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Minutes of the Monetary Policy Meeting

on January 16, 1998
(Preliminary translation prepared by the Bank staff)

March 3, 1998
Bank of Japan

A meeting of the Bank of Japan Policy Board on monetary policy (Monetary Policy Meeting) was held in the Head Office of the Bank of Japan in Tokyo on Friday, January 16, 1998, from 9:05 a.m. to 1:27 p.m. 1

Policy Board Members Present Mr. Y. Matsushita, Chairman, Governor of the Bank of Japan
Mr. S. Koino, appointed member
Mr. Y. Gotoh, appointed member
Mr. S. Taketomi, appointed member
Mr. T. Nakagawa, representative of the Ministry of Finance
Mr. Y. Fujishima, representative of the Economic Planning Agency

Reporting Staff Mr. T. Fukui, Senior Deputy Governor
Mr. A. Nagashima, Deputy Governor for International Relations
Mr. J. Yonezawa, Executive Director
Mr. Y. Yamaguchi, Executive Director
Mr. T. Kawase, Director, Policy Planning Department
Mr. K. Takeshima, Director, Credit and Market Management Department
Mr. Y. Kawahara, Adviser to the Governor, Credit and Market Management Department
Mr. M. Sugita, Director, International Department
Mr. M. Matsushima, Director, Research and Statistics Department

Secretariat of the Monetary Policy Meeting Mr. T. Mitani, Director, Secretariat of the Policy Board
Mr. S. Watanabe, Associate Adviser, Secretariat of the Policy Board
Mr. K. Yamamoto, Chief Manager, Planning Division, Policy Planning Department
Mr. M. Amamiya, Associate Adviser, Policy Planning Department

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on February 26, 1998.

I. Summary of Staff Reports2

A. Recent Money Market Operations

Market operations were directed toward maintaining the uncollateralized overnight call rate on average slightly below the official discount rate, a policy stance maintained since September 8, 1995.

From the beginning of the monthly reserve maintenance period starting on December 16, 1997, the Bank supplied ample liquidity to the market daily, significantly in excess of required reserves, utilizing various instruments of market operations. As a result, any significant rise in the uncollateralized overnight call rate was averted, although potential upward pressure persisted.

As regards term instruments, rates on those with maturity of two months or less showed a considerable decline after the turn of the year as end-of-year demand for funds receded. However, rates on 3-month funds, which would be held over the fiscal year-end in March, remained at a high level. The Bank therefore actively supplied the market with funds with maturity of 3 months or over. As a result, rates on these instruments were finally starting to decline.

B. Recent Developments in the Foreign Exchange Market and Overseas Economic and Financial Conditions

1. Developments in the foreign exchange market

In the foreign exchange market, the yen depreciated against the U.S. dollar from autumn 1997, falling to the 134-135 yen range on January 7, 1998. Subsequently, heightened expectations of the additional economic stimulus package in Japan and a view that the economic adjustment in the Asian countries would come to affect the U.S. economy pushed up the value of the yen against the U.S. dollar to the 129-130 yen range. The exchange rate of the yen against the deutsche mark, which had been stable at the 72-74 yen range, more recently rose to the 70-71 yen range. The nominal effective exchange rate of the yen rose to the level of the beginning of 1996 reflecting substantial appreciation of the yen against other Asian currencies.

While the exchange rate of the Korean won was stabilizing, the rates of some other Asian currencies such as the Indonesian rupiah remained unstable.

2. Overseas economic and financial developments

In the United States, there was weakness in some indicators, for example in corporate sentiment. However, economic indicators on the whole, especially those relating to private consumption, suggested that economic growth remained strong. Prices continued to be stable. Both long- and short-term market interest rates declined due partly to an inflow of funds reflecting disturbances in the Asian currencies and financial markets. Meanwhile, the stock market showed some fluctuation.

In Europe, economic recovery continued in Germany and France, supported mainly by recovery in exports. The economy of the United Kingdom continued to follow a steady expansionary trend.

In East Asia, there were signs of improvement in the current account balances of some countries, but domestic demand continued to weaken further. The stock market was starting to recover in the Republic of Korea, while it remained bearish in Singapore and Indonesia.

C. Economic and Financial Developments in Japan

1. Real economy

With respect to final demand, net exports continued to increase, and business investment was rising moderately, mainly in the manufacturing sector. Meanwhile, private consumption continued to stagnate, reflecting cautious household sentiment that persisted even after the rebound of the front-loading expansion of spending prior to the consumption tax hike had subsided. Housing investment continued to be weak and public-sector investment was decreasing. Reflecting the weak final demand, inventory adjustment pressures were spreading, and industrial production was on a slightly declining trend. The pace of improvement in employment and income conditions was also slowing. Thus, the positive growth cycle of production, income, and expenditures had stalled.

As regards the outlook of the economy, external demand was expected to continue upholding the economic growth, and the special tax-cut measures announced in December 1997 were expected to have positive effects on household spending. Overall, however, the economy was likely to remain stagnant for a while, due to the intensifying pressures of inventory adjustment, the continued decline in public-sector investment, and the anticipated deceleration in business fixed investment. Given the slowdown in the pace of growth, the economy was considered to be vulnerable to further negative impacts. In these circumstances, the possibility of the emergence of further downside risks should be carefully observed, such as prolonged and intensified adjustments in the Asian economies, more restrictive lending stance of financial institutions impeding corporate finance, or further deterioration of confidence in the corporate and household sectors.

2. Prices

With regard to prices, wholesale prices declined reflecting a slack in the supply and demand conditions of goods. Meanwhile, consumer prices remained at a level slightly above that of the previous year when observed excluding the effects of institutional changes such as the rise in the consumption tax rate. Thus, prices on the whole remained stable. Prices were likely to be steady in the immediate future, since downward pressures on prices were not as significant as was the case in 1995, when the yen's appreciation induced a penetration of imports, which then directly dampened prices of import-competing domestic final goods, arousing concerns for a deflationary spiral in the economy. However, conditions which might affect price developments, including the slack in supply and demand conditions in the Asian economies, should be carefully examined, since the output gap in the domestic economy was unlikely to diminish for a while.

3. Financial developments

Financial markets showed the following developments. Yields on TBs and long-term government bonds were at around their lowest levels. Interest rates of term instruments in money markets and yields on corporate bonds and bank debentures, on the other hand, had risen and remained high due to the more cautious attitude of market participants toward credit and liquidity risks following the failure of some financial institutions. Stock prices were low as the confidence in corporate profit growth continued to be weak and uncertainty over the financial system mounted. In the foreign exchange markets, the yen appreciated against other Asian currencies, while it depreciated against the U.S. dollar.

With respect to growth in monetary aggregates, the underlying trend of lendings by private financial institutions remained almost unchanged, and the year-to-year changes in average outstanding of M2+CDs continued to be at around 3 percent. Lending attitudes of financial institutions, however, were becoming increasingly cautious as capital adequacy constraints became more binding due to the fall in stock prices and the yen. Moreover, higher market interest rates had been gradually pressuring lending rates to rise since December 1997. There was, therefore, a need to carefully monitor the developments in the financial markets and their influences on the real economy.

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

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

In the Policy Board's discussion of recent economic and financial developments in Japan , all of the members agreed that Japan's economic growth remained stagnant. Sluggish domestic demand, especially household expenditures, had been exerting a negative influence on production, employment, and income, and corporate sentiment had weakened.

Members reviewed the continued stagnation ofprivate consumption. The sluggishness of private consumption since November 1997 appeared to be somewhat different in nature from the weakness of the period from April to October. It could not be explained merely by the drop-off in consumer demand following the front-loading of spending prior to the rise in the consumption tax rate in April 1997 and by the effects of the discontinuation of the special income tax reduction. As the major factor behind the stagnant consumption since November, many of the members referred to a decline in consumer confidence, which led to an intensified"defensive attitude," or a tendency to hold back on spending to save for the future, in the household sector. They considered the weakening of confidence to have been caused by the renewed concern about the stability of the financial system from November, declining stock prices, and the turmoil in Asian currencies and financial systems.

Developing on this discussion, members went on to examine the trends underlying the economic stagnation that was becoming increasingly apparent.

Members noted that the current phase of the economy featured (1) a substantial decline in private consumption, which had remained relatively stable in past economic recessions; (2) a significant deterioration of confidence in the economic outlook not only in the household sector but also the corporate and financial sectors, leading to amplified concern about the economy; and (3) a vicious circle created by interaction between the real economy and financial activity whereby an increasingly stagnant economy brought about a decline in stock prices, which led to more cautious financial institution behavior, which in turn negatively influenced corporate activity and sentiment.

Many members commented that these features made it difficult to explain recent developments adequately merely by the ordinary business cycle, such as the inventory cycle and the capital stock cycle.

Based on this assessment of the current economic situation, members deliberated on the outlook for the economy by examining prospective supportive factors in the economy and downside risks requiring due attention.

They referred to the following as the supportive factors, and many considered that the risk at present of the economy going into a downward spiral was not significant.

  1. (1) The effects of the factors constraining private consumption such as the rise in the consumption tax rate were expected to subside gradually.
  2. (2) Policy measures including special income tax reduction and financial system stabilization measures were to be implemented.
  3. (3) The conditions for Japan's exports remained favorable overall in view of the foreign exchange rate developments and the strength of overseas economies.
  4. (4) Significant downward revisions of business fixed investment plans currently seemed unlikely.

Many members pointed to the following factors as downside risks calling for attention.

  1. (1) Further intensification of adjustments in other Asian economies might dampen Japan's economic activity, especially exports.
  2. (2) A more restrictive lending attitude of financial institutions might hamper corporate financing.
  3. (3) Concern about the stability of the financial system and increased company failures might further undermine the confidence of the household and corporate sectors.
  4. (4) Prolonged inventory adjustment might place downward pressure on corporate profits, with this in turn leading to adjustments in fixed investment and employment.

Of these risk factors, the prospects for a more restrictive lending attitude of financial institutions and its possible effects were discussed in detail. It was pointed out that with the Japanese economy and financial system in a major transition phase, it was natural that the lending attitude of financial institutions would become cautious. In the long term, such an attitude should contribute to improving the efficiency of financial institution management and thereby to the rationalization of Japanese industry. However, a majority of the members, including those who referred to such long-term effects, were of the view that the lending attitude of financial institutions was likely to become more restrictive in the January-March quarter of 1998 and, therefore, that its impact on real economic activity must be closely watched. It was pointed out that this might not only restrain real economic activity such as business fixed investment through the tightening of corporate financing, but this might also further intensify anxiety of households and firms about the economy and the financial system, especially if company failures increased.

All of the members agreed that they should monitor carefully the lending stance of financial institutions and its influence on the economy, considering that these would depend on various factors including (1) movements of stock prices and the yen's exchange rates, and their effects on the balance sheets of financial institutions; (2) developments in alternative fund-raising means such as corporate bonds and commercial paper; (3) the lending attitude of financial institutions with relatively high capital ratios; and (4) the effects of the economic stimulus package, including a raising of the maximum lending limits of government financial institutions and financial system stabilization measures announced by the government in and after November 1997, and of the provision of sufficient funds in the financial market by the Bank of Japan.

With regard to recent developments in foreign exchange markets, members commented that the exchange rates of the yen generally reflected the economic growth differentials between Japan and other countries. However, some pointed out that further rapid depreciation of the yen might be a problem for the Japanese economy. Specifically, it might slow the pace of structural reform in industry. In addition, an increase in the yen value of foreign currency-denominated assets might, by reducing the capital ratios of financial institutions, cause them to adopt an even more restrictive lending attitude in order to remain in compliance with capital adequacy requirements.

In the Board's discussion of price developments , the observation was made that prices would continue to be stable in the immediate future, with little risk of inflation or deflation. At the same time, it was pointed out that in view of ongoing economic adjustments in other Asian countries and developments in international commodity prices, attention should be focused more on the deflationary risks.

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

Based on the Policy Board's discussion of domestic economic and financial developments, members deliberated on the monetary policy for the immediate future.

Members indicated that in order to prevent a further deceleration of the economy, it was important to avert a further decline in private consumption, which had caused the slowdown. The fall in private consumption could be attributed mainly to two factors: (1) negative aspects of fiscal consolidation and (2) deteriorated confidence in the economy reflecting heightened concern about the stability of the financial system. While the outlook was subject to uncertainty, some members expected that the income tax reduction measure and financial system stabilization measures announced by the government would diminish the two restraining factors and stimulate private consumption. Such government policies were considered to realize a better-balanced economic policy and, with the end of the accounting period of most companies coming up in March, it was considered important that they be implemented promptly.

In the context of preventing a further weakening of confidence, members stressed the significance of implementation of measures by the government to stabilize the Japanese financial system as well as of the various measures taken internationally to stabilize the Asian economies and financial systems. Specifically, measures aimed at fundamentally resolving Japan's financial system problems, which were to include the use of public funds, were being considered by the government, and they were beginning to gain the public's understanding. To counter the turmoil in Asia, prompt and large-scale economic assistance had been extended by international organizations such as the International Monetary Fund (IMF) with the participation of Japan, the United States, and other countries. Members commented that such positive moves were clear advancements toward solving the problems, and would thus help to strengthen confidence in the economy. In this regard, some members suggested monitoring closely whether the recovery in stock prices in recent days reflected a change in the sentiment of market participants.

During this discussion, the two members representing the Ministry of Finance and the Economic Planning Agency explained the various economic measures to be implemented by the government. The measures included a raising of the maximum lending limits of government financial institutions, financial system stabilization measures involving the use of public funds worth 30 trillion yen, and special income tax reduction. The representatives expected that the effects of these measures combined would reduce uncertainty about the economic outlook and thereby support economic recovery. In addition, the representative of the Economic Planning Agency commented that along with the ongoing six reforms in Japan's economic and social systems, including fiscal consolidation, flexible policy measures should be implemented according to the prevailing economic conditions.

In considering monetary policy for the immediate future, the members also deliberated on recent developments in market interest rates. Members were of the view that the current term structure of market interest rates, with low and stable overnight rates and high rates on term instruments, did not reflect developments in economic activity properly. It reflected heightened awareness of market participants of credit and liquidity risks, which brought about expanding spreads between yields on TBs offered by the Japanese government and rates on term instruments offered by private institutions such as CDs and euro-yen. Therefore, all of the members agreed that it was most important in market operations that the Bank of Japan provided ample long-term funds, such as 3-month funds, to the market to thereby restore the stability of market interest rates and lower the level of interest rates on term instruments. Further, a majority of the members commented that the sufficient provision of liquidity would contribute to stabilizing the financial system and to improving household and depositor sentiment.

Some members also commented that with the weak private-sector sentiment, further monetary easing would have only limited effects on the real economy and, moreover, it could reinforce the defensive consumption attitude of households.

It was also pointed out that recent price developments made it difficult to evaluate the interest rate level in terms of its effect on the economy. Consumer prices remained above the previous year's level while wholesale prices declined slightly. Therefore, it was possible that the real interest rate offered to investors such as households (nominal interest rate minus expected rate of consumer price inflation) remained low while that offered to fund-raisers such as firms (nominal interest rate minus expected rate of wholesale price inflation) was rising, expanding the gap between the two. In relation to this point, the importance of raising the real investment yield on the financial assets of households to a more appropriate level was mentioned. However, under the present circumstances, members were of the view that in order to support economic activity from the monetary side, it was most important to hold down the real fund-raising cost of firms by maintaining the current policy and thereby encouraging declines in interest rates on term instruments.

At the conclusion of the Board's discussion, all of the members generally agreed that in the implementation of monetary policy in the immediate future, the Bank should maintain the current easy stance of monetary policy and promote the permeation of its effects on interest rates on term instruments. In doing so, they should monitor developments closely, including the implementation of various measures by the government and their effects.

IV. Votes

Before votes were taken on monetary policy action, the chairman confirmed the rules for the formulation of policy proposals and for the determination of policy action.

Of the three instruments of monetary policy implementation, the guideline for money market operations would be determined at every Monetary Policy Meeting, including determination of unchanged guidelines. Policies regarding the official discount rate and the reserve requirement ratio would be determined only when policy changes were involved. Thus, when the Bank's monetary policy stance was to remain unchanged, a policy proposal for maintaining the existing guideline in the intermeeting period would be formulated, but policy proposals concerning the official discount rate or the reserve requirement ratio would not be drafted.

After the members approved the above procedures, the chairman formulated the following policy proposal, on which votes were taken.

Policy Proposal:

The guideline for money market operations in the intermeeting period would be as follows, and published by the attached press release. The Bank of Japan would encourage the uncollateralized overnight call rate to remain on average slightly below the official discount rate.

Votes for this proposal:
Mr. Y. Matsushita
Mr. S. Koino
Mr. Y. Gotoh
Mr. S. Taketomi
Votes against this proposal:

At the end of the meeting, the Policy Board approved"The Bank's View" on recent economic and financial developments, which would be published on January 20, 1998 in the Monthly Report of Recent Economic and Financial Developments (consisting of"The Bank's View" and"The Background").3

  1. 3The Japanese version of the full text of the Monthly Report of Recent Economic and Financial Developments was published on January 20, 1998 together with the English version of The Bank's View. The English version of The Background was published on February 6, 1998.


For immediate release

January 16, 1998

Bank of Japan

The Bank today held a Monetary Policy Meeting, a regular meeting of the Policy Board on monetary policy.

By unanimous vote, the Policy Board decided to leave monetary policy unchanged.