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Minutes of the Monetary Policy Meeting

on March 26, 1998
(English translation prepared by the Bank staff based on the Japanese original)

April 30, 1998
Bank of Japan

Policy Board Members Present 2
Mr. M. Hayami, 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 2
Mr. S. Fujiwara, 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 2
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 April 24, 1998.
  2. Those present at the meeting are referred to by their titles at the time of the meeting.

I. Approval of the Minutes of the Monetary Policy Meeting held on February 26, 1998

The Policy Board approved the minutes of the Monetary Policy Meeting held on February 26, 1998 for release on March 31.

II. Summary of Staff Reports 3

A. Money Market Operations since the Previous Meeting

Market operations in the period since the previous meeting on March 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 in consideration of the strengthened demand for funds in the run-up to the fiscal-year-end settlement in March. In supplying the liquidity, the Bank utilized various market operations instruments. As a result of the operations, the uncollateralized overnight call rate remained stable.

Interest rates on term instruments continued to follow a downward trend overall, partly as a result of the Bank's ample provision of funds maturing after the turn of the fiscal year. In view of the increase in such funds in the money market, the Bank conducted operations to withdraw funds by selling bills maturing after the fiscal year-end, paying careful attention to the developments in interest rates on term instruments.

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

1. Developments in foreign exchange markets

In the period since the previous meeting, the yen followed a slightly declining trend against the U.S. dollar reflecting strong economic performance and high stock prices in the United States. The decline, however, was accompanied by small fluctuations reflecting such factors as the market's anticipation of additional economic stimulus packages. The yen also depreciated slightly against other Asian currencies. Consequently, the nominal effective exchange rate of the yen declined moderately.

2. Overseas economic and financial developments

In the United States, the economy continued to expand firmly. Although growth in exports moderated somewhat, household spending, in particular, increased firmly. Tight labor market conditions were widespread across industries. Meanwhile, prices remained stable. In the financial markets, long-term interest rates moved in a narrow range with various factors placing upward and downward pressures on prices: steady economic growth continued and tightness in labor markets persisted; while productivity rose, the dollar appreciated, and international commodity prices declined. In the stock market, prices continued to advance, setting new record highs, owing mainly to the continued strong economic performance. Speculative investment was recently reported in the real estate market by some Federal Reserve Banks. Growth of money supply accelerated somewhat reflecting an increase in bank lending related to real estate.

Turning to economic developments in Europe, in Germany, growth in exports slowed somewhat and domestic demand remained weak. In France, domestic demand grew steadily with particular strength in private consumption. In the United Kingdom, upward pressure on wages and prices persisted although some signs of a slowdown in domestic demand were observed.

In East Asia, foreign exchange and stock markets were gradually regaining credibility in Korea and Thailand. A slowdown in domestic demand was, however, becoming more evident in these countries. In Indonesia, prices soared while the economy stagnated, and disturbances of public order had been reported. In China, prices continued to decline and monetary easing measures were taken.

C. Economic and Financial Developments in Japan

1. The real economy

Economic indicators released during the intermeeting period generally supported the Board's assessment of the economy at the last meeting on March 13. Growth in exports was evidently dampened by a further decrease in exports to Asia. Private consumption remained sluggish, with the effects of the special tax-cut measures not yet materializing. Firms' fixed investment plans for fiscal 1998, according to a recently conducted business survey, were down from their forthcoming-year plans of the past three years, all of which were surveyed around the same time of year. The cutback in investment plans reflected factors such as declines in corporate profits. With regard to employees' income, bonus payments in winter 1997 were subdued, and the base wage increase in fiscal 1998 was expected to be restrained in view of the ongoing spring wage negotiations between management and labor.

2. Financial developments

Money market interest rates on term instruments had trended downward since March 1998, but were still high compared to those before autumn 1997. Market participants' concern about liquidity shortages near the fiscal year-end had eased significantly. Their concern about credit risk seemed to persist, however. Stock prices continued to fluctuate and yields on long-term government bonds declined somewhat. With the continued weak business sentiment, both stock and bond markets were sensitive to the market's anticipation of additional economic stimulus packages.

The year-to-year growth in money stock in terms of M2+CDs accelerated in February. The growth in broadly-defined liquidity, however, remained almost unchanged. It could, therefore, be concluded that the high growth in M2+CDs mainly reflected a shift of funds between financial assets, such as from investment trusts to financial assets included in M2+CDs. As regards lending by financial institutions, the capital constraints on their lending capacity was alleviated somewhat by various financial system stabilization measures, including the use of public funds. Some firms, however, still faced difficult financing conditions. Therefore, it was considered that developments in lending by financial institutions would need to be monitored carefully even after the fiscal year-end.

  1. 3Reports were made based on information available at the time of the meeting.

III. Summary of Discussions by the Policy Board on Economic and Financial Developments and on Monetary Policy for the Immediate Future

The Board's discussion was based on economic indicators and developments observed after the previous meeting on March 13. The members deliberated on the need to revise the Board's judgment of the overall economic and financial conditions at the previous meeting and on issues that required careful attention until the next meeting scheduled for April 9.

On the current economic and financial conditions, all of the members agreed that new data supported the Board's judgment at the last meeting, which was that "Japan's economy remained stagnant with increasing downward pressures on economic activities."

With regard to the economic outlook, many members considered the results of Tankan (Short-Term Economic Survey of Enterprises in Japan, a quarterly survey of business sentiment in Japan), to be released in early April, to carry great significance. Other points examined by the members included the following.

Many members mentioned that developments in exports should be watched closely, giving particular attention to the effects of adjustments in the Asian economies. A member also pointed out that it was necessary to keep a close watch on developments in the U.S. economy. The member considered it undeniable that in the United States potential adjustment pressures were mounting in the robust stock market, tight labor market, and trade deficit although the economy was expected to continue steady growth for some time.

The Board then discussed the future developments in the economic activity of the household sector. Households' propensity to consume had been declining since last autumn, and this suggested an accumulation of savings, or potential purchasing power. In the future these savings could be used to either purchase goods and services, in other words to consume; or to purchase financial assets, in other words to invest, in the new environment created by the amendment of the law on foreign exchange and foreign trade. In this respect, some members pointed out the need to monitor carefully developments in both real economic activity and financial activity of households.

With regard to real economic activity, a member referred to a possible improvement in consumer confidence following the stabilization of financial market developments, which might inspire households to resume consumption activity with their accumulated savings. The majority of the members, however, including the above member, agreed that they needed to keep a careful watch on consumer sentiment, including the effects of future income growth.

Turning to the financial activity of households, a member focused on the effects of accumulated household savings on the flow of funds and interest rate developments. Further, the member noted that attention should be paid to the shifts that might occur in the financial asset portfolios of households with the introduction of diverse financial products under the new Foreign Exchange and Foreign Trade Law effective April 1, 1998.

Members observed some new features in land price developments. Posted prices of land, released the day before the meeting, showed a narrower decline. Foreign investors actively purchased securities backed by real estates. Members expected these developments to mitigate the nonperforming-loan problem which had long been a heavy burden on the Japanese economy.

With regard to developments in the financial markets, many members were of the view that financial institutions had secured a considerable proportion of liquidity necessary for the fiscal-year-end settlement in March. All of the members agreed, however, that the market's concern about credit risk was likely to persist until the financial reports for fiscal 1997 were published in May. The members, therefore, agreed that they needed to pay careful attention to the developments in interest rates and stock prices beyond the fiscal-year-settlement in March.

Some members also pointed out the need to continuously watch developments in corporate financing, although large-scale corporate failures had decreased recently.

During the Board's discussion, the member representing the Ministry of Finance explained the series of economic measures implemented by the government, such as the supplementary budget for fiscal 1997, which included a special income tax reduction, and the financial system stabilization measures. The representative also explained that the ruling coalition parties were discussing the possible implementation of additional economic stimulus packages. Further, the member reported that the government was giving top priority to the early passage of the fiscal 1998 budget and its smooth implementation. The representative also made a comment regarding the Bank's holding of government securities, accumulated through market operations to supply funds for the fiscal year-end. The member suggested that in selling the government securities to withdraw surplus funds from the market after the turn of the fiscal year, the Bank should give due consideration to the market conditions of government securities.

The member representing the Economic Planning Agency mentioned that firms continued to face severe financing conditions despite some favorable developments in the financial markets such as the decline in interest rates on term instruments. The government, therefore, took various measures to deal with the problem.

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 policy stance determined at the previous meeting should be unchanged. In maintaining the current easy stance of monetary policy, the Bank should monitor closely economic and financial developments, including developments in the financial markets in and after April and the results of the Tankan.

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 publicized 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. M. Hayami, Mr. S. Koino, Mr. Y. Gotoh, Mr. S. Taketomi

Votes against this proposal:None

At the end of the meeting, members agreed on the dates of Monetary Policy Meetings in April - September 1998 (see attachment 2).

Attachment 1

For immediate release

March 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.

Attachment 2

March 26, 1998
Bank of Japan

Scheduled Dates of Monetary Policy Meetings in April-September 1998

Table:Scheduled Dates of Monetary Policy Meetings in April-September 1998
  Date of MPM Publication of Monthly Report Publication of MPM Minutes
Apr. 9 (Thu.) 13 (Mon.) May 22 (Fri.)
  24 (Fri.) -- June 17 (Wed.)
May 19 (Tue.) 21 (Thu.) June 30 (Tue.)
June 12 (Fri.) 16 (Tue.) July 22 (Wed.)
  25 (Thu.) -- July 31 (Fri.)
July 16 (Thu.) 21 (Tue.) Aug. 14 (Fri.)
  28 (Tue.) -- Sep. 14 (Mon.)
Aug. 11 (Tue.) 13 (Thu.) Sep. 29 (Tue.)
Sep. 9 (Wed.) 11 (Fri.) To be announced
  24 (Thu.) -- To be announced