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Minutes of the Monetary Policy Meeting

on February 28, 2002
(English translation prepared by the Bank's staff based on the Japanese original)

April 16, 2002
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, February 28, 2002, from 9:00 a.m. to 1:54 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. T. Miki
Mr. N. Nakahara
Mr. K. Ueda
Mr. T. Taya
Ms. M. Suda
Mr. S. Nakahara

Government Representatives Present
Mr. T. Taniguchi, Senior Vice Minister of Finance, Ministry of Finance
Mr. Y. Kobayashi, Vice Minister for Economic and Fiscal Policy, 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. T. Wada, Associate Director, Policy Planning Office
Mr. M. Amamiya, Associate Director, Policy Planning Office
Mr. K. Yamamoto, 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. Y. Hashimoto, Director, Secretariat of the Policy Board
Mr. Y. Nakayama, Advisor to the Governor, Secretariat of the Policy Board
Mr. H. Onobuchi, Manager, Secretariat of the Policy Board
Mr. T. Umemori, Chief Manager, Planning Division 2, Policy Planning Office
Mr. K. Etoh, Senior Economist, Policy Planning Office
Mr. S. Shimizu, Senior Economist, Policy Planning Office

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on April 10 and 11, 2002 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. Decision on the Maximum Limit for Interest Rates on Liquid Deposits in Line with the Removal of Blanket Deposit Insurance

A. Staff Reports

On February 21, 2002, in accordance with the Temporary Interest Rate Adjustment Law, the Commissioner of the Financial Services Agency (FSA) and the Minister of Finance requested the Bank's Policy Board to determine the maximum limit for interest rates on liquid deposits, which would continue to be fully protected for a year after the removal of blanket deposit insurance in April 2002.

In response to this request, the Bank's Policy Board consulted with the Financial System Council (FSC) in accordance with the above law, and the council submitted the report regarding the maximum limit for interest rates on liquid deposits at financial institutions to the Board on February 25, 2002.

B. Members' Votes

Members of the Policy Board decided unanimously to (1) alter the maximum limit for interest rates on liquid deposits in accordance with the FSC's report and (2) report the alteration to the Commissioner of the FSA and the Minister of Finance. Members agreed that the decision should be made public after the meeting.

II. Summary of Staff Reports on Economic and Financial Developments2

A. Money Market Operations in the Intermeeting Period

Market operations in the intermeeting period were conducted in accordance with the guideline determined at the previous meeting on February 7 and 8, 2002.3 In the Bank's funds-supplying operations, undersubscription, where bids fell short of the Bank's offers, continued to occur frequently. In this situation, the Bank had maintained the outstanding balance of current accounts at the Bank at around 15 trillion yen, by such means as increasing the number of operations. As a result, the uncollateralized overnight call rate stayed at 0.001 percent.

  1. 2Reports were made based on information available at the time of the meeting.
  2. 3The guideline was as follows:
    The Bank of Japan will conduct money market operations, aiming at the outstanding balance of the current accounts at the Bank at around 10 to 15 trillion yen. Should there be a risk of financial market instability, such as a surge in liquidity demand, the Bank will provide more liquidity irrespective of the guideline above.

B. Recent Developments in Financial Markets

1. Developments in domestic financial markets

In the money market, three-month Euro-yen rates had strengthened slightly to 0.18 percent recently from around 0.10 percent in early February as lenders were becoming more cautious about lending funds maturing beyond the fiscal year-end. Given this situation, developments in the future required close monitoring.

Long-term interest rates continued to show nervous developments, hovering around 1.5 percent. This reflected two factors which pulled in opposite directions: (1) selling pressure on long-term Japanese government bonds (JGBs) from foreign investors had subsided due to a pause in the decline in stock prices and the depreciation of the yen, and banks' selling of long-term JGBs in preparation for the fiscal year-end had peaked out; while (2) a foreign credit rating agency had announced that it was reviewing the credit rating of JGBs and considering a possible downgrade.

The yield differentials between corporate bonds and JGBs in the secondary market continued to widen slightly, especially for bonds issued by firms with low credit ratings, reflecting the persistent concerns about credit risk among market participants. The spreads between bonds issued by banks and JGBs were expanding further as market participants' view of banks was becoming more severe.

Stock prices started to recover slightly in the intermeeting period, against the background of a reduced inclination to sell stocks reflecting the tightened regulations on short selling.

2. Developments in the foreign exchange market

The yen fluctuated in the range of 132-135 yen to the U.S. dollar. This reflected the fact that although expectations for bottoming out of the U.S. economy encouraged buying of the dollar, this movement had not intensified due to a weak upward momentum in U.S. stock prices and comments by government officials at home and abroad signaling that they were against a further depreciation of the yen.

C. Overseas Economic and Financial Developments

In the intermeeting period, the foundation of overseas economies seemed to be gradually firming on the whole, as evident in the fact that an increasing number of indicators suggested a bottoming out of the U.S. economy and that exports and production in East Asia began to stop declining.

Private-sector economists revised their forecasts of the U.S. GDP growth rate for 2002 upward for the first time since March 2001 when the current recession started. The central tendency of the real GDP growth forecasts, released by the Federal Reserve on February 27, 2002, was 2.5 percent to 3.0 percent for the October-December quarter of 2002 compared with the same quarter in the previous year. The majority of market participants, however, considered that the momentum of economic recovery would be weaker than in past recoveries because (1) the strength of the recovery of final demand seemed to be weak, (2) concern about overseas economies remained, and (3) financial market participants were showing a tendency to be risk averse.

In the U.S. financial markets, market participants continued to factor in an increase in the federal funds rate target around the middle of 2002. Recently, they were becoming slightly more cautious about the pace of economic recovery in and after the second half of 2002, as seen in the slight decline in interest rate futures and implied forward rates. U.S. stock prices did not show any particular direction because concern about firms' accounting information and better-than-expected economic indicators pulled in opposite directions.

In Europe, the economy had continued to decelerate. There were, however, some developments that would ease adjustment pressures, for example, the start of a recovery in Germany's foreign orders.

In NIEs and ASEAN, the economic deceleration was coming to a halt, as exports and production had stopped decreasing on the whole against the background of the progress in inventory adjustment in IT-related goods worldwide. In China, however, the economic growth was slowing due to a decline in the growth rate of exports, and the consumer price index expanded its year-on-year decline to minus 1.0 percent in January 2002.

D. Economic and Financial Developments in Japan

1. Economic developments

Economic indicators released in the intermeeting period did not offer sufficient grounds for changing the assessment of the economy that "the economy continues to deteriorate," but some indicators started showing positive signs for Japan's economic outlook.

With regard to final demand, the decline in exports continued to contract in January 2002 as in the October-December quarter of 2001. By type of goods, exports of automobiles started to decrease, but those of intermediate goods such as iron and steel and chemicals increased. Exports of IT-related goods continued to decrease, but the decline in those of electronic parts was likely to contract given the recovery in exports from NIEs and in DRAM prices.

As for business fixed investment, machinery orders in the October-December quarter of 2001 continued to decrease greatly as in the July-September quarter. Private consumption remained slightly weak as evident in a decrease in sales of electrical appliances in January 2002 compared with the monthly average of the October-December quarter of 2001.

Reflecting these developments in final demand, production continued to decrease. Industrial production in January 2002 was lower than the forecast in the previous month. There had been successive downward revisions of production of electrical machinery, but production of some goods such as semiconductor parts had started increasing. Inventories as a whole were decreasing steadily, and taking into consideration developments in the forecast index, a contraction in the rate of decline in production was becoming clear.

Regarding prices, the rate of decline in the corporate service price index expanded slightly in January 2002. Prices of advertising services continued to decline, and a reduction in general service prices was becoming noticeable to some extent.

2. Financial environment

Bank lending was decreasing at a faster pace year on year. This was basically due to the weakness in demand for funds. In addition, financial institutions were becoming more cautious in extending loans, particularly to firms with high credit risk. With regard to firms' demand for funds, financial institutions were saying that (1) demand for equipment funds was decreasing further, (2) funds demand stemming from difficulties in issuance of CP and corporate bonds with low credit ratings was marginal, and (3) demand for working capital for the fiscal year-end was decreasing significantly.

There were unstable developments in financial markets recently, for example credit spreads for CP and corporate bonds were on an increasing trend and interest rates on term instruments rose due to financial institutions' concerns about raising funds which would mature beyond the fiscal year-end. Given these developments, further attention should be paid to downside risks to the economy arising from the financial side, for example, the risk that toward the end of March 2002 financial markets might become more unstable and corporate financing conditions more severe.

The growth rate of the monetary base was likely to rise further in February as in January. The growth rate of the money stock was increasing mainly due to a shift of funds from investment trusts.

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

A. Current Economic Situation

On the current state of Japan's economy, the majority of members concurred that there was no need to change the assessment of the economy at the previous meeting that "Japan's economy continues to deteriorate." As for the outlook for the economy, members generally agreed that the pace of deterioration would moderate gradually, given that downward pressures from exports and production were abating due partly to overseas economies hitting bottom and the progress in inventory adjustment in Japan.

Members acknowledged that in overseas economies positive indications were increasing on the whole, for example, adjustment in IT-related industries was near to completion. Many members commented that the U.S. economy was bottoming out, although the strength and sustainability of the recovery should be monitored more closely than in past recovery phases. One member, however, expressed the view that the U.S. economy was still in a severe situation, pointing out the following concerns. First, the economic growth in the January-March quarter of 2002 was due largely to temporary factors such as the large tax refund and fiscal expenditures and the growth in housing construction owing to the record mild winter. And second, real estate investment was overheating. A few members commented that European economies continued to decelerate, but some confidence indicators were beginning to improve. As for East Asian economies, members expressed the view that they were on the way to recovery since exports, in particular, those of IT-related goods, had very likely hit bottom.

On the outlook for Japan's economy, members concurred that downward pressures on the economy from exports and production would decrease, given that Japan's export conditions were on the way to recovery against the background of the developments in overseas economies.

However, many members remarked that they could still not be optimistic about the economic outlook because (1) there were structural problems, such as the nonperforming-loan (NPL) problem; (2) financial markets were unstable, as seen in the developments in stock prices and credit spreads; (3) adjustment pressures on employment and wages seemed to be still strong; and (4) in this situation, domestic private demand seemed to be still vulnerable. One member commented that the major change in the intermeeting period was the further deterioration of business sentiment reflecting the decline in stock prices.

A different member, citing the global deflationary trend and the worst employment and income conditions in history in Japan as cause for concern, expressed the view that the severe situation of Japan's economy as a whole would hardly change even if production and exports recovered somewhat. This was because Japan's economy was shifting from a recessionary phase caused by adjustment in production to one caused by a fall in consumption, as evident from the decline in the index of living expenditure to its lowest level since 1986. The member added that the high wages paid by Japanese firms had led to the decline in their international competitiveness and the increase in unemployment.

With regard to price developments, members shared the view that, as assessed at the previous meeting, downward pressure on prices would continue given the deteriorating economy. One member, however, pointed out that service prices continued to decline, but prices of goods seemed to have stopped declining on the whole, with some of them hitting bottom, because (1) the supply-demand balance was improving due to progress in inventory adjustment, (2) prices of goods, which had declined to close to marginal cost, were being revised upward in line with reorganization of firms, and (3) the price differential between Japan and other countries was narrowing reflecting the depreciation of the yen. A different member commented that close monitoring was required of the effects of the dry spell in the northeast of the United States on stocks of crude oil and on crude oil prices in the future.

B. Financial Developments

The majority of members commented on the financial environment as follows. First, concerns about the stability of the financial system and the soundness of banks were growing gradually as the fiscal year-end and the removal of blanket deposit insurance approached. Second, financial markets were becoming slightly unstable, as seen in the increase in various types of credit spreads and in the slight increase in interest rates for funds that would mature beyond the fiscal year-end. And third, stock prices continued to be generally unstable, although they had started to increase slightly. One member commented that the economy was in a phase where due attention should be paid to downside risks stemming from vulnerability in the financial side, and other members agreed with this view.

In relation to the vulnerability in the financial side, a few members noted the emergence of the Japan premium, after a period in which it had not been observed. Other members commented that financial institutions' moves to increase cash holdings and secure liquidity suggested their anxiety. Furthermore, some members presented their analysis that Japanese stock prices were sluggish due mainly to the weakness in bank stocks. One member remarked that the weakness in bank stocks was a warning from the market that it demanded a drastic disposal of NPLs.

One member said that long-term interest rates were showing nervous developments reflecting concerns about fiscal discipline, and therefore, there was a risk that they could surge if there were a shock, such as a downgrading of JGBs.

One member summarized the above financial environment and commented that the permeation of the effects of monetary easing could be hindered if concerns heightened in financial markets toward the fiscal year-end. The member continued that the increase in risks stemming from the financial side was due to the delay in the disposal of NPLs by financial institutions, and that the Japanese authorities and financial institutions needed to take sufficiently effective measures immediately to restore confidence in the Japanese financial system at home and abroad.

One member expressed the view that the full-scale quantitative monetary easing since September 2001 had had positive effects on financial markets, such as the foreign exchange market, and also on the growth of the money stock (M2+CDs).

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

Members discussed the monetary policy stance for the immediate future.

Most members shared the view that economic indicators released in the intermeeting period did not offer sufficient grounds for changing the Bank's assessment of the economy at the previous meeting. These members, however, also shared a concern that financial markets were becoming unstable and that if this trend intensified, it could hinder the permeation of the effects of the monetary easing measures which had been taken so far. The majority of members therefore considered it necessary that the Bank make the utmost effort to ensure the stability of financial markets and the permeation of the effects of the monetary easing measures, by (1) improving its means of funds provision, (2) reviewing the range of eligible collateral, and (3) providing more liquidity toward the end of the fiscal year.

As for the guideline for money market operations, most members expressed the view that it was unnecessary to change the target itself of "around 10 to 15 trillion yen," since there was no change in the Bank's assessment of the economy from that at the previous meeting. Most members were strongly concerned, however, that, given the current developments in financial markets, it was likely that the Bank would need to provide ample funds of well over 15 trillion yen toward the fiscal year-end. Therefore, members generally shared the view that the Bank should go further than the contingency clause in the guideline for money market operations and state clearly in the guideline that it would provide funds exceeding the upper end of the target range to an extent that would give market participants confidence.

It was also pointed out that it remained highly uncertain how financial markets would move from April 2002 onward. A few members pointed out that liquidity demand might decrease sharply after the turn of fiscal 2002 and that, therefore, it was appropriate to maintain the current guideline with a target range of "10 to 15 trillion yen." One member commented that it was, on the other hand, necessary to bear in mind the possibility that liquidity demand might remain high as financial institutions might become cautious about lending in the money market after the removal of blanket deposit insurance.

With regard to the Bank's eligible collateral, many members expressed the view that the Bank should broaden the range of eligible collateral as far as possible with a view to improving its ability to provide funds and dispelling concerns about liquidity toward the fiscal year-end. As specific measures, a few members proposed accepting loans to the Deposit Insurance Corporation and to the Government's Special Account for the Allotment of Local Allocation Tax and Local Transfer Tax as eligible collateral as had been requested by financial institutions. A few other members pointed out that after the turn of fiscal 2002 the Bank could consider reviewing the range of eligible collateral more broadly in order to provide funds smoothly and stabilize credit premiums.

Many members commented on the use of the Lombard-type lending facility that the Bank should increase the maximum number of days on which the official discount rate could be applied to the facility as a temporary measure toward the end of the fiscal year.

Members then discussed an increase in the Bank's outright purchases of long-term JGBs. Many members shared the view that it would be meaningful if the Bank increased its outright purchases of long-term JGBs at this time on the following grounds: (1) the Bank should reduce the burden on money market operations to some extent and make the utmost effort to provide more funds toward the fiscal year-end, given that there were frequent cases of undersubscription; and (2) funds demand might decrease after the turn of fiscal 2002.

In the course of the above discussion, some members said that it would be meaningful to demonstrate the Bank's determination to provide ample liquidity at this time, although an increase in the outright purchases of long-term JGBs was not necessarily needed in conducting money market operations at present. One member, however, pointed out that (1) there was insufficient reason, at least for the time being, to increase the Bank's outright purchases of long-term JGBs for the purpose of maintaining the outstanding balance of current accounts at the Bank at 15 trillion yen, although this member understood that the Bank might increase the outright purchases of long-term JGBs in view of the possible future need to provide liquidity more smoothly; and (2) it was originally left to the staff's discretion to decide on increases in the Bank's outright purchases of long-term JGBs, and the staff should increase them in a timely manner if there were actual difficulties in providing liquidity smoothly.

With regard to the amount of an increase in the Bank's outright purchases of long-term JGBs, many members said that it was appropriate to increase them by the same amount as on the two previous occasions, while a few members said that a larger increase was necessary.

Based on these discussions, it was agreed that the staff should continue to decide whether it was necessary to increase the Bank's outright purchases of long-term JGBs and the amount of the increase based on the framework adopted in March 2001.

Some members commented on the role of the Bank's outright purchases of long-term JGBs. A few members commented on the option of the Bank regarding JGB outright purchase operations as a means of influencing risk premiums and, in turn, long-term interest rates, by improving the supply-demand balance of long-term JGBs. One of these members said that, if the Bank increased the outright purchases of long-term JGBs at this point, it might become necessary to change the concept of the purchases in order to clarify the aim of the increase. A few members pointed out that the following should be kept in mind: (1) the effects of an increase in the Bank's outright purchases of long-term JGBs on long-term interest rates were uncertain, and it could have adverse effects, causing concerns about fiscal discipline; and (2) the Government's bond management policy would have a larger effect on the supply-demand balance of long-term JGBs than increasing the Bank's outright purchases of long-term JGBs.

A few members requested the Bank's staff to comment from a practical viewpoint on several policy options that could be adopted at this meeting. The staff explained as follows.

(1) The guideline for money market operations

  • Given the recent developments in the money market, it seemed that it would be meaningful if the Bank clearly stated its stance that it would provide more liquidity irrespective of its target for the outstanding balance of current accounts at the Bank, as it had done in the case of the Year 2000 problem, in order to bring about a sense of stability in the market.

(2) Ways of increasing the maximum number of business days on which the official discount rate could be applied for use of the Lombard-type lending facility

  • It was decided at the Monetary Policy Meeting held in September 2001 that the maximum number of days on which the official discount rate could be applied for use of the Lombard-type lending facility should be increased to ten business days, in order to cover the period from September 19, 2001 to beyond the end of September 2001 sufficiently.
  • On the present occasion, there was more than a month remaining before the fiscal year-end, and this period of time extended over two reserve maintenance periods. In order to cover this period of time sufficiently, the Bank could apply the official discount rate to the Lombard-type lending facility on any business day in the period starting March 1 and ending April 15, the end of the March reserve maintenance period, suspending the current restriction on the maximum number of days for such use.

(3) The possibility of broadening the range of eligible collateral

  • The total amount of eligible collateral accepted by the Bank could be greatly increased by including loans to the Deposit Insurance Corporation and to the Government's Special Account for the Allotment of Local Allocation Tax and Local Transfer Tax (their loans outstanding at end-December 2001 were around 17 trillion and 16 trillion respectively).
  • There was no problem with regard to the creditworthiness of these loans as they were extended either to the Government or with the Government's guarantee, but the Bank had not accepted them as eligible collateral to date since they were not transferable. As the Bank would have to consult with the parties concerned, it should examine the operational issues involved in including loans as eligible collateral.

(4) Increasing the outright purchases of JGBs

  • The Bank could decide to increase the outright purchases of JGBs within the framework decided in March 2001, given that (1) it should make the utmost effort to provide ample funds of well over 15 trillion yen toward the fiscal year-end, and (2) there was also a possibility that undersubscription in the Bank's money market operations to provide funds could occur more frequently than at present due to a sharp fall in liquidity demand from April 2002 onward.

Based on the above discussions, the chairman suggested that the current target for the outstanding balance of current accounts at the Bank of "around 10 to 15 trillion yen" should be maintained and at the same time the contingency clause in the guideline for money market operations should be changed to the following: "for the time being, to secure the financial market stability towards the end of a fiscal year, the Bank will provide more liquidity irrespective of the guideline above." Most members agreed.

Further, members were generally agreed on the following. First, the Bank would apply the official discount rate to the Lombard-type lending facility on any business day in the period starting March 1 to April 15, 2002. And second, with a view to broadening the range of eligible collateral to include loans to the Deposit Insurance Corporation as well as to the Government's Special Account for the Allotment of Local Allocation Tax and Local Transfer Tax, the Bank would examine operational issues.

With regard to increasing outright purchases of JGBs by the Bank, the chairman said that, on the basis of the above discussion and representing the Bank's staff, he would like to increase such purchases from the current 800 billion yen per month to 1 trillion yen per month.

One member said that the member would like to propose the following based on a more severe view on the economy: the Bank should (1) introduce inflation targeting; (2) start purchasing foreign bonds; and (3) raise the target for the outstanding balance of current accounts at the Bank. The member continued that it would be appropriate to restrict the maximum number of days on which the Bank applied the official discount rate to the Lombard-type lending facility to ten, and that the member would like to propose this. This member commented on the Bank's outright purchases of JGBs that (1) they should be increased to 1.5 trillion yen per month, and with this increase, it was still unlikely that the outstanding amount of JGBs the Bank held would reach the ceiling for the outstanding amount of banknotes issued for a while; and (2) the decision to increase outright purchases of JGBs should be approved at the meeting in view of its importance, even though it was entrusted to the Bank's staff.

With regard to economic policy in general, many members commented on it in relation to the Government's efforts to implement the "Emergency Countermeasures to Deflation" released on February 27, 2002.

On this point, one member summed up by saying that the Bank's monetary policy measures discussed at the meeting were the best possible at present from the viewpoint of supporting the Government's measures to combat deflation. Many members said that it was impossible to combat deflation by monetary policy alone and it was essential to revitalize economic activity in the private sector and improve the supply-demand balance by stimulating aggregate demand. A few members referred to some concrete measures to this end, and said that they hoped that the Government would achieve immediate and concrete results in areas such as disposal of NPLs, tax reform, and deregulation. In addition, it was pointed out that, in order to increase the effectiveness of monetary policy, it was vital that the Government gained the market's confidence regarding fiscal discipline.

Some members noted that against the background of the instability in financial markets, there were concerns over the soundness of banks and the delay in disposal of NPLs, and they said that banks should carry out a drastic disposal of NPLs utilizing the Resolution and Collection Corporation (RCC) and determine the final amount of losses immediately. These members continued that if banks' capital bases became inadequate as a result, an injection of public funds should be considered. Members shared the view that in this situation the Bank should make the utmost effort to stabilize the financial system by fulfilling its role in an appropriate manner as the lender of last resort.

Many members commented on the fact that some high-ranking members of the Government made specific comments about the conduct of monetary policy, especially outright purchases of JGBs by the Bank, on occasions such as their press conferences.

Most members emphasized the following. First, regarding the Government's remarks about monetary policy, the Bank of Japan Law set out a framework whereby (1) representatives of the Government attend and express views at Monetary Policy Meetings, and (2) the Bank publishes a document which contains an outline of the discussion at the meeting. Second, the fact that some high-ranking members of the Government made specific comments in public about the conduct of monetary policy outside the framework could impair public confidence in the conduct of economic policy by the Government and the Bank. And third, such comments not only reduced the effectiveness of monetary policy but also increased the risk of inducing a negative response from the market.

Based on these strong comments by members, the chairman summarized as follows: the recent remarks by some high-ranking members of the Government were problematic in view of the Bank of Japan Law's framework and they were also significantly damaging public confidence in Japan's conduct of economic policy as a whole. The Bank would like to request the representatives of the Government who were attending this Monetary Policy Meeting to strictly observe the rule that remarks by the Government about the conduct of monetary policy should be made only at Monetary Policy Meetings and made public in the minutes of the meetings.

V. Remarks by Government Representatives

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

(1) Japan's economy continued to experience moderate deflation, and overcoming deflation would require the Government and the Bank to act in unison.

(2) The Government would like the Bank to give due consideration to developments in the economy and financial markets and to the stability of the financial system. In particular, the Government would like the Bank to provide more funds to deal promptly with developments in liquidity demand toward the end of the fiscal year so that there would not be anxiety in the market about the availability of liquidity.

(3) The downtrend in prices was unlikely to change, and the effects of the Bank's conventional market operations mainly using short-term JGSs were limited. The Government would, therefore, like to ask the Bank to (a) stop the continuous price falls and stabilize prices by diversifying monetary policy measures, for example by increasing the Bank's outright purchases of long-term JGBs and (b) take drastic measures to prevent the economy from sliding into a deflationary spiral.

(4) This meeting was a focus of great attention. Therefore, the Government would like the Bank to discuss measures for money market operations with a view to causing a positive shock to the public. The Government would like to ask the Bank to avoid creating a situation where the Lombard-type lending facility would not function effectively due to concerns that the use of the facility might lead to reputational risk.

The representative from the Cabinet Office made the following remarks.

(1) At the meeting of the Council on Economic and Fiscal Policy on February 27, 2002, the Minister of State for Economic and Fiscal Policy reported on the "Emergency Countermeasures to Deflation." The Government would continue to implement specific and effective measures in a bold and flexible manner in response to any changes in economic and financial conditions. In particular, with regard to the disposal of NPLs, actions would be taken to achieve concrete progress in line with the ongoing process of special inspections, thereby solidifying the prospects for an early resolution of the so-called "NPL problem." Meanwhile, the Government would stand ready to take any and all necessary measures to prevent a financial crisis.

(2) The Government considered that the Bank's commitment was the key to the emergence of the effects of its monetary policy. The Government would like to ensure that the public was confident that the Government and the Bank were working together to tackle structural reforms and overcome deflation. It was left to the Bank's discretion to decide on the actual measures of monetary policy. The Government would like the Bank to carry out drastic measures to increase the amount of funds provision, given the Prime Minister's policy speech and direction to execute the "Emergency Countermeasures to Deflation."

VI. Votes

Based on the above discussions, the majority of members considered that at this meeting the Bank should determine that it would (1) provide more liquidity for the time being irrespective of the target of current account balances, around 10 to 15 trillion yen, in order to secure the financial market stability towards the end of a fiscal year; and (2) apply the official discount rate to the Lombard-type lending facility on any business day in the period starting March 1st and ending April 15th as a temporary measure relating to the Lombard-type lending facility.

One member, however, said that the member would like to propose that the Bank should (1) introduce inflation targeting, (2) start purchasing foreign bonds in order to provide funds smoothly, (3) raise the target for the outstanding balance of current accounts at the Bank to around 20 trillion yen, and (4) increase the maximum number of days on which the Bank applied the official discount rate to the Lombard-type lending facility to ten business days in a reserve maintenance period during only the current and the following periods.

This member gave the following reasons. First, it would be easier for the public to understand if the target for prices was set in terms of the rate of inflation rather than the level of prices, and the former was more commonly used by overseas central banks than the latter. Second, the Bank should purchase foreign bonds from the viewpoint of diversifying its means of providing funds, and such purchase by the Bank, as distinct from foreign exchange intervention, would be feasible and not be in contravention of the Bank of Japan Law. Third, the Bank should raise the target for the outstanding balance of current accounts at the Bank much higher than the current level of the outstanding balance of current accounts at the Bank, around 15 trillion yen, in order to prevent a possible crisis at the fiscal year-end in March 2002. And fourth, the Bank should increase the maximum number of days on which it applied the official discount rate to the Lombard-type lending facility in a reserve maintenance period, but from the viewpoint of avoiding moral hazard, increase it only to ten business days from the current five business days.

As a result, the following proposals were submitted.

Mr. N. Nakahara proposed the following procedures for money market operations:

The Bank of Japan will (1) conduct money market operations, aiming at maintaining the average of the year-on-year CPI (excluding fresh food, on a nationwide basis) in the October-December quarter of 2003 at a target of 1.0-3.0 percent; and (2) start to purchase foreign bonds as soon as all arrangements are made. Foreign bonds will be purchased when it is judged necessary to increase the outstanding balance of current accounts at the Bank smoothly.

The proposal was defeated with one vote in favor, eight against.

This member also proposed the following guideline for money market operations for the intermeeting period ahead:

The Bank of Japan will conduct money market operations, aiming at an outstanding balance of current accounts at the Bank of around 20 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.

The proposal was defeated with one vote in favor, eight against.

Further, this member made the following proposal:

Effective March 1, the Bank of Japan will increase the maximum number of days on which it applies the official discount rate to the Lombard-type lending facility to ten business days in a reserve maintenance period in the period starting February 16 and the following one starting March 16.

The proposal was defeated with one vote in favor, eight against.

To reflect the majority view, the chairman formulated the following two proposals.

The Chairman's Policy Proposal on the Guideline for Market Operations:

1. The guideline for money market operations in the intermeeting period ahead will be as follows.

The Bank of Japan will conduct money market operations, aiming at the outstanding balance of the current accounts at the Bank at around 10 to 15 trillion yen.

For the time being, to secure the financial market stability towards the end of a fiscal year, the Bank will provide more liquidity irrespective of the guideline above.

2. A public statement will be decided separately.

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

Vote against the proposal: Mr. N. Nakahara.

Mr. N. Nakahara dissented for the following reasons. First, given the fact that the outstanding balance of current accounts at the Bank had been maintained at around 15 trillion yen since December 2001, a directive that aimed at a balance in the range of 10 to 15 trillion yen was inappropriate, and the Bank should pinpoint a specific target for the outstanding balance. Second, the chairman's policy proposal could not be regarded as an aggressive monetary easing, and in order to avoid a critical situation toward the fiscal year-end, the Bank should raise the target for the outstanding balance of current accounts at the Bank to around 20 trillion yen. And third, the Bank should take forward-looking policy measures in response to the deterioration in the economy.

The Chairman's Policy Proposal on Easing the Restriction on the Use of the Lombard-Type Lending Facility:

1. In the period starting March 1st and ending April 15th, when the Bank conducts lending based on the "Principal Terms and Conditions for the Complementary Lending Facility" (Policy Board Decision on February 28, 2001), it will apply the official discount rate to any lending on any business day, as a temporary measure, irrespective of the current restriction on the maximum number of days for such use prescribed in item 5 of the above.

2. A public statement will be decided separately.

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

Vote against the proposal: Mr. N. Nakahara.

Mr. N. Nakahara dissented for the following reasons. First, based on the experience of actual use of the Lombard-type lending facility in the past, there was insufficient need for the Bank to apply the official discount rate to the Lombard-type lending facility on any business day as proposed. And second, taking into account the possibility that banks would use the Lombard-type lending facility more in the future, the Bank should increase it only to ten business days from the viewpoint of avoiding moral hazard.

VII. Discussion on the Public Statement

Members discussed the draft of the public statement prepared by the staff regarding the above decision of the Board, and put it to the vote. The Board approved, by majority vote, "On Today's Decision at the Monetary Policy Meeting" and decided to release it after the meeting (see Attachment 1).

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

Vote against the proposal: Mr. N. Nakahara.

Mr. N. Nakahara dissented as he opposed the chairman's two proposals.

A press conference by the chairman would be held after the meeting as was the normal practice when a policy change was decided.

VIII. Approval of the Minutes of the Monetary Policy Meeting

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of January 15 and 16, 2002 for release on March 5, 2002.

Attachment 1

For immediate release

February 28, 2002
Bank of Japan

On Today's Decision at the Monetary Policy Meeting

  1. As a result of strong monetary easing by the Bank of Japan, extremely accommodative conditions are being maintained in the financial markets. Short-term interest rates have declined to virtually zero percent while the year-on-year growth rate of monetary base has reached nearly 30 percent.
  2. With the end of a fiscal year approaching, however, there is a possibility that liquidity demand will increase further depending on the financial market developments. It is thus extremely important to take all possible measures to secure the financial market stability in order to prevent a deflationary spiral and to pursue a sustainable economic growth.
  3. Against this background, the Bank has decided to take the following measures.
    1. 1) Providing ample liquidity towards the end of a fiscal year
      For the time being, to secure the financial market stability towards the end of a fiscal year, the Bank will provide more liquidity to meet a surge in demand irrespective of the target of current account balances, around 10 to 15 trillion yen (Attachment 2).
    2. 2) Increasing the outright purchase of long-term government bonds
      In order to provide liquidity smoothly, the Bank will increase the outright purchase of long-term government bonds from the current 800 billion yen per month (or 9.6 trillion yen per year) to 1 trillion yen per month (or 12 trillion yen per year).
    3. 3) Easing the restriction on the use of the Lombard-type lending facility
      In the period starting March 1st and ending April 15th, the end of the March reserve maintenance period, the Bank will apply the official discount rate to the Lombard-type lending facility on any business day, suspending the current restriction on the maximum number of days for such use, namely five business days in a reserve maintenance period.
    4. 4) Examining issues to broaden the range of eligible collateral
      The Bank will immediately examine operational issues to broaden the range of eligible collateral to include loans to the Deposit Insurance Corporation as well as loans to the Government's "Special Account for the Allotment of Local Allocation Tax and Local Transfer Tax." In the process, the Bank will consult with concerned parties to take necessary steps including those for making such loans negotiable.
  4. To realize the full permeation of the effects of strong monetary easing, it is essential to strengthen a financial system and ensure its stability by making a swift move to resolve the non-performing loan problem. It is also vital to make progress in structural reform on the economic and industrial fronts through tax reform, streamlining of public financial institutions, and deregulation. The Bank strongly hopes that both the Government and the private sector, in particular financial institutions, will take more determined and effective steps in this regard.
  5. The recent price decline reflects the widening output gap in the economy as well as the effects of structural changes in the supply-side including a rise in the import penetration ratio. In order to exit from deflation, it is indispensable to revitalize economic activity and to bring the economy back to a sustainable growth path through decisive steps including those described in paragraph 4.
  6. The Bank of Japan is determined to continue its utmost efforts as a central bank by a) providing ample liquidity to the market and b) preventing systemic risk from materializing as the lender of last resort.

Attachment 2

For immediate release

February 28, 2002
Bank of Japan

At the Monetary Policy Meeting held today, the Bank of Japan decided, by majority vote, to set the following guideline for money market operations for the intermeeting period:

The Bank of Japan will conduct money market operations, aiming at the outstanding balance of the current accounts at the Bank at around 10 to 15 trillion yen.

For the time being, to secure the financial market stability towards the end of a fiscal year, the Bank will provide more liquidity irrespective of the guideline above.