Minutes of the Monetary Policy Meeting

on April 30, 2002
(English translation prepared by the Bank's staff based on the Japanese original)

June 17, 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 Tuesday, April 30, 2002, from 9:00 a.m. to 12:57 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. K. Ueda
Mr. T. Taya
Ms. M. Suda
Mr. S. Nakahara
Mr. H. Haru
Mr. T. Fukuma

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. M. Amamiya, Associate Director, Policy Planning Office
Mr. K. Yamamoto, Director, Financial Markets Department
Mr. H. Hayakawa, Director, Research and Statistics Department
Mr. K. Monma, 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. K. Etoh, Senior Economist, Policy Planning Office
Mr. S. Nagai, Senior Economist, Policy Planning Office

The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on June 11 and 12, 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. 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 10 and 11, 2002.³

Given that precautionary demand for funds had increased against the background of a system failure of a major bank group, the Bank provided more liquidity irrespective of the target for the outstanding balance of current accounts at the Bank "at around 10 to 15 trillion yen," in accordance with the contingency clause in the guideline for money market operations. As a result, the outstanding balance of the current accounts exceeded 22 trillion yen for some days, and recently, it was moving at around 18 trillion yen. As a result of these market operations, the weighted average of the uncollateralized overnight call rate stayed stable at 0.001-0.002 percent.

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 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

Short-term interest rates were stable in the intermeeting period reflecting the Bank's ample funds provision into the market.

Long-term interest rates continued to hover around 1.4 percent. Despite the weak U.S. stock price developments, Japanese stock prices remained firm, due partly to expectations for an improvement in corporate profits of Japanese firms, and speculations about a possible buyback of Japanese stocks by foreign investors.

The yen started to appreciate against the U.S. dollar after depreciating temporarily in the first half of April. This reflected the fact that the U.S. dollar had generally depreciated against major currencies due partly to weak U.S. stock prices and waning of expectations for an early resolution of the Middle East situation.

Credit spreads, the yield differentials between corporate bonds or bank bonds and Japanese government bonds (JGBs) in the secondary market, were recently contracting slightly overall as institutional investors' investment in corporate bonds was gradually recovering due partly to expectations for a bottoming out of the economy. The credit spreads for low-rated bonds, however, remained wide, suggesting that concern about credit risk still persisted among market participants.

C. Overseas Economic and Financial Developments

The recent recovery of the U.S. economy was becoming distinct, but the sustainability of its strength remained uncertain. The GDP growth rate was high for the January-March quarter of 2002, but while the contribution of inventory investment to the GDP growth was large, that of final demand dropped from the previous quarter, as seen in the fall in business fixed investment.

In the U.S. financial markets, despite firm economic indicators, stock prices were weak reflecting market participants' cautious views on the outlook for corporate profits. Moreover, yields on U.S. federal funds futures indicated that market expectations for a raise in the target of the federal funds rate around the middle of 2002 were waning. The recent depreciation of the U.S. dollar also seemed to reflect such market sentiment.

In the euro area, domestic demand components, such as private consumption, remained weak, but exports and production had almost stopped decreasing due to an increase in exports to the United States and progress in inventory adjustment.

In East Asian countries, more indicators showed signs of recovery in exports and production. In China, the GDP growth rate for the January-March quarter of 2002 increased due to a recovery in exports in addition to strong domestic demand supported by an increase in fiscal spending and direct investment from abroad.

D. Economic and Financial Developments in Japan

1. Economic developments

Exports were gradually starting to increase, due mainly to those to the United States and Asian countries, while overseas economies were clearly gaining momentum for recovery. Business fixed investment continued to decrease, and private consumption generally remained weak with variations in different indicators. In addition, public investment was declining and housing investment remained sluggish.

Final demand overall continued to be weak. However, there were clearer signs that the fall in production was coming to a halt reflecting the increase in exports and progress in inventory adjustment. In addition, the forecast index for production predicted high growth for April and May. Capacity utilization rates were rising due partly to progress in scrapping of plants.

Employment and income conditions of households basically continued to worsen as evidenced by a continuous wage decline. However, there were marginal changes, such as an increase in the number of new job offers in the manufacturing industry.

With regard to prices, the pace of decline in domestic wholesale prices was contracting against the background of an increase in import prices and progress in inventory adjustment. On the other hand, the consumer price index (CPI; excluding fresh food, on a nationwide basis) continued to fall at a pace of a little less than 1 percent from the previous year. So far, the decline in wages did not seem to be causing the CPI to fall further, but the effect of developments in wages on prices required attention.

2. Financial environment

Private banks' lending continued to decline by about 2 percent on a year-on-year basis. Fund raising through corporate bonds and CP markets was above the previous year's level, but the growth rate was declining. The weight of CP with low credit ratings in the total amount of CP issued rose slightly due to the fact that issuing conditions had started to improve slightly after the fiscal year-end.

The year-on-year growth rate of the monetary base in April was projected to be higher than the 32.6 percent in March. This was due to a rise in the growth of banknotes in addition to the fact that the outstanding balance of current accounts at the Bank continued to be at a high level even after the fiscal year-end. The year-on-year growth rate of the money stock continued to be at the 3.5-4.0 percent level.

Regarding funding costs for firms, issuance rates on CP and corporate bonds had started to decline from the beginning of April. However, attention needed to be paid to the fact that some survey results suggested that banks' lending attitude was becoming more cautious and the terms and conditions of loans were tightening.

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

A. Current Economic Situation

On the current state of Japan's economy, members generally shared the view that, while the activity of manufacturing industries appeared to have stopped declining against the background of a rebound in exports and progress in inventory adjustment, domestic demand components such as private consumption and business fixed investment remained weak.

Regarding the U.S. economy, many members expressed the view that economic indicators such as those related to private consumption were showing noticeable firmness, but there were also concerns regarding the weak U.S. stock price developments and the depreciation of the U.S. dollar, and the slow improvement in leading indicators of business fixed investment.

As for the corporate sector in Japan, most members pointed out that the recovery in exports and production had become more evident against the background of the recovery in overseas economies. Many members, however, expressed the view that business fixed investment was still in an adjustment phase judging from leading indicators.

A few members pointed out that structural adjustments, such as a reduction of excessive debts, had made progress in large manufacturers, but were still at the halfway stage in nonmanufacturers and small firms, and this was hampering a self-sustained economic recovery.

One member said that the effects of China's economic dynamism were intensifying throughout Asia including Japan. The recent economic development of China was having a positive effect on Japan's exporting conditions, but could have a negative effect on business fixed investment in Japan.

As for employment and income conditions of households, some members said that there were signs of a marginal recovery of the supply-demand balance in the labor market, as was evident in a decline in the unemployment rate, a rise in the ratio of new job offers to applicants, and a recovery in the diffusion indexes of employment conditions in the March Tankan (Short-Term Economic Survey of Enterprises in Japan). However, they also pointed out that many firms were still encumbered with excess labor, and wages continued to decline. Many members therefore expressed the view that it would take more time for employment and income conditions to improve.

Members generally agreed that, although indicators continued to show mixed developments, private consumption remained weak on the whole. One member pointed out as a positive sign the fact that some indicators of consumer confidence were starting to improve.

Regarding price developments, many members noted that the month-on-month decline in domestic wholesale prices had come to a halt, and the pace of year-on-year decline started to contract. A few members however expressed the view that price developments continued to require careful monitoring because they could have been strongly affected recently by the short-term impact of developments in crude oil prices and foreign exchange rates, and of the recovery of commodity prices due to the completion of inventory adjustment.

Some members said that consumer prices continued to decline by slightly less than 1 percent year on year, but it was becoming less likely that the pace of the decline would accelerate. These members explained the reasons as follows: (1) so far the decline in wages had not pushed down service prices; (2) firms were changing their price setting strategy, for example, prices of food services and clothing stopped declining, and prices of personal computers increased; and (3) surveys showed that consumers' expectations for a decline in prices subsided slightly.

As for the conditions surrounding prices in general, a few members noted that downward pressure on prices due to supply-side factors such as globalization of the economy persisted, and it was also unlikely that upward pressure stemming from the demand side would increase for some time.

With regard to financial developments, a few members noted that there were signs that credit spreads of corporate bonds had been contracting somewhat since the beginning of April. These members, however, added that the level of the spreads remained high, seeming to indicate that investors remained cautious about taking credit risk.

Some members pointed out that the Bank's Senior Loan Officer Opinion Survey on Bank Lending Practices at Large Japanese Banks for April suggested that the terms and conditions of loans to firms, such as spreads of loan rates over banks' cost of funds, and banks' lending stance were becoming tighter. These members commented that the tightening of banks' lending practices was inevitable in overcoming the nonperforming-loan (NPL) problem and would accelerate structural adjustments of industries, but there was a risk that it could hamper a self-sustained recovery of domestic private demand.

B. Outlook and Risk Assessment of the Economy and Prices

Members discussed the outlook for Japan's economy and prices in fiscal 2002 and early fiscal 2003 and risk factors which might influence the standard scenario, given that the final text of the "Outlook and Risk Assessment of the Economy and Prices" (hereafter the Outlook Report) was to be decided for publication at this meeting.

Members generally agreed that the standard scenario for the economy would be as follows. An increase in exports and progress in inventory adjustment were expected to induce a recovery in production, and this would lead to an improvement in corporate profits and business fixed investment, particularly in the manufacturing sector. However, given that persistent downward pressure on employment and wages would remain, it was expected to take a significant period of time for a recovery in exports and production in the manufacturing sector to spread into the economy as a whole, including the nonmanufacturing sector, small firms, and households. Overall, Japan's economy was expected to stop deteriorating toward the latter half of fiscal 2002 but an anticipated autonomous recovery was not likely to gain much momentum.

Reflecting the above developments in the economy, members generally shared the view that prices were likely to stay on a gradual declining trend given downward pressure from both the demand and supply sides.

Members then discussed the upside and downside factors constituting risks to the standard scenario. On the strength of the recovery of domestic private demand, a few members referred to a survey conducted by the Cabinet Office on business activity and commented on the nonmanufacturing sector that the outlook for demand was severe and the reduction of excessive debts had not made much progress. These members therefore considered that it would take time for movements toward recovery in the manufacturing sector to spread to the nonmanufacturing sector. A few members commented on private consumption and raised concerns that the downward pressure on wages and employment conditions would likely remain because the share of labor in income distribution was still high. One member pointed out that households were greatly influenced by developments in stock prices and the financial system. Based on these discussions, some members expressed the view that downside risk might outweigh upside risk with regard to the strength of the recovery of domestic private demand.

Many members commented on the strength and sustainability of recovery in overseas economies. One member commented on the U.S. economy that the continued high growth in productivity was a positive factor but there remained a risk that the economy would suffer from the negative legacy of the quasi-bubble expansion that had lasted for the past several years. In relation to the fact that firm housing prices were supporting U.S. private consumption, a different member pointed out that there was a considerable time-lag before the collapse of a bubble economy became apparent in real estate prices as observed in the case of Japan.

A different member noted that the outlook for corporate profits would be the key determinant for U.S. economic recovery, and they required monitoring because the recent recovery relied on cost reduction. A few members, including this member, raised concerns about the loss of market confidence in accounting information on corporate profits and in analyst reports after the filing for bankruptcy of a large U.S. energy company.

A few members raised the issue of the sustainability of the financing of the United States' current account deficit, and commented that developments in the international capital flows and the associated movements in foreign exchange rates were important risk factors. Further, some members commented on developments in crude oil prices and the situation in the Middle East as a risk factor.

Many members also raised developments in dealing with NPLs and their effects as another risk factor to the standard scenario. One member commented that it was uncertain whether the pace of the increase in NPLs would slow, given that, as stated in the standard scenario, the anticipated recovery was not likely to gain momentum. A different member pointed out the possibility that NPLs might increase as more nonviable firms were weeded out against the background of banks' plans to increase profitability and reduce risks. A few members said that following the removal in April of the blanket deposit insurance, with the exception of demand deposits, closer monitoring was required of how the financial intermediary function of banks and financial markets would be affected in the event the credibility of the Japanese financial system was impaired due to a delay in the disposal of NPLs.

On developments in asset prices and long-term interest rates, one member remarked that, although financial market developments were generally stable recently, attention still needed to be paid to them because the stability partly reflected market participants' wait and see stance with regard to how the economy would develop and what progress would be made in the disposal of NPLs. A different member commented that the downgrading of JGBs had affected market participants' behavior little so far, but it was necessary to keep monitoring its effects. On the other hand, one member gave the following points as positive factors in relation to the stock market. First, an increasing number of firms were dealing with problems in their balance sheets well in advance of the introduction of impairment accounting, and thus net profits of these firms could be expected to increase in the future. And second, amid the polarization of stock prices between firms with high and low credit standings, an increasing number of investors were becoming convinced through experience that buying stocks of firms with good performance was a profitable investment.

Many members further pointed out the progress of structural reform and its effects as an important risk factor. One member commented that risk factors such as the effects of structural reforms and the disposal of NPLs, the strength of recovery in domestic private demand, and developments in asset prices were all closely related. The member pointed out that, therefore, if these risks were to materialize, it would be simultaneous.

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

Based on the above assessment of economic and financial developments, members shared the view on the monetary policy stance for the immediate future that it was appropriate to maintain the current target for the outstanding balance of current accounts at the Bank of around 10 to 15 trillion yen. On this basis, members generally agreed that, since demand for funds held in current accounts at the Bank was expected to remain unstable due to the effects of the system failure of a major bank group, the Bank should provide funds in a timely manner in accordance with the contingency clause of the guideline for money market operations and gradually reduce the outstanding balance of current accounts to the target range of around 10 to 15 trillion yen, giving due consideration to the stability of market conditions.

One member stressed that it was important to explain appropriately the actual state of the money market, although there was no problem in continuing to conduct money market operations in accordance with the contingency clause. This member explained that, in providing funds beyond the target range, the Bank should give explanation to avoid an emergence of market concerns given that the effects of the system failure on liquidity demand were not clear.

This member also pointed out that the outstanding balance of current accounts could remain high, given that (1) market participants might have become cautious about taking credit risk after the removal of blanket deposit insurance, and furthermore, (2) the intermediary function of the money market was declining as a result of the Bank's high level of funds provision, as evident in the decrease in the volume of transactions among market participants. Another member said that it was difficult to make a general assessment on this point because, while the deterioration in the market function was a negative side effect of the extremely low interest rates, it also allowed the Bank to implement quantitative easing. This member continued that, since this was not causing significant problems so far, the Bank should continue conducting money market operations in accordance with the current guideline for the time being, giving due consideration to developments in the unstable demand for funds held in current accounts at the Bank.

One member commented on how the Bank should conduct money market operations after the effects of the system failure of a major bank group subsided, and said that the Bank should continue money market operations, aiming as far as possible at the upper end of the target range, and if deemed necessary, examine ways to broaden the range of eligible collateral and review the means for money market operations. Against this view, a different member said that, in examining new means for money market operations, various issues including their side effects should be considered carefully.

IV. Remarks by Government Representatives

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

(1) Japan's economy was showing movements toward bottoming out as exports and industrial production were almost bottoming out. This view of the economy was basically the same as the Bank's. The Outlook Report to be released on April 30, 2002 forecasted, however, that prices were likely to stay on a declining trend for some time, and therefore, decisive monetary easing was still necessary to stop deflation.

(2) The Government would like to ask the Bank to take every necessary step in terms of liquidity provision, paying due attention to developments in the economy and financial markets. The Government would also like to ask the Bank to stop the continuous price falls and stabilize prices by devising additional monetary policy measures, and consider a variety of options and take drastic measures to prevent the economy from sliding into a deflationary spiral.

The representative from the Cabinet Office made the following remarks.

(1) The Government expected that, although the Japanese economy would continue to be in a severe situation, it would escape from stagnation and begin to move gradually toward recovery led by private demand in the second half of the fiscal year, against the background of (a) materialization of positive consequences of policy efforts, such as the implementation of the second supplementary budget for fiscal 2001 and the budget for fiscal 2002, (b) the recovery of the U.S. economy, and (c) the progress in inventory adjustment.

(2) The Government would further discuss strategies to revitalize the economy and tax measures at the Council on Economic and Fiscal Policy and draw up a basic guideline by around June. The Government was firmly resolved to stop deflation in cooperation with the Bank. In this regard, the Government would continue promoting further disposal of NPLs even after the release of the results of special inspections and discussing measures to strengthen the Japanese financial system.

(3) The Government would like the Bank to continue deliberating on drastic and effective monetary policy measures and implementing them to stop deflation, as the Government considered that the Bank's commitment played an important role in the emergence of the effects of its monetary policy.

V. Votes

Based on the above discussions, members shared the view that it was appropriate to maintain the current guideline for money market operations.

To reflect this view, the chairman formulated the following proposal.

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

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

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.

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

Votes against the proposal: None.

VI. Discussion on the "Outlook and Risk Assessment of the Economy and Prices"

The Policy Board discussed the draft of the "Outlook and Risk Assessment of the Economy and Prices" and put it to the vote. By unanimous vote, the Board decided to publish it on April 30, 2002.