Minutes of the Monetary Policy Meeting

on June 25, 2003
(English translation prepared by the Bank's staff based on the Japanese original)

August 13, 2003
Bank of Japan

A Monetary Policy Meeting of the Bank of Japan Policy Board was held in the Head Office of the Bank of Japan in Tokyo on Wednesday, June 25, 2003, from 9:00 a.m. to 11:51 a.m.¹

Policy Board Members Present
Mr. T. Fukui, Chairman, Governor of the Bank of Japan
Mr. T. Muto, Deputy Governor of the Bank of Japan
Mr. K. Iwata, 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. E. Hirano, Executive Director (Assistant Governor)
Mr. M. Shirakawa, Executive Director
Mr. A. Yamamoto, Executive Director
Mr. H. Yamaguchi, Adviser to the Governor, Policy Planning Office
Mr. S. Kushida, Director, Head of Planning Division I, Policy Planning Office
Mr. H. Nakaso, Director-General, Financial Markets Department
Mr. H. Hayakawa, Director-General, Research and Statistics Department
Mr. K. Momma, Director, Head of Economic Research Division, Research and Statistics Department
Mr. A. Horii, Director-General, International Department

Secretariat of the Monetary Policy Meeting
Mr. K. Akiyama, Director-General, Secretariat of the Policy Board
Mr. Y. Nakayama, Adviser to the Governor, Secretariat of the Policy Board
Mr. N. Yoshioka, Director, Head of Planning Division II, Policy Planning Office²
Mr. M. Ohsawa, Director, Head of Money and Capital Markets Division, Financial Markets Department²
Mr. H. Onobuchi, Deputy Director, Secretariat of the Policy Board
Mr. H. Yamaoka, Senior Economist, Policy Planning Office
Mr. S. Shimizu, Senior Economist, Policy Planning Office

The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on August 7 and 8, 2003 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.
Messrs. Yoshioka and Ohsawa were present from 9:00 a.m. to 9:10 a.m.

I. Establishment of Principal Terms and Conditions for the Outright Purchases of Asset-Backed Securities

A. Staff Proposal

The staff proposed that the Bank establish Principal Terms and Conditions for the Outright Purchases of Asset-Backed Securities and the procedure for selection of eligible counterparties to outright purchases of asset-backed securities (ABSs) and amend the rules for conducting the Bank's business. The proposal was made based on "Outline of the Outright Purchase Scheme for Asset-Backed Securities" decided at the previous Monetary Policy Meeting held on June 10 and 11, 2003. The staff also proposed that the Bank extend Temporary Rules of Eligibility Standards for Asset-Backed Commercial Paper and Dematerialized Asset-Backed Commercial Paper, effective until end-March 2005, for one year until end-March 2006 when the outright purchases of ABSs would be terminated.

B. Members' Discussion and Vote

Members voted unanimously to approve the proposal and agreed that the decision should be made public.

II. Summary of Staff Reports on Economic and Financial Developments³

A. Money Market Operations in the Intermeeting Period

The Bank conducted market operations in accordance with the guideline decided at the previous meeting on June 10 and 11, 2003.⁴ As a result, the outstanding balance of current accounts at the Bank was at the 28-30 trillion yen level.

As a result of these market operations, the weighted average of the uncollateralized overnight call rate moved at 0.001-0.002 percent.

B. Recent Developments in Financial Markets

Money market rates continued to be stable due to the Bank's provision of ample liquidity. In the call market, transactions at negative interest rates, which had been taking place for some time, were increasing somewhat. This was considered to be largely because the cost for foreign banks of raising yen funds through the currency swap market, already negative, was falling further with an increase in demand for U.S. dollar funds.

In the Japanese government bond (JGB) market, the yield on newly issued ten-year JGBs in the secondary market had declined to the 0.4-0.5 percent level. Thereafter, it had risen temporarily to the 0.65-0.7 percent level based on a market view that the result of the auction of 20-year JGBs was slightly disappointing and on a rise in long-term interest rates overseas. The volatility of long-term interest rates, which had been stable until recently, was increasing.

Japanese stock prices continued to rise. The Nikkei 225 Stock Average had recovered to the 9,000 yen level. A breakdown by type of investor showed that foreign investors continued to be net buyers of Japanese stocks. Bank stocks were rising as concern about an increase in unrealized capital losses on their stockholdings had subsided.

In the foreign exchange market, the yen and the euro moved in a relatively narrow range against the U.S. dollar. This was largely because views of market participants were mixed regarding the amount by which the Federal Open Market Committee (FOMC) would lower the target for the federal funds rate at its meeting on June 24 and 25, 2003.

The following developments were observed in Japan's flow of funds. In outward portfolio investment, residents' investment in foreign government, municipal, and corporate bonds was firm. In inward portfolio investment, it seemed that foreign investment funds were becoming active recently.

C. Overseas Economic and Financial Developments

The U.S. economy had stayed on a modest recovery trend, but the momentum for an increase in production and income was weakening. Private consumption remained on a moderate upward trend. Developments in business fixed investment continued to lack momentum although it had stopped declining. Regarding prices, the producer price index declined for the second consecutive month in May. However, the consumer price index (CPI) for all items less food and energy, which was unchanged in March and April, increased in May.

In U.S. financial markets, stock prices were on an uptrend. Long-term interest rates declined further as market participants' expectations of a further cut in the target for the federal funds rate by the FOMC had increased since the beginning of June 2003. However, long-term interest rates were increasing somewhat recently given that concern about deflation had subsided slightly following the release of economic indicators such as consumer prices.

In the euro area, the economy was decelerating since domestic demand components, such as private consumption and business fixed investment, remained sluggish and exports were slowing. In European financial markets, stock prices were on an uptrend. Long-term interest rates had declined due to anticipation of an additional monetary easing, but had recently returned, as in the United States, to the levels of early June. Developments in the financial markets strongly suggested that market participants expected that the European Central Bank (ECB) would cut interest rates further by early 2004.

In East Asian economies, the pace of economic recovery was decreasing slightly recently. In economies such as China, Hong Kong, Taiwan, and Singapore, the spread of severe acute respiratory syndrome (SARS) was having negative effects, for example in private consumption, but its effects on exports and production seemed to be limited. If SARS stopped spreading, its effects would be limited to slightly pushing down the growth rate of East Asian economies. In South Korea, it was clear that the growth in domestic demand was sluggish given that private consumption was decelerating and the pace of increase in business fixed investment was starting to slow.

D. Economic and Financial Developments in Japan

1. Economic developments

Economic indicators released recently suggested that there was no need to change the assessment of and the outlook for the economy agreed at the previous meeting.

With regard to developments in exports, real exports increased by 3.3 percent in May from the previous month. This showed that the effects of SARS on Japan's exports were not as great as expected. By region, exports to the United States increased. Those to NIEs increased in May and this suggested that the effects of SARS were limited. Exports to China remained at high levels. However, those to South Korea were weak reflecting sluggish domestic demand.

The survey by the Japan Finance Corporation for Small Business (JFS) for April showed that the value of business fixed investment planned for fiscal 2003 by small manufacturers was 7.4 percent lower than the actual value of investment in the previous fiscal year. This difference was relatively small compared with that at the beginning of previous fiscal years.

As for private consumption, sales at department stores increased slightly in May from the previous month, but the increase was smaller than a fairly large decrease in April. Outlays for travel fell sharply in April, due to the smaller number of holidays in Golden Week (the period from late April to early May that includes several national holidays), Iraq-related developments, and the effects of SARS.

The indices of all industrial activity generally remained basically level, although the indices for April decreased marginally by 0.2 percent from the monthly average of the January-March quarter of 2003. The indices decreased because of a decline in the indices of industrial production and the indices of construction industry activity, two components of the indices of all industrial activity.

Summer bonuses were expected to increase by 4.3 percent from the previous year according to the survey, mainly of large manufacturers, conducted by the Japan Business Federation (Nippon Keidanren).

The corporate services price index remained virtually level in May from the previous month. A breakdown showed that a fall in prices of advertising services in particular had contributed negatively to overall corporate services prices.

2. Financial environment

Regarding the issuing environment for corporate bonds and CP, investors continued to be inclined to purchase them in the face of limited investment opportunities. As a result, credit spreads at issuance on corporate bonds and CP overall were moving at levels close to the record low. The issuing environment continued to improve, with issuance by firms with low credit ratings continuing to increase.

The monetary base increased further and the year-on-year growth rate for June 2003 was expected to be around 20 percent. This was considered to be attributable to the following. First, regarding the outstanding balance of current accounts held at the Bank, the effects of the Bank's decision on May 20, 2003 to raise the target for current account balances would be more apparent in the average outstanding balance for June. And second, for banknotes, the year-on-year growth rate was increasing somewhat recently after declining in January to April 2003. The growth rate in January to April was low due to the significant increase in banknotes in the same period of the previous year against the background of the partial removal of blanket deposit insurance.

The number of corporate bankruptcies for May decreased by 16.1 percent from the previous year. Looking at the developments over a longer time frame, it had been declining gradually since the middle of 2002, although the level was still high. The decline seemed to be due to the slight improvement in small firms' financing situation against the background of the increase in their cash flows.

3Reports were made based on information available at the time of the meeting.
4The guideline was as follows:
The Bank of Japan will conduct money market operations, aiming at the outstanding balance of current accounts held at the Bank at around 27 to 30 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 above target.

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

Members agreed on the state of Japan's economy as follows. First, indicators released since the previous meeting offered no grounds for changing the assessment of the current situation that economic activity remained virtually flat as a whole. And second, developments in overseas economies and financial markets would continue to require close monitoring.

A few members expressed the view that economic developments were basically in line with the standard scenario in the "Outlook and Risk Assessment of the Economy and Prices" released in April 2003, although the economy might deviate slightly below the projected path in the first half of fiscal 2003. A different member said that the general sentiment was improving slightly with the fading of the problems arising from SARS and the rise in stock prices.

Many members expressed the view that exports were firm on the whole, with no negative effects of SARS observed in the data for May. One of these members commented that stability in the yen's real effective exchange rate also contributed to the firmness in exports. These members said that they would, however, continue monitoring related indicators closely, as there was uncertainty regarding how the effects of SARS would materialize.

One member expressed hope that business fixed investment would start increasing soon, given the current capacity utilization ratio and the capital stock cycle. This member added that a survey by the JFS suggested that small firms' investment plans for fiscal 2003 were relatively high for the beginning of the fiscal year. A different member, however, said that it was unlikely that an increase in business fixed investment would be the driving force of economic recovery. This was because momentum for a recovery in business fixed investment was weak due to factors such as pressures to adjust both the industrial structure and firms' balance sheets, and the decline in the expected growth rate.

Most members cited overseas economic developments and financial market developments as risk factors for the economy, and agreed that they required close monitoring.

Regarding the U.S. economy, many members pointed out the following. First, positive signs could be seen in some economic indicators released recently, including those related to private consumption. Second, the general sentiment was improving reflecting the decrease in geopolitical risks and the rise in stock prices. And third, positive effects of tax cuts and the interest rate decline were expected to materialize in the second half of 2003. On the other hand, some members said that corporate activity lacked strength, as seen in the weak recovery in production and the sluggish business fixed investment in nonresidential structures against the background of the low capacity utilization ratio, and that the employment situation remained severe. A few members added that, although housing investment remained firm currently, it was necessary to watch whether the Federal Home Loan Mortgage Corporation's accounting problems would have negative effects on housing financing. Some members commented that price developments required vigilant monitoring given the following factors: the pace of increase in the CPI was gradually slowing, although it increased in May from the previous month; prices of goods were continuing to fall; and the pace of increase in prices of services was slowing.

Based on the above discussion of the U.S. economy, members agreed as follows. Although substantial downside risks to the U.S. economy were decreasing, a full-fledged recovery had not yet been confirmed, and therefore developments in the U.S. economy, including policy measures and their effects, continued to require close monitoring.

With regard to East Asian economies, many members said that although the spread of SARS had negatively affected private consumption and some business activities, such as business negotiations, its effects on the overall economy were likely to be limited. One of these members pointed out that the effect of SARS on production in Asian economies had been small. A few members expressed the view that if SARS stopped spreading, East Asian economies would continue their steady growth, and this would increase the probability of a recovery of the Japanese economy in the second half of fiscal 2003. A few other members, however, commented that there remained a risk that the negative effects of SARS on private consumption in East Asian economies would cause growth in the region to decelerate and place downward pressure on Japan's exports.

Regarding financial developments, members concurred that the money market was stable as there were no negative effects arising from the problem of Resona Bank.

With regard to developments in long-term interest rates in Japan, some members said that they had started to rise based on market participants' view that the result of the auction of 20-year JGBs was slightly disappointing, and in a situation where long-term interest rates overseas were rising reflecting the abatement of deflationary concern about the U.S. economy and stock prices at home and abroad were on an uptrend. Some members pointed out that there had been strong concern among market participants that JGB prices had risen too high, reflecting the fact that long-term interest rates in Japan had declined to a historical low, and this concern had also caused JGB prices to fall. One member expressed the view that the recent rise would not have significant negative effects on the risk-taking capacity of banks holding a considerable amount of JGBs. A different member said that the flattening of the yield curve until recently had gone slightly too far, and pointed out that the current degree of increase in long-term interest rates would have positive effects on banks through the steepening of the yield curve. With regard to the outlook, some members said that the general view of market participants was that there would be no immediate substantial increase in long-term interest rates because, as there were no clear signs that the economy was recovering, there was no significant change in the fundamentals of Japan's economy.

Some members expressed the view that a rise in long-term interest rates could easily start if market participants' view changed, and the management of interest rate risk was therefore extremely important for market participants including financial institutions. In relation to this, one member stressed that long-term interest rates should basically be left to the market, and therefore the Bank should not create expectations among market participants that it would take some kind of action to deal with a rise in long-term interest rates.

Based on these discussions, members concurred that developments in long-term interest rates continued to require careful monitoring.

Many members said that stock prices were rising and also trading volume was increasing. This was mainly because foreign investors were becoming more inclined to invest in Japanese stocks against the background of the rise in U.S. and European stock prices, and the anxiety among market participants about the stability of the Japanese financial system was abating slightly. One member pointed out that the recovery in firms' business performance was also contributing to the rise in stock prices, as seen in the fact that some firms had resumed dividend payments following the improvement in their corporate profits. Another member expressed hope that the rise in stock prices would ease the anxiety about the stability of the financial system and lead to a recovery in firms' risk-taking capacity and in households' willingness to spend. However, some members said that the recent rise in stock prices was mainly due to purchases by foreign investors and that many market participants were still cautious about the sustainability of this rise.

Regarding the yen's exchange rates, a few members said that the foreign exchange market was relatively stable, as a surge in the yen had been avoided partly due to market participants' anticipation of possible intervention. A few other members commented that investment in foreign bonds by Japanese investors was increasing recently, and that these members intended to monitor carefully the effects of this increase on foreign exchange rates.

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

On the monetary policy stance for the immediate future, all members agreed that it was appropriate to maintain the current guideline for money market operations, given that there was no significant change in the state of the economy since the previous meeting, and that the money market continued to be stable. One member said that it was important that the Bank continue to provide ample liquidity to the market by conducting money market operations in a timely manner within the current framework for quantitative monetary easing. A different member commented in relation to the decision regarding the details of the outright purchases of ABSs that the Bank should continue its efforts to promote the development of the ABS market and facilitate smooth financing of small firms, in a way that would induce efforts by market participants.

Members exchanged views on a numerical target for price stability. One member stressed that the Bank should make a stronger commitment to overcome deflation, and continued that the member would like to discuss what would be appropriate indicators for measuring prices and what would be the desirable inflation rate. A different member agreed to having a discussion, saying that members should reach a conclusion as soon as possible on whether or not to set a numerical target for price stability in order to enhance the transparency of monetary policy. In response to these views, one member noted that members had already discussed a number of times in the past Monetary Policy Meetings the problems associated with a numerical target for price stability. The member then commented that if the Bank were to set some kind of numerical target regarding prices, various points still needed to be examined, including the following: the relationship between the target and the overall economic conditions; and how asset prices should be treated. A different member said that it could be considered that, at some time in the future when the Bank terminated the quantitative monetary easing, some sort of numerical target for price stability would be necessary to stabilize people's expectations. However, this member expressed the view that even if the Bank indicated a higher numerical target for price stability or announced clearly that it was adopting inflation targeting in the current situation in order to stimulate the economy further, this alone was unlikely to have positive effects. Some other members agreed with this view and were cautious about proceeding with a discussion solely on a numerical target for price stability at this stage. These members said that the issue should be examined from a broader perspective taking into account future developments in the economy.

V. Remarks by Government Representatives

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

(1) The government was currently compiling the "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2003" as part of the measures to realize sustainable economic growth and overcome deflation.

(2) The Bank had determined, at this meeting, the details of the scheme for outright purchases of ABSs with underlying assets mainly related to small and medium-sized firms. The government would like the Bank to start purchasing ABSs as soon as possible. In addition, the government considered it necessary that the Bank examine what positive effects the purchases had on corporate financing and the flow of funds in the economy, and continue to deliberate on the scheme including reviewing it when necessary.

(3) The Bank's decision to purchase ABSs was made against the background of the problem that the channels through which funds flowed in the economy were partially blocked, and, in particular, funds were not flowing smoothly to small and medium-sized firms. In order to solve this problem, the government considered it necessary that financial institutions become more active in their lending, in addition to the policy response by the government and the Bank. The government expected that private financial institutions would take active measures to this end.

(4) The government would like the Bank to deliberate on the possibility of new measures that would contribute to stimulating the flow of funds in the economy, and implement effective monetary easing measures. For example, the government would like to ask the Bank to improve the financial environment in order to encourage financial institutions to lend more actively through measures such as promoting project finance, and to give guidance to financial institutions.

(5) Deflation had been considered a phenomenon peculiar to the Japanese economy. However, concerns over deflation and disinflation were becoming widespread worldwide. In examining deflation in Japan, it would be meaningful to study deflation and disinflation in overseas economies.

The representative from the Cabinet Office made the following remarks.

(1) In its Monthly Economic Report released on June 17, 2003, the government assessed the economy as follows: "While the economy remains roughly flat, weak movements are seen recently in some areas." Although there was no change in the view that economic activity remained flat as a whole, the government revised the assessment of the economy slightly downward from the previous month because temporary weak developments were seen, mainly in exports and business fixed investment. As for short-term prospects, the economy was expected to move toward recovery if the recovery in the United States and other economies was sustained. However, there were concerns that the uncertainties surrounding the future of the U.S., Asian, and other economies might exert downward pressure on Japan's final demand.

(2) The two most important tasks for Japan's economy were to overcome deflation promptly and to achieve a self-sustained economic recovery led by domestic demand. To this end, the government was compiling the "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2003," which included policies for overcoming deflation and revitalizing the economy. The Prime Minister would ask the Council on Economic and Fiscal Policy to deliberate on the draft and report back. The Cabinet was then scheduled to approve it on June 27, 2003. The document would state that the government, with the Bank, would take powerful and comprehensive action to overcome deflation.

(3) The Bank had been examining the basic framework for the conduct of monetary policy since March 2003. The Bank had been prompt in deciding the details of the scheme for the outright purchases of ABSs at this meeting, in order to strengthen the transmission mechanism of monetary easing. The government hoped that the Bank would continue to conduct monetary policy that was effective in overcoming deflation. In order to overcome deflation in fiscal 2005, the government would like the Bank first of all to take measures to increase the inflation rate, and also to deliberate on what kind of money market operations would be appropriate to use in line with different stages of future developments in prices and interest rates.

VI. Votes

Based on the above discussions, members considered 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 1).

The Bank of Japan will conduct money market operations, aiming at the outstanding balance of current accounts held at the Bank at around 27 to 30 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 above target.

Votes for the proposal: Mr. T. Fukui, Mr. T. Muto, Mr. K. Iwata, Mr. K. Ueda, Mr. T. Taya, Ms. M. Suda, Mr. S. Nakahara, Mr. H. Haru, and Mr. T. Fukuma.
Votes against the proposal: None.

VII. Approval of the Minutes of the Monetary Policy Meeting

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of May 19 and 20, 2003 for release on June 30, 2003.

VIII. Approval of the Scheduled Dates of the Monetary Policy Meetings in July-December 2003

At the end of the meeting, the Policy Board approved the dates of the Monetary Policy Meetings to be held in the period July-December 2003, for immediate release (see Attachment 2).

Attachment 1

For immediate release

June 25, 2003
Bank of Japan

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