Minutes of the Monetary Policy Meeting

on November 17, 2000
(English translation prepared by the Bank staff based on the Japanese original)

December 20, 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, November 17, 2000, from 9:00 a.m. to 12:30 p.m., and from 1:17 p.m. to 2:44 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. T. Komine, Director-General of the Research Bureau, Economic Planning Agency

Reporting Staff
Mr. M. Masubuchi, Executive Director
Mr. S. Nagata, Executive Director
Mr. M. Shirakawa, Advisor to the Governor, Policy Planning Office
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
Mr. E. Hirano, Director, International 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. S. Uchida, Senior Economist, Policy Planning Office
Mr. H. Yamaoka, Senior Economist, Policy Planning Office

The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on December 15, 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. Approval of the Minutes of the Monetary Policy Meeting Held on October 13, 2000

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of October 13, 2000 for release on November 22, 2000.

II. 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 30, 2000.³ The overnight call rate was generally steady at 0.25 percent. From mid-October, the Bank had been providing a larger amount of funds maturing beyond the year-end than in the same period the previous year when there were concerns over the Year 2000 problem.

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

Stock prices trended downward again, moving in the lowest range since the beginning of 2000.

Many market participants attributed the weakness to adjustments in U.S. high-tech stocks, as seen in the fall in Nasdaq stocks, and to political uncertainty in both the United States and Japan.

Long-term interest rates had been weak recently due to the following factors. First, reduced expectations of a rise in long-term rates following the weakness in stock prices and price indicators. Second, abatement of concern about a deterioration in the supply-demand balance of Japanese government bonds (JGBs). And third, technical factors such as repurchases of oversold positions in JGB futures transactions ahead of the introduction of real-time gross settlement (RTGS). Credit spreads (the yield differentials between private and government bonds) had in general not expanded substantially except in the case of bonds with particularly low ratings, while stock prices were weak.

In the foreign exchange market, the yen was recently moving in the range of 106-109 yen against the U.S. dollar. The euro was declining somewhat again, after a rebound prompted by coordinated intervention by G-7 countries in late September.

C. Overseas Economic and Financial Developments

The slowdown in the U.S. economy was becoming clear. It could be considered that this development was basically in line with the soft-landing scenario. Meanwhile, U.S. financial markets, notably high-tech stocks remained somewhat unstable.

Many U.S. economic indicators released recently, such as those for private consumption and production, pointed to a slowdown in the economy. The view was widely held that growth in Christmas sales would be slightly lower than in the previous year.

In these circumstances, the Federal Open Market Committee (FOMC) decided at its meeting on November 15 to keep its target for the federal funds rate unchanged, and the statement released after the meeting said that the committee continued to see a risk of heightened inflation pressures. However, the statement also referred to the possibility that the economy could expand for a time at a pace below the productivity-enhanced rate of growth of its potential to produce. Many market participants interpreted this as a sign that the FOMC was preparing to change its assessment of risks from the current one, which was weighted mainly toward conditions that might generate inflation pressures, to one balanced with respect to prospects for both upside and downside risks.

In U.S. financial markets, the credit spreads for bonds issued by firms with low ratings expanded, making it difficult for these firms to issue bonds. Against this background, issuance of corporate bonds decreased and lending by banks declined in October. As evident in these developments, signs indicating tighter financial conditions were gradually appearing in the corporate financing environment.

In the euro area, economic conditions remained unchanged. The European Central Bank decided on November 16 to start publishing Staff Economic Projections for the euro area from December 2000.

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.

With regard to exogenous demand, public investment was decreasing gradually since the implementation of the supplementary budget for fiscal 1999 had peaked out. Net exports continued to follow a moderate upward trend. As for domestic private demand, business fixed investment continued to increase. The recovery in private consumption continued to be weak as a whole, although there were somewhat positive signs in some indicators. Housing investment was mostly unchanged.

Reflecting these developments in final demand, production was increasing and the virtuous circle of income and spending driven by the corporate sector continued. Although the income situation of households still remained severe, the supply-demand balance in the labor market was recently on an improving trend and regular and overtime payments were increasing.

As for prices, domestic wholesale prices were mostly unchanged, while consumer prices were somewhat weak.

Positive factors for the economic outlook were as follows. First, it was likely that the rise in business fixed investment, mainly by manufacturers, would continue. And second, public investment was unlikely to drop sharply in the second half of fiscal 2000 and was expected to increase in the first half of fiscal 2001 due to the Government's formulation of the "Policy Package for New Economic Development toward the Rebirth of Japan."

Risk factors for the economy were (1) that the stagnation of exports of information technology (IT)-related goods in the July-September quarter might adversely affect future production, and (2) that there was a possibility that the weakness in consumer prices might exert downward pressure on corporate profits. It was considered that the impact of these factors, if they materialized, would be limited for the following reasons.

First, demand for IT-related goods was firm worldwide, and the recent weakness in exports of these was likely to be a temporary phenomenon caused by exports in the April-June quarter ahead of schedule. This temporary stagnation in exports was expected to somewhat dampen growth in production in the immediate future. However, judging from the inventory cycle, production was unlikely to enter an adjustment phase.

And second, the recent weakness in the consumer price index (CPI) was mainly attributable to a decline in the price of clothes. This decline was prompted by large apparel manufacturers and retail stores both of which had started, from this autumn, full-scale sales of imported clothes at low prices to compete against new entrants to the industry. However, overall corporate profits had not been adversely affected by these developments as these firms had secured adequate profit margins by cutting costs.

Judging from the above developments, there was no need at this point to change the scenario that the economy would continue to recover moderately. However, close attention should still be paid to the influence of the decline in U.S. stock prices on Christmas sales, and to developments in the profits of small Japanese firms that could not keep up with the price competition.

With regard to factors that would determine the direction of prices, the domestic supply-demand balance was expected to improve gradually. As for other factors, the increase in crude oil prices was likely to exert upward pressure on prices, while the weakness in semiconductor prices, progress in technological innovation, and the streamlining of distribution channels were expected to exert downward pressure. Overall, prices were likely to be stable or somewhat weak.

2. The financial environment

Lending outstanding in October by city banks, long-term credit banks, trust banks, regional banks, and regional banks II (adjusted for special factors such as loan write-offs) decreased by 1.7 percent year on year. The rate of decline had been shrinking slightly since June. Meanwhile, firms' borrowing through capital markets remained sluggish.

The monetary base in October grew by 5.3 percent from a year earlier, a faster pace than the 4 percent of the previous month. The rise could be attributed mainly to the increase in the amount of banknotes post offices held in preparation for expected massive withdrawals of cash from postal savings due to mature in October-December.

Money stock (M2+CDs) in October grew by 2.2 percent from a year earlier, up from 1.9 percent growth in the previous month due to an increase in banknotes in circulation, and to a shift of funds from money management funds (MMFs) to time deposits as interest rates on some time deposits became more attractive than those of MMFs after the termination of the zero interest rate policy.

Firms' fund-raising costs basically remained unchanged, although short-term rates maturing beyond the year-end increased somewhat. The long-term prime lending rate was lowered to 2.25 percent from 2.3 percent on November 10.

The credit spreads for bonds issued by firms in troubled industries expanded slightly due to an increase in the market's sensitivity concerning credit risks following the failure of two life insurance companies in October and the fall in stock prices. However, sensitivity in relation to credit risks overall had not heightened noticeably.

The amount of liabilities of failed firms surged in October reflecting the failure of the two life insurers. The number of corporate bankruptcies in the same month remained more or less unchanged.

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

A. The Current Economic Situation

Regarding the current economic situation, the majority of members shared the view that, economic indicators released since the previous meeting as a whole did not offer sufficient grounds for changing their assessment of the economic situation: the economy was recovering gradually, with corporate profits and business fixed investment continuing to increase.

Some members pointed out that, although movements of economic indicators were generally consistent with the view that the economy was recovering gradually, market participants and firms saw the economy as sluggish, as shown in stagnant stock prices and a fall in long-term interest rates.

Regarding this point, a few members said that it was understandable that market participants and firms perceived the momentum of the economic recovery as being weak because (1) the current recovery was gradual against a background of structural adjustment pressure coupled with a deepening contrast between strong and weak sectors, and (2) firms were seeing a continued increase in production and sales in volume terms but not a rebound in prices. These members continued that the economy was currently in a momentary lull in the early stage of its recovery. Further, they noted that corporate and household sentiment might have been undermined by uncertainty over the political situation, weak stock prices, concern about the future of the pension and social security system, and uncertainty about the prospects for fiscal consolidation.

A different member pointed out the following. Economic growth would reach 1.9 percent this fiscal year even if quarter-on-quarter growth remained flat from the July-September quarter onward. Meanwhile, forecasts by the majority of Policy Board members for fiscal 2000 growth ranged from 1.9 to 2.3 percent. Thus, the Bank's outlook for the pace of economic recovery was that it would be gradual.

Members next discussed each component of aggregate demand.

With regard to exports, one member said that the stagnation in exports of IT-related goods in the July-September quarter had been more or less expected given the high level of inventories of these goods in Asia. The member expressed the view that exports were likely to return to a moderate upward trend after the turn of the year as global demand for IT-related goods was growing steadily.

As for business fixed investment, the majority of members agreed that machinery orders and various surveys showed that it continued to increase and this upward trend was likely to be sustained for a while.

One member pointed out the following. First, machinery orders increased for the fifth consecutive quarter in July-September, and they were forecasted to rise in October-December. A breakdown of machinery orders revealed that, in addition to orders for IT-related products, orders were increasing for a wide range of machinery such as industrial machinery and machine tools. Second, the Business and Investment Survey of Incorporated Enterprises showed that firms had significantly increased fixed investment in the July-September quarter. Third, according to a survey by Japan Finance Corporation for Small Business, capital expenditure by small manufacturers in fiscal 2000 was expected to increase by 13.5 percent from the previous year, the largest increase since fiscal 1990, and their borrowing was also expected to increase sharply. Further, this member added that the latter survey also showed that 14 out of 18 industries planned to increase capital outlays in fiscal 2000, indicating that the upturn in business fixed investment was spreading to a wide range of industries.

Another member, however, noted that the achievement ratio for the quarterly forecast of machinery orders had been declining after reaching its peak in the January-March quarter, dipping below 100 percent in the July-September quarter. This member commented that the momentum of business fixed investment was not as strong as machinery orders suggested, and that it could decline next year.

With regard to developments in the corporate sector as a whole, one member said that production in the October-December quarter was likely to increase for the second consecutive quarter and the uptrend in profits of manufacturers was expected to continue.

A different member pointed out the following positive movements in corporate activity: (1) according to the Report on the Current Survey of Selected Service Industries released by the Ministry of International Trade and Industry, sales in information service-related industries had surged in the July-September quarter and were forecasted to continue increasing in the October-December quarter; and (2) the amount of freight handled by Japan Freight Railway Company and of traffic on highways had increased in the July-September quarter.

Based on this discussion, the majority of members shared the view that the momentum for recovery prompted by the corporate sector was being maintained.

With regard to private consumption, the majority of members agreed that various sales data suggested that it continued to show mixed developments.

As for the employment and income situation, the basis for private consumption, a few members pointed out that growth in regular payments in the Monthly Labor Survey might be slightly higher than the actual growth due to changes at the beginning of this year in the samples on which the statistics were based. However, some members including these members commented that developments in the ratio of new job offers to new applicants and in regular and overtime payments indicated that the employment and income situation was starting to improve, albeit moderately. One of these members said that although a significant improvement could not be expected, it was becoming less likely that private consumption would decrease given these developments in the employment and income situation.

A different member considered that the improvement in the employment situation was becoming clearer on the grounds that (1) although the rise in the ratio of job offers to applicants had been mainly due to the increase in part-timers, employees other than part-timers were also contributing to the rise recently, and (2) both the number of employees in the Labor Force Survey by the Management and Coordination Agency and the number of regularly employed workers in the Monthly Labor Survey by the Ministry of Labor were increasing on a seasonally-adjusted quarter-on-quarter basis. Moreover, a few members including this member expressed the view that winter bonus payments were likely to be slightly higher than the previous year, in view of the improvement in the employment situation, the uptrend in corporate profits, and forecasts by private research institutes.

In response to this, a different member said that firms were basically expected to hold down this year's winter bonus payments as they were likely to continue their efforts to restrain personnel expenses, and thus the effects of a virtuous income circle starting from firms and passing through households were likely to be delayed. With regard to risks relating to private consumption, this member remarked that concern about the future of the pension system and uncertainty about the prospects for fiscal consolidation could dampen consumer sentiment.

As for prices, members noted that price indexes had recently been weak as evident in the slight increase in the year-on-year rate of decline in the CPI.

Many members attributed the slightly faster decline to a fall in the price of apparel, resulting from an increase in imports of low-priced clothes this autumn by apparel manufacturers and retailers, which were facing competition from new entrants, and shared the view that the supply-demand balance had not deteriorated.

One of these members expressed the view that this kind of price decline in Japan could be considered as an adjustment to close to international levels against the background of intensified global competition. This member added that some industry leaders had recently begun to understand that such intensification of competition was inevitable in the process of changing the structure of the Japanese economy, and it was a challenge that all firms had to face to survive.

Following the above discussion, many members expressed the view that recent price developments were not adversely affecting the profits of the distribution sector as a whole, and they were basically compatible with the ongoing economic recovery. Some members, however, pointed out that the recent price falls could hamper the economic recovery by squeezing the profits of small retailers that could not keep up with price competition. A few of these members said that the heightened price competition seemed to be accelerating the polarization of the economy, as evident in the increase in bankruptcies of small self-employed businesses.

Based on the above discussions, many members shared the view that developments in prices would require close monitoring together with corporate profits.

Some members commented on downward pressure on prices stemming from deterioration in the supply-demand balance.

One member said that concerns about price declines due to a possible deterioration in the supply-demand balance had reemerged recently. This member explained the background to this view. The increase in lending by government financial institutions, the expansion of credit guarantee programs, and debt-waiver schemes implemented by financial institutions had helped otherwise non-viable firms survive. This had resulted in viable firms in the construction, machinery, and raw material industries becoming caught up in excessive price competition. This member added that these measures had been necessary at the time as top priority had been given to achieving an economic recovery. However, it could be said that they had delayed structural reform and had resulted in the present concern about "malignant price declines." This member continued that firms might cut personnel expenses further to cover the decline in profits caused by a fall in output prices. Accordingly, this could delay the recovery in the household sector and might become another risk factor for the economy.

A different member stated that developments in the world economy and in demand for IT-related goods warranted monitoring, because a slowdown in the latter could affect Japan's exports, hindering the improvement in the domestic supply-demand balance.

A few other members including this member expressed the view that it was extremely difficult to identify from price statistics the degree to which demand factors and supply factors were contributing to the fall. And thus, it was important to examine price developments together with corporate profits and check their consistency with a continuation of the economic recovery.

A different member said that the Bank had been using the phrase "downward pressure on prices stemming from weak demand was declining significantly" to express its assessment of prices in "The Bank's View" in the Monthly Report of Recent Economic and Financial Developments every month since July this year. With this phrase, the Bank had intended to compare the situation with that when the zero interest rate policy had been introduced, and this had been made clear in the statement released when the Bank terminated the zero interest rate policy, which said that Japan's economy had substantially improved over the past one and a half years. This member continued that some people seemed to have misunderstood this phrase and believed that the Bank was attributing price developments solely to supply-side factors, and thus the Bank might have to consider expressing its assessment of prices in a different way.

B. Outlook for the Economy and Prices and their Risks

With regard to the economic outlook, the majority of members shared the view that there had been no developments to change the standard scenario in the "Outlook and Risk Assessment of the Economy and Prices" (hereafter, Outlook and Risk Assessment) released on October 31.

At the same time, many members expressed the view that it had become clearer which among the downside risks described in the above report, for example developments in overseas economies such as the United States and in financial markets, required particular attention and careful examination in the short term. A few of these members described the change in their perception of the probability distribution of their economic outlooks as follows: although the standard scenario--the one most likely to materialize--had not changed, the probability of scenarios with downside risks materializing had slightly increased.

Members discussed developments in the U.S. economy and their impact on Japan's economy.

One member put forward three possible scenarios for the U.S. economy: (1) the economy would make a hard landing as a result of a rapid monetary tightening prompted by a lack of clear signs of deceleration; (2) the economy would make a soft landing; and (3) the economy would slow somewhat more sharply than in the second scenario. The member continued that economic indicators released in the past few months suggested that the U.S. economy was slowing moderately--a development that was in line with the soft-landing scenario--reflecting the tightening of monetary policy and the rise in crude oil prices. The member added that judging from economic indicators alone, production in high-tech industries seemed to remain firm.

The member said, on the other hand, that U.S. financial markets seemed less confident about the outlook for high-tech industries than economic indicators suggested as could be judged from (1) price adjustments in stocks, primarily those of high-tech firms, (2) the widening of the credit spreads of corporate bonds, (3) the increasingly unfavorable financial environment for bond issuance by firms with low credit ratings, and (4) the decrease in bank lending.

With regard to the three scenarios, this member noted that while the soft-landing one remained the most likely, the probability of the first scenario had declined while that of the third had slightly increased. The member added that consumer spending in the Christmas holiday season and developments in financial markets needed close monitoring.

Another member remarked that the U.S. economy was likely to slow to an annualized growth rate of 3 percent from approximately 5 percent in the first half of this year. The member expressed the view that, from the medium- to long-term point of view, this degree of deceleration was desirable for sustainable growth. However, developments in the economy would have to be carefully watched as there was a risk that downward momentum could strengthen unduly in the process of an economic slowdown.

A different member said that after nearly a decade of economic growth, it was natural that market participants were concerned about the possibility of imbalances emerging to some extent in some areas of the economy, and this concern seemed to have led to nervousness in the U.S. stock market.

A separate member said that the fall in U.S. stock prices could be a threat to a soft landing, since it might impede the smooth financing of the U.S. current account deficit. On the other hand, there was scope for the U.S. authorities to take both fiscal and monetary policy measures, which was a positive factor for achieving the soft landing.

Further, a different member commented on how the slowdown in the U.S. economy might affect Japan's economy. The member indicated three channels through which the effect could reach Japan: (1) the slowdown of the U.S. economy might affect the global economy including that of Asia, affecting in turn Japan's economy; (2) the adjustment in the U.S. high-tech industry might discourage Japan's business fixed investment by high-tech industries; and (3) the fall in U.S. stock prices might induce a fall in Japan's stock prices, adversely affecting Japan's economy. The member remarked that unless the U.S. economy was to slow rapidly, the risk of Japan's economy being affected through the first channel was not likely to be significant, but the risk of the second or third channel becoming reality should be carefully monitored.

One member who held a particularly cautious view relative to the others on the outlook for U.S. stock prices said that their rise could be described as a bubble and it was becoming evident that it was now bursting. The member noted that Nasdaq stocks had already fallen back close to the level at which they stood before their rise that had started in mid-October 1999 and expressed the view that if they fell below their October 2000 low, there was a risk that Nasdaq stocks would plunge toward early December, probably pushing the Dow Jones Industrial Average down with them. The member added that such a fall in U.S. stock prices could have a considerable effect on Christmas sales in the United States.

Turning to the economic and financial situation in Japan, members commented that movements in economic indicators, such as those on production and business fixed investment, suggested that the economy was recovering gradually led by the corporate sector, while developments in financial markets were sluggish as indicated, for example, by weak stock prices. Many members expressed the view that attention should be paid to (1) whether weak stock prices provided some information on the future of Japan's economy, and (2) whether weak stock prices would affect business and consumer confidence, as well as lending by financial institutions.

Members discussed the background of the current weakness in stock prices.

Many members cited the following as reasons for the weakness: (1) the global adjustment in stocks of high-tech firms, typically those listed on Nasdaq; and (2) political uncertainty in Japan and the United States. These members continued that the fundamentals on which stock prices were based, such as production and corporate profits, had not changed.

One of the members noted that stock prices had fallen not only in Japan, but also in the United States, Europe, and Asia. For example, stock prices in Europe had declined by about 20 percent from the start of the year in U.S. dollar terms.

Another member pointed out that stock market participants might be considering that a further increase in corporate profits could not be expected, as firms were gradually easing efforts to restrain personnel expenses through corporate restructuring and few firms seemed to have succeeded in establishing new business models. The member also pointed out that restructuring that would further push up stock prices could have a negative impact on household income.

A different member noted that many market participants were waiting to see (1) how the slowing U.S. economy and price adjustment in stocks overseas might affect Japan, and (2) whether transition in the driving forces of Japan's economy would take place smoothly, for example from external demand to domestic demand, from the old economy to the new economy, and from firms to households.

A member who held a particularly cautious view on stock prices said that Japan's stock prices were expected to fall below the low marked in October and test the medium-term floor once again reflecting market participants' anxiety about prospects for firms' earnings.

Then, members discussed the impact that the current weakness in stock prices might have on Japan's economy.

One of the members said that looking at financial markets as a whole, credit spreads had not expanded significantly nor had financial institutions become less willing to lend, and concluded that weak stock prices were not leading to the "credit crunch" observed in 1997 and 1998. However, the member was of the opinion that movements in stock prices needed to be closely monitored as a further decline might affect financial institutions' stance with regard to their disposal of bad loans and lending.

A different member said that although an analysis based on an econometric model showed that the current degree of weakness in stock prices was unlikely to have a large impact on the economy as a whole, a further fall in stock prices could have unexpectedly large negative effects. Another member pointed out that firms' unrealized gains on stocks were at very low levels and therefore a further decline in stock prices would be likely to adversely affect their net profit.

Based on the above discussion, many members agreed that movements in stock prices, their effect on corporate and household confidence, and developments in corporate financing should continue to be monitored as a further decline in stock prices would affect the sentiment of firms and households, as well as the lending attitude of financial institutions.

Another member said that, apart from developments in overseas economies and stock prices, the following factors needed to be examined as risks. First, the effects of the slow progress in structural adjustment and the decline in land prices on the financial strength of financial institutions. Second, the vulnerable profit basis of many firms that were relying on an increase in exports and corporate restructuring. Third, a possible rise in long-term interest rates prompted by further issuance of JGBs and an associated decline in the credibility of Japan, whose government debt was reaching a critically high level in terms of the amount of debt outstanding. Fourth, the effects of a surge in crude oil prices. And fifth, the effects of depreciation of the euro. Another member pointed out as a risk factor the possible negative effect on consumer sentiment of the concern among the public over their life plans as a result of the bankruptcies of life insurance companies.

A member who held a cautious view on the outlook for Japan's economy relative to the others cited the following as negative factors for Japan's economy. First, there were some weak signs such as the leading diffusion index in the Indexes of Business Conditions for September, which was below 50, and although the economy was presently in a phase of expansion, the period from the year-end to some time in fiscal 2001 would be crucial. Second, the rise in machinery orders had been flattered by strong orders for mobile phones, and thus the momentum of business fixed investment was not as strong as the data suggested. Third, consumer confidence had weakened slightly according to a survey conducted by Japan Research Center. And fourth, the increase in corporate profits and improvement in wages and employment were likely to lose momentum before the end of this fiscal year reflecting the deterioration in the terms of trade, the decline in sales prices and the projected decrease in exports, and thus firms were sooner or later likely to enter the next phase of restructuring which would force them to not only reduce the number of employees but also cut personnel expenses per employee.

This member added that crude oil prices could remain high and might exceed the previous peak. The member continued that a rise in oil prices would have a significant impact on some Asian countries that were heavily dependent on oil such as Korea and Thailand, given that the ratios of the aggregate value of imports of crude oil, oil products, and natural gas to nominal GDP for these countries were much higher than for Japan and the United States. Specifically, in the second quarter of 2000, the ratio was over 6 percent for Korea while it was 1-2 percent for both Japan and the United States. In addition, the member expressed the view that the stability of Korea's financial system might hinge on whether, as was believed necessary, the Korean authorities decided to inject an additional 50 trillion won into financial institutions, which had already received 100 trillion won.

C. Financial Developments

With regard to financial developments other than those in stock markets described above, a member expressed the view that the environment for corporate financing had remained favorable given that (1) banks remained willing to lend and there had been a slight contraction in the year-on-year fall of the amount outstanding of their lending, and (2) the environment for firms' borrowing in the capital market was also favorable with no notable increase in credit spreads.

A few members including this member pointed out that long-term interest rates had declined to below 1.8 percent in line with weak stock prices and the market's lackluster economic outlook.

IV. 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, regarding the outlook, the economy was likely to recover gradually led mainly by business fixed investment in line with the standard scenario in Outlook and Risk Assessment. Third, it was becoming clearer which risk factors, such as developments in overseas economies and in financial markets, required close attention in the immediate future. Fourth, prices were expected to be stable or somewhat weak. And fifth, monetary conditions continued to be relaxed.

Based on the above view, the majority of members concurred that the Bank should (1) maintain the current accommodative monetary stance to support the economic recovery, and (2) examine carefully the strength and sustainability of the recovery in private demand. They thus agreed that it was appropriate to maintain the current guideline for market operations. They further shared the view that close attention should be paid to risk factors such as developments in overseas economies and financial markets at home and abroad.

One of these members raised several points relating to risk factors from the perspective of conducting monetary policy. First, public investment and exports were likely to increase again from 2001. Second, it was inappropriate to use monetary policy to directly influence stock prices, even when these were sluggish. And third, the recent easing of prices was caused mainly by technical factors, not by a deterioration in the supply-demand balance. Based on the above, some members including this member said that although some risk factors were becoming clearer, the current degree of monetary easing should be maintained since the standard scenario of a gradual recovery remained valid.

A few members remarked that the self-adjusting mechanism of the market was functioning properly under the current monetary policy as seen in the fall in long-term interest rates in response to the weakness in stock prices and market participants' view that the economic recovery was weak.

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.

The reasons were as follows. First, judging from the year-on-year declines in various price indexes, particularly the domestic wholesale price index (WPI), a deflationary phase was continuing. The domestic WPI for October had marked the first decline on a year-on-year basis since February this year and had fallen for the second consecutive month on a month-on-month basis. Second, it was necessary to accelerate economic growth to 1.5-2.0 percent which this member believed was the potential growth rate of Japan and maintain it at that level for a certain period of time, as stock prices were falling and overseas economies were unstable. And third, it was becoming likely that the economy could be derailed from the standard scenario in the Outlook and Risk Assessment.

V. Remarks by Government Representatives

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

(1) Japan's economy as a whole continued to improve moderately, with the momentum for a self-sustained recovery continuing, mainly in the corporate sector. However, the employment situation remained severe and private consumption was generally unchanged, indicating a delay in an improvement in the household sector. 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 compiled a set of economic measures and submitted the fiscal 2000 supplementary budget to the Diet on November 10 accordingly.

The supplementary budget placed emphasis on financing economic measures such as social infrastructure investment, measures related to IT, measures for disaster relief, measures for the financing of small and medium-sized enterprises, and measures for housing financing and employment. With regard to revenue, tax revenue was projected to increase by 1,236.0 billion yen from the initial budget and 1,510.3 billion yen would be carried over from the fiscal 1999 budget surplus. The incurred shortfall of revenue would be financed by issuing an additional 1,988.0 billion yen worth of JGSs. As a result, JGS issuance for fiscal 2000 would amount to 34,598.0 billion yen, accounting for 38.5 percent of revenue. To facilitate steady and smooth JGS sales, the Government would issue securities with different maturities appropriately, taking into account market developments and strength of demand.

(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 the movements toward a self-sustained recovery continued mainly in the corporate sector. On balance, the economy was continuing to improve moderately. However, the employment situation remained severe, and private consumption was generally unchanged. The number of corporate bankruptcies was at a relatively high level, and the amount of liabilities of failed firms was increasing. Furthermore, downside risks to the economy such as the continued decline in stock prices, developments in the U.S. and Asian economies, and movements of oil prices should be taken into consideration.

(2) Considering the above situation, the Government would continue to implement measures including the "Policy Package for New Economic Development toward the Rebirth of Japan" to put the economy on a full-scale recovery track and to promote steady structural reform.

(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.

VI. 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 July-September 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 three reasons. First, the CPI (excluding perishables), the GDP deflator, and the domestic WPI were lower than a year earlier, indicating that deflation persisted. Second, the current monetary policy was insufficiently accommodative given that the deflationary gap remained large and that self-sustained recovery led by private demand had not been realized, while prices were stable and there was little inflationary pressure. Third, neither On Price Stability nor Outlook and Risk Assessment of the Economy and Prices, both released recently, provided a specific indicator to be used in setting a price target or that could act as a guide for the conduct of monetary policy and the Bank's explanation of its conduct of monetary policy was still based on abstract expressions, and thus the Bank should set a numerical price target to prove its accountability.

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

The Policy Board discussed "The Bank's View" of recent economic and financial developments, and put it to the vote. By unanimous vote, the Board decided to publish "The Bank's View" on November 20, 2000 in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background").⁴

4The original full text, written in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on November 20, 2000 together with the English version of "The Bank's View." The English version of "The Background" was published on November 29, 2000.

Attachment

For immediate release

November 17, 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: