Change in the Guideline for Money Market Operations

March 9, 2006
Bank of Japan

(For immediate release)

At the Monetary Policy Meeting held today, the Bank of Japan decided to change the operating target of money market operations from the outstanding balance of current accounts at the Bank to the uncollateralized overnight call rate, and to set the following guideline for money market operations for the intermeeting period (see Attachment).

The Bank of Japan will encourage the uncollateralized overnight call rate to remain at effectively zero percent.

Measures concerning Money Market Operations

The outstanding balance of current accounts at the Bank of Japan will be reduced towards a level in line with required reserves. Given that financial institutions have managed liquidity against the backdrop of large amounts of current account balances and extensive funds-supplying operations by the Bank for a prolonged period since the adoption of the quantitative easing policy, the reduction in current account balance is expected to be carried out over a period of a few months, taking full account of conditions in the short-term money market. The process will be managed through short-term money market operations. With respect to the outright purchases of long-term interest-bearing Japanese government bonds, purchases will continue at the current amounts and frequency for some time, with due regard for future conditions of the balance sheet of the Bank. With respect to the complementary lending facility, the loan rate will remain at the current level. The temporary waiver of add-on rates for frequent users of the facility, in effect since March 2003, will also be maintained.

The Bank's View on Economic Activity and Prices

Since March 2001, in view of preventing sustained decline in prices and preparing the basis for sustainable growth, the Bank of Japan has supplied extremely ample liquidity with current account balance at the Bank as the main operating target. The Bank also made a clear commitment to maintain the policy until the consumer price index (excluding fresh food, on a nationwide basis) registers stably zero percent or an increase year on year. The Bank has since maintained the quantitative easing policy according to this commitment.

Currently, Japan's economy continues to recover steadily. Exports have continued to increase reflecting the expansion of overseas economies. With respect to domestic private demand, business fixed investment has also continued to increase against the backdrop of high corporate profits. Robust corporate activity is positively influencing households, and private consumption has become solid. Looking ahead, the Bank expects a sustained recovery.

Concerning prices, year-on-year changes in the consumer price index turned positive. Meanwhile, the output gap is gradually narrowing. Unit labor costs generally face weakening downward pressures as wages began to rise amid productivity gains. Furthermore, firms and households are shifting up their expectations for inflation. In this environment, year-on-year changes in the consumer price index are expected to remain positive. The Bank, therefore, judged that the conditions laid out in the commitment are fulfilled.

Current View on Monetary Policy

Given that the effects of the quantitative easing policy on economic activity and prices now mainly result from short-term interest rates being zero, there will be no abrupt change as a result of today's policy decision.

Looking ahead, in considering the central scenario for economic activity and prices, there is a high probability of realizing sustainable growth under price stability. In the meantime, it should be noted that, over the medium- to long-term, there is a risk of swings in economic activity, as the stimulus from monetary policy is amplified against the backdrop of improving corporate profitability and a positive turn in price developments.

On the future path of monetary policy, there will be a period in which the overnight call rate is at effectively zero percent, followed by a gradual adjustment in the light of developments in economic activity and prices. In this process, if the risk mentioned above remains muted, in other words, if it is judged that inflationary pressures are restrained as the economy follows a balanced and sustainable growth path, an accommodative monetary environment ensuing from very low interest rates will probably be maintained for some time.

Attachment

March 9, 2006
Bank of Japan

At the Monetary Policy Meeting held today, the Bank of Japan decided, by 7-1 majority vote, to set the following guideline for money market operations for the intermeeting period:

The Bank of Japan will encourage the uncollateralized overnight call rate to remain at effectively zero percent.

(Reference)

Meeting hours:
March 8th: 14:00-15:50
March 9th:9:00-14:07

Members present :
Toshihiko Fukui ( Governor )
Toshiro Muto ( Deputy Governor )
Kazumasa Iwata ( Deputy Governor )
Miyako Suda
Shin Nakahara
Hidehiko Haru
Atsushi Mizuno
Kiyohiko G. Nishimura

(Others present)

March 8th
From Ministry of Finance:
Kazuyuki Sugimoto, Deputy Vice Minister for Policy Planning and Co-ordination (14:00-15:50)

From Cabinet Office:
Yoshiro Nakajo, Vice-Minister for Policy Coordination (14:00-15:50)

March 9th
From Ministry of Finance:
Kazuyoshi Akaba, Senior Vice Minister of Finance (9:00-13:51, 13:56-14:07)

From Cabinet Office:
Yoshiro Nakajo, Vice-Minister for Policy Coordination (9:00-13:51, 13:56-14:07)

Release of Monthly Report of Recent Economic and Financial Developments:
(Consisting of "The Bank's View" and "The Background")

"The Bank's View" 3:15 p.m. on Thursday, March 9
Full text (Consisting of "The Bank's View" and "The Background")
2:00 p.m. on Friday, March 10 (Japanese)
4:30 p.m. on Monday, March 13 (English)

Release of minutes:
2:00 p.m. on Friday, April 14, 2006