Minutes of the Monetary Policy Meeting

on June 14 and 15, 2001
(English translation prepared by the Bank's staff based on the Japanese original)

July 18, 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 Thursday, June 14, 2001, from 2:03 p.m. to 3:42 p.m., and on Friday, June 15, from 9:01 a.m. to 12:11 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
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. H. Takenaka, Minister of State for Economic and Fiscal Policy, Cabinet Office²
Mr. T. Komoda, Deputy Director General for Economic and Fiscal Management, Cabinet Office³

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. S. Nagai, 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 July 12 and 13, 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. Takenaka was present on June 15 from 10:25 a.m. to 12:11 p.m.
Mr. Komoda was present on June 14 for the whole of the session, and on June 15 from 9:01 a.m. to 10:25 a.m.

I. Summary of Staff Reports on Economic and Financial Developments⁴

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 May 17 and 18, 2001 so that the outstanding balance of current accounts at the Bank was around 5 trillion yen.⁵ As a result, the uncollateralized overnight call rate was at 0.01 percent, except for May 31 when it rose to 0.03 percent.

There had been no cases where the total amount of bids fell short of the amount offered by the Bank, under-subscription in market operations, since May 22. This was partly attributable to the measures for facilitating money market operations decided in May, for example, accepting bid rates in smaller units in competitive yield auctions.

4Reports were made based on information available at the time of the meeting.
5The 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

Short-term interest rates including rates on term instruments were steady at an extremely low level close to zero percent. Long-term interest rates were generally around 1.2-1.3 percent in the intermeeting period, but they fell to 1.1-1.2 percent recently.

Stock prices were generally weak, although they continued to be underpinned by expectations of structural reform. This situation was caused partly by concerns that emerged recently about downside risk to corporate profits and delay in disposal of banks' nonperforming loans.

In the foreign exchange market, the yen appreciated to 118-119 yen against the U.S. dollar at the beginning of June reflecting transactions to cover short yen positions by foreign investors. However, it weakened afterwards, moving recently at 120-123 yen, about the same level as at the time of the previous meeting.

C. Overseas Economic and Financial Developments

In the United States, developments in the household sector remained relatively firm. In the corporate sector on the other hand, adjustments were intensifying, mainly in information technology (IT)-related industries. The developments in the corporate sector exerted downward pressure on the economies of Europe and Asia including Japan, causing a simultaneous deceleration in the world economy.

Adjustments in the corporate sector, mainly in IT-related industries, were likely to be protracted, and the risk that they would eventually affect the U.S. household sector could not be ruled out. Therefore, it should be expected that the momentum for economic recovery would be weak, even after the pressure of the current inventory adjustments peaked out.

In the U.S. financial markets, long-term interest rates rose and stock prices recovered, both of which suggested that markets had factored in expectations of economic recovery over the next year. However, against the background of slightly weakened stock prices recently, mainly in IT-related industries, more market participants considered that the Federal Open Market Committee would further reduce its target for the federal funds rate at its next meeting on June 26 and 27, judging from comments from Federal Reserve officials.

In the euro area, private consumption remained firm due partly to the effects of tax cuts in major countries. However, the impact of the slowdown of the U.S. economy was becoming distinct: mainly in Germany and France, business fixed investment in manufacturing seemed to be decreasing against the background of slower growth in production and manufacturing orders. The inflation rate remained at high levels due to foot and mouth disease and a rise in energy prices.

East Asian economies decelerated substantially. Exports, mainly in IT-related goods, to the United States and Japan continued to decline. Reflecting this, production was on a decreasing trend and manufacturers' confidence continued to deteriorate. In Korea and Taiwan particularly, growth in business fixed investment contracted due to a decline in capacity utilization and a deterioration in corporate profits. In Taiwan, private consumption was sluggish, reflecting consumer sentiment dampened by a rise in the unemployment rate. In Korea, an increase in exports of automobiles and machinery stemming from a depreciation of the won acted as a buffer to the deceleration of the economy.

In China, although the growth in exports had slowed, the economy remained buoyant reflecting strong domestic demand supported by an increase in fiscal spending and high levels of direct investment from abroad.

D. Economic and Financial Developments in Japan

1. Economic developments

Exports and production continued to decline substantially reflecting not only a slowdown in overseas economies such as those of the United States and East Asia but also sluggish demand for IT-related goods. Excess inventories of electronic parts and some materials were building up further. Reflecting these developments, corporate profits, mainly those of manufacturers, were likely to start decreasing and business fixed investment also would be starting to decrease.

Despite the substantial decline in production, its effect on the household sector was still limited: household income had not yet deteriorated and there were positive signs in some indicators of private consumption, although its recovery continued to be weak as a whole. However, the decline in production was starting to affect the household sector mainly through the decrease in hours worked.

Adjustments in economic activities were gradually intensifying, as production was declining substantially reflecting the fall in exports.

As for Japan's economic outlook, the adjustments were likely to continue for some time, mainly in production. As exports were likely to continue decreasing for a while, it was expected that inventory adjustments, mainly in electronic parts, would cause production to follow a declining trend at least until summer 2001. In this situation, household income was expected to weaken gradually.

While adjustments were concentrated mainly in exports and production of IT-related goods at present and prospects for an endogenous recovery were dim, economic developments from the second half of 2001 onward would be influenced to a great extent by overseas economies, particularly that of the United States. In addition, developments in stock prices, their effects on corporate and household sentiment, and the effects of a possible acceleration in the disposal of nonperforming loans would warrant monitoring.

Prices were weak on the whole due to an easing of the supply-demand balance, technological innovation, and the streamlining of distribution channels. Prices were likely to remain weak for some time.

2. The financial environment

The monetary easing had continued to permeate steadily into the financial markets, particularly in relation to interest rates and credit risk premium in the period since the previous meeting.

Both short- and long-term interest rates continued to move at levels below those under the zero interest rate policy. Interest rates for firms' fund raising, such as banks' lending rates and issuance rates of corporate bonds and CP, were also declining substantially.

Credit risk premium was on a declining trend owing to an increased willingness among market participants to take risk. As a result, in the primary market for CP, the share of CP issued by firms with lower credit ratings such as A2 or A3 was on an increasing trend.

With regard to corporate financing, no significant change in banks' lending stance was observed. A closer look, however, suggested that banks were more eager to increase lending to firms, mainly large ones, displaying good performance but were becoming cautious about lending to firms with lower creditworthiness. In other words, there might be a growing polarization of banks' lending stance.

The growth rates of the monetary aggregates, such as money stock (M2+CDs) and the monetary base, were gradually increasing recently.

In this financial environment, the lending attitude of financial institutions and corporate financing conditions remained easy on the whole. For the time being, attention should be paid to the effects of the monetary easing measures taken by the Bank, while careful monitoring was required of the effects of stock price developments and corporate profit conditions on the behavior of financial institutions and the fund-raising conditions of firms.

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

A. The Current Economic Situation

With regard to the current economic situation, members said that exports and production continued to decline substantially, reflecting a slowdown in overseas economies mainly in IT-related industries. Many members expressed a severe view on the economy that the adjustments in exports were gradually leading to a decline in production, corporate profits, and business fixed investment. One of these members brought up the fall in the Indexes of Business Conditions released recently and said that a recession was in progress. A different member said that the economy was deteriorating. All members agreed on the assessment of the economy that adjustments in economic activities were gradually intensifying, which was a more cautious assessment than the previous month.

A few members, however, said that although the situation was severe, such economic developments had been anticipated to a large extent when the Bank adopted monetary easing measures in March, and to date downside risk to the economy was increasing somewhat within the scope of the standard scenario in the "Outlook and Risk Assessment of the Economy and Prices" of April 2001.

One member said, on the other hand, that the present state of the economy already went beyond the scenario in the "Outlook and Risk Assessment."

Many members pointed out that the substantial decline in exports and production was reflecting the global adjustments in IT-related industries, including those in the United States.

These members said that both positive and negative signs were observed in the U.S. economy: there were some signs that the economy was firm as seen in progress in inventory adjustments in traditional industries, the so-called "old economy," including the automobile industry, and the firmness in household spending, while there were signs that adjustments in the "new economy," i.e., IT-related industries, were lagging behind, especially in network investment. One member commented that the significant decline in production in Japan was a reflection of strong global linkage in IT-related industries.

Another member pointed out that a major change in demand in the current situation was a fall in construction-related demand, reflecting a decline in investment related to construction by both the public and private sectors.

Many members expressed the view that adjustments in the corporate sector were becoming clearer: given the decline in production, the environment for corporate profits had become more severe and business fixed investment had started to decline.

On the other hand, a few members remarked that households' employment and income situation and private consumption remained relatively firm and effects of the decline in production on households to date remained marginal. One member expressed the view that households were tending to spend in line with their income, against the background of structural changes in consumer spending and saturation of consumption. This member continued that private consumption as a whole was at normal levels--that is, it was neither strong nor weak, while the contrast between popular goods/firms and unpopular goods/firms was deepening further.

Regarding the environment for private consumption, this member expressed the view that while the level of anxiety among the general public about the employment situation and the outlook for the pension and medical system remained high, downward pressure on consumption arising from household balance-sheet adjustments was gradually easing, judging from the developments in outstanding loans.

A different member, however, pointed out that the ratio of housing loan repayments to households' disposable income was higher than in the past, and the difference in consumption between households with and without loans might be widening. This member continued that the negative GDP growth for the January-March quarter of 2001 from the previous quarter was mainly caused by a decline in both external demand and domestic private demand, and that it warranted serious consideration that private consumption remained at the same level as in the previous quarter, despite a surge in demand for electrical appliances before a new law requiring consumers to pay the cost of recycling old appliances came into force.

A few members pointed out the features of the economic recovery phase in the previous year as follows: (1) an increase in IT-related exports and production had not led directly to an increase in economic activities in other sectors, including nonmanufacturers; and (2) a significant rise in corporate profits had not greatly improved the employment and income situation of households. The members continued that this year the effects of the significant decline in IT-related exports and production on other industries were marginal, unlike the situation a year earlier when economic developments in IT-related industries were strong and the effects of this on other industries were marginal.

B. The Economic Outlook

With regard to the economic outlook, many members expressed the view that production was likely to follow a declining trend for a while, as a buildup of inventories of producer goods was becoming distinct against the background of the continued slowdown in exports.

These members added that, given the downtrend in prices, in addition to these developments in exports and production, the environment for corporate profits would inevitably be severe for a while and business fixed investment was likely to follow a declining trend.

One of these members said that inventory adjustments would inevitably be protracted as excess capacity had become evident, and the recent increase in funds demand for inventory financing was hampering firms' efforts to squeeze debt.

A different member presented the results of a simulation that manufacturers' current profits for the first half of fiscal 2001 would decrease by around 10 percent from a year earlier, and that in order to increase the return on assets (ROA) of Japanese firms to around 4 percent from the current level of around 3 percent shown in the Financial Statements Statistics of Corporations by Industry, Quarterly, a drastic corporate restructuring would be necessary, for example, squeezing firms' balance sheets by more than 20 percent or cutting personnel expenses considerably.

With regard to the above results, a different member commented that, as the year-on-year increase in profits had been fairly high last year, profit levels and profitability would remain relatively high, even if the estimate of a 10 percent fall in the profits materialized.

Next, members discussed the extent to which adjustments in the corporate sector, mainly in IT-related industries, would affect the household sector as one of the points that required attention in assessing the economic outlook.

Many members expressed the opinion that it was inevitable that adjustments in the corporate sector would affect the employment and income situation of households. A few of these members remarked that the following required closer monitoring: whether the effects of adjustments in the corporate sector on the household sector would go only to a certain point, or a decline in consumption would cause a further decrease in corporate profits, thereby leading to a cycle of negative interaction between the corporate and household sectors. One member held a more cautious view than other members about the outlook for private consumption given the deterioration in the employment and income situation and the increase in the housing-loan burden on households.

A different member said that consumer sentiment had tended to deteriorate due to increasing uncertainty about the employment situation, and in view of this, it was important to ensure a safety net to alleviate the anxiety of the household sector over the future and this could encourage households to spend more of their financial assets.

As risk factors to the economic outlook, members discussed (1) developments in overseas economies, especially in the United States, and in IT-related industries, and (2) progress in structural reforms and its effects.

One member outlined the conditions for and risks to any future economic recovery based on a comparison of the current economic situation to that during the recession phase of 1997-98.

This member explained that, in 1997-98, the overall economy deteriorated due to the interaction of economic and financial developments amid growing anxiety about the financial system triggered by failures of large-scale financial institutions. In such a situation, the member said that it was important to alleviate anxiety about the financial system and liquidity. The member continued that, in fact, the following measures had functioned effectively: (1) reducing interest rates and facilitating corporate financing by means of monetary policy measures; and (2) adopting measures including the injection of public funds into financial institutions to strengthen the financial system.

Regarding the current economic situation, this member continued that (1) adjustments in Japan were being triggered by U.S. economic adjustments and were occurring in line with them, and (2) such adjustments centered on IT-related industries. The member noted that, therefore, the key factors for the completion of such economic adjustments were a recovery in IT-related demand and developments in the U.S. economy, rather than monetary policy measures.

Many members commented on the U.S. economic outlook.

A few members said that there was still much uncertainty, citing two points. First, it could not be ruled out that the adjustments in the new economy industries would spread to the old economy industries and the household sector. And second, on the other hand, the effects of interest rate reductions so far would underpin the overall economy through a recovery in the old economy industries. One member said the following points required attention in assessing the U.S. economic outlook: (1) the extent of the various kinds of surpluses that had developed in the past in the new economy industries; (2) whether the effects of employment adjustment, which had advanced at a fairly fast pace, would be stronger in terms of a deterioration in the situation in the household sector or in terms of an early recovery of corporate profits; and (3) the degree of change in the rising trend in productivity.

On this basis, some members expressed the view that the risk was increasing that a recovery in the U.S. economy, especially in the new economy industries, would take place later than had been expected.

One of these members added that, if U.S. economic recovery was led mainly by the old economy industries while adjustments in IT-related industries were prolonged, the environment for Japan's exports might remain severe.

Another member expressed a cautious outlook that a recovery in the U.S. economy would take place in the first quarter of 2002 at the earliest, as the balance sheet of the private sector was impaired, as seen in an increase in households' credit-card debt, a decrease in net worth, and a rise in the ratio of private-sector debt to GDP.

Many members mentioned that it was important to examine the progress in structural reforms and its effects in Japan.

Some members pointed out the importance of structural reform and remarked that it was necessary to consider how structural reforms might actually progress in the future when assessing their effects on the economy as a whole. One member said that the following required attention: (1) the pace of improvement in Japan's fiscal balance; and (2) the scale and pace of disposal of nonperforming loans.

One member explained the background of relatively firm household spending in Japan as follows: (1) anxiety about the financial system had subsided, unlike the situation in 1997-98; and (2) the expectation of progress in structural reforms might be underpinning the household sentiment.

A different member, on the other hand, remarked that there was widespread concern that structural reforms would increase deflationary pressure in the short term, and said that this could be having a negative effect on corporate sentiment.

Based on the above discussions, some members expressed the view that presenting a concrete scenario of how the Government would deal with the fiscal deficit, reform in the pension and medical systems, and the disposal of nonperforming loans could have a positive impact on economic entities and market sentiment.

One of these members commented on how structural reforms should be carried out as follows. First, structural reforms should be led by the private sector's own efforts, making full use of the market mechanism. Second, the role of the Government should be focused on providing a better environment for the private sector through tax measures, deregulation, and measures to increase mobility in the labor market and to provide a safety net. Third, fiscal measures should be implemented in such a way that the maximum multiplier effect permeating through the economy could be expected. Fourth, the disposal of nonperforming loans should, in principle, be carried out in accordance with the procedure laid down in law and debt forgiveness should be applied only in exceptional circumstances. Also, corporate managers and stockholders should share the loss, and the future viability of reorganized firms should be carefully and strictly assessed when preparing reorganization plans. And fifth, it was necessary that banks strictly review debtor categories and prepare for additional nonperforming loans through ample loan-loss provisions.

One member said that prices were weak recently due to two kinds of factor that were interacting to cause them to fall as a whole. One was supply-side factors such as technological innovation, adjustments of domestic prices to an internationally competitive level, and an inflow of low-priced imports owing to low wages and land prices overseas. The other was factors leading to "malignant price declines," such as deterioration in the supply-demand balance and price slashing by non-viable firms which paid little regard to profit margins.

Based on the above, some members including this member said that, given the intensifying economic adjustments, downward pressure on prices stemming from weak demand required closer monitoring.

One member estimated that crude oil prices for the third quarter of 2001 would remain at around the current level.

C. Financial Developments

Many members were of the opinion that the effects of the monetary easing measures decided in March were steadily permeating into the financial markets.

Many members pointed out the following. First, both short- and long-term interest rates were at lower levels than they had been under the zero interest rate policy, helped by the "commitment effect" of the monetary easing measures decided in March. Second, concerns about liquidity had almost been dispelled. Third, the credit risk premium was decreasing reflecting an increased willingness among market participants to take risk. And fourth, given this situation, the conditions for firms raising funds in the capital markets through such instruments as corporate bonds and CP were improving. On this basis, a few members remarked that the financial environment as a whole remained easier than under the zero interest rate policy.

One member pointed out that the current weakness in stock prices was largely attributable to further adjustments in the corporate sector and an expected deterioration in corporate profits. A different member commented that it would have positive effects on the capital markets to draw up and implement a concrete plan for structural reforms that would be credible to market participants.

One member asked a question to the staff regarding some media reports that the recent considerable increase in government deposits made it difficult for the Bank to further increase the outstanding balance of current accounts at the Bank. In response to this, the staff answered that, although it was true that the accumulation of government deposits at the Bank could impose a burden on the Bank's market operations, the accumulation of government deposits was not directly connected with the feasibility of increasing the outstanding balance of current accounts at the Bank.

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

Members discussed the monetary policy stance for the immediate future.

Many members agreed that (1) adjustments in economic activities, mainly in exports and production, were gradually intensifying, (2) the Bank had adopted monetary easing measures in March in anticipation of the possible emergence of severe situations like this, and (3) the effects of the monetary easing had continued to permeate steadily into financial markets.

On this basis, all members concurred that the Bank should maintain the current guideline for market operations and carefully monitor developments in overseas economies, progress in structural reforms and its effects, and the extent to which the monetary easing would permeate into the economy.

Many members commented on the effects of the current monetary policy measures.

Some members said that the current accommodative monetary policy with its ample provision of liquidity, strong duration commitment, and the safety net effect of the "Lombard-type" lending facility, could (1) fully support the economy when it started gathering positive momentum and (2) cope with short-term deflationary pressure that might arise in the course of implementing structural reforms. One of these members emphasized the effects of the current policy, particularly its quantitative effects.

One member said that the current accommodative policy had an extremely high potential and was flexibly adaptable to possible changes in the economy. This member continued that the effects of the monetary easing were not being completely utilized, in other words, the economy was not receiving the full benefit of the current monetary easing, and in order to increase the effectiveness of monetary easing, it was necessary to concurrently implement concrete measures to ensure highly efficient reallocation and revitalization of capital and labor. Another member stressed the "built-in stabilizer" role of the "commitment effect," utilizing the consumer price index as a guideline. This member pointed out that a further deterioration of the economy would flatten the yield curve due to market participants' expectation that the monetary easing would continue for a long time. The member continued that this effect of the current policy had not been fully recognized. Many members expressed agreement with this view.

A few members commented on the relation between structural reforms and monetary policy. These members were of the opinion that progress in structural reforms, including restoration of the financial system, was essential for the current policy measures to have the maximum effect on the economy, and a combination of the effects of structural reforms and monetary easing was necessary to pave the way for a full-fledged recovery. One of these members commented that the Bank had anticipated deflationary pressure stemming from structural reforms when it adopted the current accommodative policy, and it was important to achieve a full-fledged recovery of the economy by a combination of the monetary policy measures, efforts by the private sector, and fiscal policy.

Next, members exchanged views on further monetary easing.

A few members raised the issue of the effectiveness of further monetary easing. Specifically, these members pointed out the following: (1) various interest rates were already close to their lowest levels; and (2) as economic entities' risk-taking capacity had declined, a further increase in excess reserves would not increase credit creating activity of financial institutions nor stimulate diversification of investment tools. One of these members remarked that depending on the contents of further monetary easing, one could not rule out the possibility that such easing would increase the risk premium related to price fluctuation and the Government's fiscal position in the financial and capital markets. Another member said that it was difficult to completely eliminate the pain of structural reforms by additional monetary easing. A question was raised regarding the feasibility of further increasing the target for the outstanding balance of the Bank's current accounts when demand for liquidity had been fully met.

Many members including these members remarked that the outlook for the economy was highly uncertain, and thus these members would like to further examine the scope for additional monetary policy measures in case of further deterioration of the economy.

One member expressed the opinion that although the "commitment effect" of the current accommodative policy was certainly strong, it would become a passive policy if the Bank simply continued it and waited to see the economic developments. The member continued that the Bank should examine how further quantitative easing measures could be carried out, for example by increasing the outstanding balance of current accounts or base money. The member added that, if the economy deteriorated, the Bank should consider the possible policy responses including setting a target for inflation with a specified time frame. Another member said that possible effects of increasing the outstanding balance of current accounts and outright purchases of long-term government bonds should be examined further. A different member raised the issue of whether it was possible to take further accommodative measures and positively affect the markets' expectations without any side effects.

A few members summed up the above discussions as follows. First, the Bank should employ the most appropriate monetary policy measures in light of the economic conditions prevailing at the time. Second, given that the Bank was already taking strong monetary easing measures, the Bank should carefully examine the effects and feasibility of possible additional easing measures. And third, as a prerequisite for effective monetary policy, it was important to conduct a thorough assessment of the economic outlook, taking into account the effects of developments in overseas economies and of structural reforms in Japan.

Regarding some views that a depreciation of the yen should be induced to stimulate the economy, one member commented that (1) it was desirable that foreign exchange rates be stable based on the fundamentals of the economy, (2) on this basis, firms should make efforts to increase their international competitiveness by, for example, undergoing corporate restructuring, and (3) it was inappropriate to induce a depreciation of the yen or to intervene in the foreign exchange market in order to abate deflationary concerns or to bring about quantitative easing.

Another member said that it was desirable that foreign exchange rates be determined basically by the market mechanism.

IV. Remarks by Government Representatives

The representative from the Cabinet Office made the following remarks.

(1) The Council on Economic and Fiscal Policy would formulate a solid policy framework for structural reforms in the near future. The Government was confident that this would be a bold reform program. Structural reforms would be accompanied by a high degree of uncertainty and their outcome and effects could only to some extent be predicted. Nevertheless, these reforms needed to be implemented however uncertain their outcome and effects might be.

(2) Looking back over the past, the Government acknowledged that the monetary authority had been in some respects under strain due to the delay in structural reforms. However, this was now changing. The Bank of Japan had played an important role in bringing up the issue of structural reforms up to this point. The Government acknowledged that the Bank had adopted the new monetary policy measures in March, recognizing the necessity of taking further action even under the uncertainty over the effects of the measures, which was in line with the Government's thinking.

(3) When advancing structural reforms, it would be important to minimize the deflationary pressure to the greatest possible extent within the severe fiscal constraints. The Government would make efforts to establish a concrete program of structural reforms. Therefore, the Government would like to ask the Bank to conduct monetary policy in harmony with other policy actions from the standpoint of utilizing all possible policy measures. While it had been discussed earlier in the meeting that further monetary policy actions should be taken based on an examination of the effects of structural reforms, there was an idea that a "policy window" should be opened, where a wide range of thoughts and actions could be put forward and gathered in one place, to create a break in the thick, low-hanging clouds. Monetary policy would play an extremely important role in managing such dynamic economic policy measures.

(4) Based on the above, the Government would like to ask the Bank to conduct monetary policy in a flexible manner, taking into account the deflationary pressure during the adjustment period.

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

(1) In Japan's economy, the employment situation remained severe, while private consumption had remained broadly flat with some weakness in recent months, and exports and production continued to decline. Therefore, the economy was deteriorating. There were factors, such as signs of weakness in business fixed investment, that gave cause for concern about Japan's economic outlook, and there were still concerns about the impact on the economy of the fall in prices, which was causing a rise in real interest rates, of an increase in real debt burden, and of a deceleration in the growth of corporate profits.

(2) The Government would resolutely implement structural reforms based on the thinking that "without structural reforms there can be no economic recovery." Regarding fiscal structural reforms, the Government would review fiscal expenditures thoroughly, i.e., cut down expenditures in inefficient sectors and focus its resources on growing sectors, with the aim of limiting the issuance of government bonds to less than 30 trillion yen in the fiscal 2002 budget as the first step to achieving fiscal soundness. Thereafter, the Government would make efforts to fully rebuild the fiscal system through such steps as setting the goal of restricting new borrowing exclusively to the payment of principal and interest on existing debts.

(3) The Government considered that monetary policy's role of underpinning the economy, was extremely important in advancing the above structural reforms. The Government would like to ask the Bank to conduct monetary policy appropriately to deal with the current severe economic situation--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.

Some members of the Policy Board commented on the remark by the Government representative that the Bank should conduct monetary policy in harmony with other policy actions.

One member said that it should be noted that the scope for further monetary policy measures was limited. Another member commented that the economy could not be stimulated by monetary policy alone, and thus it was important to implement structural reforms.

A different member expressed the view concerning policy harmonization that the Bank should keep in mind the principles laid down in Article 4 of the Bank of Japan Law. The representative of the Cabinet Office agreed with this view.

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. 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 June 18, 2001 in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background").⁶

6The original full text, written in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on June 18, 2001 together with the English version of "The Bank's View." The English version of "The Background" was published on June 19, 2001.

VII. Approval of the Minutes of the Monetary Policy Meetings

The Policy Board approved unanimously the minutes of the Monetary Policy Meetings of April 25, 2001, and May 17 and 18, 2001 for release on June 20, 2001.

Attachment

For immediate release

June 15, 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 intermeeting period: