Minutes of the Monetary Policy Meeting

on December 15, 2000
(English translation prepared by the Bank's staff based on the Japanese original)

January 24, 2001
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, December 15, 2000, from 9:00 a.m. to 12:13 p.m., and from 1:01 p.m. to 2:31 p.m. ¹

Policy Board Members Present
Mr. M. Hayami, Chairman, Governor of the Bank of Japan ²
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. S. Murakami, Senior State Secretary for Finance, Ministry of Finance
Mr. Y. Nakajo, Deputy Director-General of the Coordination Bureau, Economic Planning Agency ³
Mr. T. Komine, Director-General of the Research Bureau, Economic Planning Agency ⁴

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. 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. 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 January 19, 2001 as"a document which contains an outline of the discussion at the meeting" stipulated in Article 20, Paragraph 1 of the Bank of Japan Law of 1997. Those present are referred to by their titles at the time of the meeting.
Mr. Hayami was absent from 9:00 a.m. to 10:14 a.m. to attend a meeting of the Ministerial Council which discussed issues including the Economic Planning Agency's Monthly Economic Report. During his absence, Mr. Fujiwara performed the duties of chairman pursuant to Article 16, Paragraph 5 of the Bank of Japan Law of 1997.
Mr. Nakajo was present from 9:00 a.m. to 1:22 p.m.
Mr. Komine was present from 1:22 p.m. to 2:31 p.m.

I. Summary of Staff Reports on Economic and Financial Developments ⁵

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 November 30, 2000, and the overnight call rate was steady around 0.25 percent. ⁶

The Bank was providing funds maturing beyond the year-end in a flexible manner and would continue to conduct appropriate market operations to ensure stable market conditions.

5Reports were made based on information available at the time of the meeting.
6The 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 in Japan were weak, falling to their lowest level in 2000 in late November. In December, they edged up temporarily in response to the rebound in the U.S. Nasdaq composite index. Recently, the following developments were noticeable: buying back of stocks in the low-medium price range was increasing; and some market participants seemed to consider that Japanese stocks were attractive given the price-earnings ratios and yield spreads (government bond yields minus expected earnings on stocks). As for the outlook, many market participants believed that developments in U.S. stock prices and Japanese corporate profits held the key to the stock market's direction.

Long-term interest rates had been declining since November and eased in early December to around 1.55 percent, the lowest level in about one and a half years. They had been volatile and were recently around 1.6-1.7 percent. The market was increasingly paying close attention to economic developments as a key factor determining long-term rates. Meanwhile, the credit spreads between private and government bonds were on the whole unchanged or narrowing somewhat.

In the money market, term rates rose somewhat as many financial institutions' procurement of funds maturing beyond the year-end was at its peak. However, the market was stable as a whole as the Bank supplied ample funds maturing beyond the year-end.

The yen had been somewhat weak against the U.S. dollar owing to uncertainty about Japanese political developments and the economic recovery. It was recently moving in the range of 111-113 yen. The euro rose against both the U.S. dollar and the yen.

C.Overseas Economic and Financial Developments

A slowdown in the U.S. economy was becoming clear as evidenced by the following economic indicators. Real private consumption was unchanged from the previous month; sales of automobiles, the consumer confidence index, and the National Association of Purchasing Management (NAPM) index were declining moderately. As for Christmas sales, growth at chain stores seemed to be somewhat weaker than had been expected. The labor market, however, remained tight, and inflationary pressure was still present. Producer prices for November were stable due partly to a decline in crude oil prices.

U.S. interest rates eased overall due to a string of economic indicators showing an economic slowdown and remarks by Mr. Alan Greenspan, the Chairman of the Board of Governors of the Federal Reserve System on December 5, which were taken as signaling a future easing of monetary policy. In the federal funds rate futures market, many expected the Federal Open Market Committee (FOMC) to lower policy rates at its meeting scheduled for the end of January 2001. Meanwhile, the U.S. stock market had regained some stability as seen in the rebound in the Nasdaq composite index and a decline in stock price volatility.

Meanwhile, credit spreads between bonds issued by firms with low ratings and government bonds continued to expand, and banks tightened their lending standards. Careful monitoring was required to determine whether this tightening would affect the economy, including business fixed investment.

Economies in Asia continued to grow firmly, but a slowdown in export growth had become evident recently. In Korea, the economy grew at a high rate until the July-September quarter, but it might show zero growth in the October-December quarter due to weaker exports. The pace of the slowdown in Asian economies required close attention.

D. Economic and Financial Developments in Japan

1. Economic developments

Japan's economy continued to recover gradually. Net exports were starting to level off as Asian countries adjusted their inventories of steel and some electronic parts, and public investment was decreasing gradually. As a result, growth in production declined and the pace of recovery was judged to be slowing slightly.

As for the outlook, production was expected to remain on a rising trend, because an increase in business fixed investment mainly by manufacturers was expected and public investment would increase, albeit temporarily, as a result of the supplementary budget passed by the Diet. However, the adjustment in exports could be substantial if the U.S. and Asian economies slowed significantly. Thus, the outcome of Christmas sales in the United States and the extent of the economic slowdown in NIEs required close attention.

Turning to developments in individual components of final demand, real exports were likely to remain flat until the spring of 2001 because of a decline in exports of some materials such as steel and chemicals, and a momentary lull in exports of information technology (IT)-related goods, which had been increasing. Exports of IT-related goods might remain stagnant for a while, because (1) adjustments in inventory of IT-related goods in Asian countries were taking a long time, and (2) a downward revision of demand for personal computers in Europe and the United States had weakened demand for computer parts.

Business fixed investment on the whole continued to increase chiefly in IT-related sectors, although there was a difference in momentum between manufacturers and nonmanufacturers. Machinery orders, a leading indicator of capital spending, continued to increase led mainly by orders from manufacturers. Meanwhile, business fixed investment for the July-September quarter had decreased marginally by 1.2 percent from the previous quarter, according to Financial Statements Statistics of Corporation by Industry, Quarterly. A close look at the data showed the following two developments. First, large manufacturers seemed to be slightly behind their business fixed investment plans for fiscal 2000 shown in the December Tankan (Short-Term Economic Survey of Enterprises in Japan). This delay could be attributed to a bottleneck in the supply side; production of some parts central to machines for producing semiconductors was failing to keep up with the increase in orders for these machines. Part of the investment planned for the first half of fiscal 2000, therefore, might be postponed to the second half of the year or to fiscal 2001. And second, Financial Statements Statistics of Corporation by Industry, Quarterly showed a large decline in business fixed investment by small nonmanufacturers. It was difficult to form an accurate picture given that small nonmanufacturers had revised their investment plans upward in the December Tankan and surveys by other institutions.

Sales statistics for October and November were generally flat, and private consumption continued to show mixed developments. The supply index for consumer goods showed that the increase in overall supply was not accelerating, even though imports continued to increase at a fairly high rate. Attention should be paid to whether the large amount of imports would cause an increase in distributors' inventories.

With these developments in final demand, production growth for the October-December quarter was expected to slow due to a lull in exports of materials and electrical machinery. In the January-March quarter of 2001, the pace of increase was expected to slow further as adjustments in production of materials and electronic parts were likely to continue. The rising trend in production was, however, expected to continue. From the viewpoint of the inventory cycle of manufacturers, inventories of producer goods such as steel and chemicals were already showing signs of adjustment, while those of electrical machinery remained low. Therefore, a large inventory adjustment involving all manufacturers was unlikely to occur.

Compensation of employees had stopped decreasing, with the number of regular employees remaining broadly unchanged and wages continuing to exceed the level in the previous year. Winter bonuses were likely to be around the level of the previous year, as a slight increase in those for employees at private firms would be offset by a planned cut in those for civil servants.

Domestic wholesale prices were declining somewhat, mainly because a decrease in machinery prices and electricity charges was outweighing a rise in petroleum product prices. Consumer prices continued to be somewhat weak, despite rising petroleum product prices, due to a decline in prices of imported products (excluding petroleum products) and domestic products competing with these imports.

2. The financial environment

Private banks' lending remained sluggish, decreasing by about 2 percent from a year earlier, although its year-on-year rate of decline had stopped expanding. In the capital market, issuance of CP, mainly those maturing beyond the year-end, increased substantially, nearly reaching the level of a year earlier when issuance of CP had surged due to concerns about the Year 2000 problem. In contrast, issuance of corporate bonds was sluggish.

The monetary base in November grew by 5.7 percent from a year earlier against 5.3 percent in the previous month, due to a further increase in banknotes post offices held in preparation for expected massive withdrawals of cash from postal savings due to mature. Its year-on-year growth rate was expected to slow from December onward because of the previous December's sharp growth prompted by concerns about the Year 2000 problem. Money stock (M2+CDs) continued to grow by its recent year-on-year rate of around 2 percent, marking 2.1 percent growth in November.

With regard to firms' fund-raising costs, short-term rates were almost unchanged while long-term rates declined somewhat reflecting the decrease in market rates. The average contracted interest rate on new loans and discounts rose in October, chiefly those on short-term loans, reflecting the rise in short-term rates following the termination of the zero interest rate policy.

Firms' cash flow remained at a high level, and the December Tankan showed no deterioration in the diffusion indexes for firms' perception of their financial position and their perception of banks' lending attitude. This indicated that banks' lending attitude and corporate financing conditions remained easy.

The number of corporate bankruptcies increased in November compared with the previous month. However, if monthly fluctuations were adjusted, it could be said that the number of bankruptcies had been more or less unchanged since the summer.

II. 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, although economic indicators released since the previous meeting showed a slight slowdown centering around exports and production, the economy continued to recover gradually.

Many members pointed out that the increase in production was decelerating somewhat reflecting a decline in public investment and a slowdown in exports, and the recovery in the economy was at a temporary standstill. One member said that the view that the economy was at a temporary standstill and concern about the future were reflected in the December Tankan: business conditions diffusion indexes had not improved and had been forecasted to decline, and firms' earnings forecasts for the second half of fiscal 2000 had been revised downward. A different member expressed the opinion that polarization between strong and weak firms and industries or uneveness in improvement across firms and industries was unavoidable in the recovery of Japan's economy, which was undergoing various structural changes as could be seen in (1) the growth of firms that had responded flexibly to changes in demand structure and (2) the active business fixed investment mainly in IT-related areas. Based on this opinion, the member commented that the pace of economic recovery continued to be gradual and the recovery might even enter a temporary lull.

These members, however, emphasized that the momentum for recovery prompted by the corporate sector was being maintained, judging from the following developments. First, the uptrend in corporate profits continued although the pace might decelerate somewhat. Second, business fixed investment remained firm with the Tankan and interviews with corporate managers confirming there was strong interest in investing in IT-related areas. And third, although the recovery in the household sector lacked momentum, the employment and income situation was improving gradually. One of these members said that the output gap was not widening again, judging from (1) a continuing uptrend in the index of capacity utilization by manufacturers and (2) a slight improvement in firms' perception of the excess in equipment and employment as shown in the Tankan.

Members next discussed each component of aggregate demand.

First, some members said that public investment was decreasing gradually since the implementation of the supplementary budget for fiscal 1999 had peaked out. One of these members added that housing investment was declining slightly. These members said, however, that these developments had been more or less expected.

Many members were of the view that exports were recently losing momentum reflecting a slowdown in the U.S. economy. Some of these members said that East Asian economies had decelerated due to the slowdown in the U.S. economy and this had resulted in a deterioration in the environment for Japan's exports.

Regarding business fixed investment, some members remarked that Financial Statements Statistics of Corporations by Industry, Quarterly for the July-September quarter suggested a slowdown in the growth in business fixed investment. One member said that an increase in the number of parts makers moving their production base abroad and the sluggishness in capital spending by small firms, many of which still felt that they had excess equipment and were still posting losses, were undermining the overall trend of business fixed investment. A different member expressed concern that the achievement ratio for the quarterly forecast of machinery orders had been falling after reaching a peak in the January-March quarter of 2000.

Some members, however, expressed the view that business fixed investment as a whole remained on an increasing trend, judging from the following points: first, the continuing firmness in machinery orders--a leading indicator of capital investment--including those through agencies, regarded as showing trends in fixed investment by small firms; second, upward revisions to firms' investment plans for fiscal 2000 in the December Tankan; and third, positive developments in business fixed investment revealed in surveys such as the Business Outlook Survey compiled by the Ministry of Finance and the Survey of Capital Investment by Small Sized Manufacturers compiled by Japan Finance Corporation for Small Business.

Many members expressed the view that the recovery in private consumption continued to be weak. One member was of the view that households' net worth calculated as the difference between their assets and liabilities at market value had not recovered sufficiently and this had restrained consumption to some extent. Another member, however, said that private consumption was at normal levels in view of the recovery in aggregate supply of consumer goods at a time when structural changes were taking place in consumption, seen in the deepening contrast between popular and unpopular goods, which reflected diversified consumer needs. This member continued that private consumption in real terms might be growing, even though nominal income had not increased, given the decline in prices due to (1) technological innovation, (2) the distribution revolution, and (3) the narrowing gap between prices at home and abroad. A different member said that consumption was faring relatively well at present considering the continuing strong pressure for corporate restructuring.

Some members expressed the view that the employment and income situation was improving, though only slightly, as shown by the results of employment conditions in the December Tankan and other surveys, and this would support a recovery in consumption. One member said that the income situation for households was improving, albeit very slowly, given that nominal wages continued to increase compared with a year earlier and winter bonus payments in the private sector were forecasted to increase for the first time in three years. However, a few members expressed the view that it would take some more time before an improvement in the employment and income situation could support a recovery in private consumption for the following reasons. First, although winter bonus payments were expected to be higher than those of the previous year, the rise was likely to be limited. Second, the recent improvement in the employment situation and wages could be attributed to an increase in the employment of part-timers and the upturn had not spread to full-time employees. And third, labor's share in income distribution would remain on a downward trend as firms were continuing restructuring.

Many members pointed out that reflecting these developments in final demand, the pace of growth in production was slowing somewhat. Some members remarked that inventories in some materials industries such as steel had overaccumulated slightly, reflecting the sluggish exports. One of these members noted, however, that the inventories overall remained at a low level, and thus, production could continue to rise.

Some members expressed the view that the uptrend in corporate profits was being maintained although the pace might slow in or after the second half of fiscal 2000 against the background of a slowdown in exports and an easing of product prices. These members explained that the ratio of current profit to sales was improving and thus profits were likely to increase as long as sales did not fall sharply. These members added that the slight weakness in the yen would help improve export profitability and support corporate profits.

One member, however, remarked that what the economy was experiencing was not merely a temporary standstill or lull, and expressed a more cautious view than other members, saying that there were indications that Japan's economy might be approaching a recession. First, analysis of the Indexes of Business Conditions suggested that the economy might reach its peak in February 2001. Second, industrial production and machinery orders might have hit their peak in August 2000. Third, the slowdown in the world economy, especially in the United States, was becoming clear. And fourth, stock prices at home and abroad were unstable. The member continued that based on the above, quarter-on-quarter real GDP growth in 2000 might repeat the pattern of the previous year which saw expansion in the January-March and April-June quarters and contraction in the July-September and October-December quarters.

With regard to price developments, many members pointed out that domestic wholesale prices were somewhat weak and the fall in consumer prices had accelerated slightly. One member, however, said that the domestic supply-demand balance had not deteriorated and these price developments had not put a brake on economic activity by dampening corporate profits and the employment and income situation. Another member said that the economy was not experiencing serious deflation given that wages, which were the basis for various prices, remained higher than a year earlier. This member, however, added that it was necessary to monitor the effect of the increase in low-priced imports because they could have a deflationary impact on small firms lacking competitiveness. Following the above discussion, many members shared the view that developments in prices should be monitored more carefully as the economy was about to come to a temporary standstill.

B. Financial Developments

One member remarked that the adjustment in Japanese stocks, which had fallen by more than 20 percent from their peak in spring 2000, was large and comparable to major adjustments in the past. The member continued that the adjustment indicated that stock market participants might have been anticipating the recent slowdown in the economic recovery. This member also commented that the fall in stock prices had not led to anxiety over the financial system but might have had a slightly negative impact on corporate sentiment as was evident in the fall in the business conditions diffusion index for electrical machinery manufacturers in the December Tankan. This member added that a decrease in unrealized gains on stock holdings due to a decline in stock prices might hamper restructuring efforts by firms and financial institutions. A different member said that uncertainty about the economic outlook was preventing the stock market from fully reflecting in prices the improvement in corporate profits. The member continued that a fall in stock prices would have a large impact on corporate results under mark-to-market accounting. The member would, therefore, pay close attention to the level of stock prices at end-March 2001, when many firms would close their books. Another member commented that technical analysis suggested that the Nikkei 225 Stock Average might have difficulty in rising from the level of a little more than 14,000 yen, the floor of the recent range, and there was even a risk that it might dip below this floor.

There were also comments on developments in the U.S. stock market. One member remarked that it could be said that the bubble in U.S. stocks had burst, since the Nasdaq composite index, which had started to increase from October 1999 and peaked out in March 2000, was currently below the level of October 1999 with the aggregate market value of Nasdaq stocks down by about US$3 trillion. This member continued that it might fall further toward February 2001 given the slowdown in the U.S. economy and uncertainty over the economic policies of the new administration.

As for corporate financing, one member pointed out that the diffusion indexes of firms' perception of their financial position and the lending attitude of financial institutions in the December Tankan suggested that the financial environment continued to be relaxed. Therefore, it could be judged that the termination of the zero interest rate policy and the fall in stock prices had not particularly affected the lending attitude of financial institutions or the environment for firms' borrowing.

C. Outlook for the Economy and Prices and Their Risks

The majority of members shared the view that the standard scenario in the"Outlook and Risk Assessment of the Economy and Prices" (hereafter, Outlook and Risk Assessment) released on October 31 remained valid and that the economy was likely to continue recovering gradually, led mainly by business fixed investment.

Many members noted, however, that some of the downside risks described in the above report, for example developments in overseas economies such as that of the United States, had become larger.

Members exchanged views on developments in the world economy, particularly the U.S. economy.

Many members pointed out that the slowdown in the U.S. economy was becoming clearer as was evident in the sluggishness in demand for some IT-related products. One of these members remarked that, because the U.S. authorities still had room to take policy action, the view that the U.S. economy would make a soft landing predominated in the market. This member noted, however, that the rate of economic growth the markets had in mind for the soft-landing scenario seemed to be falling gradually. Another member expressed the opinion that, as the potential growth rate of the U.S. economy was estimated to be about 4 percent, an actual growth rate of below 3 percent would not be regarded as a soft but as a hard landing. This member added that particular attention should be paid to whether the growth of business fixed investment would fall below 6 percent. These members expressed the view that the slowdown in the U.S. economy was affecting the world economy, particularly Asian economies. One member noted that the growth of exports by Asian economies such as Korea and Taiwan had been decreasing significantly since autumn, and as exports accounted for a large share of GDP in these countries, this slower pace of increase might lead to a deceleration of economic growth in Asia as a whole. Another member commented that the problems in Korea and Taiwan were cause for concern and those of the latter included a decline in exports of high-tech products, political uncertainty, and an increase in the share of nonperforming loans in the assets of the banking sector. Against this background, a few members commented that the projected growth rate for the world economy for 2001 onward should be revised slightly downward.

Some members pointed out that a slowdown in the world economy led by the U.S. economy would reduce Japan's exports and this might lead to a decrease in the growth rate of corporate profits from the second half of fiscal 2000. One of these members added that attention should be paid not only to falls in export volume but also in export prices, because a decline in prices, as seen in those of semiconductors, would also damage corporate profits. Another member said that inventory adjustments in Asia and a deterioration in the supply-demand balance of materials, both due to a slowdown in the U.S. economy, and uncertainty about the outlook, were to some extent affecting corporate sentiment and the stock market. On these grounds, many members concurred that economic developments and policy actions in the United States, and the effects of these on Japanese and overseas economies should be examined very carefully. One member added that the following should be looked at carefully when examining developments in the U.S. economy: developments in business fixed investment, the outcome of Christmas sales, changes in consumer confidence, the effects of the fall in stock prices, and movements in the unemployment rate.

Further, members exchanged views on developments in global IT-related demand. One member said that the possibility had emerged that business fixed investment by IT-related firms, which had been fueling the world economy, might undergo an adjustment. Responding to this, another member said that it was premature to judge that the trend in IT-related investment had weakened. A few other members agreed that any adjustments in IT-related areas would be moderate since (1) demand for semiconductors in terms of their types was diversified and different types of semiconductors were being produced by different countries and firms, and (2) demand for IT-related products was likely to grow with increased use of the Internet and development of next-generation mobile phones. A different member, however, said that the slower growth in U.S. bank lending required attention when examining developments in IT-related sectors as well, as U.S. banks' nonperforming loans, many of which were to IT-related firms, seemed to be increasing.

Many members pointed out that the continued instability in domestic and overseas financial markets was a risk factor. One member said that the effects of the weakness in stock prices on corporate and household sentiment and on financial institutions would require careful monitoring. Some members, however, considered that the recent weakness of the yen might act as a buffer against negative effects on the economy. In addition, these members noted that the fact that the euro had stabilized was reducing the risks to the world economy.

A few members referred to the effects of the balance-sheet adjustments of firms and financial institutions. One member noted that financial institutions were finding it difficult to reduce their nonperforming loans, because new nonperforming loans were continuing to emerge due to sliding land prices and the deteriorating financial strength of firms. Further, this member said that these developments would restrain business fixed investment and private consumption. In contrast, another member remarked that although the fall in stock prices had damaged the environment for balance-sheet adjustment more severely than had been expected, developments in the lending attitude of financial institutions and market credit spreads provided little evidence that financial developments were restraining economic activity.

One member referred to the public's anxiety about the future. This member noted that consumer confidence had not deteriorated conspicuously nor had business fixed investment plans been revised downward so far, but remarked that the risk of such developments had increased somewhat.

Some members pointed out that the rise in crude oil prices, one of the risk factors mentioned in the Outlook and Risk Assessment released on October 31, appeared to be coming to a halt and the significance of this risk had decreased somewhat. A different member commented on the recent developments in oil prices. The member said that the price of West Texas Intermediate had marked a high of about US$37 per barrel in mid-September, had then remained steady at around that level before plunging in early December, and was currently around US$28. This member continued, however, that a fall below US$28 would provide a clear sign of a change in the medium-term trend of oil prices. This member pointed out that the recent stability in crude oil prices was attributable to reduced procurement of crude oil by U.S. oil refiners, and the following should be kept in mind: (1) oil inventories remained low in the United States, and (2) some oil producing countries might reduce production. This member continued that the surge in natural gas prices might have negative effects on the U.S. economy.

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, Japan's economy continued to recover gradually, albeit at a somewhat slower pace due to decelerating export growth. Second, regarding the outlook, the economy was likely to follow a gradual recovery trend led mainly by business fixed investment in line with the standard scenario in the Outlook and Risk Assessment released in October. Third, risk factors, such as developments in overseas economies and financial markets at home and abroad and their effects on the economy, required close attention. Fourth, prices were expected to be somewhat weak for the time being. 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 degree of deceleration in the world economy and its effects on Japan's economy. They agreed that it was appropriate to maintain the current guideline for market operations.

As for assessment of risks, many members said that downside risks, mainly those related to overseas economic factors, had increased slightly. The majority of members including these members, however, expressed the opinion that it was necessary to wait for more information and carefully monitor the situation in view of the uncertainty remaining about the U.S. economy.

One member remarked that the Bank should change its assessment of the economy more flexibly in line with the economic situation in order to enhance communication with the market, which would help long-term interest rates better reflect the state of the economy. This member added that attention should continue to be paid to developments in financial markets. Another member said that any change in monetary policy to address an increase of risks should be made after comprehensive evaluation of the overall effects, including an assessment of the effectiveness and side effects.

A different member called for a prompt easing of monetary policy. The member specifically said that the Bank should adopt monetary base targeting accompanied by a target for the rate of increase in the consumer price index (CPI) and raise current account balances at the Bank to achieve these targets.

The reasons were as follows. First, judging from a decrease in external demand, a cut in personnel expenses as shown in Financial Statements Statistics of Corporations by Industries, Quarterly, and stagnation in compensation of employees in GDP data, the economy was clearly stalling and was expected to reach its peak as early as February 2001. Second, the Bank's standard scenario in the Outlook and Risk Assessment released on October 31 might fail to materialize, and thus it was necessary to accelerate economic growth to 1.5-2.0 percent which this member believed was the potential growth rate of Japan. Third, serious deflation persisted as evident in the year-on-year decline in almost every kind of price index, including the GDP deflator, which had decreased for ten consecutive quarters, and the slightly accelerated decrease in land prices. And fourth, it was important for the Bank to give more concise form to its inflation objectives as stated in the OECD Economic Survey for Japan, and then explain to the public the framework or strategy of the Bank's policy.

IV. 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 improvement in the household sector. Regarding prices, the CPI and the GDP deflator continued to decrease year on year despite the sharp rise in crude oil prices, and the impact of the fall in prices on the economy required attention. Furthermore, the effects of market developments at home and abroad, including the weakness in the stock market, and of the slowdown of the U.S. economy required closer monitoring.

(2) The Government, under the new Cabinet, would continue to give top priority to putting the economy on a self-sustained recovery track. To this end, the Government would take appropriate measures, including the prompt implementation of the supplementary budget.

(3) The Government would like to ask the Bank to conduct monetary policy appropriately--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) The economy remained in a severe situation with an improvement in the household sector lagging, but the movements toward a self-sustained recovery continued mainly in the corporate sector. Business fixed investment in the recently released July-September GDP data was estimated based on the results of the Business and Investment Survey of Incorporated Enterprises, which showed relatively high growth. However, it would be reestimated based on Financial Statements Statistics of Corporations by Industry, which had been released since, and the GDP figure was likely to be revised downward due to this reestimation.

Attention should also be paid to the weakness in market sentiment as evident in the recent fall in stock prices. As for the economic outlook, it was hoped that the employment and income environment would improve, following the continued firmness in production and business fixed investment and the continuing improvement in corporate profits. Meanwhile, the high level of corporate bankruptcies and liabilities of failed firms, the continuing decline in land prices, firms' excessive capacity and debts, developments in the U.S. economy, and changes in crude oil prices required close monitoring.

(2) In view of the situation described above, 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.

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 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 1). 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 four reasons. First, market developments such as the decline in long-term interest rates below 1.7 percent and the fall in stock prices to 14,000-15,000 yen reflected a worsening of economic fundamentals, and the current monetary policy was insufficiently accommodative under these circumstances. Second, the Bank's monetary policy should be forward-looking in the current situation where the economy was reaching its peak. Third, almost every kind of price index was lower than a year earlier, indicating that unprecedentedly serious deflation persisted. And fourth, the goal of monetary policy was not clear to the public, as the Bank had no quantitative target for price stability, and the Bank was not communicating well with the market.

VI. 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 decided to publish"The Bank's View" on December 18, 2000 in the Monthly Report of Recent Economic and Financial Developments (consisting of"The Bank's View" and"The Background"). ⁷

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 four reasons: (1) the world economy was likely to enter a recession, contrary to the projection in the report that the expansion in overseas economies would continue, (2) the outlook for exports and production in the report was too optimistic, (3) the economy was expected to reach its peak soon although the report stated that it was likely to follow a gradual upward trend, and (4) as for the conditions surrounding price developments, the balance between supply and demand in the domestic market was unlikely to improve gradually given that quarter-on-quarter real GDP growth for July-September was expected to be revised downward.

7The original full text, written in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on December 18, 2000 together with the English version of "The Bank's View." The English version of "The Background" was published on December 19, 2000.

VII. Approval of the Minutes of the Monetary Policy Meeting

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of November 17, 2000 for release on December 20, 2000.

VIII. Approval of the Scheduled Dates of the Monetary Policy Meetings in January-June 2001

At the end of the meeting, members approved the dates of Monetary Policy Meetings to be held in the period January-June 2001, for immediate release(see Attachment 2).

Attachment 1

For immediate release

December 15, 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.

Attachment 2