- Sep. 30, 2020
- Sep. 29, 2020
- Sep. 29, 2020
on April 9, 1998
(English translation prepared by the Bank staff based on the Japanese original)
May 22, 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, April 9, 1998, from 9:02 a.m. to 11:49 a.m., and from 12:30 p.m. to 4:10 p.m. 1
Policy Board Members Present
Mr. M. Hayami, Chairman, Governor of the Bank of Japan
Mr. S. Fujiwara, Deputy Governor of the Bank of Japan
Mr. Y. Yamaguchi, Deputy Governor of the Bank of Japan
Mr. Y. Gotoh
Mr. S. Taketomi
Mr. T. Miki
Mr. N. Nakahara
Ms. E. Shinotsuka
Mr. K. Ueda
Government Representatives Present
Mr. H. Matsunaga, Minister of Finance 2
Mr. K. Omi, Director General of the Economic Planning Agency 3
Mr. J. Yonezawa, Executive Director
Mr. I. Yamashita, Director, Financial Markets Department
Mr. M. Sugita, Director, International Department
Mr. M. Matsushima, Director, Research and Statistics Department
Mr. N. Inaba, Advisor, Policy Planning Office
Mr. K. Yamamoto, Chief Manager, Planning Division I of the Policy Planning Office
Secretariat of the Monetary Policy Meeting
Mr. T. Mitani, Director, Secretariat of the Policy Board
Mr. S. Watanabe, Secretariat of the Policy Board
Mr. K. Momma, Manager, Policy Planning Office
Before proceeding with the meeting, the Minister of Finance, representing the government, made the following remarks:
Next, the Director General of the Economic Planning Agency, also representing the government, made the following remarks:
Market operations in the period since the previous meeting on March 26, 1998 were conducted in accordance with the guideline determined at the meeting, which was to encourage the uncollateralized overnight call rate to remain on average slightly below the official discount rate. Until March 31, the Bank supplied ample liquidity to the market as there was a strong concern among market participants about liquidity shortages arising near the fiscal year-end. As a result, the uncollateralized overnight call rate ended the fiscal year at around the previous year's level. In April, the uncollateralized overnight call rate dropped temporarily to the 0.3-0.4 percent range due to a seasonal surplus of funds. The Bank therefore withdrew an appropriate amount of funds according to the guideline for money market operations, paying careful attention to the developments in interest rates on term instruments. As a result of these operations, the uncollateralized overnight call rate in the current monthly reserve maintenance period (from March 16 to April 15) averaged slightly above 0.42 percent up to April 8.
Interest rates on term instruments declined significantly from late February owing to the Bank's ample provision of funds, and very recently fluctuated in the 0.7-0.8 percent range. On April 3, stock prices dropped and rates on term instruments came under upward pressure against the background of an overseas credit rating agency's revision of its outlook for both Japan's country ceilings and the domestic currency rating for the government to negative from stable. However, stock prices recovered steadily thereafter and rates remained stable. Although the seasonal tightening of money market conditions at the fiscal year-end and the effects of the downgrading of the outlook for the Japanese sovereign rating had been dealt with, it was considered that developments in interest rates on term instruments continued to require careful monitoring.
In the period since the previous meeting, the yen had depreciated against the U.S. dollar, at one point falling to 135 yen, reflecting releases of weak economic indicators such as the Bank'sTankan (Short-term Economic Survey of Enterprises in Japan) and an overseas credit rating agency's downgrading of the outlook for the Japanese sovereign rating. Subsequently, the yen recovered to around 131 yen, due to anticipation of an economic stimulus package and heightened expectation of foreign exchange intervention. The nominal effective exchange rate of the yen fluctuated similarly to developments in the yen's value against the U.S. dollar. Option prices indicated that the expected volatility of the yen against the U.S. dollar was greater than that of the deutsche mark against the U.S. dollar. This seemed to reflect the uncertainty prevailing in the markets regarding the details of the economic stimulus package and execution of foreign exchange intervention.
During the same period, East Asian currencies weakened against the U.S. dollar.
In the United States, economic activity continued to expand firmly, at a pace exceeding the potential growth rate. Although growth in net exports slowed somewhat, household spending in particular increased steadily. The number of employees on non-farm payrolls declined slightly in March, but this seemed attributable to extraordinary factors such as weather. Tightness in labor markets continued, judging from the continuing low unemployment rate and the rapid growth in labor compensation per hour. In the financial markets, long-term interest rates declined somewhat due partly to the reduced number in employees on non-farm payrolls in March. Stock prices passed the US$9,000 mark following the news of mergers of large financial institutions, but were later adjusted reflecting a weakening of the outlook for corporate profits.
Turning to Europe, recovery in production and employment in Germany continued to be very moderate. In the United Kingdom, economic growth remained firm.
In East Asia, no signs of economic recovery led by exports were seen despite a depreciation of currencies. In Korea and Thailand, stock prices weakened. In China, production growth decelerated, a development considered to require due attention.
With respect to final demand, growth in net exports, which had been underpinning the economy, slowed and business fixed investment seemed to have started to decline. Private consumption and housing investment continued to be weak, and public-sector investment was on a decreasing trend. Industrial production continued to decline against the background of a significant accumulation of inventories reflecting the weak final demand. Consequently, negative impacts on corporate profits as well as on employment and income conditions intensified and business sentiment rapidly weakened, leading to a further deterioration of domestic demand. Thus, developments in production, income, and expenditure were starting to operate in a vicious circle and there was strong downward pressure on overall economic activity.
As regards the outlook for the economy, growth in net exports was unlikely to be strong enough to prevent deterioration of the economy, partly reflecting further adjustments in other Asian economies. Business fixed investment was likely to enter an adjustment phase due mainly to a decline in corporate profits. With regard to private consumption, no clear recovery could be expected against the background of the weakening of income formation. Downward pressures on economic activities, particularly on production, were likely to continue to be strong for the time being, because the level of inventories was high and a conspicuous recovery in domestic private demand was unlikely. However, following the implementation of measures to stabilize the financial system and the special tax-cut measures, additional economic stimulus measures were being discussed based on the outline of the package exceeding 16 trillion proposed by the ruling coalition parties. The details of the measures and their effects on corporate and household confidence would hold great significance.
Wholesale prices continued to decline, and the year-to-year increase in consumer prices (excluding the effects of institutional changes such as the rise in the consumption tax rate) declined to close to zero. As for the future, prices overall were likely to soften reflecting a continued widening of the output gap in the domestic economy and the decline to date in overseas commodity prices. The negative effects of these price developments on business activity would also need to be monitored carefully.
As for land prices, there were indications that both commercial land prices and residential land prices had been softening again since autumn 1997.
In the money markets, interest rates on term instruments declined substantially from mid-February through mid-March and generally remained steady thereafter. This reflected the Bank of Japan's ample provision of funds through contracts that matured after the fiscal year-end as well as progress in implementing the financial system stabilization measures. It was to be noted, however, that the rates were still high compared with those prevailing before autumn 1997, which could be attributed to the continuing cautious attitudes of market participants toward credit risk. Meanwhile, with releases of weak economic indicators, long-term government bond yields fluctuated in a historically low range and stock prices declined from the end of March.
With respect to monetary aggregates, the growth in money stock continued to be rather high in February partly due to the shift of funds away from investment trusts. Meanwhile, private bank lending remained sluggish, but with an increase in corporate financing via the capital market, a substantial fall in overall corporate fund-raising seemed to have been avoided. Banks, however, remained cautious in extending loans with a view to improving their medium-term profitability and financial soundness. In addition, fund-raising costs of firms remained high reflecting their low credit standing. Some firms, particularly small and medium-sized firms, therefore faced difficult financing conditions and it was considered that the effect of this on the economy continued to warrant careful monitoring.
At the beginning of the afternoon session of the meeting, the Policy Board approved unanimously the minutes of the Monetary Policy Meeting held on March 13, 1998 for release on April 14.
Members first discussed the current economic condition based on economic indicators released from the end of March through the beginning of April, including Tankan. The following comments were made.
As seen above, members made various comments from different points of view. Members, however, shared the view that sluggish final demand, particularly household spending, was leading to prolonged inventory adjustment and declines in production and corporate profits, and this, together with the persistent structural adjustment pressure, continued to place strong downward pressure on overall economic activity.
The members then discussed the outlook for the economy focusing on (1) the implications of the weakened cycle of production, income, and expenditure, and (2) the effect of a possible large-scale economic stimulus package involving fiscal expenditure. 5 Comments made included the following.
In the Board's discussion of price developments, most of the members shared the view that prices were likely to remain weak in the immediate future reflecting a continued widening of the domestic output gap, although the risk of any significant declines was small.
The members also discussed the risk of the economy falling into a deflationary spiral given the above-mentioned economic and price situation. Many members were of the view that the recent declines in prices largely reflected falls in international commodity prices such as crude oil prices. Therefore, there was no imminent risk of a deflationary spiral occurring, resulting in a further decline in corporate profits or a serious impact of higher real interest rates. Also, a member pointed out that there was little risk of a critical deflationary spiral in the immediate future in view of the latest Tankan survey results, which indicated that while corporate profits were forecast to decrease in fiscal 1998, the current profits-to-sales ratio of principal manufacturing firms was projected at around 4.0 percent, which was about the average for the past.
However, the same member added that the strengthening downward pressure on the economy injected uncertainty into this outlook for corporate profits. Another member commented that the market conditions and price developments of the raw and processed materials industries indicated that the economy was on the verge of a deflationary spiral. A different member pointed out that even the rate of increase in consumer prices, the prices of goods and services at the final stage of demand, had been close to zero percent. Therefore, if further downward pressure were exerted on prices, it would be difficult to contain the pressure in the short term.
The above discussion suggested that the members had slightly different views of the outlook for economic and price developments depending on how they anticipated the effects of the government's economic stimulus package, the details of which were as yet undecided. However, the members shared the view that the extent of economic adjustment would intensify unless measures were taken to contain the downward pressure on the private sector. Also, the majority of the members, including those who remarked that there was no impending risk of a deflationary spiral, agreed that they should be aware of the possibility that such a risk might increase in the future.
Consequently, all of the members agreed that the most critical issue at the time was how much boost the government's economic stimulus package, to be announced soon, would give to household and corporate confidence, and that they needed to examine closely the details of the economic package and the permeation of its effects throughout the economy.
Regarding the cautious lending attitude of financial institutions, the members agreed with the view that a rapid collection of loans through cancellation of contracts toward the fiscal year-end in March, which had been a matter of concern, had been averted owing in part to various government measures including the injection of public funds. However, the lending attitude of financial institutions remained cautious in April. Therefore, all of the members also agreed that they needed to continue to observe the effect of this attitude on corporate financing, especially on the financing conditions of small and medium-sized firms. In relation to this issue, a member pointed out that although the turmoil in the Japanese financial system had subsided, the system was not functioning so as to stimulate economic activity, and continued to be vulnerable to possible shocks.
Following the Board's discussion of current economic and financial developments, the members discussed the basic thought behind monetary policy for the immediate future. A member pointed out that the present level of interest rates was especially low from the viewpoint of households and pensioner households, therefore, faced unstable income conditions, which were issues to take into consideration in deliberating monetary policy. However, members including the above member considered that because households earned income either by running a business or working for a firm, monetary policy should ultimately be directed at strengthening the economic activity mainly through the corporate sector. Accordingly, all of the members took the view that from the central bank's macroeconomic standpoint, it would be an extremely difficult choice to raise interest rates under the current economic condition.
By contrast, many members agreed that a further lowering of interest rates could be consistent with the strong downward pressure on overall economic activity and the increase in real interest rates due to weak developments of prices. However, following the comments below, all of the members indicated their hesitance to decide an additional lowering of interest rates at this meeting.
A member also commented that at present, the availability of monetary policy measures to place the Japanese economy on a strong recovery path was limited, and that it was important to implement structural reform to strengthen the supply side of the economy, such as establishing an environment to promote technological innovations.
In considering the guideline for market operations in the intermeeting period ahead, the members deliberated on financial market developments.
Interest rates on term instruments declined markedly from mid-February, and thus the members agreed that the effect of the increase until mid-February on the real economy would not be as significant as was previously anticipated.
However, the rates remained approximately 0.2 percent higher than the level before autumn 1997, even after the fiscal year-end on March 31. Therefore, the members shared the view that market participants' concern about credit risk persisted. There was also the observation that the signs of an upturn in interest rates on term instruments and the Japan premium, following an international credit rating agency's downgrading of the outlook for the Japanese sovereign rating reported on April 3, indicated that the money market continued to be sensitive to credit risk information. Based on such understanding, all of the members agreed that they should continue to observe developments in interest rates of term instruments carefully in conducting market operations.
In connection with the persistent market concern over credit risk, the members discussed issues regarding the financial system and financial structure in the context of monetary policy management. The following views were contributed as points for discussion.
With respect to the above-mentioned matters, a member commented that they should basically be deliberated separately from monetary policy discussions, although the issues contained many important points for discussion concerning the Japanese financial structure. However, with the Japanese financial system and the financial structure in a transition period, the members agreed that it was necessary to pay due attention to these issues in deciding monetary policy if anxiety among market participants about the stability of the domestic financial system should increase suddenly, with interest rates rising across the market.
At the conclusion of the Board's discussion, all of the members agreed that in the implementation of monetary policy for the immediate future, the Bank should maintain the current stance of monetary policy. A member commented that the uncollateralized overnight call rate should be maintained at the lowest possible level consistent with the Bank's stance.
Another member pointed out that if the Bank were to implement further monetary easing in the future, it might be worth considering the possible use of monetary targets, such as monetary base targeting, in addition to the conventional lowering of the official discount rate and the uncollateralized overnight call rate. A member showed sympathy with the view, but another member pointed out that the experiences of other countries had shown that such monetary policy management was not always successful.
Lastly, the Director General of the Coordination Bureau of the Economic Planning Agency complemented the comments of the Director General of the Agency at the morning session of the meeting. He explained that Diet deliberations were about to start on bills concerning the deregulation measures and structural reforms based on the emergency package of economic policies to conduct reforms in preparation for the 21st century, adopted on November 18, 1997. If these bills were passed in May or June, they would stimulate corporate activity in the latter half of this fiscal year and thereby promote economic recovery.
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 continued permeation of its effects on interest rates on term instruments and on the stability of the market sentiment. In doing so, the Bank should monitor closely economic and financial developments, including the implementation of the economic stimulus package and its effects.
Based on this agreement, the chairman formulated the following policy proposal, on which votes were taken 6.
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.
At the end of the meeting, the Policy Board discussed"The Bank's View" on recent economic and financial developments, and put it to the vote.
The Board unanimously determined"The Bank's View," which would be published on April 13, 1998 in the Monthly Report of Recent Economic and Financial Developments (consisting of"The Bank's View" and"The Background"). 7
For immediate release
April 9, 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.