Minutes of the Monetary Policy Meeting
on October 30, 2000
(English translation prepared by the Bank staff based on the Japanese original)
December 5, 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 Monday, October 30, 2000, from 9:00 a.m. to 12:28 p.m., and from 1:18 p.m. to 2:27 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. T. Haraguchi, Deputy Vice Minister for Policy Coordination, Ministry of Finance
Mr. E. Kawade, Director-General of the Coordination Bureau, Economic Planning Agency
Reporting Staff
Mr. M. Matsushima, Executive Director
Mr. M. Masubuchi, Executive Director
Mr. S. Nagata, Executive Director
Mr. I. Yamashita, Director, Financial Markets Department
Mr. S. Murayama, Director, Research and Statistics Department
Mr. E. Hirano, Director, International Department
Mr. M. Shirakawa, Advisor to the Governor, Policy Planning Office
Mr. M. Amamiya, Chief Manager, Planning Division 1, Policy Planning Office
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. T. Kurihara, Senior Economist, Policy Planning Office
Mr. S. Shimizu, Senior Economist, Policy Planning Office
- The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on November 30, 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.
I. Summary of Staff Reports on Economic and Financial Developments2
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 October 13, 2000.3 As a result, the overnight call rate was generally steady at 0.25 percent.
Since July, financial institutions had been inclined to concentrate reserve balance holdings early in a reserve maintenance period. However, in the period that started in mid-October, they managed their daily balances at the Bank so that these were more or less equal to their period-average reserve requirements as the market stabilized further after interim book closings at the end of September.
- 2Reports were made based on information available at the time of the meeting.
- 3The 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
1. Developments in domestic financial markets
Japanese stock prices were generally at their lowest level since the beginning of this year. The weakness could be attributed to the following factors. First, the influence of adjustments in U.S. stocks related to information technology (IT) on Japanese stocks. Second, expectations that growth in Japanese firms' earnings would slow. Third, increased awareness, prompted by the failure of life insurance companies, of credit risks of firms with deteriorating business performance. Fourth, concern that the supply-demand balance of stocks might deteriorate due to the planned sale of government-owned shares of Nippon Telegraph and Telephone Corporation (NTT). As for the outlook, many market participants believed it unlikely that domestic factors would push stock prices further downward given the continuing improvement in corporate profits.
Meanwhile, interest rates on term instruments, including those maturing beyond the year-end, were generally stable as the Bank increased provision of funds covering the year-end through market operations. Long-term interest rates moved in a relatively narrow range centering around 1.8-1.9 percent, as weakness in domestic and overseas stock prices offset the influence of the planned increase in issuance of Japanese government securities.
2. Developments in foreign exchange markets
The yen remained in the range of 107-109 yen against the U.S. dollar. It did not appreciate against the U.S. dollar, despite the fall in U.S. stock prices, due mainly to two factors. First, "safe haven" investment in U.S. Treasury securities had been increasing against the background of tensions in the Middle East. Second, foreign investors had continued to sell Japanese stocks. The euro remained on a downward trend reflecting heightened selling pressure stemming from concern about the influence of high crude oil prices on the euro-area economy and reduced concern about market intervention.
C. Overseas Economic and Financial Developments
In the July-September quarter of 2000, the real GDP of the United States grew at an annualized rate of 2.7 percent from the previous quarter, a lower rate than in the April-June quarter. This confirmed that the U.S. economy was decelerating moderately due mainly to slowing domestic demand such as housing investment and business fixed investment. Reflecting this deceleration, long-term interest rates such as yields on U.S. Treasury securities eased moderately. Movements in federal funds rate futures implied that some market participants expected an interest rate cut after the turn of the year.
Meanwhile, U.S. stock prices remained unstable, but were showing some signs of regaining stability recently, as downward revisions to corporate profits had gradually been factored in by the market and U.S. interest rates were generally on a declining trend.
In the euro area, both domestic and external demand continued to expand, but some economic indicators were weak. For example, Germany's Ifo business climate index had declined for four months in a row. Prices continued to trend upward reflecting the rise in crude oil prices and the depreciation of the euro. In September, consumer prices in the euro area rose by 2.8 percent from a year earlier, exceeding for four consecutive months the European Central Bank's definition of price stability of a year-on-year increase of below 2 percent.
The yield spreads between U.S. dollar-denominated bonds issued by emerging economies and U.S. Treasury securities were expanding recently, as investors became more risk averse. In the Philippines, stock prices, the peso, and bond prices were tumbling due partly to heightened political uncertainty.
D. Economic and Financial Developments in Japan
1. Economic developments
Regarding indicators released after the previous Monetary Policy Meeting on October 13, 2000, although the consumer price index (CPI) was slightly weak, economic indicators such as production continued to increase firmly. Given these developments, there seemed to be no need to change the judgment on the economy made at the previous meeting.
Real exports rose mainly due to increases in exports of automobiles and their parts to the United States and Europe, and capital goods and parts to the United States and East Asia. Exports of IT-related goods, however, were lower compared with the previous quarter for the first time in seven quarters. The view was widely shared in the electronics industry that the decline was a temporary phenomenon caused by earlier exports of semiconductors to personal computer manufacturers ahead of schedule. Nevertheless, further developments in this area and prices of memory chips, which had recently been declining, required close attention. There was some concern that the fall in U.S. stock prices would adversely affect consumption and other demand in the United States, but there had been no change in the trend of demand for IT-related goods so far.
Turning to indicators related to the employment and income situation, special earnings for June-August increased by 0.8 percent from a year earlier, and summer bonuses for 2000 turned out to be slightly above the level marked in 1999. According to a survey by the Nihon Keizai Shimbun, firms planned to increase recruitment of new graduates for the next business year by 3.5 percent--the first rise in three years--led mainly by increases in the manufacturing sector.
The recovery in private consumption continued to be weak according to related indicators. Recent statistics showed that sales of electrical appliances and sales at convenience stores were growing, while sales at department stores and chain stores remained stagnant. Consumer confidence remained generally unchanged, but attention should be paid to the influence of recent developments such as weak stock prices and the failures of life insurance companies.
Production indexes for September were lower than producers had forecasted, but forecasts for October onward indicated a firm rising trend in production. These forecasts were consistent with anecdotal information.
As for prices, while the year-on-year fall in corporate service prices expanded slightly in September, there had been basically no significant change in the underlying trend. The year-on-year decrease in the CPI in September expanded due mainly to falls in prices of goods, especially clothes. Recently, the decline in prices of imported products and domestic products competing against imports was more marked than those of other domestic products.
2. The financial environment
After declining toward September, the year-on-year growth rate of the monetary base for October was expected to exceed that in the previous month because post offices held a large amount of banknotes in preparation for possible massive withdrawals of cash from maturing postal savings. Meanwhile, the year-on-year growth rate of money stock (M2+CDs) had been slightly below 2 percent.
In corporate financing, the Bank's Senior Loan Officer Opinion Survey on Bank Lending Practices at Large Japanese Banks (Loan Survey) conducted in October confirmed anecdotal information that demand for new credit was emerging. The survey showed that, in July-September, the percentage of banks reporting stronger demand for loans (compared to three months earlier) exceeded slightly those reporting weaker demand. The survey also showed that financial institutions remained willing to increase lending, particularly to small and medium-sized firms. From these developments, there seemed to be no substantial change in the lending attitude of financial institutions and in the easing of corporate financing conditions since the termination of the zero interest rate policy.
Although there were fewer corporate bankruptcies in September than in August, the underlying trend since the second half of 1999 was a slight increase. A breakdown by industry showed that failures of construction firms were increasing.
II. Summary of Discussions by the Policy Board on Economic and Financial Developments
A. The Current Economic Situation
The discussion of members centered on the assessment of economic indicators released after the previous meeting on October 13.
Many members pointed out that close attention should be paid to the following developments: (1) the recent changes in the global economy, including the signs of a slowing U.S. economy; (2) the continued instability of stock prices at home and abroad; and (3) the slight increase in the rate of decline in the CPI. One member said that the economic recovery had temporarily slowed somewhat. However, the majority of members, including those above, shared the view that it was unnecessary to change the judgment that the economy was recovering gradually. One member said that the economy seemed to lack strong momentum for recovery since business and consumer sentiment were weak. However, this meant that a substantial imbalance in supply and demand was unlikely to emerge, and therefore there seemed to be a good possibility of sustained economic recovery.
With regard to the corporate sector, many members noted that the firm increase in the industrial production index was projected to continue in the October-December quarter and that the index of tertiary industries' activity remained on an upward trend. The members remarked that the gradual economic recovery led by the corporate sector was being maintained. One of these members said that, in addition to the improvement in production, the recovery in business fixed investment had started to spread to a wide variety of industries. Another member noted that the level of inventories was still low and that shipments and inventories were well balanced.
There were, however, comments that growth in exports was declining somewhat due to the slowing global economy. One member said that some firms were reducing production in line with a decline in exports of raw materials to Asia and automobiles to the United States. Noting that the level of inventories was rising at firms in the raw materials industry including the steel industry, this member added that close attention should be paid to these developments to see whether they were temporary phenomena, and whether there was a possibility that they would spread from the raw materials industry to manufacturers downstream. Another member noted that (1) capacity utilization rates in industries such as automobile and electronic devices manufacturing in other Asian countries had declined reflecting the slowdown in the U.S. economy, and (2) orders received by Japanese machinery makers from overseas had decreased due to the depreciation of the euro, and the fall in orders was beginning to affect manufacturers of machinery for producing molds and dies. Some of the other members also commented that attention needed to be paid to how the slowing global economy, including the U.S. economy, would affect Japan's economic recovery.
With regard to the employment and income situation, some members noted as positive factors the higher summer bonus payments compared with the year before and the expected increase in next year's recruitment by firms of new graduates. They commented that these factors suggested that the increase in corporate profits was, albeit gradually, starting to influence employment and income. One member, however, said that the fact that the number of regularly employed workers remained smaller than the year before was worrying, and added that developments in various employment statistics should be carefully followed. Another member added that it was not easy to assess the employment and income situation, noting that while compensation of employees calculated from the Monthly Labour Survey had increased from the previous year, firms' personnel expenses for the April-June quarter had decreased from the previous year, according to Financial Statements Statistics of Corporation by Industry, Quarterly.
Some members shared the view that the recovery in private consumption continued to be weak as sales were stagnant overall according to sales data on department stores and chain stores. One of these members, however, pointed out that the improvement in the employment and income situation was having a positive effect on consumer confidence. Another member said that the contrast between buoyant and stagnant areas of consumption had become more pronounced reflecting the structural changes in consumer spending, the saturation of consumption, and uncertainty about future income. This member continued that spending by consumers remained in line with their income, and that aggregate supply of consumption goods had recovered to the level of 1996 and 1997. Thus, it could be judged that private consumption had already recovered to a normal level. The member added that the environment necessary for further improvement in consumer spending was being created given that a recovery in household income was in prospect. A few members suggested that it was likely that the economic recovery would, for the time being, be characterized by firms taking the lead with households lagging behind, as it would take some time for the positive effects of the recovery in the overall economy to spread from firms, which were under strong pressure to restructure, to households.
One of the members held a cautious view of the current economic situation relative to the others, pointing out that the following factors gave cause for concern. First, in comparison with past economic recovery phases, the current recovery seemed to lack strength, especially on the demand side. Second, it was likely that the economy would peak out and turn downward in the near future according to an analysis based on the Indexes of Business Conditions, and the period from the year-end to some time in fiscal 2001 would therefore be crucial for the economic recovery. Third, there were causes for concern in the corporate sector as well, such as the drop in the volume of electricity contracted for by large-lot users, and the lower-than-expected production and increase in inventories in the electrical machinery industry according to statistics on production. Fourth, overseas demand was weakening as growth rates in the United States and Asian countries were slowing somewhat. And fifth, given that the debt burden of workers' households resulting from land and housing acquisition was continuously increasing, an improvement in consumption could not be expected.
On price movements, members discussed how to assess the slightly weakened price indexes.
One member expressed the view that the possibility that the output gap would exert downward pressure on prices could not be ruled out even though production and corporate profits were improving. Another member noted that uncertainty over prices had led to uncertainty over corporate profits, which could result in cautious corporate sentiment. However, some members including these members agreed that there was no need to change the current judgment on the trend of prices, although price movements should be followed carefully to examine whether the recent weakness in price indexes was temporary and whether the weakness was compatible with an improving trend in corporate profits and indicators on employment and income. In connection with this view, a few members said that downward pressure on prices stemming from weak demand did not seem to be increasing again. This was because the output gap was expected to narrow somewhat thanks to the moderate recovery in private demand and a decline in the potential growth rate of aggregate supply reflecting a decline in the economic value of capital stock due partly to obsolescence of production equipment.
With regard to movements in the CPI, one member remarked that, judging from the fact that the decrease in the apparel and food services indexes was contributing to the decline in the overall index, increased productivity and the distribution revolution were continuing to push prices lower. Another member emphasized that the recent decline in price indexes reflected the fall in prices of imported goods and the narrowing gap between prices at home and abroad.
Comments were also made on movements in crude oil prices. After noting that oil prices remained slightly above US$30 a barrel, one member pointed out that the lower end of the recent range was firm and prices might rise further toward the winter when seasonal demand increased. This member added that a major U.S. refiner had strengthened ties with an oil producing country, and the medium-term effect of this was a matter of concern. Many members expressed the view that attention should be paid to how the increase in crude oil prices might affect the global economy and Japan's economic recovery.
B. Financial Developments
On the financial front, many views were expressed on domestic and overseas stock prices, which remained unstable.
Some members voiced concern about developments in Japanese stocks, which had recently been moving at their lowest level since the beginning of the year, and pointed out that attention should be paid to the possibility that these developments could adversely affect household and corporate sentiment. A few of these members said that developments in the U.S. stock market, which was in an adjustment phase due partly to concerns that the profit growth of high-tech firms would slow, were affecting stock markets all over the world including Japan. As for domestic factors, one member mentioned various points including (1) concern that the nonperforming loan problem might intensify again, (2) revisions of excessively high expectations for corporate profits, and (3) anxiety about the economic outlook. Another member expressed the view that there had been no major deterioration in stock price fundamentals, judging from developments in corporate profits, and that it could be, at present, concluded that the developments in stock prices were attributable to a correction of the excessively high expectations for the future of IT-related sectors. A different member expressed concern that the recent low growth in the monetary base might negatively affect stock prices since there was a correlation between developments in stock prices and the year-on-year growth rate of the monetary base.
Following the above discussion, many members shared the view that it was necessary to examine carefully the recent developments in stock prices from various viewpoints including whether they suggested a future change in the economic trend and whether they might have a negative impact on economic activity.
With regard to long-term interest rates, several views were expressed on the stability of yields on ten-year Japanese government bonds (JGBs) at 1.8-1.9 percent. As the background to this, one member noted that concern about JGB sales was unlikely to emerge in the market as credit demand in the private sector remained basically sluggish, and commented that the following factors had been pointed out by market participants. First, concerns that the supply-demand balance of JGBs would deteriorate had somewhat faded after the Ministry of Finance announced the outline of the planned increase in JGB issuance. And second, purchases of JGBs as part of investment linked to global bond indexes continued. A different member remarked that the member would watch whether financial institutions would change their stance toward purchasing JGBs. Another member said that the introduction of mark-to-market accounting would change institutional investors' stance toward investment and this might affect long-term interest rates.
With regard to corporate financing, one member expressed the view that the decline in the overall amount of lending seemed to be coming to a halt. This was because growth of new lending was outpacing that of debt repayment, although the amount of debt being repaid still exceeded new lending as firms continued their efforts to repay debt. This member added that the Loan Survey also revealed some positive signs for demand for new credit by small and medium-sized firms. This member thought that, judging from the above, financial data confirming the moderate economic recovery were increasing gradually.
There were also comments on U.S. financial markets. After pointing out that U.S. stock prices had recently rebounded, one member expressed the view that they were at a stage that warranted very careful monitoring since stock prices could plunge if they fell again and dropped below the low of mid-October. This member expressed concern that the deterioration in the U.S. financial environment, evident in the following, might have a negative effect on the U.S. economy. First, the credit spread in the corporate bond market had become wider than in the autumn of 1998, and was discouraging issuance of corporate bonds. Second, nonperforming assets of financial institutions were increasing sharply, and some Internet-infrastructure firms were beginning to face tight financial positions. And third, some large commercial banks were tightening their lending standards.
C. Outlook and Risk Assessment of the Economy and Prices
Members first discussed the outlook for Japan's economy during fiscal 2000 and 2001. The majority of members agreed that the standard scenario for the economy would be as follows. First, it was likely to continue to trace a gradual recovery mainly led by private demand. Second, prices overall were expected to remain stable. Third, however, because of various structural adjustment pressures, including balance sheet problems and continuing restructuring at firms and financial institutions, expansion of the economy was unlikely to be vigorous. And fourth, the present recovery pattern led by the corporate sector, with the household sector lagging, was expected to continue for a while. One of the members stressed that a virtuous circle was operating despite various concerns arising from structural adjustments, intensified global competition, and the future of fiscal management and the social security system.
Members then discussed the risks to the standard scenario.
One member expressed the view that it was unlikely that the economy would slow as a result of developments in economic cycles, such as the inventory and capital stock cycles. Another member said that a deceleration of the world economy might pose the largest risk to Japan's economy given that the country's recovery was not spreading smoothly to a wider range of sectors even at a time when the world economy continued to provide a favorable external environment. Many members agreed with the above views and raised the following as risk factors: (1) a slowdown in the world economy triggered by a decline in demand for IT-related goods; (2) a further rise in crude oil prices; and (3) changes in the trends of financial and foreign exchange markets.
A few of these members said that the authorities in the United States were aiming to slow down the pace of economic expansion to achieve sustained economic growth and it was crucial that the economy did not decelerate excessively. One member, however, said that close attention should be paid to developments in the U.S. economy and the markets because even a modest slowdown in the economy, which had been expanding vigorously, had prompted an adjustment in stock market expectations and thus a further slowdown could create confusion in some areas.
Regarding the effects of the rise in crude oil prices, one member expressed the view that the uncertainty of the situation in the Middle East had become another risk factor, and added that anxiety over the effects on the economy and prices was heightening in oil importing countries. A different member said that it was also important to focus on whether the rise in crude oil prices would place upward pressure on prices, in addition to whether the rise would cause a worldwide economic slowdown.
A few other members remarked that, in addition to developments in the U.S. stock market, the foreign exchange rate of the U.S. dollar, which might be affected adversely by concern about the large U.S. current deficit, and of the euro, which had plunged recently, were risk factors that should not be overlooked. One member commented that careful attention should be paid to trends in European direct and securities investment in the United States, and to the market's confidence in the euro. In response to this, another member said that it might not be appropriate to focus on foreign exchange rates as risk factors because the degree of adjustment in exchange rates would vary depending on how and the extent to which the economic slowdown in the United States would affect Japan, the euro area, and Asia.
In addition to the overseas factors, members also discussed domestic risk factors. A few members expressed their views on the effects of balance sheet adjustment and restructuring at firms and financial institutions. One of the members remarked that the financial system remained somewhat vulnerable. Another member said that pressure from structural adjustment was already reflected in the use of the word "gradual" in relation to the recovery. The current point at issue was what would happen to corporate and household confidence and financial markets if structural problems that were not evident at the moment suddenly surfaced.
A few other members commented on factors affecting corporate and household sentiment. One of the members cited a variety of concerns such as job insecurity, uncertainty over the social security system and life after retirement, and political instability, noting that such concerns might exert downward pressure on the economy. These members expressed the view that these psychological factors might be preventing firms and households from acknowledging the economic recovery.
The problem of Japan's fiscal balance was also touched upon. One member said that the Government should provide its long-term vision of fiscal reconstruction at an early date, and should also gradually undertake fiscal consolidation paying due consideration to developments in the economy in the short term. This member continued that in a situation where there was no nationwide consensus on fiscal consolidation, it was difficult to predict how the market would react if government debt increased rapidly, and this was also a risk factor.
In response to the above views, one member said that the standard scenario envisaged by many of the other members and their risk assessment might be too optimistic and that the following should be borne in mind. First, with regard to price developments, deflationary concerns still remained. Second, the decline in the growth rate of the monetary base might adversely affect stock prices and exchange rates. And third, the recent fall in stock prices would have a negative impact on corporate profits.
The forecasts of Policy Board members (in terms of year-on-year changes), which would be included as reference in "Outlook and Risk Assessment of the Economy and Prices" (hereafter, Outlook and Risk Assessment) were as follows.
Forecasts of the majority of Policy Board members for fiscal 2000:41.9 to 2.3 percent for real GDP; 0.0 to 0.1 percent for domestic WPI; and -0.4 to -0.2 percent for CPI (excluding perishables).Forecasts of all Policy Board members for fiscal 2000:51.5 to 2.3 percent for real GDP; 0.0 to 0.2 percent for domestic WPI;and -0.5 to -0.1 percent for CPI (excluding perishables).
Members exchanged views regarding the contents and presentation of Outlook and Risk Assessment and the forecasts of Policy Board members. Some members said that forecasts should be produced and published for fiscal 2001 as well as for the current fiscal year because forecasts for the following fiscal year were important for deciding monetary policy for the immediate future. One of these members said that it was worth considering presenting forecast figures with their probability distribution to show the members' assessment of risks. Another member commented that it might be a good idea to rank the risks in Outlook and Risk Assessment in order of the probability of occurrence. In response to these suggestions, a different member said that since the report was being released for the first time, the contents and presentation could be improved as the Bank gained more experience.
One member stressed that, when releasing the report, it was important to explain clearly the following points to the public. First, the standard scenario for Japan's economic outlook was that the economy was likely to continue to trace a gradual recovery mainly led by private demand, and the risk factors discussed in Outlook and Risk Assessment were those that required close monitoring because their potential impact was large, even though the probability of their materializing was at present considered low compared to the probability of the economy following the standard scenario. Second, the forecasts of Policy Board members were not targets but their economic outlook expressed numerically purely for the public's information.
- 4Forecasts of the majority of Policy Board members are shown as a range with the highest and lowest figures excluded. If there are multiple highest and/or lowest figures, only one from either end is excluded.
- 5Forecasts of all Policy Board members are shown as a range, i.e., the highest and lowest figures among members' forecasts.
III. 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, it was not necessary to change the judgment at the previous meeting that Japan's economy was recovering gradually. Second, the moderate economic recovery mainly led by private demand was likely to continue into fiscal 2001. And third, attention should, however, be paid to signs of a slowing down in overseas economies and to developments in domestic and overseas stock prices.
Based on the above view, the majority of members concurred that the Bank should (1) maintain the current accommodative monetary conditions to support the economic recovery, and (2) examine the strength of the economic recovery, giving due consideration to various risks mentioned in Outlook and Risk Assessment. They thus agreed that it was appropriate to maintain the current guideline for market operations.
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, for the following reasons. First, the year-on-year declines in the CPI, the corporate service price index (CSPI), and the GDP deflator were increasing. Second, it was becoming likely that the economy could be derailed from the standard scenario for recovery since (1) the sentiment of consumers could worsen due to an increase in their debt burden and a fall in domestic and overseas stock prices, and (2) the environment for corporate profits was deteriorating. And third, the growth rates of the monetary aggregates, such as the monetary base and money stock, were contracting and having a negative effect on stock prices and exchange rates. Therefore, it was necessary to adopt quantitative easing and accelerate economic growth to the potential growth rate of 1.5-2.0 percent.
IV. 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, the CPI and the GDP deflator continued to decrease year on year despite the sharp rise in crude oil prices. The impact of the surge in crude oil prices and of market developments at home and abroad on the economy required close monitoring.
(2) The Government would give top priority to achieving a smooth shift in the driving force for an economic recovery from public to private demand. To ensure that the movements of a self-sustained recovery of the economy led to a full-fledged recovery and to establish a new foundation for development of Japan's economy in the 21st century, the Government had recently compiled a "Policy Package for New Economic Development toward the Rebirth of Japan." Bearing this in mind, the Government was working on the supplementary budget for fiscal 2000, which would be submitted to the Diet by around November 10. The size of the budget necessary for implementing the policy package was approximately 3.9 trillion yen. The budget would partly be financed by the general account budget surplus carried over from fiscal 1999. The shortfall of about 2 trillion yen would be financed by issuing construction bonds.
(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 implementation of the policies included in the Government's policy package 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 continued to improve moderately. Although the positive effects of various policy measures and the economic recovery in Asia on the economy were weakening slightly, 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 to the economy such as the continued decline in stock prices, developments in the U.S. economy, movements in oil prices, and fluctuations in exchange rates should be taken into consideration.
(2) The Government had drawn up a "Policy Package for New Economic Development toward the Rebirth of Japan." This package was aimed at (a) firmly establishing the Japanese economy on a self-sustained recovery, and (b) providing the basis for launching a future society appropriate for the "era of diverse knowledge." To achieve these objectives, the package placed emphasis on action that would advance economic structural reform: (a) promote the IT revolution; (b) respond to environmental issues; (c) respond to the aging of society; and (d) upgrade the urban infrastructure. The Economic Planning Agency had revised upward its projection for real economic growth this fiscal year to 1.5 percent from 1.0 percent, the Government's projection.
(3) The Government's request to the Bank on monetary policy had been included in the policy package.
V. 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 for 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 as he considered the current guideline for market operations insufficiently accommodative for the following reasons. First, the economic environment at home and abroad was changing, and it had become more likely that the standard scenario for economic recovery based on improvements in corporate profits would be undermined. Second, deflation was continuing as prices were falling. Third, a self-sustained recovery in private demand had not been achieved, and a large deflationary gap remained. Fourth, growth in monetary aggregates was slowing.
VI. Decision on Outlook and Risk Assessment
The Policy Board discussed the draft of Outlook and Risk Assessment and put it to the vote. By majority vote, the Board decided to publish it on October 31, 2000.
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, Outlook and Risk Assessment was generally optimistic and lacked sufficient explanation about the recent changes in the external environment, particularly the slowing global economy and the change of tone in domestic and foreign stock markets. Second, it did not explicitly touch upon deflationary concern in Japan. Third, it discussed inflation risks that were unlikely to materialize given the continuing decline in the CPI, the CSPI, and the GDP deflator, as well as the existing substantial output gap. Fourth, it did not mention how the slower growth in the monetary base might affect financial markets. And fifth, the view that the current price movements would not be a trigger suppressing economic activity was questionable, considering the fact that a decline in output prices was the most critical factor for corporate profits.
Attachment
For immediate release
October 30, 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.