment continuing to increase. Looking at exogenous demand, public investment was starting to decrease while net exports continued to follow an upward trend. As for private demand, business fixed investment continued to increase but the recovery in private consumption continued to be weak. Housing investment was mostly unchanged. Reflecting these developments in final demand, production was increasing. Corporate sentiment was improving overall, and the virtuous circle of income and spending starting from the corporate sector continued. Although income conditions of households still remained severe, they seemed about to move into a phase of gradual improvement as many firms had stopped cutting bonus payments and regular and overtime payments were increasing. There had been no significant change in prices.

As for the economic outlook, the succession of upward revisions to business fixed investment plans by manufacturers and the prospect that a sharp decline in government spending would be avoided due to the planned supplementary budget were regarded as positive factors. It was likely that the economy would continue recovering gradually although there were some factors, discussed below, that gave cause for concern.

First, crude oil prices remained at a high level. The current level was, however, unlikely to cause an immediate and sharp slowdown of the global economy given that industrial countries had been reducing oil consumption. In Japan, in particular, the effect of high crude oil prices on overall corporate profits was likely to be limited, as the earlier appreciation of the yen and the cut in electricity charges due partly to deregulation would ease their impact. However, if the strength of oil prices heightened inflationary expectations in oil consuming countries, leading to the adoption of tight monetary policies to substantially restrain aggregate demand, the global economy could slow down considerably. Therefore, close attention should still be paid to the situation.

Second, some firms in the raw materials industry, including the steel industry, were reducing production for export to Asia. However, in the case of the steel industry, this development was seen as a temporary adjustment of exports following the completion of the rebuilding of inventories prompted by the region's economic recovery.

And third, in the September Tankan (Short-Term Economic Survey of Enterprises in Japan), small nonmanufacturers unusually revised their business fixed investment plans downward. It was, however, difficult to judge the trend of fixed investment by small nonmanufacturers solely from the results of this Tankan since (1) the diffusion indexes of small non-manufacturers for business sentiment and for production capacity were improving moderately, (2) surveys on business fixed investment conducted by other institutions generally indicated that investment by small nonmanufacturers was not sluggish, and (3) the number of job offers by small firms and the diffusion indexes for employment conditions for small firms suggested that their business had become brisk. Developments in leading indicators, such as machinery orders and construction starts, and statistics on leased equipment would also need to be followed to assess the outlook for business fixed investment.

2. The financial environment

There seemed to be no substantial changes in the lending attitude of financial institutions and in the easing of corporate financing conditions since the termination of the zero interest rate policy. According to the results of the September Tankan, the net percentage of large firms that considered the lending attitude of financial institutions "accommodative" expanded slightly. By contrast, the net percentage of large firms that answered that their financial position was "easy" narrowed slightly. As for small and medium-sized firms, their perception of the lending attitude of financial institutions and of their financial position was almost unchanged.

The underlying tone of private banks' lending remained sluggish. Recently, however, the expansion in the year-to-year decline seemed to be ceasing. Fund-raising from capital markets was steady overall.

Money stock (M2+CDs) in September grew by 1.9 percent year on year, a higher rate than the previous month. For the fourth quarter of 2000, year-to-year growth was projected to remain around the level posted during the third quarter as there would be some inflow from postal savings on maturity, while private-sector funds demand would remain sluggish. (The projected year-to-year growth rate for the fourth quarter was around 2 percent.)

The monetary base grew by 4 percent in September. Even though post offices increased cash on hand toward the end of September, the rate of growth was lower than that of the previous month owing to the steep decline in current account balances at the Bank.

The funding cost for firms was somewhat rising due to the rise in money market rates after the termination of the zero interest rate policy.

The number of corporate bankruptcies in August remained around the same level from the previous month.

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

Regarding the current economic situation, the majority of members shared the view that the information that had become available since the previous meeting, such as the September Tankan and the reports on the regional economies by general managers of the Bank's branches, did not change the judgment that the economy was recovering gradually, with corporate profits and business fixed investment continuing to increase.

However, an opinion was expressed that the economic recovery had temporarily slowed somewhat, based on (1) the sluggish pace of recovery mainly in private consumption, and (2) the possibility of a decrease in public investment and of a slowdown of the world economy.

Members generally agreed that the Tankan survey confirmed the strength of the recovery trend in the corporate sector. A few members mentioned the fact that small nonmanufacturers had revised their business fixed investment plans downward--an unusual development. However, they expressed the view that it was premature to judge the trend solely from the results of the September Tankan, given that some surveys by other institutions showed that small manufacturers had revised their investment plans upward. These members and some other members remarked that business fixed investment as a whole continued to be on an increasing trend, judging from leading indicators such as machinery orders. With regard to corporate profits, one member commented that they were on a rising trend in parallel with increasing sales, suggesting that, in addition to the effects of corporate restructuring, quantitative effects were starting to have a positive impact. A different member also expressed the view that the recovery in the corporate sector as a whole was becoming evident. The member pointed out that private research institutes' surveys predicted double-digit increases in the current profits of listed companies (excluding the financial industry) for fiscal 2000 and 2001. This represented an overall upward revision from the June survey.

One member made the following remarks regarding inventory adjustment in some parts of the raw materials industry such as steel and petrochemicals manufacturers. First, these firms had already started to adjust their production as concern over excess inventory had spread quickly. This was because inventories had increased to almost adequate levels, leading to a decline in demand to replenish inventories, which in turn was forcing the manufacturers to reduce production to levels that reflected demand. Moreover, speculative demand had also disappeared. And second, although the inventory adjustment was expected to be temporary, it required careful monitoring since it could last for longer than expected if the momentum for a self-sustained recovery in private demand slackened in the future.

On the basis of the above discussion, members generally agreed that the momentum for a recovery in the corporate sector was being maintained.

Responding to this, one member expressed a cautious view, mentioning the following points. First, the September Tankan merely reconfirmed the moderate pace of economic recovery, given that (1) the pace of upward revisions to business fixed investment plans had not accelerated, (2) the rise in crude oil prices was squeezing profit margins, and (3) external demand was sluggish. And second, the results of a survey by the Development Bank of Japan were weak, showing an 8.6 percent decrease in business fixed investment plans for fiscal 2001.

As for private consumption, many members expressed the view that the recovery continued to be weak, judging from indicators released in the past month and reports at the meeting of general managers of the Bank's branches.

One member pointed out that the results of the Family Income and Expenditure Survey for August were weak for both all households and workers' households. This member added that there might be a slight downward bias in the survey results in view of the slight increase in retail sales in real terms. The member and a different member pointed out, however, that the volume of consumer goods supplied was steadily increasing. A different member pointed out that there were some indicators of consumer sentiment which remained unchanged or were weakening.

As for the employment and income situation, some members expressed the view that wages were expected to increase moderately along with the recovery in the employment situation, pointing out that (1) the Tankan survey showed that firms' perceptions that they had excess employees was fading on the whole, and the Survey on Labor Economy Trend by the Ministry of Labor showed a similar trend, and (2) employees' income had increased slightly overall in the three-month period from June to August on a year-on-year basis.

A different member pointed out that, although employees' income had clearly bottomed out, it was increasing only slowly and thus it was no surprise that developments in private consumption showed small ups and downs in line with the propensity to consume. This member expressed the view that private consumption for the July-September quarter was in a weak phase. A few members remarked that one should not expect a sharp increase in private consumption when the economy was recovering while at the same time undergoing structural adjustments. One of these members commented that one should consider that consumption was at normal levels, as spending by consumers remained in line with their income amid anxiety about future income and structural changes in consumption.

Following the above discussion, members generally agreed with the view that it was not necessary to change their current judgment that the employment and income situation continued to recover and this development would help private consumption recover gradually.

Based on the above assessment of the economic and financial situation, members discussed some points regarding the outlook.

First, many members remarked that the contrast between leading sectors (the corporate sector, especially large manufacturers) and lagging sectors (the household sector and small nonmanufacturers) was becoming sharper.

Some members commented that the reports made at the recent meeting of general managers of the Bank's branches also gave them a similar impression. A few members were of the opinion that (1) the moderate growth in employees' income, (2) the sluggishness in private consumption, and (3) the weak recovery of small nonmanufacturers were interrelated. One of these members commented as follows: (1) such a contrast was inevitable given the ongoing structural changes caused by advances in IT and globalization of the world economy, in addition to efforts to dispose of the legacies of the bubble economy; (2) under such circumstances, economic growth as a whole would only be achieved by a strong performance by growth sectors, and this was likely to happen; but (3) developments required careful monitoring since leading sectors could be negatively affected if the lagging sectors lagged too far behind.

On this issue, some members referred to corporate and household sentiment. A few members pointed out that corporate managers and consumers, who still remembered the high growth in the past, might consider the economic situation remained severe even if the economy reached or slightly surpassed its potential growth rate. One of these members commented that the member hoped that the public in general shared a reasonable assessment of the economy, recognizing the fact that economic recovery accompanied by a rise in prices was unlikely for the time being as the nature of the economy had changed.

Members also discussed the developments in crude oil prices and their impact. One member said that the recent rise in crude oil prices was attributable to (1) a decline in oil inventories in the United States, (2) cold weather in the northeast of the United States, and (3) heightened tensions in the Middle East. The member continued that there was a risk that oil might be used as a strategic weapon in international politics for the first time in the three decades since the first oil crisis. This member added that the price of West Texas Intermediate (WTI) crude oil remained largely unchanged for the moment, but in view of the decrease in oil product inventories it could rise to US$ 45 per barrel or more if prices went above the recent high of US$ 37.

One member expressed the view that the direct impact of the strength of crude oil prices on Japan's economy was not so large because (1) it had been offset somewhat by the previous appreciation of the yen, and (2) energy consumption had become more efficient. A different member also said that the impact had been limited so far, pointing out that, according to the Tankan, manufacturers expected their earnings for the second half of fiscal 2000 to increase by almost 30 percent, although firms had revised their forecasts for the period downward. Another member remarked that there was no cause for concern about the availability of oil because Japan's public and private sectors had ample stockpiles equivalent to 150-160 days' worth of consumption.

A few members, however, said that the rise in crude oil prices might have an indirect impact through its effects on emerging economies whose reliance on imported oil was high. In response to this, a different member said that at present, it would be enough to take a close look at the effects as one risk factor, given that private research institutes and international organizations had not recently revised their outlook for the world economy downward.

Members discussed the global fall in stock prices, U.S. stocks in particular, and the outlook for the world economy.

One member said that the fall in global stock prices came against a background of the following factors. First, monetary policy in many countries was being tightened. And second, IT-related industries, whose stocks had driven overall stock prices higher, were in the process of adjustment reflecting their excessive fixed investment. This member continued that it would be necessary to monitor whether the above developments would settle down, paving the way for a soft landing.

A different member raised the following points on the outlook for the U.S. economy in relation to the developments in stock prices. First, it was probable that excessively high expectations for the performance of IT stocks were being corrected following the large downward revisions to the earnings forecasts of IT-related firms relative to the extent to which the economy was slowing. Second, if a correction was indeed taking place, it might well be regarded as necessary for the U.S. economy. Third, the point at issue was whether the economy would slow down so rapidly that it would deviate from the path for a soft landing, and at the moment, it was difficult to judge whether this would happen. And fourth, even if this turned out to be the case, it was unlikely that developments in stock prices would dictate the performance of the economy because in the United States, there was much room to take various macroeconomic measures to deal with the situation. Another member was of the view that the U.S. economy was likely to make a soft landing, but added that it was somewhat worrying that steel firms, which were among the firms furtherest upstream in the manufacturing sector, had started to adjust production as inventories had increased as a result of overproduction.

This member further remarked that developments in the U.S. economy and crude oil prices might negatively affect Asian economies because in the region (1) excessive inventories of some raw materials had accumulated, and (2) there was a strong dependence on exports to the United States and on oil. The member continued that the above developments of the world economy were affecting Japan's exports. For example, Japanese automobile and raw materials manufacturers had started to reduce production for exports in response to a slowdown in U.S. car sales and the rise in raw materials inventories in South East Asian countries.

Many members commented that the recent weakness in stock prices in Japan was partly attributable to the above trends in the world, especially the fall in Nasdaq stocks reflecting the downward revisions to some U.S. high-tech corporations' earnings forecasts. Another member said that, in addition to the above factors, the fall in Japanese stock prices could be attributable to the depreciation of the euro, the rise in crude oil prices, the situation in the Middle East, and the weakness in semiconductor prices. Anxiety over the domestic economy, for example, concern over the lack of recovery in both the household sector and small nonmanufacturers as well as corporate failures, might also be affecting stock prices. However, this member and a few other members remarked that Japanese firms had been revising their earnings forecasts upward and the fundamentals of Japan's economy were firm, and thus the basic environment for the stock markets in Japan was not unfavorable. One of these members, however, said that because there was a risk that the downtrend in stock prices might itself weaken investors' positive outlook, it would be necessary to monitor developments in stock prices closely for the time being. A different member added that it was necessary to monitor for a while the impact of falling stock prices on corporate and household confidence, as well as the stability of financial markets.

One member said that technical analysis of U.S. stocks suggested that they had peaked out at the beginning of this year, rebounded to hit a lower peak in early September, and had been on a downward trend since then but had not yet hit bottom. It was probable that the Nikkei 225 Stock Average would decline further because the recovery in corporate earnings and return on equity was not sufficiently strong.

On the basis of the above discussions, many members agreed on the economic outlook that the economy was likely to recover gradually led mainly by business fixed investment, although developments in crude oil prices as well as foreign and domestic capital markets, together with their effects on the economy, needed careful monitoring.

With regard to prices, a few members were of the view that the situation remained unchanged with the output gap continuing to narrow moderately. One of these members said that wholesale prices were likely to move sideways and consumer prices were likely to remain on a modest downtrend, and in such a situation, the rise in corporate earnings and the slight increase in employees' income were expected to continue.

As for corporate financing, some members remarked that recently released data such as the Tankan and surveys conducted by the Japan Finance Corporation for Small Business and Shokochukin Bank, which would help in assessing the situation after the termination of the zero interest rate policy, remained unchanged or had improved slightly. This confirmed the view that monetary conditions continued to be relaxed even after the termination of the zero interest rate policy.

In response to the above assessment, one member who held a more cautious view on the economy than other members pointed out the following. First, the lagging index for business conditions in the Indexes of Business Conditions was sluggish recently. Second, the supply and demand balance of semiconductors, the inventories of which had hit cyclical peaks in 1984 and 1995, might deteriorate in the future on the following grounds: (1) distributors' inventories of some chips were increasing in Europe and the United States; and (2) stock prices of semiconductor-related firms, movement in which was considered to be predictive of changes in actual demand for the product, had already hit their peak and were falling. Third, Japan's environment for external demand was severe because the world economy could slow considerably in the future and the yen's real effective exchange rate was rising. Fourth, it was likely that Japan's wholesale price indexes would decline year on year in fiscal 2001 when the effects of the rise in prices of petroleum and coal products would subside. And fifth, the downward trend of the consumer price index (CPI) was expected to continue for a while because of the continuing decline in the cost of rented accommodation reflecting the deterioration of the supply and demand balance for rented housing.

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

Based on the above assessments 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 was recovering gradually, with corporate profits and business fixed investment continuing to increase. Second, looking forward, the economy was likely to recover gradually led mainly by business fixed investment, while the developments in crude oil prices as well as in foreign and domestic capital markets, along with their effects on the economy, would need careful monitoring. Third, there had been no significant change in the environment for prices. And fourth, monetary policy had remained easy even after the termination of the zero interest rate policy.

Based on the above view, the majority of members concurred that the Bank should (1) maintain the current accommodative stance to support the economic recovery, and (2) examine carefully the strength and sustainability of the recovery in private demand and developments in financial markets at home and abroad. They thus agreed that it was appropriate to maintain the current guideline for market operations.

One member considered that it might be appropriate to adopt a slightly easier stance of monetary policy. However, the member would like to wait for a more appropriate moment, given that (1) the zero interest rate policy had just been terminated, and (2) the scope for further easing was limited, and supported maintaining the current guideline.

A different member 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.

This member expressed the view that it was necessary to adopt quantitative easing since (1) it was necessary to accelerate economic growth to the potential growth rate of 1.5-2.0 percent and maintain it at that level for more than a year, while the output gap remained large and there was no risk of inflation, (2) the growth rate of the monetary base was declining rapidly, and this might have a negative effect on exchange rates and stock prices, and (3) it was likely that a fall in U.S. stock prices would affect Japan's stocks, and thus it was necessary to prevent a sharp fall in stock prices and negative wealth effect.

VII. Remarks by Government Representatives

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

(1) Japan's economy continued to improve moderately, and the momentum for a self-sustained recovery continued mainly in the corporate sector. However, the employment situation remained severe, and private consumption was generally unchanged. Thus, it was not yet clear whether the substantial improvement in corporate profits would lead to an increase in income and private consumption. Regarding prices, despite the surge in oil prices, the CPI and the GDP deflator continued to decrease year on year. The impact of the surge in crude oil prices on the world economy required close monitoring.

(2) The Government would make efforts to ensure full-scale recovery led by private demand, giving top priority to the achievement of a smooth shift in the driving force for an economic recovery from public to private demand. Moreover, to establish a new foundation for development in the 21st century, it would draw up a new policy package, and submit the supplementary budget for fiscal 2000 to the Diet by mid-November. In compiling the supplementary budget, given the severe fiscal conditions, the Government would try to minimize the issuance of government securities by reviewing its revenue and expenditure, and by using the surplus from the settlement of accounts for fiscal 1999.

(3) The Government would like to ask the Bank to conduct monetary policy appropriately and in a timely manner--for example, by flexibly providing ample funds in the market giving due consideration to developments in the economy--harmonizing its actions with the Government's measures to achieve a full-scale economic recovery led by private demand.

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

(1) Japan's economy remained in a severe situation but was continuing to improve moderately. Various policy measures and the economic recovery in Asia were having a positive effect on the economy, and the momentum for a self-sustained recovery of the economy continued mainly in the corporate sector. However, the employment situation remained severe, and private consumption remained unchanged; the number of corporate bankruptcies was at a relatively high level, and the liabilities of failed firms had increased. Furthermore, downside risks such as the continued decline in stock prices, developments in the U.S. economy, oil prices, and fluctuations in exchange rates should be taken into consideration.

(2) On October 19, the Government would announce a new policy package that placed emphasis on bold structural reform of the economy. It continued to consider that economic policy should give high priority to economic recovery.

(3) The Government would like to ask the Bank to continue conducting monetary policy that would contribute to economic recovery--for example, by flexibly providing ample funds in the market giving due consideration to developments in financial markets, including the foreign exchange market.

(4) The Economic Planning Agency would publish GDP data for 1990 to 1998 at the end of October. The data would be based on the System of National Accounts 1993, a new international standard for national accounts, and their base year would be 1995.

VIII. Votes

Based on the above discussion, the majority of members considered it appropriate to maintain the current guideline for market operations.

However, one member proposed adopting quantitative easing accompanied by targets for the rate of increase in the CPI and the growth rate of the monetary base.

As a result, two policy proposals were submitted.

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 2002 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 15 percent annual growth of the monetary base (change from the average for the January-March quarter of 2000 to the average for the same quarter of 2001) 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 encourage the uncollateralized overnight call rate to move on average around 0.25 percent.

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

Vote against the proposal: Mr. N. Nakahara.

Mr. Nakahara dissented for the following reasons. First, the deflationary trend was continuing as was evident in the accelerating fall in the CPI and the GDP deflator, and it could be judged that maintaining the current stance was not enough. Second, the current passive stance needed to be altered, given the decrease in fiscal spending and deterioration in overseas economies, against a background of a weak recovery of private demand. And third, the Bank had been deficient in its accountability to the public in that it had not given a sufficient explanation when it decided to terminate the zero interest rate policy.

IX. 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. By majority vote, the Board determined "The Bank's View," for publication on October 16, 2000 in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background").¹¹

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

Vote against the proposal: Mr. N. Nakahara.

Mr. Nakahara dissented for the following reason: consumer prices (excluding perishables) in the Tokyo metropolitan area had fallen sharply, and the output gap remained large. It was therefore inappropriate to judge that the downward pressure on prices stemming from weak demand was declining significantly.

1. 11The original full text, written in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on October 16, 2000 together with the English version of "The Bank's View." The English version of "The Background" was published on October 24, 2000.

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Attachment

For immediate release

October 13, 2000
Bank of Japan

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

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