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(English translation prepared by the Bank staff based on the Japanese original)
March 31, 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 Thursday, February 26, 1998, from 9:00 a.m. to 10:50 a.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
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
The Policy Board approved the minutes of the Monetary Policy Meeting held on January 16, 1998, which would be released on March 3.
Market operations in the period since the previous meeting on February 13, 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. As a result, the uncollateralized overnight call rate generally fluctuated within the 0.40-0.45 percent range.
Interest rates on term instruments continued to follow a gradual rising trend, owing to a further increase in demand for funds in preparation for fiscal-year-end settlement in March. The Bank therefore continued actively to supply the market with long-term funds due after the turn of the fiscal year. As a result of the increase in the Bank's provision of such funds and progress in the formulation and implementation of financial system stabilization measures by the government, rates on term instruments began to show signs of a decline very recently.
In the period since the previous meeting, the yen depreciated against the U.S. dollar again, falling to the 128-129 yen range very recently. The yen also depreciated against the deutsche mark. The nominal effective exchange rate of the yen declined slightly. As for East Asian currencies, while some currencies such as the Indonesian rupiah continued to show volatility, other currencies were generally stabilizing.
In the United States, economic activity remained strong, particularly household spending. However, producer prices weakened further. In the financial markets, long-term interest rates rose slightly due partly to reduced expectation of monetary easing. In the stock market, prices continued to advance significantly, reflecting a view that the impact of the economic adjustments in the Asian countries on U.S. firms would be smaller than previously anticipated.
In Europe, the growth in German exports, which had supported the economic recovery in Germany, moderated. In France, on the other hand, private consumption started to increase gradually following a recovery in exports, promoting economic recovery. In the United Kingdom, domestic demand, especially private consumption, continued to follow a steady expansionary trend, although there were some indications of an economic slowdown such as a decline in net exports. Price developments were in a delicate situation in relation to the inflation target.
In East Asia, signs of improvement in the current account balance were seen in some countries, but domestic demand continued to weaken further. The stock markets were generally recovering.
Economic indicators released during the intermeeting period showed that the declining trend in exports to Asia intensified. Private consumption indicators revealed that the propensity to consume had declined substantially toward the end of 1997, indicating a clear decline in consumer sentiment. Firms' fixed investment plans for fiscal 1998, according to a recently conducted business survey, were down only slightly from investments in the current fiscal year. Therefore, the investment attitude of firms did not seem to have deteriorated to the extent indicated by leading indicators, which had suggested a more substantial decline. However, there is a risk that the investment plans would be revised downward, depending on future economic developments.
In the financial markets, interest rates on term instruments in money markets remained at a high level, although they showed signs of a decline very recently. Yields on corporate bonds and bank debentures also remained high. These conditions suggested that market participants' concern about credit and liquidity risks was still strong. Meanwhile, stock prices showed some fluctuation. Yields on long-term government bonds rose in the latter half of January, but started declining again in February, suggesting that the expectation of additional economic stimulus packages had weakened somewhat.
Growth in money stock in terms of M2+CDs accelerated in January. Both the year-to-year change and the annualized increase from 3 months earlier were larger than in December 1997, reflecting an increase in firms' liquidity and a shift in the financial asset portfolios of firms and households to more liquid assets.
Prior to the Board's discussion, the chairman confirmed that deliberations at the second Monetary Policy Meeting of each month would be conducted on the following basis:
In principle, at the second Monetary Policy Meeting of the month, members would deliberate whether it was necessary, based on economic indicators released in the intermeeting period and most recent developments in the financial markets, to alter the Board's judgment of the overall economic and financial conditions and its monetary policy decision at the first meeting of the month, and would also examine issues to be closely monitored in the intermeeting period ahead.
After the members approved this, the Board's discussion was held.
Many of the economic indicators released during the intermeeting period suggested weakness in economic and financial conditions. All of the members agreed that, overall, the indicators supported the Board's judgment at the previous meeting, which was 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."
With regard to the economic outlook, the members deliberated on the following points as factors requiring due attention in the immediate future.
Business fixed investment plans for fiscal 1998 had shown only slight declines from the previous year. However, considering the decrease in corporate profits, there was a view that these plans would likely be revised downward. It was also pointed out, however, that the business fixed investment plans for fiscal 1998 were not yet fixed, and there seemed to be a number of potential investment projects firms needed to implement. Therefore, it was mentioned that developments in fixed investment would be strongly influenced by firms' view of the outlook for the economy.
Exports to Asia declined in December 1997, especially those to the Republic of Korea. It was commented that the fall could have been amplified by reduced availability of trade credits reflecting the disturbance in Asian markets, and therefore it was difficult to assess at present the degree of the fundamental impact of weakening domestic demand in Asia on Japan's exports. Concerning the depreciation of Asian currencies , it was noted that although it would initially have negative effects on Japan, such effects would ease off and it would eventually have positive effects on Japan's economy in the long term. In the short term, exchange rate adjustments might increase net exports to Japan. However, in the long term, the increase in exports from these Asian countries might, for example, be accompanied by a rise in imports of parts from Japan for their export industries. Further, if these Asian economies achieved an early recovery supported by exports, this could be expected to have favorable effects on Japan's economy.
Members also pointed out several other aspects of real economic activity to which close attention should be paid, such as the influence of the present economic stagnation on employment and the possibility of a further weakening of prices.
In the financial markets , there were signs of a decline in money market interest rates on term instruments very recently. However, many members considered that awareness of credit and liquidity risks remained strong among market participants. Accordingly, all of the members agreed that they should continue to monitor carefully the effects of the Bank's provision of ample funds in the money market, the implementation of financial system stabilization measures by the government, and the influence of those actions on market sentiment.
Concerning the lending attitude of financial institutions, there were no grounds to revise the judgment at the previous meeting that"capital adequacy constraints appeared to have become somewhat less binding." The majority of the members suggested that they should continue to observe carefully the lending activity of financial institutions in the run-up to the fiscal-year-end settlement in March and its effects on corporate financing.
During the Board's discussion, the member representing the Ministry of Finance explained that the government had been putting its effort into implementation of the supplementary budget for fiscal 1997, which included a special income tax reduction, additional public works, and frontloading of public work orders for the next fiscal year, and implementation of measures under the two laws regarding the stabilization of the financial system. The representative also remarked that at present, the government considered it most important to realize an early implementation of the fiscal 1998 budget.
The member representing the Economic Planning Agency explained that the cautious lending attitude of financial institutions continued to have a severe impact on firms, and therefore the government had taken such measures as expanding the loan facilities of government financial institutions. The representative commented that the government would continue to pay close attention to the lending attitude of financial institutions and its effects on the real economy.
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 policy stance determined at the previous meeting should be unchanged. The Bank should maintain the current easy stance of monetary policy and promote the permeation of its effect 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.
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.
For immediate release
February 26, 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.