Minutes of the Monetary Policy Meeting

on September 11 and 12, 2003
(English translation prepared by the Bank's staff based on the Japanese original)

October 16, 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 Thursday, September 11, 2003, from 2:00 p.m. to 4:11 p.m., and on Friday, September 12, from 9:01 a.m. to 1:25 p.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 Finance²
Mr. H. Tsuda, Deputy Vice Minister for Policy Planning and Coordination, Ministry of Finance³
Mr. Y. Nakajo, Director General for Economic and Fiscal Management, Cabinet Office

Reporting Staff
Mr. E. Hirano, Executive Director (Assistant Governor)⁴
Mr. M. Shirakawa, Executive Director
Mr. A. Yamamoto, Executive Director
Mr. Y. Maehara, Adviser to the Governor, Policy Planning Office
Mr. H. Yamaguchi, Adviser to the Governor, Policy Planning Office
Mr. S. Kushida, Deputy Director-General, Policy Planning Office
Mr. H. Nakaso, Director-General, Financial Markets Department
Mr. H. Hayakawa, Director-General, Research and Statistics Department
Mr. K. Momma, Deputy Director-General, 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. T. Takei, Adviser to the Governor, Secretariat of the Policy Board
Mr. H. Onobuchi, Deputy Director, Secretariat of the Policy Board
Mr. N. Yoshioka, Director, Head of Planning Division II, Policy Planning Office⁵
Mr. S. Uchida, Senior Economist, Policy Planning Office
Mr. T. Kato, Senior Economist, Policy Planning Office
Mr. T. Kurihara, Director, Head of Money and Capital Markets Division, Financial Markets Department⁵

1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on October 9 and 10, 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.
2. Mr. Taniguchi was present on September 12.
3. Mr. Tsuda was present on September 11.
4. Mr. Hirano was present on September 12.
5. Messrs. Yoshioka and Kurihara were present on September 12 from 9:01 a.m. to 9:33 a.m.

I. Summary of Staff Reports on Economic and Financial Developments⁶

A. Money Market Operations in the Intermeeting Period

The Bank conducted market operations in accordance with the guideline decided at the previous meeting on August 7 and 8, 2003.⁷ As a result, the outstanding balance of current accounts at the Bank was at the 28-30 trillion yen level. In late August, the Bank purchased bills with a maturity of about nine months, the longest ever for such operations.

B. Recent Developments in Financial Markets

Developments in the money market were as follows. The weighted average of the uncollateralized overnight call rate was moving in the 0.001-0.002 percent range. Interest rates on term instruments remained generally stable. Interest rates on Euroyen futures were declining somewhat recently, after rising markedly starting from late August.

Long-term interest rates rose sharply, as the outlook for Japan's economy was improving. Recently, they were moving in the 1.4-1.6 percent range. The yield differentials between corporate bonds and Japanese government bonds (JGBs) in the secondary market increased slightly.

Stock prices rose substantially, as foreign investors continued to invest in Japanese stocks. The Nikkei 225 Stock Average was recently at around the 10,500 yen level.

The yen appreciated against the U.S. dollar, as foreign investors continued to invest in Japanese stocks. Recently, it was being traded in the 116-118 yen range against the U.S. dollar.

In credit markets, arrangement of syndicated loans had been growing steadily in recent years. It seemed that these loans were being extended increasingly to small and medium-sized firms, judging from the fact that the size of such loans was decreasing. In the intermeeting period, the Bank conducted purchasing operations of asset-backed commercial paper twice, to a total of approximately 100 billion yen.

C. Overseas Economic and Financial Developments

The U.S. economy had stayed on a modest recovery trend supported by household spending. Growth of real GDP for the April-June quarter of 2003 on an annualized quarter-on-quarter basis had been revised upward from the previous estimate of 2.4 percent to 3.1 percent due mainly to improvements in private consumption and net exports. Indicators related to private consumption were favorable on the whole, showing positive effects from the mailing out of government tax refund checks in late July. Positive developments were beginning to be observed in orders in the manufacturing sector and business fixed investment, particularly in IT-related goods. Production was also recovering, although it lacked momentum. However, pressure to adjust labor input remained strong. In U.S. financial markets, long-term interest rates and stock prices had risen slightly since the previous meeting.

In Europe, the economy in the United Kingdom remained on a modest growth path, although its momentum was weakening. Economies in the euro area, however, were slowing down. Real GDP growth for the overall euro area and for Germany and France individually was negative in the April-June quarter of 2003. Production in the euro area remained sluggish. In the financial markets, stock prices and long-term interest rates were rising, reflecting the increasing prevalence of the view that economies in the region would recover led by external demand.

In East Asian economies, economic recovery was gradually gaining strength. In China, both domestic and external demand had regained their former strength after the containment of severe acute respiratory syndrome (SARS). In Hong Kong, Taiwan, and Singapore, private consumption was recovering. In the NIEs and ASEAN economies, exports and production, particularly of IT-related goods, were beginning to regain their upward trend overall. In South Korea, however, private consumption remained weak, and business fixed investment was decelerating.

Judging from the above developments, it was becoming increasingly likely that the growth rate of the world economy would increase led by the U.S. economy. In the United States, however, there was concern that the rise in long-term interest rates and the severe employment situation would have negative effects on private consumption and housing investment. Furthermore, in Europe and South Korea, uncertainty about the economic outlook persisted. Downside risks to the world economy were smaller than they had been but nevertheless remained relatively large.

D. Economic and Financial Developments in Japan

1. Economic developments

Growth of real GDP for the April-June quarter of 2003 had been revised upward substantially from the first preliminary estimate, to 1.0 percent on a quarter-on-quarter basis and to 3.9 percent on an annualized quarter-on-quarter basis. However, when evaluating the large growth in real GDP, the following two factors should be taken into account. First, real GDP was boosted by temporary factors such as the favorable results of the Family Income and Expenditure Survey and the Financial Statements Statistics of Corporations by Industry, Quarterly. And second, there was a downward bias to the GDP deflator, particularly that of business fixed investment, due to factors related to calculation of indices, and this might have been pushing up the real GDP.

Real exports were more or less flat. They decreased marginally by 0.2 percent in the April-June quarter on a quarter-on-quarter basis and inched up by 0.9 percent in July from the monthly average of the April-June quarter. A breakdown showed that exports to the United States continued to be weak, mainly due to the decrease in automobile-related goods, while those to East Asia were recovering, especially IT-related goods and capital goods and parts such as semiconductor fabrication machines and equipment. As for the outlook, real exports were expected to resume their uptrend, reflecting the recovery in overseas economies.

Business fixed investment was recovering gradually, and the recovery trend was expected to become clearer, especially in large manufacturing firms that had so far significantly restrained investment despite the recovery in their profits. However, given various structural factors, it was unlikely that a strong recovery in business fixed investment would spread to a wide range of firms including small firms and nonmanufacturers.

With regard to the employment situation, although the number of regular employees continued to decline as firms remained cautious about hiring such employees, the total number of employees including both regular and non-regular employees had stopped falling, and the pace of decline in wages had slowed. As a result, the decline in household income was gradually coming to a halt. However, the employment and income situation overall still remained severe, as seen in the continuing high level of the unemployment rate.

In private consumption, many indicators declined even further in July from the already weak indicators of the April-June quarter. However, it was not necessary to change the basic assessment regarding private consumption for the following reasons. First, an unusually cool summer had had negative effects on private consumption. And second, the decline in household income was coming to a halt, and consumer sentiment had been improving somewhat recently. As for the outlook, private consumption overall was likely to remain weak, since the employment and income situation was unlikely to improve markedly for the time being.

Production continued to be basically level. It increased by 0.6 percent in July from the monthly average of the April-June quarter, after decreasing by 0.6 percent on a quarter-on-quarter basis in the April-June quarter. As for the outlook, production was expected to resume a gradual uptrend supported mainly by the recovery in exports, since hardly any adjustment pressure had built up on inventories as a whole.

On the price front, import prices had stopped declining, reflecting the uptrend in international commodity prices, especially crude oil prices. Domestic corporate goods prices were more or less flat. Corporate services prices continued a year-on-year decrease of slightly over 1 percent. On the other hand, the year-on-year rate of decline in consumer prices had diminished to 0.2 percent in July due to factors such as the rise in medical treatment costs in April caused by the reform of the medical care insurance system and the rise in tobacco tax in July. As for the outlook, consumer prices were basically projected to continue falling at the current moderate pace on a year-on-year basis, although there were possibilities that the rate of decline might temporarily diminish further depending on future special factors.

2. Financial environment

With regard to credit aggregates, private banks' lending continued to decline at around 2 percent on a year-on-year basis. In the corporate bond issuance market, some firms seemed to be taking a wait-and-see stance in view of the rise in long-term interest rates. The yield differentials between corporate bonds and JGBs in the secondary market were increasing somewhat, but those in the issuance market remained virtually unchanged. The favorable issuing environment of corporate bonds and CP was virtually unchanged on the whole, especially for firms with low credit risk.

In corporate finance, credit demand in the private sector continued to follow a downtrend, as business fixed investment was still below the level of firms' cash flow although it was recovering moderately. Private banks remained cautious in extending loans to firms with high credit risk, while on the other hand they continued to be active in extending loans to blue-chip firms. However, their lending attitude seemed to be becoming slightly more accommodative in areas such as terms and conditions for loans. Reflecting these developments, the lending attitude of financial institutions as perceived by firms in general was improving somewhat, although small firms continued to perceive it as severe. The financial position of firms in general was improving slightly, although that of small firms remained severe.

Growth rates of the money stock and the monetary base relative to economic activity remained high. The year-on-year growth rate of the money stock rose slightly and was at around 2 percent. This seemed to reflect, in addition to a recent slight slowdown in the decrease in funds raised by the private sector, the following temporary factor: firms' deposits increased due to the inflow of funds arising from sales of assets by corporate pension funds, which were returning funds entrusted to them in order to discontinue acting on behalf of public pension funds.

Developments in the financial and capital markets, the behavior of financial institutions, and the situation of corporate finance continued to require close monitoring.

1. 6Reports were made based on information available at the time of the meeting.
2. 7The 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.

II. Staff Report concerning the Acceptance of Syndicated Loans as Eligible Collateral

The staff made the following report concerning the acceptance of syndicated loans as eligible collateral.

Syndicated loans arranged in the form of loans on deeds would be accepted as eligible collateral under the current eligibility criteria if they satisfied the specified standards, such as those of creditworthiness. However, syndicated loans were hardly used as collateral in market transactions for operational reasons, and they had not been used as collateral submitted to the Bank. The Bank had been examining operational issues related to the acceptance of syndicated loans as collateral in the same manner as other types of loans on deeds. From December 2003 onward, the Government Housing Loan Corporation was scheduled to issue securities backed by mortgages purchased from private financial institutions. If thereafter financial institutions that held current accounts with the Bank requested their acceptance as eligible collateral, the Bank would start assessing the eligibility of such securities.

In response to the staff report, members expressed the following views. First, as arrangement of syndicated loans to small and medium-sized firms had been increasing, members would like the staff to examine operational issues related to the acceptance of syndicated loans as eligible collateral, from the viewpoint of promoting smooth corporate financing and fostering the development of the syndicated loan market. And second, it would be meaningful to accept them as eligible collateral given that this would contribute to appropriate pricing of loans in general through expansion of the secondary market for syndicated loans.

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

A. Economic Developments

On the state of Japan's economy, members agreed that economic activity still continued to be virtually flat as a whole, although signs of improvement had been observed in such areas as the environment for exports. Regarding the outlook, they agreed that with the recovery in overseas economies, the uptrend in exports and production would resume gradually, which in turn would initiate the momentum for an economic recovery in Japan.

Many members said that it was becoming more likely that the growth rate of the U.S. economy would increase in the second half of 2003, judging from the following developments. First, growth of real GDP for the April-June quarter of 2003 had been revised upward considerably from the previous estimate. Second, various indicators related to private consumption showed that it was firm, suggesting that effects of the large-scale tax cuts by the U.S. government were starting to materialize. And third, positive developments had been observed in production and business fixed investment, particularly in IT-related goods. One of these members expressed the view that the U.S. economy might achieve 4-5 percent growth in the second half of 2003. Most members, however, said that the speed and the sustainability of the economic recovery should be viewed with caution, as there was a possibility that the delay in improvement in the employment situation and the rise in long-term interest rates could have negative effects on private consumption and housing investment. Regarding the employment situation, a few members pointed out that the pace of recovery was even slower than during the jobless recovery in the first half of the 1990s, and that the recent situation was rather a "jobloss" recovery. One of these members expressed concern that, if the increase in domestic demand turned out to be a temporary development due to the effects of the tax cuts and an improvement in general sentiment, the pace of adjustment in employment might accelerate again. A different member said that recent developments in the U.S. economy were supported by a remarkable increase in labor productivity, and that the severe employment situation lay behind this increase. Another member said that the outlook for business fixed investment, which was expected to become the driving force of the economy in place of fiscal expenditure and private consumption, was fairly uncertain, as firms' problem of excess capacity was not yet solved. A few members expressed concern about the negative effects of the deterioration in the fiscal balance and the current account balance on long-term interest rates.

Many members said that East Asian economies had started to follow a growth path again, judging from the following developments. First, the effects of SARS were subsiding, as seen in the recovery in private consumption in China, Taiwan, and Singapore. And second, exports and production in NIEs were increasing, reflecting the improvement in global IT-related demand. One of these members pointed out that direct investment from abroad and construction of infrastructure in East Asia were very active. The member also noted that demand for shipping services was increasing due to the increase in trade with overseas economies. Regarding the euro area, one member said that the environment surrounding external demand was improving, as the U.S. economy was recovering and the euro had depreciated somewhat after following an upward trend. However, the growth rate of real GDP for the April-June quarter of 2003 had been slightly negative and production was sluggish. A different member said that although the member considered that economies in the region had stopped deteriorating, they were still burdened with various problems.

Members agreed that it was becoming increasingly likely that the growth rate of the world economy would rise due to the increase in the growth rate of the U.S. economy and the return of East Asian economies to their growth paths. However, there were also various uncertainties with regard to the above scenario such as the employment situation and developments in long-term interest rates in the United States, the strength of global IT-related demand, and geopolitical risks including possible terrorist attacks.

Given these developments, members agreed that, although Japan's exports and production remained virtually flat overall, the probability that they would gradually resume their recovery trend was high. One member said that positive developments in exports were spreading to a wider range of industries, as evident in the fact that exports of IT-related goods were rising steadily and those of capital goods and parts were recently increasing further, reflecting the recovery in global IT-related demand. However, some members raised the recent appreciation of the yen as a risk factor for developments in exports, and emphasized the importance of exchange rate stability.

Many members said that a gradual increase in business fixed investment was confirmed by the Financial Statements Statistics of Corporations by Industry, Quarterly and machinery orders. One member said that it was encouraging that business fixed investment in the GDP data had increased on a year-on-year basis even in nominal terms, although temporary fluctuations contributed to the increase to some extent. A different member pointed out that business fixed investment of large manufacturers in particular had been kept below the level of their cash flow for a long time, and said that it was likely that the recovery trend of their business fixed investment would become clearer. Some members said that improvement in corporate profits was confirmed by the Financial Statements Statistics of Corporations by Industry, Quarterly, and that the ground for business fixed investment to increase had been prepared. However, a few members pointed out that firms remained cautious about increasing business fixed investment for the following reasons. First, the increase in corporate profits was mainly due to progress in corporate restructuring. Second, firms continued to face the problem of their balance sheets. And third, the overseas production ratio had been rising. These members also said that management perception of firms' business condition was becoming even more severe amid structural changes in the economy and intensifying polarization in terms of firms' performance. One of these members said that business fixed investment was unlikely to achieve a full-fledged recovery, unless a rise in sales came into prospect reflecting an increase in final demand components, such as private consumption and exports. Some members said that they would focus on the results of the September Tankan (Short-Term Economic Survey of Enterprises in Japan) to be released in early October, to understand the latest developments in the corporate sector.

With regard to the employment and income situation, members agreed that it remained severe, although some positive developments had been observed, such as the halt in the decline in wages. One member added that the mismatch between supply and demand of labor had not become smaller. This member expressed the view that the break-even point had not declined sufficiently among small firms and nonmanufacturers, and therefore it would take a fairly long time before wages started to increase, although the pace of adjustment in employment and wages might slow slightly in the future. Regarding private consumption, many members said that the cause of the overall weakness in July following that of the April-June quarter was the cool summer, and said that future developments in private consumption required monitoring. One member raised the decrease in disposable income of households due to the increase in the social insurance premium as cause for concern. Another member, on the other hand, commented that consumer sentiment had not deteriorated as much as might have been expected given the cool summer, and there were positive factors, such as the improvement in the employment situation, that would contribute to private consumption in the near future.

Some members positively evaluated the growth of Japan's GDP for the April-June quarter, although they were aware that temporary factors and the upward bias of the index affected it to some extent. One member said that it was noteworthy that growth of nominal GDP had become positive year on year. However, many members said that there was a discrepancy to some extent between the figure and actual developments in production as well as the state of the economy as perceived by firms, and thus future developments required more careful monitoring.

Based on these discussions, members agreed on the following with regard to the assessment of the overall economy. First, the probability of the scenario for economic recovery that had been forecasted since the spring was increasing further. And second, however, the recent state of the economy according to indicators available to date remained virtually flat.

In relation to this, one member said that although the economy was improving in terms of flow, the recovery in the economy had not spread as widely as in past recovery phases because there still were structural problems in terms of stock, and these might continue to be a hindrance to economic growth. This member pointed out that there were still various uncertainties concerning the financial system and firms' balance sheets, such as the accounting treatment of deferred tax assets, the effects of the goal imposed on banks of reducing nonperforming loans as a proportion of their total loans by half, the removal of blanket deposit insurance, and the implementation of impairment accounting for real estate. A different member said that amid the structural changes there were a few positive developments regarding the economy's stock. First, reduction in excessive employee numbers, capital stock, and debts was almost completed in large firms with advanced technology that could lead industry for the next generation. And second, regarding the financial system, banks were becoming more active in extending loans to firms. This member added, however, that these developments had been observed only in small parts of the economy as a whole, and the member was therefore still cautious about overall developments.

As for prices, members agreed that although the year-on-year rate of decline in the consumer price index (CPI; excluding fresh food) diminished to 0.2 percent, this was partly due to temporary factors, and thus it was necessary to exclude their contribution in assessing the improvement. One member said that the deceleration in deflation was largely attributable to the temporary factors but it was also due to some extent to the continuing high growth of real GDP. A different member said that a cyclical upturn that continued for some time would be insufficient to cause the CPI to register "stably a zero percent or an increase year on year." This member said that considering the previous recovery phase experienced during 1999-2000 and the present size of the output gap, either extremely strong cyclical factors or continuous upward pressure stemming from completion of structural adjustments would be necessary for the CPI to register "stably a zero percent or an increase year on year." Therefore, the progress in structural adjustments required even closer monitoring than before.

B. Financial Developments

Members were agreed that the rise in stock prices was basically due to an improvement in market participants' perception of the economy. One member said that the rise also reflected market participants' favorable response to the increase in firms' profitability. Some members said that the rise in stock prices would not only lead to an improvement in corporate and household sentiment but also contribute to financial system stability.

The view was put forward that the increase in long-term interest rates was basically due to an improvement in market participants' perception of the economy, but it was also due to technical factors such as financial institutions' adjustment of their positions. Many members expressed the view that the JGB market remained unstable as a whole, although it started to show signs of stabilizing. As for the outlook, some members said that long-term interest rates could become more unstable given that financial institutions' risk-taking capacity was constrained under their risk management measures and because the semiannual book closings were approaching. With regard to the effects of the rise in long-term interest rates, many members expressed concern that a large rise in the rates deviating from economic fundamentals could negatively affect the financial system and economic activity. All members agreed with this view. One member commented on the corporate bond issuance market that firms were taking a wait-and-see stance. So far, it was unlikely that this was restraining corporate activity given that business fixed investment remained below the level of firms' cash flow. The member continued that monitoring was thus required of how developments in long-term interest rates affected corporate bond issuance and bank lending.

With regard to the money market, one member raised as cause for concern the fact that the term structure of bid rates for treasury bills (TBs) and financing bills (FBs) had been irregular, and interest rates on futures had remained at high levels. Most other members noted that money market rates remained stable overall, but there was some nervousness in the market reflecting the rise in long-term interest rates.

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

On the monetary policy stance for the immediate future, most members agreed that it was appropriate to maintain the current target range of "around 27 to 30 trillion yen" for the outstanding balance of current accounts at the Bank. This was because economic activity still continued to be virtually flat, although some signs of improvement had been observed.

In relation to the Bank's commitment in terms of policy duration, members discussed how the Bank should communicate with market participants. Some members pointed out that medium-term interest rates rose as long-term interest rates were increasing in late August, and said that this was partly due to market participants' skepticism about the Bank's stance on maintaining the quantitative easing policy. One member said that the rise could be due to the fact that market participants had become extremely nervous about the Bank's stance given the deterioration in the supply-demand balance of short- to medium-term Japanese government securities (JGSs). A few other members commented that the Bank should be careful when communicating its thinking in such a situation.

Given these circumstances, members concurred that it was important that the Bank regain and then reinforce market participants' confidence in the Bank's commitment in terms of policy duration. To this end, most members agreed on the following points. First, the Bank should explain thoroughly and repeatedly that its commitment to continue the current quantitative easing policy was very definite and specific. And second, it was important that market participants share the Bank's understanding regarding the economy and price developments. Some members commented that the Bank should explain these points to the public in the "Outlook and Risk Assessment of the Economy and Prices" to be released at the end of October 2003. Some members said that the rate of decline in the CPI excluding fresh food might diminish further depending on the effects of the cool summer. However, if the slower pace of decline was due to temporary factors, the Bank should explain that this would not cause changes in the Bank's quantitative easing policy. One member said that the Bank should state clearly to market participants its strong determination to overcome deflation, and added that it was also important to state that it had various policy measures to secure market stability.

Members then discussed the conduct of monetary policy in relation to the target for the outstanding balance of current accounts at the Bank for the period leading up to the semiannual book closings. Members agreed that the Bank would implement monetary policy based on the contingency clause of the guideline for money market operations, if it became necessary to provide funds exceeding the 30 trillion yen ceiling of the target around the semiannual book closings. Members also agreed that it was possible for the Bank to provide ample funds in a flexible manner based on the contingency clause, should there be a risk of financial market instability, whether or not this was related to the approach of the semiannual book closings. Many members expressed the view that, with the contingency clause, the Bank could respond appropriately to such a situation with the current target range of 27-30 trillion yen.

In response to this, one member said that the Bank should raise the current target range for the outstanding balance of current accounts at the Bank to around 30 to 35 trillion yen for the following reasons. First, the Bank should take a preemptive policy stance because there was a risk that the financial markets might become unstable in the near future. Second, the Bank should clearly indicate its strong determination to continue the quantitative easing policy not only by communicating its thinking to market participants but also by actually raising the target range. And third, the ceiling of the target range, which was 30 trillion yen, gave little leeway with the semiannual book closings approaching. The member added that, in addition to the raising of the target range, the Bank should secure market stability by carefully managing the frequency and maturities of market operations.

Some members expressed the view that it would be appropriate to extend the maturity of purchase/sale of JGSs with repurchase agreements from the viewpoint of conducting money market operations in a flexible manner for the maintenance of financial market stability under the quantitative easing framework. The maximum maturity at present of the Bank's outright purchases of bills as well as TBs and FBs was one year, while that of purchase/sale of JGSs with repurchase agreements was six months. In response, the chairman instructed the Bank's staff to study the issue of extending the maturity of purchase/sale of JGSs with repurchase agreements and report the result at the next Monetary Policy Meeting. Members agreed unanimously to make it public by the attached statement (see Attachment 1).

V. Remarks by Government Representatives

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

(1) There had recently been positive developments in Japan's economy, particularly in the corporate sector. However, prices continued to fall, and the role of the Bank's conduct of monetary policy in overcoming deflation continued to be vital.

(2) Reflecting the recent increase in expectations for economic recovery, developments in some interest rates were unstable. Some market participants considered that some people's concern that the quantitative monetary easing policy might be terminated earlier than expected had contributed to the instability. An excessive rise in interest rates preceding improvements in the economy could have negative effects on economic recovery.

(3) The government would like the Bank to give due consideration to developments in the economy and financial markets and reaffirm its stance of maintaining the quantitative monetary easing policy, and conduct monetary policy more flexibly.

(4) The government would also like the Bank to deliberate on and implement effective monetary easing measures to contribute to stimulating the flow of funds in the economy, including measures that would promote the smooth financing of small and medium-sized firms.

(5) The role of monetary policy was particularly important in Japan, considering that it was the only major industrial country where deflation continued amid global disinflation. The government would therefore like the Bank to continue to implement effective monetary easing measures to overcome deflation. The government would also like the Bank to devise ways of improving communication with the market, so as not to undermine its confidence that the Bank would maintain the quantitative monetary easing policy for some time.

The representative from the Cabinet Office made the following remarks.

(1) Growth of real GDP for the April-June quarter of 2003 had been revised upward in the second preliminary estimates to an annualized rate of 3.9 percent on a quarter-on-quarter basis. The government's assessment of the economy would be reported on September 12, 2003 at the meeting of the Ministerial Council, which discussed issues including its Monthly Economic Report. The economy was showing movements toward an incipient recovery, as seen in the increase in business fixed investment and the improvement in corporate profits. However, the deflationary trend continued. It was necessary to pay attention to developments in the financial and capital markets, as there was a possibility that long-term interest rates were rising unreasonably fast compared to improvements in the economy.

(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 implementing structural reform, based on "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2003" (hereafter the Basic Policies 2003). Moreover, the government had been deliberating on measures to strengthen the functioning of corporate financing. The Basic Policies 2003 stated that the government, with the Bank, would take powerful and comprehensive action to overcome deflation. The government considered that through these efforts deflation would be overcome after an intensive adjustment period, as anticipated in the fiscal 2002 version of "Structural Reform and Medium-Term Economic and Fiscal Perspectives."

(3) As the deflationary trend continued, the government would like the Bank to conduct effective monetary policy in order to overcome deflation in fiscal 2005. The government would like the Bank to conduct money market operations more appropriately and flexibly by, for example, utilizing operational tools that were more effective from the viewpoint of stabilizing the financial and capital markets, including developments in long-term interest rates. The government would also like the Bank to reaffirm that it would maintain the monetary easing policy until the CPI registered "stably a zero percent or an increase year on year," regardless of any temporary year-on-year increase in the CPI.

VI. Votes

Based on the above discussions, most members considered that it was appropriate to maintain the current guideline for money market operations with the target for the outstanding balance of current accounts at the Bank at around 27 to 30 trillion yen.

One member, however, said that it was appropriate to raise the target for the outstanding balance of current accounts at the Bank to around 30 to 35 trillion yen.

As a result, the following two proposals were submitted and put to the vote.

Mr. T. Fukuma proposed the following guideline for money market operations for the intermeeting period ahead:

The Bank of Japan will conduct money market operations, aiming at the outstanding balance of current accounts held at the Bank at around 30 to 35 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.

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

To reflect the majority 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 2).

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, and Mr. H. Haru.
Votes against the proposal: Mr. T. Fukuma.

VII. Discussion on the Bank's View of Recent Economic and Financial Developments

Members discussed "The Bank's View" of recent economic and financial developments, and put it to the vote. By unanimous vote, the Policy Board decided to publish "The Bank's View" on September 16, 2003 in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background"). ⁸

1. 8The original full text, in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on September 16, 2003 together with the English version of "The Bank's View." The English version of "The Background" was published on September 17, 2003.

VIII. Approval of the Minutes of the Monetary Policy Meeting

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of August 7 and 8, 2003 for release on September 18, 2003.

IX. Approval of the Scheduled Dates of the Monetary Policy Meetings in October 2003-March 2004

At the end of the meeting, the Policy Board approved the dates of the Monetary Policy Meetings to be held in the period October 2003-March 2004, for immediate release (see Attachment 3).

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Attachment 1

For immediate release

September 12, 2003
Bank of Japan

Review of Extending Maturities of the Purchase/Sale
of Japanese Government Securities with Repurchase Agreements

In the current money market operations of the Bank of Japan, the maximum maturity of outright purchases of bills¹ as well as treasury bills and financing bills is 1 year, while that of the purchase/sale of Japanese government securities² with repurchase agreements is 6 months.

At the Monetary Policy Meeting held today, views were expressed that it should be desirable to extend the maturity of the purchase/sale of Japanese government securities with repurchase agreements from the viewpoint of conducting money market operations in a flexible manner for the maintenance of financial market stability under the quantitative easing framework.

The Chairman instructed the Bank staff to study the issue of extending the maturity of the purchase/sale of Japanese government securities with repurchase agreements and report the result at the next Monetary Policy Meeting.

1. Bills issued by financial institutions accompanied with eligible collateral.
2. The Japanese government securities include Japanese government bonds with coupons, treasury bills and financing bills.

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Attachment 2

For immediate release

September 12, 2003
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 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.

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Attachment 3

For immediate release

September 12, 2003
Bank of Japan

Scheduled Dates of Monetary Policy Meetings in October 2003-March 2004

Table : Scheduled Dates of Monetary Policy Meetings in October 2003-March 2004

	Date of MPM	Publication of Monthly Report1	Publication of MPM Minutes
Oct. 2003	9 (Thur.), 10 (Fri.)	14 (Tue.)	Nov. 27 (Thur.)
	31 (Fri.)	--	Dec. 19 (Fri.)
Nov.	20 (Thur.), 21 (Fri.)	25 (Tue.)	Dec. 19 (Fri.)
Dec.	15 (Mon.), 16 (Tue.)	17 (Wed.)	Jan. 23 (Fri.)
Jan. 2004	19 (Mon.), 20 (Tue.)	21 (Wed.)	Mar. 2 (Tue.)
Feb.	5 (Thur.), 6 (Fri.)	9 (Mon.)	Mar. 19 (Fri.)
	26 (Thur.)	--	To be announced
Mar.	15 (Mon.), 16 (Tue.)	17 (Wed.)	To be announced

1. Outlook and Risk Assessment of the Economy and Prices (October 2003) will be published on Friday, October 31, 2003.