Minutes of the Monetary Policy Meeting

on April 25, 2001
(English translation prepared by the Bank's staff based on the Japanese original)

June 20, 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 Wednesday, April 25, 2001, from 9:00 a.m. to 12:50 p.m¹

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
Mr. K. Ueda
Mr. T. Taya
Ms. M. Suda

Government Representatives Present
Mr. Y. Tamura, Deputy Vice Minister for Policy Planning and Coordination, Ministry of Finance
Mr. Y. Kobayashi, Director General for Economic and Fiscal Management, Cabinet Office

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, Associate Director, Policy Planning Office
Mr. I. Yamashita, Director, Financial Markets Department
Mr. H. Hayakawa, 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. H. Yamaoka, 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 June 14 and 15, 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.

I. Summary of Staff Reports on Economic and Financial Developments²

A. Money Market Operations in the Intermeeting Period

Market operations in the intermeeting period were conducted in accordance with the guideline determined at the previous meeting on April 12 and 13, 2001 so that the outstanding balance of current accounts at the Bank was around 5 trillion yen.³ As a result, the uncollateralized overnight call rate was at 0.01-0.02 percent. Market participants seemed to feel that they had more abundant liquidity than under the zero interest rate policy. Against this background, financial institutions' incentive to procure funds weakened rapidly. In the latter half of the previous week, the rate at which the Bank provided the market with liquidity had fallen to 0.01 percent, the minimum bid rate permitted in the Bank's market operations auctions.

2Reports were made based on information available at the time of the meeting.
3The guideline was as follows:
The Bank of Japan will conduct money market operations, aiming the outstanding balance of the current accounts at the Bank at around 5 trillion yen.
Should there be a risk of financial market instability, e.g., a rapid surge in liquidity demand, the Bank will provide ampler liquidity irrespective of the guideline above.

B. Recent Developments in Financial Markets

1. Developments in domestic financial markets

In the intermeeting period, interest rates on term instruments in the money market had declined further and had generally been below those under the zero interest rate policy. This suggested that the "commitment effect" of the monetary policy easing measure decided at the meeting on March 19 was stronger than that of the zero interest rate policy.

Stock prices had been relatively firm as a significant rebound in the U.S. Nasdaq composite index had prompted a recovery in information technology (IT)-related stocks and some mergers had encouraged bargain hunting in stocks in the low-to-medium price range.

Long-term interest rates had rebounded in many major industrial countries since late March. This seemed to be because investors who had been shifting funds to bonds from stocks were reversing the flow in response to (1) a correction to the overly pessimistic outlook for the global economy and (2) the recovery in stock prices. In this situation, yields on ten-year Japanese government bonds had increased due to (1) profit taking and (2) concerns, reflecting speculation about the future conduct of fiscal policy, about a deterioration in the supply-demand balance of government bonds.

Meanwhile, credit spreads between government bonds and both corporate debt and bank debentures had on the whole not changed substantially, but in some cases they had contracted reflecting a readiness among investors to take risks in the face of limited investment opportunities.

2. Developments in the foreign exchange market

The yen had recently appreciated and was in the range of 121-123 yen to the U.S. dollar due to comments by Japanese officials signaling that the relevant authorities were against a rapid weakening of the yen and to views in the market that Japanese institutional investors' attitude toward investment in foreign bonds since the beginning of fiscal 2001 had not become more positive to the extent that had been expected.

C. Overseas Economic and Financial Developments

Noticeable developments since the previous meeting were as follows. First, a similar development had been observed in stock and bond markets in various countries, that is, a simultaneous rebound of stock prices and long-term interest rates. Second, market developments in emerging economies such as Indonesia, Turkey, and Argentina had been unstable.

In the U.S. economy, despite its slowdown, production and sales of passenger cars had been relatively firm and inventory adjustments in traditional industries, in particular the passenger-car industry, were expected to end soon. However, the view was becoming prevalent that inventory adjustments in high-tech related sectors would not be completed until some time in or after the second half of 2001. Recently, the fall in U.S. imports had become pronounced reflecting the slowdown in domestic demand. This fall, while suggesting that the U.S. economic slowdown was affecting other economies, was acting as a buffer for U.S. production against the deceleration in domestic demand.

Against this background, the Federal Open Market Committee (FOMC) decided at an unscheduled meeting on April 18 to lower its target for the federal funds rate to 4.5 percent from 5.0 percent.

While U.S. stock prices remained sensitive to the performance of high-tech related firms, the Federal Reserve's rate cut and the higher-than-expected profits of some large high-tech related firms for the January-March quarter prompted a rebound, mainly in high-tech stocks. Long-term interest rates had increased reflecting a shift of funds from bonds to stocks.

Euro-area economies seemed to be slowing with production growth declining moderately, but private consumption remained firm due to an improvement in the employment situation and a series of tax cuts in major countries in the area. Meanwhile, prices rose slightly reflecting the rise in meat prices due to the outbreak of foot-and-mouth disease. The Harmonised Index of Consumer Prices for March marked a 2.6 percent increase year on year.

NIEs and ASEAN economies were decelerating with exports losing their upward momentum due to the slowdown in the U.S. economy and in growth of global semiconductor demand. In China, economic growth remained high reflecting an increase in fiscal spending and a high level of direct investment from abroad.

Instability of financial markets in some emerging economies had increased. In Indonesia, the central bank allowed interest rates to rise to support the rupiah as stock prices and the currency had fallen against a background of political instability and delay in economic reform. In Argentina, yield spreads between Argentine government bonds and U.S. Treasuries had expanded significantly reflecting speculation that the currency board system could not be maintained. The Brazilian real hit a new record low due partly to political instability and developments in Argentina, prompting the central bank to raise interest rates. In Turkey, the Turkish lira had continued to weaken and yield spreads between Turkish government bonds and U.S. Treasuries had expanded.

D. Economic and Financial Developments in Japan

1. Economic developments

Economic indicators released in the intermeeting period showed that there were no significant factors to change the judgment that adjustments in economic activities had been under way, as production was declining reflecting a fall in exports.

With regard to economic indicators released after the previous meeting, the contracted value of public works for March had increased significantly from the previous month due to the concentration of supplementary budget implementation toward the fiscal year-end and the value for the January-March quarter of 2001 had also increased from the previous quarter. Public investment, however, had continued to be lower than a year earlier as the size of the supplementary budget for central and local government combined had been reduced in recent years.

Real exports for March were virtually unchanged from the previous month and had basically continued to follow a decreasing trend.

Imports had been noticeably weak recently; although imports of consumer goods from China and some other countries had been firm, those of IT-related goods showed a clear decrease. Due to progress in the global division of labor in the production of IT-related goods, exports and imports of these goods were likely to show similar developments, a trend that was becoming evident in statistical data. Imports of materials had also been weak reflecting a fall in domestic production.

The Business and Investment Survey of Incorporated Enterprises showed that manufacturers planned to reduce business fixed investment slightly in fiscal 2001 and that nonmanufacturers, mainly retailers, planned to cut it markedly. These results were similar to the March Tankan and other surveys on business fixed investment.

Indicators on consumer confidence were deteriorating markedly recently although they had been relatively stable despite the fall in stock prices. Specifically, there were signs of growing concerns about the employment situation, and this would warrant attention as they were one of the key factors that would determine developments in consumption.

The year-on-year decrease in the Corporate Service Price Index for March had expanded slightly from February due to (1) a decline in leasing charges reflecting a fall in long-term interest rates, and (2) price competition among telecommunications firms to win subscribers to MYLINE, a new telephone service, enabling customers to be connected to a selected telephone company without having to dial its access code.

2. The financial environment

Only a few indicators such as corporate bankruptcies had been released in the intermeeting period.

The amount outstanding of loans by private banks had recently been lower than a year earlier by slightly less than 2 percent. There was not enough evidence to confirm the effects of the Bank's monetary easing in March on banks' lending attitude. The effects would be examined using various sources of information including the Bank's Senior Loan Officer Opinion Survey on Bank Lending Practices at Large Japanese Banks.

The number of corporate bankruptcies in recent months had remained almost unchanged from a year earlier.

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

A. The Current Economic Situation

Discussion centered on assessment of economic indicators released since the previous meeting on April 12 and 13. The majority of members agreed that there were no factors to change the judgment that adjustments in economic activities had been under way, as production was declining reflecting a fall in exports.

Many members shared the view that the global economic slowdown would continue to depress Japan's exports and production, and business fixed investment was likely to level off gradually.

One member commented that production in the April-June quarter was likely to fall for the second consecutive quarter on the following grounds. First, most orders based on the supplementary budget for fiscal 2000 had been placed by March and public investment was expected to be on pause in the April-June quarter. Second, the decline in production of construction-related goods had become clearer. And third, many firms, mainly those in the materials sector, were likely to carry out a full-scale adjustment of their inventories in or after April. This member continued that the environment for corporate profits would be severe due not only to (1) price factors such as strong downward pressure on prices reflecting adjustments to close to international levels and intense domestic price competition, but also to (2) volume factors such as a decrease in production.

A few other members commented that (1) the economy as a whole still had slight upward momentum and GDP growth in the most recent quarter might be fair, and (2), from an economic mechanism perspective, manufacturing industry had clearly decelerated and thus business fixed investment was expected to peak out.

B. Financial Developments

On the financial front, many members commented on the changes in financial markets since the monetary easing measures were adopted on March 19.

One member pointed out that interest rates on term instruments in the money market had declined after this monetary easing and many were below the level marked under the zero interest rate policy. The member commented that this indicated that the current policy, with its clear duration commitment, was stronger than the zero interest rate policy. Moreover, there was hardly any room for interest rates to decline, and thus it could be said that monetary conditions had been eased virtually to the limit.

A few members pointed out that one of the changes observed since the March easing was a readiness among investors to take credit risk, that is a shift of funds from time deposits to other investment vehicles such as stock investment trusts and corporate bonds. Based on this, these members said that, in a broad sense, the effects of monetary easing were in the process of permeating into the economy.

In addition, some members said that the recovery in stock prices in domestic and overseas markets since late March was a favorable sign on the financial front. Another member, however, commented that the recovery was unlikely to be a strong one led by IT-related stocks, given that the ratio of the Nikkei 225 Stock Average to TOPIX (Tokyo Stock Price Index) was falling.

Some members commented on developments in long-term interest rates.

A few members said that the rise in long-term interest rates since late March was not a matter of concern because (1) it had occurred in parallel with a rise in long-term rates overseas, a recovery in stock prices both at home and abroad, and a pause in the weakening of the yen, and thus had not been caused by sales of Japanese financial assets, and (2) despite the rise, the level of long-term rates remained very low. Some members including these members remarked that the rise in long-term interest rates was attributable mainly to a rebound after a fall in the rates until mid-March reflecting the market's excessively pessimistic view of the economic outlook and expectations of further monetary easing.

These members, however, pointed out that the market seemed to be sensitive to the conduct of fiscal policy and the future supply-demand balance of government bonds.

One member said that the shape of yield curve showed that the Bank's commitment in terms of the duration of the current accommodative policy was helping to keep rates in the short- to medium-term zone low, while rates in the long-term zone were rising noticeably. On this basis, the member said that (1) long-term bonds were influenced to a relatively large extent by the investment attitude of foreign investors, (2) foreign investors were taking a keen interest in Japan's fiscal deficit, and (3) Japanese government bond yields were already higher than those on yen-denominated Italian government bonds, which had a lower credit rating. The member commented that, given the above, it was important to provide a clear picture of how Japan's structural reform would advance and ensure that the fiscal deficit would be sustainable in order to stabilize long-term rates in the future.

C. Outlook and Risk Assessment of the Economy and Prices

Members discussed the outlook for Japan's economy in fiscal 2001 and early fiscal 2002 and risk factors to the standard scenario, given that "Outlook and Risk Assessment of the Economy and Prices" (hereafter, Outlook Report) was to be finalized for publication at this meeting.

Many members considered that the most likely scenario for the economy was as follows. In the first half of fiscal 2001, the global economic slowdown would probably continue to depress Japan's exports and production, and thus the economy was likely to remain sluggish as a whole. In the second half, downward pressure from the global economic slowdown was expected to abate if the U.S. economy bottomed out and started recovering gradually. However, it was likely that it would take time for the Japanese economy to exhibit a clear recovery given persisting pressure on the economy arising from various structural problems.

Based on this understanding, members shared the view that prices were likely to remain weak throughout fiscal 2001 affected by downward pressure from both the supply side and the demand side.

Members pointed out that developments in overseas economies, especially in the United States, and in IT-related areas could affect future developments in the economy and prices.

With regard to the outlook for the U.S. economy, which was the basis of the above standard scenario for the economy and prices, many members pointed out that it was expected to start recovering slowly in the second half of 2001 led by progress in economic adjustments, although many uncertainties still remained. On this basis, they expressed the view that (1) if the U.S. economy faced a larger-than-expected adjustment and did not start recovering in the second half of 2001, Japan's exports and production could come under downward pressure, and (2) if, on the other hand, U.S. economic adjustments made rapid progress and a resulting recovery in the economy became clear, Japan's economy could be given upward momentum.

One of these members pointed out that (1) the current economic adjustments in the United States had been caused partly by capital stock adjustment necessitated by the various surpluses that had developed in line with the excessively rapid growth of the economy in the past, and (2) if these adjustments grew stronger, they could depress firms' expectations of medium- to long-term economic growth, and like a self-fulfilling prophecy, lead to larger adjustments. The member added, however, that if firms' expectations of the economic growth rate remained at around 3 percent with support from monetary policy, the U.S. economy might start recovering at a faster pace than expected.

Another member took a more cautious view than other members on the U.S. economy. The member said that it was unlikely to recover in the second half of 2001 on the following grounds: (1) adjustments in IT-related sectors, such as a cut in business fixed investment, were spreading to other sectors; (2) a negative wealth effect due to a fall in stock prices was likely to appear and the personal savings rate was expected to rise; and (3) the electric power crisis was spreading throughout the western part of the United States, and this was likely to push up the prices of kerosene and gas oil in the United States.

Some members commented on the close connection between the U.S. economy and the world economy, including that of Japan.

One member pointed out that although Japan still had its own business cycle, it was becoming increasingly vulnerable to developments in the global economy, for example in inventory adjustments, since Japan's involvement in the global division of labor was increasing as a result of technological innovation and globalization of the economy. On this basis, the member pointed out that attention should be paid to whether import penetration of consumer goods in the domestic market would increase even when economic adjustments were under way.

Another member pointed out that Asia might be shielding U.S. production from the effects of the U.S. demand shock, in effect acting as a buffer, since Asia's production and its exports to the United States had fallen in response to the slowdown in U.S. domestic demand. This member added that this indicated that a decline in U.S. demand tended to affect Asian economies.

A different member remarked that, given that growth in Japan's IT-related sectors had been fueled by a surge in global IT-related demand, it was possible that a prolonged adjustment in U.S. IT-related sectors might have a direct negative effect on Japanese firms' attitude to IT-related investment.

Another member pointed out that the continued expansion of IT-related exports and imports was at a turning point, and that domestic production and exports of producer goods and imports of capital goods were likely to decrease.

After the above discussions, many members agreed in general with the following. First, the standard scenario for overseas economies was that they would start recovering moderately in the second half of 2001. Second, however, it was necessary to continue monitoring developments closely, bearing in mind both upside and downside risks to the standard scenario.

Many members pointed out that the effects of structural adjustments in the economy were another factor that could affect future developments in the economy and prices.

These members expressed the view that (1) structural adjustments could, in the short term, exert deflationary pressure on the economy through employment adjustment pressure and restructuring of industries, (2) in the medium- to long-term, however, they would improve the productivity of the economy as a whole, and (3) a favorable reception of structural reform efforts by capital markets, firms, and households could trigger a virtuous circle between the markets' positive response and economic activity, thereby easing deflationary pressure even in the short term. These members expressed the opinion that, in order to achieve a full-scale economic recovery, it was important that efforts for structural reform were made in a way that enabled the markets and economic entities to envision how such reform would progress.

One member said that the combined efforts of the corporate sector, the Government, and the financial sector to advance structural reform might dispel the gloom hanging over Japan's economy. A few other members including this member pointed out that hopes were growing among the public that the new administration would address this issue effectively.

Some members said that it was important to assess structural reform by reference to a list of concrete measures. These members noted the importance of disposing of nonperforming assets and restoring the health of the financial system. One of these members pointed out the importance of improving the productivity of various industries and reducing the risk premium on financial instruments stemming from the conduct of fiscal policy.

Members generally agreed that Japan's economic outlook would be largely determined by developments in overseas economies and the effects of structural adjustments. In addition, some members pointed out other factors that also required attention.

A few members explained the uncertainties felt by the public with respect to the future. These members mentioned that these uncertainties, for example about the pension system, were one of the factors that dampened consumption. On this basis, these members commented that it was important to undertake structural reform to remove such anxieties, as the decrease in corporate profits was expected to negatively affect the employment situation and household's income.

A different member, referring to developments in asset prices, such as stock prices, emphasized that the market's reaction to developments in overseas economies and to the new administration's policies would require close monitoring.

A member who took a more cautious view on the U.S. economy than other members expressed a severe view on Japan's private consumption on the following grounds: (1) the Consumer Sentiment Indexes had deteriorated significantly due to a worsening of the employment situation and many households' decisions to postpone buying of consumer durables; (2) single-member households, which had been fueling private consumption, were becoming more cautious about spending; and (3) the Consumer Behavior Survey suggested that spending on services was likely to decrease. Further, the member pointed out the following negative factors: (1) the Indexes of Business Conditions were declining, (2) the Indices of Tertiary Industry Activity revealed that the level of activity in the mobile communications sector was declining or, viewing the situation in a longer timeframe, coming to a lull, (3) prices were declining clearly, and (4) it was likely that the yen had started rising in the medium term.

The forecasts of Policy Board members (in terms of year-on-year changes), which would be included for reference in the Outlook Report, were as follows.

Forecasts of the majority of Policy Board members for fiscal 2001:⁴

0.3 to 0.8 percent for real GDP; -0.9 to -0.6 percent for the domestic WPI; and -0.8 to -0.4 percent for the CPI (excluding perishables).

Forecasts of all Policy Board members for fiscal 2001:⁵

-0.1 to 1.0 percent for real GDP; -1.5 to -0.5 percent for the domestic WPI; and -1.0 to -0.3 percent for the CPI (excluding perishables).

4Forecasts of the majority of Policy Board members are shown as a range with the highest and lowest figures excluded. When two or more members forecast the same highest/lowest figure, the figure will be included in the range.
5Forecasts of all Policy Board members are shown as a range, i.e., the highest and lowest figures among members' forecasts.

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

Based on the above assessments of the economic and financial situation, members discussed the monetary policy stance for the immediate future.

Members' view of the economic and financial situation was as follows. First, there were no factors to change the judgment at the previous meeting that adjustments in economic activities had been under way, as production was declining reflecting a fall in exports. And second, the adjustments were expected to continue for some time, mainly in production.

Many members expressed the view that, although the outlook for the economy and prices was quite severe at the moment as described above, the Bank had adopted drastic measures at the Monetary Policy Meeting on March 19, 2001 precisely because it had to a large extent foreseen such severe developments. Members shared the view that it was appropriate to maintain the current monetary easing policy.

Many members said they hoped that a wide range of entities would make strong efforts for structural reform.

One member said that the outlook for the economy and prices for fiscal 2001 was quite severe despite the current extremely accommodative monetary policy for the following reasons: (1) the effects of monetary easing appeared with a time-lag, (2) there were some uncertainties as to the effect of the current monetary easing measures since they were unprecedented in the experience of any country, and (3) monetary policy alone would not rejuvenate the economy since there were various structural problems that needed to be resolved. This member remarked that, when the economy started gathering positive momentum with progress in structural reform and the intermediary functions of financial institutions recovered to some extent, the current accommodative policy would provide strong support for these developments.

A different member commented that the current monetary easing was so powerful that there had been some reports by the mass media that, judging from historical experience at home and abroad, there might be a risk of inflation in the medium to long term. The member expressed hope that structural reform led by the private sector would make further progress.

IV. Remarks by Government Representatives

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

(1) The economy was weakening: the employment situation remained severe; private consumption remained generally unchanged; and production was declining reflecting a decrease in exports. Factors such as the deceleration in the U.S. economy gave cause for concern about Japan's economic outlook. Regarding prices, the CPI and the GDP deflator continued to decrease year on year, and concern remained as to the impact of the fall in prices on the economy through a rise in real interest rates and real debt burden.

(2) Under these circumstances, the Government would make efforts to smoothly and steadily implement the fiscal 2001 budget, and steadily implement the emergency economic package.

(3) The Government would like to ask the Bank to conduct monetary policy appropriately--for example, flexibly provide the market with ample funds under the new procedures for money market operations giving due consideration to developments in the economy and markets--and take into consideration the Government's measures to contribute to economic growth through the achievement of price stability.

The representative from the Cabinet Office made the following remarks.

(1) The Government's assessment of the economy and its conduct of economic and fiscal policy were just as described by the Ministry of Finance representative.

(2) The Government would like to ask the Bank to conduct monetary policy in an appropriate, timely, and preemptive manner, to achieve price stability.

V. Votes

Based on the above discussion, the members shared the view that the current guideline for money market operations should be maintained. To reflect this view, the chairman made the following proposal.

Chairman's Policy Proposal:

The guideline for money market operations in the intermeeting period ahead would be as follows, and would be made public by the attached statement (see Attachment).

The Bank of Japan will conduct money market operations, aiming the outstanding balance of the current accounts at the Bank at around 5 trillion yen.

Should there be a risk of financial market instability, e.g., a rapid surge in liquidity demand, the Bank will provide ampler liquidity irrespective of the guideline above.

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

Votes against the proposal: None.

VI. Decision on Outlook and Risk Assessment of the Economy and Prices

The Policy Board discussed the draft of Outlook and Risk Assessment of the Economy and Prices and put it to the vote. By majority vote, the Board decided to publish it on April 26, 2001.

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

Vote against the proposal: Mr. N. Nakahara

Mr. Nakahara dissented for the following reasons. First, regarding the economic outlook it would be more appropriate to state that "full-scale economic adjustments are foreseen." Second, it was unlikely that overseas economies such as that of the United States would recover in the second half of 2001.

VII. Approval of the Minutes of the Monetary Policy Meeting

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of March 19, 2001 for release on May 1, 2001.

Attachment

For immediate release

April 25, 2001
Bank of Japan

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