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Minutes of the Monetary Policy Meetingon February 13, 1998

(English translation prepared by the Bank staff based on the Japanese original)

March 18, 1998
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 Friday, February 13, 1998, from 9:00 a.m. to 1:00 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 March 13, 1998.

I. Summary of Staff Reports2

A. Recent Money Market Operations

Market operations in the period since the previous meeting on January 16, 1998 were conducted in accordance with the guideline determined at the previous meeting, which was to encourage the uncollateralized overnight call rate to remain on average slightly below the official discount rate. The Bank supplied ample liquidity to the market, utilizing various market operations instruments. Upward pressure on the uncollateralized overnight call rate mounted particularly from the last week of January, when a large number of term instruments matured and, accordingly, demand for funds heightened. The Bank therefore increased its provision of liquidity to the market and conducted additional operations as necessary. As a result, any significant rise in market interest rates was averted.

As regards term instruments, the Bank had been supplying the money market with sufficient long-term funds, and the rates on these instruments declined temporarily after the turn of the year. However, with the continuing cautious attitude of market participants toward credit risk and increasing demand for funds in preparation for fiscal-year-end settlement, the rates gradually rose from the end of January. The view prevailed in the market that interest rates on term instruments would remain high in the immediate future reflecting heightened awareness of credit risk. However, some saw a possibility of a decline in these rates on account of such factors as (1) increase in the Bank's provision of long-term funds, which would be held over the fiscal year-end, to the market and (2) progress in the formulation of financial system stabilization measures by the government.

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

1. Developments in the foreign exchange market

In the period since the previous meeting, the yen appreciated against the U.S. dollar reflecting (1) heightened expectation of additional economic stimulus packages in Japan and (2) easing of the critical situation in Asian economies and financial markets. Consequently, the exchange rate rose to the 120-125 yen range against the U.S. dollar. The yen also appreciated somewhat against the deutsche mark. The nominal effective exchange rate of the yen rose slightly to the level of autumn 1995 due to its appreciation against the U.S. dollar and European currencies, although the yen depreciated against other Asian currencies, which were gradually stabilizing on the whole.

2. Overseas economic and financial developments

In the United States, GDP data for the fourth quarter of 1997 indicated that economic activity continued to expand steadily, particularly household spending. Prices continued to be stable. Long-term interest rates rose slightly from mid-January, after declining due partly to an inflow of funds reflecting disturbances in the Asian currencies and financial markets. Stock prices advanced considerably, reaching a historical high on February 10, reflecting strong business performance in the October-December quarter of 1997 and the market's expectation of an easing of the crisis in Asia.

In Europe, economic recovery continued in Germany and France, supported mainly by recovery in exports. However, the effect of the export growth in increasing domestic demand was rather more modest in Germany than in France. The economy of the United Kingdom continued to follow a steady expansionary trend, although there were some indications of deceleration such as a reduction in net exports.

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 markets had been recovering in general since mid-January.

C. Economic and Financial Developments in Japan

1. Real economy

With respect to final demand, net exports continued to increase and were upholding the economy. Business fixed investment that had followed an upward trend, however, recently became lackluster. Meanwhile, private consumption continued to stagnate reflecting cautious household sentiment. Housing investment continued to be weak and public-sector investment was decreasing. Reflecting the weak final demand, inventory adjustment pressures intensified, and industrial production continued to decline. As a result, the pace of improvement in employment and income conditions continued to slow, and the positive growth cycle of production, income, and expenditures stalled.

As regards the outlook of the economy, external demand was expected to continue upholding the economy and the special tax-cut measures were likely to have positive effects on the household expenditure. Overall, however, the economy was likely to remain stagnant for a while, because prominent recovery in final demand was hardly foreseeable under the heightened pressures of inventory adjustment. Given the slowdown in growth, the economy was considered to be vulnerable to further negative impacts. In these circumstances, effects of adjustments in the Asian economies on Japan's economy such as exports, as well as those of financial developments on the real economy (as explained below), should be carefully observed.

2. Prices

With regard to prices, wholesale prices declined reflecting a slack in 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 overall remained stable and this trend was expected to continue in the immediate future. However, while the output gap in the domestic economy was unlikely to diminish for some time, downward pressures on domestic prices seemed to be increasing, since overseas commodity prices declined reflecting the deterioration of market conditions in Asia.

3. Financial developments

Financial markets showed the following developments. In the money markets, interest rates on term instruments, which once declined slightly in mid-January, again started to rise in the last half of the month. This reflected the persistently cautious attitudes of market participants toward liquidity and credit risks associated particularly with fiscal-year-end settlement in March. Meanwhile, there were some positive developments in reaction to policy measures to stimulate the economy and to stabilize the financial system. Stock prices rebounded, yields on long-term government bonds slightly increased, and the yen appreciated. However, a full recovery in the market confidence was yet to be seen.

Monetary aggregates, as indicated by developments in private bank lending and money stock, remained almost unchanged as a whole. With respect to lending attitudes of financial institutions, capital adequacy constraints appeared to have become somewhat less binding due to the rebound in stock prices, the appreciation of the yen, and the expectations for the effects of policy measures to stabilize the financial system. However, financial institutions were still cautious in extending loans. In addition, fund-raising cost of firms, in both borrowings from banks and direct financing in capital markets, increased to some extent especially for firms with relatively high credit risk. Financial institutions' lending attitudes, developments in capital markets, and their effects on corporate financing would have to be carefully monitored.

  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.

Despite such weakness of real economic activity, stock prices rebounded. Therefore, members went on to examine the implications of these financial market developments. A majority of the members considered that, rather than improvements in current real economic activity, the recent strength in financial markets reflected expectations of the effects of the financial system stabilization measures and special income tax reduction to be implemented by the government, as well as expectation of additional economic stimulus packages.

The majority view, therefore, was that a further deterioration of the confidence of market participants, which had been a matter for concern, had been averted. However, developments needed to be observed closely before they could judge whether this indicated any significant improvement in the business sentiment of market participants.

With regard to the lending attitude of financial institutions, members commented that the possibility had been reduced somewhat that financial institutions would take a stricter attitude toward lending in the near future, in view of the financial system stabilization measures to be implemented by the government and the recovery in stock prices. It was also pointed out that private bank lending in January maintained the previous year's level, and that fund-raising through alternative means had been facilitated, including direct financing through corporate bonds and commercial paper, and lending by government financial institutions.

However, the majority of the members commented that with the end of the accounting period for most firms coming up in March, the Bank needed to monitor carefully the lending stance of financial institutions and its impact on corporate financing. In doing so, it was important to take into account the regional differences reported at the meeting of general managers of Bank of Japan branches held on January 26-27.

In the Board's discussion of the outlook for the economy, members referred to the following as supportive factors for economic activity in the immediate future: (1) the impact of the negative aspects of fiscal consolidation, including the rise in the consumption tax rate, was expected to subside gradually; (2) the implementation of the financial system stabilization measures and the special income tax reduction was expected to produce favorable effects; and (3) Japan's exports as a whole remained on an increasing trend.

As factors requiring due attention, the members deliberated on the following: (1) developments in business fixed investment; (2) degree and duration of inventory adjustment; and (3) the influence of ongoing adjustment in Asian economies.

The majority of the members were cautious about the outlook for business fixed investment. It was pointed out that leading indicators and business surveys showed signs of a weakening of firms' attitude toward fixed investment. This was attributable to various factors including cessation of the initial boom of investment in computers and information services and strengthening of the downward pressures of production and inventory adjustments on corporate profits. Therefore, many members pointed to the possibility that business fixed investment could no longer contribute to supporting economic growth, and considered it necessary to monitor future developments closely.

In this discussion, members also examined the outlook for production and inventory adjustment pressures. Many members noted the risk that inventory adjustment would persist for some time, in view of recent developments in final demand. It was also pointed out that a delay in the recovery of production might, by restraining corporate profits and employees' income, undermine the force of the self-sustained recovery in private-sector activity, such as business fixed investment.

The members also discussed the influence of the adjustment in other Asian economies on Japan. It was pointed out that although Japan's exports on the whole continued to expand, there was a possibility that the growth would eventually slow due to a fall in demand in the Asian countries. More specifically, they expressed the concern that the deceleration in exports might start to affect the economy adversely just as the negative impact of inventory adjustment began to subside. Members commented that in examining the effects of the economic adjustment in the Asian countries on Japan's economy, it was necessary to observe not only trade developments, but also developments in other possible channels through which the adjustment might have an impact, such as international commodities markets, consolidated profits of Japanese firms, and Japanese financial institution management.

With regard to the outlook for the adjustment in the Asian economies, members pointed out that the prompt support from international organizations and various countries concerned including Japan and the United States was a positive factor. However, difficulties had recently been emerging in carrying out domestic economic and financial system reforms. Therefore, it was necessary to keep a close watch on the progress of the adjustment and its influences on Japan.

In the Board's discussion of price developments, the observation was made that, although prices were declining slightly, the stable trend was likely to continue in the immediate future, with little risk of any significant increases or decreases. At the same time, it was pointed out that downward pressure on prices appeared to be increasing in view of developments in the international commodities markets and the domestic supply and demand conditions. In the context of this second opinion, it was mentioned that if the potential growth rate of the economy were estimated at 2.0 to 2.5 percent, the output gap was likely to expand toward the next fiscal year, exerting deflationary pressure on prices. At the conclusion of this discussion, all of the members agreed that while prices were likely to be stable in the immediate future, it was necessary to pay due attention to the strengthening of potential deflationary pressures.

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

In the Policy Board's discussion of monetary policy, members first discussed the high level of money market interest rates on term instruments and possible countermeasures.

Many members considered that the persistently high interest rates on term instruments reflected the continuing heightened awareness of market participants of credit and liquidity risks with the fiscal year-end coming up in March. Members pointed out that, in view of the particularly high interest rates on term instruments due after the turn of the fiscal year, market interest rates were likely to stabilize once market participants secured sufficient funds for the fiscal year-end. At the same time, there was also the observation that some time would be required before the prevailing concerns about credit risk were dispelled. At the conclusion of this discussion, the majority of the members took the view that before they could assess overall developments in market interest rates, they needed to see the developments in the rates on term instruments after sufficient funds for the fiscal year-end were procured, and the effects of these developments on lending rates.

All of the members agreed that the Bank should therefore continue to supply ample funds to the market and conduct market operations to provide long-term funds that could be held beyond the fiscal year-end, to thereby reduce the market's concern about credit and liquidity risks.

The members also deliberated on the thinking that the Bank could encourage further declines in overnight call rates to thereby induce declines in interest rates on term instruments. Many members commented that they should first observe the effects of the Bank's provision of ample liquidity in the money market, discussed earlier. They also pointed out that as this was a question of whether further monetary easing was appropriate, it should be discussed in the context of the Bank's basic stance of monetary policy.

The members then discussed the monetary policy for the immediate future based on the Board's discussion of recent economic and financial developments.

Members considered that further monetary easing might seem appropriate if they were to focus on the downside risk of the economy. However, many of the members stressed the need to carefully examine the necessity and effects of the measure based on the overall economic and financial conditions in Japan. Further monetary easing could alleviate the extent of adjustments in business fixed investment and inventory. However, with the extremely weak confidence of firms and households, its direct stimulating effects on demand might be limited. In this discussion, a comment was also made that the economy currently featured a downturn in the expected growth rate and expected rate of return on investment. Therefore, the situation was that firms saw few investment opportunities rather than that their investment was being constrained by high financing costs.

Members considered that in order to strengthen the foundation of the economic recovery under these circumstances, it was necessary to restore the confidence of economic entities and push up the expected growth rate and expected rate of return on investment. They pointed out that to this end, it was important to promote structural reforms of industry and fiscal system, thereby strengthening the supply side of the economy, or giving firms stronger incentives to conduct productive investment.

The members also referred to various other points to be examined regarding further monetary easing. These included the influence of lower interest rates on consumer sentiment; the risk of higher volatility in money market interest rates; and the possibility of lower interest rates inducing excessive risk-taking activity, for example excessive high-risk investment in foreign currency-denominated assets with the coming into effect of the new Foreign Exchange and Foreign Trade Law.

A discussion was also held on the argument that a raising of interest rates was necessary in order to boost the economy, which had recently been put forward very frequently.

The members considered that such an argument emerged against the background of a growing sense of unfairness among depositors about income distribution and a view that lower interest rates might be impeding the restructuring efforts of firms. With regard to income distribution, it was pointed out that since September 1995, interest income of households had been declining due to the low level of interest rates. In addition, the rise in the consumption tax rate and the increase in the medical expenses to be borne by individuals, both implemented in 1997, had gradually added to the spending burden of households.

However, all of the members agreed that, judging from the overall economic condition, the Bank should maintain the current easy stance of monetary policy until a firmer foundation for economic recovery was established. From a macroeconomic viewpoint, the current low interest rates provided support for corporate profits and investment activity, and thereby for employment and income. Therefore, the members shared the view that if interest rates were raised before the self-sustained recovery gained adequate strength, it might adversely affect overall economic activity, and in turn, household income. With regard to the microeconomic issue of income distribution, there was a view that it was a matter to be solved through welfare policy rather than through macroeconomic monetary policy.

During the Board's discussion, the member representing the Ministry of Finance explained that the government was steadily implementing various measures including financial system stabilization measures, special income tax reduction, addition of public works, and front-loading of public work orders. The member expected that these measures would have positive effects on real economic activity such as business fixed investment and private consumption. The member also considered that at present, an early adoption of the fiscal 1998 budget was most important, and expected that this together with the steady implementation of various government measures should contribute to reducing uncertainty about the economic outlook.

In addition, the representative of the Economic Planning Agency referred to the disposal of nonperforming loans, reform of the Japanese economic system, and prevention of the hollowing-out of industry as the three structural issues facing Japan's economy. The member explained that in order to deal with these issues, the government had decided on reforms of the economic structure, including deregulation. It was considered that these reforms, together with the reform of the fiscal structure, would contribute to economic recovery. With regard to the current economic situation, the member explained that various measures would be implemented flexibly in accordance with the prevailing economic circumstances, but at the same time, the government would for the time being do its utmost to realize an early adoption of the fiscal 1998 budget.

IV. Votes

At the conclusion of the Board's discussion, all of the members agreed that in the implementation of monetary policy for the intermeeting period ahead, 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, the Bank should monitor closely economic and financial developments, including the implementation of various measures by the government and their effects.

Based on this agreement, 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 February 17, 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 February 17, 1998 together with the English version of The Bank's View. The English version of The Background was published on March 6, 1998.


For immediate release

February 13, 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.