Minutes of the Monetary Policy Meeting
on April 24, 1998
(English translation prepared by the Bank's staff based on the Japanese original)
June 17, 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, April 24, 1998, from 9:00 a.m. to 1:00 p.m. 1
Policy Board Members Present 2
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 2
Mr. S. Nakamura, State Secretary for Finance, Ministry of Finance
Mr. S. Shimpo, Director-General of the Research Bureau, Economic Planning Agency
Reporting Staff 2
Mr. A. Nagashima, Executive Director
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. K. Yamamoto, Chief Manager, Planning Division 1 of the Policy Planning Office
Secretariat of the Monetary Policy Meeting 2
Mr. T. Mitani, Director, Secretariat of the Policy Board
Mr. S. Watanabe, Secretariat of the Policy Board
Mr. K. Momma, Manager, Policy Planning Office
- The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on June 12, 1998.
- 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 March 26, 1998
The Policy Board unanimously approved the minutes of the Monetary Policy Meeting held on March 26, 1998 for release on April 30.
II. Statements by the Government Representatives
The following is an outline of remarks made by Mr. S. Nakamura, State Secretary for Finance of the Ministry of Finance.
- (1) The Ministry of Finance judged that the economy was"sluggish with its severity getting even further," which was consistent with the Bank of Japan's view on the recent economic developments in Japan. The wording used by the Ministry to describe the situation was, however, different from that of the Bank, as the Ministry considered that an expression such as"strong downward pressure on the economy" might have a negative influence on the confidence of corporate managers, who were seeking some sign of an economic recovery.
- (2) Just before the start of the meeting, the Conference on Fiscal Structural Reform decided to amend the Fiscal Structural Reform Act of 1997. The three pillars of the amendment were as follows: (a) establishment of a provision which would be invoked at times of"severe economic stagnation" to add flexibility to the limit on the issuance of deficit-covering government bonds; (b) extension of the target year of fiscal consolidation from fiscal 2003 to 2005, by which the government should reduce its deficit to within 3 percent of GDP and terminate the issuance of deficit-covering bonds; and (c) exceptional removal in fiscal 1999 of the ceiling on social security-related spending.
- (3) The government was taking various measures to address the cautious lending attitude of financial institutions. It was also important that the Bank of Japan should make every effort to reduce anxiety about funding among financial institutions through smooth and adequate supply of liquidity.
The following is an outline of remarks by Mr. S. Shimpo, the Director-General of the Research Bureau, Economic Planning Agency. The representative gave explanations on the basic aims of the comprehensive economic package, planned to be released on the evening of April 24, and the Agency's assessment of economic indicators that the Agency had recently released.
- (1) The basic aims of the comprehensive economic package were (a) to boost domestic demand through social infrastructure investment and tax cuts; (b) to strongly promote structural reform of the economy; and (c) to promote disposal of nonperforming assets. Details of the economic package were still under discussion.
- (2) The Consumer Sentiment Index in the"Consumer Behavior Forecast Survey" recovered slightly in March, following a large decline in December which resulted mainly from consumers' perception of employment conditions. The Agency, however, could not conclude that consumer confidence had started to show a clear recovery.
- (3) Business fixed investment plans for fiscal 1998, according to the"Business and Investment Survey of Incorporated Enterprises," were weak, especially in the manufacturing sector. This was in line with other surveys such as the Bank's Tankan (Short-Term Economic Survey of Enterprises in Japan). Business fixed investment plans for the July-September quarter showed a slight increase after declining in the January-March and April-June quarters. It should be noted, however, that the cautious lending attitude of banks that persisted even after the fiscal year-end in March might affect business fixed investment.
III. Summary of Staff Reports3
A. Money Market Operations in the Intermeeting Period
In the period since the previous meeting on April 9, 1998, the Bank conducted market operations 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. At one stage, temporary funding difficulties faced by a financial institution placed upward pressure on call rates. However, the average overnight call rate for the monthly reserve maintenance period ending on April 15 settled at 0.43 percent. The Bank's forecast of money market conditions was that there would be no significant excess or shortage of funds in the immediate future. Under such circumstances, the Bank would conduct flexible market operations utilizing CP operations and bond-borrowing ("repo") operations to inject reserves, and bill-selling operations to absorb reserves, based on careful assessment of the market conditions.
During the same period, interest rates on term instruments declined moderately. Euro-yen interest rates (3-month) had been at around 0.7 percent recently. This indicated that Japan's financial markets had recovered from the earlier disruption, although awareness of credit risk among market participants was still strong compared with the period before autumn 1997. The stabilization of the markets enabled the Bank to operate in the money market using only the regular measures. Accordingly, by April 22 the Bank had collected the full amount of funds provided to financial institutions through money market lending operations conducted pursuant to Article 33 of the Bank of Japan Law, which were recommenced in November 1997 to cope with exceptionally unstable market conditions. The amount of such lending peaked at 1.5 trillion yen in late February.
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 fluctuated in the 127-132 yen range against the U.S. dollar. After marking 127 yen reflecting foreign exchange intervention, the yen depreciated and fluctuated generally in the lower part of the range. More recent developments showed a modest recovery to the 129-130 yen level due to factors such as anticipation of foreign exchange interventions and heightened expectations concerning the content and effects of the comprehensive economic package. In the meantime, the yen generally declined against the deutsche mark reflecting growing anticipation that the Bundesbank would raise interest rates to achieve convergence of short-term interest rates within the European Union before the launch of the single currency. During the same period, East Asian currencies as a whole recovered slightly, gradually regaining stability.
2. Overseas economic and financial developments
In the United States, most economic data for the January-March quarter had been released, which showed that the economy continued to expand firmly, supported by strong household spending especially on automobiles and housing. Stock prices increased reflecting factors such as higher-than-projected first-quarter corporate profits and large-scale financial institution mergers. Long-term interest rates were also increasing slightly. Growth of money supply accelerated reflecting an increase in bank lending, especially real estate loans. In light of these developments in stock prices, real estate investment, and money supply, arguments were put forward, especially outside the United States, that there were signs of the emergence of an asset-price"bubble." In the United States, however, there was continued support for the"new economy" theory, which focused on the increase in productivity. It seemed that the risks were tilted toward rising inflationary pressure, but it was necessary to keep a close watch on the effects of adjustments in the Asian economies.
In Europe, economic developments were as follows. In Germany economic recovery remained moderate, while in France economic recovery became increasingly evident. In both countries prices remained stable. In the United Kingdom, the economy continued to grow firmly. The U.K. inflation rate was slightly above the target, but money supply and retail sales were showing signs of deceleration.
In East Asia, foreign capital was starting to return to Korea and Thailand as overseas investors regained confidence in these countries in view of steady implementation of the International Monetary Fund's (IMF) economic adjustment programs. In both countries, however, domestic demand continued to weaken and export growth remained dampened. In China, both domestic demand and net exports were starting to decelerate.
C. Economic and Financial Developments in Japan
1. Economic Developments
Economic indicators released during the intermeeting period supported the Board's assessment of the economy at the last meeting that"[there was] strong downward pressure on overall economic activity."
The real trade surplus declined in the January-March quarter affected by the economic adjustments in Asia. With regard to business fixed investment, machinery orders trended downward, especially those placed by the manufacturing sector, reflecting factors such as deterioration in corporate profits. A recent business survey indicated slight weakness in fixed investment plans for fiscal 1998, as were also shown in the results of theTankan . Another survey showed a decline in firms' expected growth rates compared with the previous year. The effects of such corporate sentiment on business fixed investment was considered to require due attention. In April, a few economic indicators and a few pieces of evidence from corporate interviews gave some favorable indications with regard to household expenditure, but these results were not strong enough to point to a recovery in overall private consumption.
Reflecting this sluggishness in final demand, inventory remained at a high level, and therefore, further cutbacks in production were expected in the April-June quarter, especially in the automobile industry.
Thus, the negative interaction between production, income, and expenditure was likely to continue. However, the government's comprehensive economic package was scheduled to be released later in the day, and in light of its already revealed scale and outline, it was hoped that it would alleviate the downward pressure on the economy from summer 1998.
2. Financial developments
In the money markets, interest rates on term instruments and the so-called"Japan premium" declined after rising temporarily in early April in response to news that an overseas credit rating agency had downgraded its outlook for the Japanese sovereign rating. The rates and the premium more recently showed generally stable developments around the level of late March. They were, however, still high compared with the level that prevailed before autumn 1997, which meant that they still included a credit risk premium.
Long-term government bond yields and stock prices declined despite the unveiling of the outline of the comprehensive economic package. Long-term government bond yields were at historically low levels and stock prices fluctuated around 15,500-16,000 yen. Judging from these developments, there had been no conspicuous recovery in the market's confidence in the economic outlook.
With respect to monetary aggregates, the growth of money supply slowed somewhat in March reflecting a decrease in lending by private financial institutions toward the fiscal year-end on March 31 and the reduced shift of funds away from investment trusts. The year-to-year decline in private financial institution lending expanded in March, especially for city banks, long-term credit banks, and trust banks. This reflected financial institutions' efforts to slim down their assets to thereby raise their capital adequacy ratios by the end of the accounting term. During this period, CP issuance continued to increase. These developments overall showed that a significant credit contraction which had previously been anticipated had been averted mainly due to implementation of measures to stabilize the financial system, including the use of public funds. But some firms, especially small and medium-sized companies, still faced difficult financing conditions. Thus it was necessary to continue to pay close attention to the effects of these financial developments on the economy.
- 3Reports were made based on information available at the time of the meeting.
IV. Summary of Discussions by the Policy Board on Economic and Financial Developments
The Board discussed current economic and financial conditions and the outlook based on newly released economic indicators and developments observed during the period since the last meeting held on April 9. The members deliberated on the need to revise the Board's judgment of the overall economic and financial conditions at the previous meeting.
The members shared the understanding that exports were on a declining trend, based on indicators such as the"Trade Return Statistics" (trade statistics on customs clearance basis) for March. A member cited the rapid fall in raw materials-related exports to Asia since the beginning of 1998, expressing concern that the economic adjustments in Asia might continue for several more years. Another member pointed out that not only Japan's exports but also its imports were declining, and considered that this suggested that the Asian economies, including Japan, might be in the process of mutual contraction.
With regard to domestic demand, many members gave special attention to business fixed investment, which started to decline. One member pointed out weakness in the leading indicators, such as the sharpest-ever decline in sales of trucks, and an evident reversal of the upward trend in general machinery orders, especially those for machine tools. Another member expressed the view that the recent sluggishness in business fixed investment mostly reflected ongoing severe restructuring in the nonmanufacturing sector. The member elaborated that from 1995 through 1997, business fixed investment recovered to some extent mainly reflecting the completion of corporate restructuring in the manufacturing sector over the three to four years immediately after the collapse of the"bubble economy." The nonmanufacturing sector, however, especially the financial, real estate, and construction industries, was slow to implement corporate restructuring during the same period. The sector was, therefore, currently in the midst of corporate restructuring and this, according to the member, was constraining overall business fixed investment. This member also expressed a concern that even the manufacturing sector, which had been on a recovery path following its previous restructuring efforts, was again coming under adjustment pressure, this time reflecting intensified economic adjustments in Asia.
Regarding household spending, many members considered that although recent developments suggested a halt in the deterioration of consumer sentiment, care was required in judging whether consumer confidence had clearly bottomed out. Some of the comments made were as follows.
- The slight recovery in the Consumer Sentiment Index in March after the plunge in December indicated a possibility that the sharp declining trend in the propensity to consume had been reined back. This, however, offered no more than a slight prospect of a positive turn of events, and therefore, it was necessary to examine closely consumers' reaction to the comprehensive economic package.
- In the past few months, private consumption had deteriorated significantly mainly reflecting a decline in households' propensity to consume. At the moment, partly due to expectations in relation to the shortly-to-be-announced comprehensive economic package, there seemed to be little risk in the immediate future that economic adjustment would intensify one step further with a decrease in employment causing additional declines in private consumption. Nevertheless, it was still uncertain whether private consumption was headed toward a recovery.
- The sluggishness in household spending was mostly due to prevailing uncertainty about the future, such as that about employment, which partly pertained to the financial system problem, and that about life after retirement in the rapidly aging society. For example, a breakdown of housing investment figures showed weakness in housing purchases among workers in the banking and securities industries. This could be a piece of evidence that anxiety about employment conditions in these industries was particularly strong.
- The share of non-regular employees in employed workers increased, especially among female workers. Statistics showed that those working less than 35 hours a week rose to quite a high level of almost 20 percent. These non-regular employees, unlike regular employees, were subject to the possibility of large-scale adjustments. Therefore, in observing developments in employment, it was necessary to bear in mind the significance of the increasing share of these workers.
With regard to prices, one member commented that the current decline in domestic wholesale prices was mainly due to decreases in overseas commodity prices. Thus the economy was not experiencing an endogenous cycle in which domestic prices and corporate and household expenditures interacted negatively in a downward spiral. Several members, however, including the above member, considered that due attention must be paid to the sluggish domestic demand, which was another factor contributing to the gradual decline in overall prices. One of these members emphasized that weak private consumption had brought about falls in sales price at the final stage of distribution, which in turn placed downward pressure on upstream prices, and expressed concern that this might substantially squeeze profits of manufacturers.
One member pointed out that the annual decline in domestic wholesale prices of about 2 percent was pushing up real interest rates, causing even yields on Japanese government bonds to rise to a fairly high level of 3.5 percent in real terms, and that such high real interest rates was one of the factors hindering firms' investment. Another member pointed out that for depositors the recent developments in consumer prices had slightly increased real interest rates on deposits. The member emphasized the need to examine closely the implications this rise would have for household expenditure at a time when households might strengthen their financial asset preference with the start of the Japanese"Big Bang" financial deregulation, which commenced with the amendment of the foreign exchange law.
At the conclusion of the above discussion, the majority of the members agreed that the economic indicators released in the intermeeting period and the recent economic and financial developments generally supported the Board's latest judgment of the economic condition, which was that"[there was] strong downward pressure on economic activity." The members agreed, therefore, that there was no need to change the Board's previous judgment. One member commented, however, that developments in production and inventory had deteriorated in general in the manufacturing sector since the last meeting, and that the economic condition, which was already recessionary, would worsen in the April-June quarter, although public-sector investment in some areas outside large cities had stopped declining due to implementation of the supplementary budget for fiscal 1997.
The members then discussed the outlook for the economy. The focus of debate was the possible effects of the comprehensive economic package. 4 Comments made included the following:
- An economic package worth as much as 16 trillion yen should be able to prevent the economy from falling into a deflationary spiral. However, whether the package could bring into operation a virtuous cycle in the economy would depend not only on the scale of the package but also the content--that is, whether or not it would offer households and firms clearer prospect.
- The package could be expected to contain the downside risk of the private sector economy. However, it should be carefully watched whether or not it would be strong enough to bring about an upturn in the economy that was placed under strong structural adjustment pressures.
- Stock and bond markets had not responded much to the announcement of the outline of the package, and the latest Tankan survey results showed that firms' confidence was particularly weak compared with the business condition suggested in other parts of the survey. These seemed to indicate that the confidence of the market, households, and firms was more strongly affected by the medium- to long-term economic outlook than by the short-term outlook.
- Inventory adjustment was a significant factor when considering the economic outlook. The manufacturing sector was cutting production drastically in the April-June quarter to reduce inventory. As a result, it was possible that inventory adjustment would progress noticeably by summer, allowing firms to respond flexibly to the demand which would be created by the package.
- Economic packages implemented in the first half of the 1990s failed to have the intended effects because their effects were offset by strong structural adjustment pressures and stock adjustment pressures in the private sector. In contrast, there was not as severe an adjustment pressure on the current private-sector economy, and therefore, it could be expected that the package would work effectively. However, the current situation was less encouraging in comparison to 1995, when an emergency economic package was implemented, in that private-sector business fixed investment appeared to have entered an adjustment phase and the lending attitude of financial institutions was cautious.
- In the United States, liquidation of real estate played an important role in pulling the economy out of recession in the early 1990s. In view of this experience, it was of great significance that the package outline included measures to promote liquidation of real estate, and it was hoped that the measures would work effectively.
Based on the discussion on the current economic condition, the economic outlook, and also on the assessment of the comprehensive economic package, the Board reached a general agreement as follows.
- (1) There had been no notable change in economic developments since the last meeting and the momentum for an economic downturn persisted.
- (2) Concern about the stability of the financial system remained, although it had eased somewhat compared with previous periods.
- (3) The implementation of the comprehensive economic package could be expected to prevent the economy from falling into a deflationary spiral. It was not clear, however, whether the package would be strong enough to bring about a self-sustained recovery driven by the private sector.
- 4The discussion was based on information provided at the time through media reports. According to these reports, the general framework of the comprehensive economic package included a total expenditure of more than 16 trillion yen, which comprised public-sector investments worth 6 trillion yen, a special income tax reduction of 4 trillion yen (including that in calendar 1999), and tax cuts for special policy purposes worth several hundred billion yen. The details of the package were announced by the government in the evening of the day of this meeting.
V. Summary of Discussions on Monetary Policy for the Immediate Future
Based on the Board's assessment of current economic and financial developments, the members discussed the basic thought behind monetary policy for the immediate future.
All of the members agreed that raising interest rates was not a policy option as it was still uncertain whether the comprehensive economic package would effectively start an economic recovery.
With regard to a further interest rate reduction, many members considered that, with the interest rates already at an extremely low level, they needed to carefully deliberate on its timing, that is, under what economic and financial conditions the action should be taken; and its effects, that is, how much effect could be expected of the policy move. One member commented that an unchanged interest rate level could in effect provide stronger support for the economy at a later stage, if aggregate demand expanded as a result of the comprehensive economic package and started exerting upward pressure on interest rates. Another member commented that maintaining the current policy stance would realize the best balance between the support for household and corporate confidence.
A different member, however, mentioned that the Bank should consider taking some policy action with a view to supporting the effects of the comprehensive economic package and to enhancing the lending capacity of financial institutions.
On the issue of financial institutions' lending capacity, many members referred to the persistently cautious lending stance of financial institutions even after the fiscal year-end in March, confirming the need to strengthen the weak financial system. Comments made included the following:
- The growth of broadly-defined liquidity slowed recently to approximately 3 percent from about 3.5 percent last year. This as well as the decline in the money multiplier (M2+CDs divided by base money) indicated a possible weakening of the credit creating function, and therefore, required due attention.
- A further decline in the economy could be prevented by the implementation of the comprehensive economic package. There was a concern, however, that the weakness of the financial system might hinder the economy from moving onto a private demand-led recovery path. In such a phase, recovery of the risk-taking ability of financial institutions, which had been one of the most important issues in the past few years, had become increasingly urgent.
- The cautious lending attitude of financial institutions was at least partly a result of the application of lending standards that reflected credit risks of borrowers, and therefore could be interpreted as a necessary step toward the establishment of normal lending practices of financial institutions. A straightforward assessment of the situation was difficult, however, because sound behavior in individual financial institutions could have negative effects on macroeconomic developments.
All of the members who gave the above comments took the view that it was difficult to address the lending attitude and the lending capacity of financial institutions directly by means of monetary policy, and therefore, these problems should be addressed through measures other than monetary policy. One member, for example, pointed out the importance of organizing a framework to promote real-estate liquidation and asset securitization and of enhancing the functions of the direct financing market. Another member mentioned that the severity of firms' financing conditions reflecting the cautious lending attitude of financial institutions varied greatly among firms, and therefore, this issue would be better addressed, if necessary, by social policy measures than by monetary policy. Another member stressed that the key point in recovering the intermediary function of financial institutions would be the effective utilization of public funds provided as part of the measures to stabilize the financial system. Another member pointed out that household savings were being accumulated in the government-operated postal savings system reflecting concern about the stability of the private financial system, and through this channel were flowing into government financial institutions. The member said it was important to consider the implication of such a shift of funds to the public financial system on the lending capacity of private financial institutions.
In the course of the above discussion, one member commented that a reduction of reserve requirement ratios could be one policy option, which might have a positive influence on the lending capacity of financial institutions. On this point, a few of the other members were cautious, raising issues such as whether the action could lead to an expansion of monetary aggregates and whether it would hinder the smooth formulation of short-term money market interest rates. Some members commented that the consistency of policy measures should be weighed if the Board was to consider a further easing of monetary conditions through the use of the reserve requirement system or other measures that had not been employed previously.
At the conclusion of the above discussion, all of the members, including those who had advocated some action of further monetary easing earlier in the discussion, agreed to maintain the current easy policy stance in the immediate future, giving heed to the specific contents of the comprehensive economic package and their outcomes, including the markets' response and the effects on the economy. One member, however, mentioned that, given the projected severity of the economic situation in the April-June quarter, the overnight call rates should be encouraged to move at the lowest possible level under the unchanged policy stance. This opinion was put forward by the same member at the previous meeting.
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. In doing so, the Bank should examine closely economic and financial developments, including the contents and effects of the comprehensive economic package.
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 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. Fujiwara
Mr. Y. Yamaguchi
Mr. Y. Gotoh
Mr. S. Taketomi
Mr. T. Miki
Mr. N. Nakahara
Ms. E. Shinotsuka
Mr. K. Ueda
- Votes against this proposal:
For immediate release
April 24, 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.