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Minutes of the Monetary Policy Meeting

on June 12, 1998
(English translation prepared by the Bank staff based on the Japanese original)

July 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 Friday, June 12, 1998, from 9:00 a.m. to 11:17 a.m., and from 12:05 p.m. to 5:56 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. T. Mutoh, Deputy Vice Minister for Policy Coordination, Ministry of Finance 2
Mr. S. Kurimoto, Parliamentary Vice Minister, Economic Planning Agency 3
Mr. K. Omi, Director General of the Economic Planning Agency 4
Mr. T. Shioya, Director General of the Coordination Bureau, Economic Planning Agency5

Reporting Staff
Mr. I. Kuroda, Executive Director
Mr. M. Matsushima, Executive Director
Mr. I. Yamashita, Director, Financial Markets Department
Mr. T. Murakami, Director, International Department
Mr. S. Murayama, Director, Research and Statistics Department
Mr. H. Hayakawa, Economic Research Division, Research and Statistics Department
Mr. K. Yamamoto, Chief Manager, Planning Division 1, 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
Mr. R. Yanagihara, Manager, Policy Planning Office6
Mr. S. Ushiro, Manager, Financial Markets Department6

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on July 16, 1998. Those present are referred to by their titles at the time of the meeting.
  2. Mr. Mutoh was present from 9:00 a.m. to 10:10 a.m.
  3. Mr. Kurimoto was present from 9:00 a.m. to 10:46 a.m.
  4. Mr. Omi was present from 10:50 a.m. to 11:17 a.m.
  5. Mr. Shioya was present from 12:17 p.m. to 5:56 p.m.
  6. Messrs. Yanagihara and Ushiro were present from 9:05 a.m. to 9:23 a.m.

I. Approval of the Minutes of the Monetary Policy Meeting Held on April 24, 1998

The Policy Board discussed and approved unanimously the minutes of the Monetary Policy Meeting held on April 24, 1998, for release on June 17.

II. Approval of the Staff's Proposal on the Criteria and Rules for the Selection of Bidders in the Bank's "Repo" Operations

A. Proposal from the Bank's Staff

The Bank's staff proposed revising and publishing criteria and rules as outlined below for selecting the bidders in the Bank's "repo" operations (the lenders of government securities in the Bank's government bond-borrowing operations against cash collateral). The proposal was aimed at improving the transparency of money market operations.

1. Bidders in the Bank's "repo" operations will be selected based on the four criteria below. However, when the number of applicants satisfying criteria (a) and (b) falls short of the number of bidders the Bank considers appropriate to ensure smooth implementation of "repo" operations, criteria (c) and (d) will not be applied:

  1. (a) They must be depository financial institutions, securities companies, money market dealers, or securities finance companies that hold current accounts at the Bank's head office.
  2. (b) They must be of adequate creditworthiness, that is, they must satisfy a certain capital adequacy ratio.
  3. (c) They must be active players in the "repo" market. The roles they play will be evaluated based on four factors: (1) transaction value; (2) average transaction outstanding; (3) number of transaction counterparties; and (4) amount of information on contract "repo" rates disclosed and disseminated to other market participants through information vendors.
  4. (d) For those who have previously bid in the Bank's "repo" operations, the average amount of past successful bids per offer will be considered.

2. Bidders will be expected to perform the following functions:(a) Bid actively on the Bank's offers;

  1. (b) Process transactions expeditiously and accurately; and
  2. (c) Provide the Bank with market information and analysis useful for the implementation of monetary policy.

A party that falls significantly short of these expectations may be excluded from the list of bidders.

3. The Bank will, in principle, revise the list of bidders every year.

The staff also explained that similar revisions would be made regarding the rules on outright bond-purchasing operations, TB operations, and CP operations before the end of the fiscal year. The staff reported that, at the same time, the Bank would promote further disclosure of information on the results of biddings in market operations, such as the successful bid rates.

B. Discussion and Vote on the Staff's Proposal

Following the staff's explanation, members expressed views on the proposal. One member commented that the proposal was appropriate in that the revision of the rules would clarify the scope of the Bank's discretion and thereby facilitate legal and regulatory compliance. Some members remarked that improved transparency of operational procedures was consonant with the principle laid down in the new Bank of Japan Law, and therefore the Bank should continue such efforts, including stipulation of rules for other money market operations, based on the basic thinking in this proposal.

At the end of the discussion, the proposal was put to the vote. The Board unanimously approved the proposal and decided to publicize the criteria and rules immediately.

III. Summary of Staff Reports on Economic and Financial Developments 7

A. Money Market Operations in the Intermeeting Period

Market operations in the period since the previous meeting on May 19, 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.

When the overnight rate trended upward and seemed likely to rise beyond 0.5 percent around the time of the previous meeting, the Bank conducted operations to supply excess reserves in the market. As a result, the rate fluctuated within the 0.40-0.45 percent range until late May. From the end of May to the beginning of June, there was upward pressure on the rate due to market anticipation of the largest reserve shortage of the year occurring as usual on June 3. This annual pattern reflects such factors as the market's demand for funds necessary for corporate tax payment by firms whose accounting year ends March 31. During this period, the rate increased slightly to 0.45-0.50 percent despite injection of excess reserves by the Bank. Subsequently, the rates fell back and generally exhibited stability, although declines in bank stocks temporarily placed upward pressure on the rate. As a result, the weighted average of the uncollateralized overnight call rate in the reserve maintenance period from May 16 to June 15 was 0.44 percent as of June 11.

Meanwhile, interest rates on term instruments remained almost unchanged, as there were no particular events to influence them.

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 continued to depreciate against the U.S. dollar. The development mainly reflected the difference in economic fundamentals between the two countries. At the same time, the yen's decline was also propelled by (1) a "flight to quality" to the U.S. dollar reflecting the deteriorating situation in other East Asian countries and Russia, and (2) growing concern about the soundness of Japanese financial institutions. From June 11 to the morning of June 12, the day of this meeting, the yen dropped further to the 144 yen level, the lowest level since 1990. This reflected diminishing expectation of intervention following a comment by a senior U.S. official that the reason for the yen's weakness lay in the condition of the Japanese economy.

During the same period, the deutsche mark depreciated against the U.S. dollar reflecting intensifying problems in Russia. However, because the yen declined against the U.S. dollar more than did the deutsche mark, the yen weakened against the latter by approximately 3 yen. While East Asian currencies in general declined against the U.S. dollar, they were more or less unchanged relative to the yen, except for the Indonesian rupiah and Thai baht, both of which weakened.

2. Overseas economic and financial developments

In the United States, domestic demand showed sustained strength, particularly in household spending. Therefore, although net exports continued to decline, particularly those to Asia, real GDP growth in the January-March quarter was revised upward from an annual 4.2 percent to 4.8 percent. Meanwhile, the yield on 30-year U.S. government bonds declined to the lowest level since they were first issued in the 1970s. This was partly due to the "flight to quality" reflecting such factors as growing instability in Asia. Stock prices were undergoing adjustment, particularly Asia-related stocks.

Turning to Europe, a moderate economic recovery continued in Germany. The French economy also remained on a recovery path. In the United Kingdom, the labor market remained tight, and in response to this situation, the Bank of England raised the official dealing rate (the repo rate) by 0.25 percentage points, from 7.25 percent to 7.50 percent.

In East Asia, economic adjustments continued. Exports remained sluggish in general, and economic growth was negative or was revised downward in all East Asian countries. Stock prices continued to decline across the region except in Korea and Indonesia. Meanwhile, economic adjustment programs imposed by the International Monetary Fund (IMF) were being smoothly implemented in Korea and Thailand. In Indonesia, the IMF programs, which had been suspended, were close to being recommenced following successful rescheduling of debt with foreign private-sector banks.

In Russia, a concern prevailed about the impact of the financial market turmoil on economic activity, and the outlook was subject to substantial uncertainties, such as whether international financial support would be provided.

C. Economic and Financial Developments in Japan

1. Economic developments

Business fixed investment was undergoing adjustment and exports continued to decline. Private consumption showed no clear improvement although it appeared to have ceased deteriorating. Reflecting this sluggish final demand, inventory accumulated further and firms intensified production cutbacks. As a result, corporate profits decreased while employment and income conditions showed a clear deterioration, as indicated by the recent rapid rise in the unemployment rate. With regard to prices, domestic wholesale prices continued to fall and consumer prices, excluding the effects of institutional changes (such as the rise in the consumption tax rate and the medical and insurance system reform in fiscal 1997), posted slight declines from the previous year's level. These developments could be summarized as follows: the weakening of final demand spurred by concern about the stability of the Japanese financial system and worsening of the Asian situation was now exerting a stronger downward influence on production and especially on employment and income.

As for the outlook, the negative interaction between production, income, and expenditure was likely to continue, at least for the time being. However, swift implementation of the large-scale economic package announced on April 24, for which a fiscal 1998 supplementary budget was under Diet deliberation, was expected to alleviate the downward pressure on the economy gradually from the early autumn. This, in turn, was expected to contain a further expansion of the domestic output gap and thereby prevent a deflationary spiral induced by price declines. Income conditions were rapidly deteriorating, however, and the possibility could not be ruled out that this deterioration, by further impairing household and corporate confidence, would have an additional downward impact on final demand. Therefore, it was necessary to be alert to the possibility that, if this risk materialized, the positive effects of the economic package would be weakened, leading the economy into a deflationary spiral.

2. Financial developments

Interest rates on money-market term instruments had generally continued unchanged. Euro-yen interest rate futures were yielding close to historically low levels. Yields on long-term government bonds dropped further following releases of weak economic indicators, recording historical lows. Stock prices showed little momentum for a recovery. These developments in financial markets suggested a further dampening of market confidence. There was a strong belief in the markets that the current easy monetary policy would be protracted, and it could be judged that there was even some expectation of further monetary easing.

With respect to monetary aggregates, money supply growth had been decelerating recently and financial institution lending remained weak. These developments could partly be reflecting a supply-side factor, the cautious lending attitude of private-sector banks, but they appeared to be more fundamentally caused by a rapid contraction of firms' financing demand reflecting continued stagnation of economic activity. Meanwhile, financial institutions and capital markets remained cautious about credit risk. Therefore, while firms with high credit standing had sufficient access to funds through financial institution loans and corporate bond issuance, it appeared that those with relatively low credit standing continued to face severe financing conditions, suffering from limited availability of funds and high funding costs. The repercussions of this situation on the economy required careful monitoring.

  1. 7Reports 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

In the Board's discussion of the current economic situation, many members commented that in view of the consistent weakness of recently released indicators, particularly those relating to employment and income, it was necessary to assume that the momentum of the negative cycle in the economy had strengthened somewhat since the previous meeting.

A few members commented that although the Bank's staff reported that private consumption appeared to have ceased deteriorating, the situation required more cautious assessment. One member elaborated that private consumption leveled off only because it was supported by the warm weather in April and May (the average temperature was about 2°C higher than usual), and therefore, it was questionable whether the trend could be sustained. Another member pointed out that the propensity to consume might have been overstated in April, when disposable income was squeezed due to payment of real estate tax. A different member expressed the view that although statistics showed signs of a recovery in the propensity to consume, depressed automobile sales and slack demand for raw and processed materials suggested the possibility that domestic demand, including private consumption, was slipping into a second round of decline.

On the other hand, a member pointed out that although private consumption had dropped significantly reflecting concern about the stability of the financial system which developed toward the end of 1997, the ensuing worsening of employment and income conditions had not prompted a further decline in private consumption. Another member expressed the view that although it might be premature to conclude that the modest rebound in the propensity to consume indicated a recovery in consumer confidence, the improvement in the propensity to consume was of course favorable as it was a natural movement following a sharp fall.

In addition to the cautious assessment of private consumption outlined above, members also expressed more critical views about overall economic activity than at the previous meeting. One member expressed a concern that demand continued to decline even as firms cut production, hindering progress in inventory adjustment. Therefore, the economy, which had been expected to bottom out in the April-June quarter, might start to show more evident signs of double-dipping toward the summer. Another member pointed out that coincident indicators had fallen from their peak of 100 around May 1997 to 89 in March 1998. This indicated that the economy had declined at a pace similar to that of the adjustment phase following the bursting of the economic "bubble," and there was no indication that the decline was slowing. A member, however, commented that the intensification of the adjustment pressure on business fixed investment and employment had been predictable from the considerable drop in corporate profits in the second half of fiscal 1997. Therefore, the recent worsening of the economic situation did not affect the Board's earlier assessment of the economy in any significant way.

In the Board's discussion of the economic outlook, the focal point was, as in the previous meeting, how to judge between the severe condition of the economy and the anticipated effects of the comprehensive economic package.

Members generally shared the view that the economic package would start producing favorable effects at the beginning of autumn, as indicated in the staff's report. One member elaborated that according to pattern, public works covered by the fiscal 1998 supplementary budget would be determined in detail in August, be contracted in September, and result in actual economic activity from October onward.

The majority of the members considered that the large-scale economic package could be expected to contain the downward pressure on the economy in the latter half of the fiscal year if implemented smoothly. Based on the critical view of the condition of the economy, however, many members commented on the probability, which might not be small, that the private sector would weaken substantially before the effects of the package materialized, and that, as a result, the package would not lead to a self-sustained economic recovery.

Specifically, one member expressed the view that considering the current inventory adjustment pressure, business conditions were expected to become quite severe in the summer. Therefore, the critical point would be how well firms could cope with the situation until the effects of the economic package started to surface in the autumn. In relation to this point, another member referred to the possibility that the economy would weaken further toward the summer, and pointed out that if this occurred, it would be necessary to be alert to the possible negative outcomes such as that (1) the effects of fiscal policy would, as in 1992 and 1993, be offset by weak private-sector demand and, consequently, fail to boost economic growth, and (2) additional pressure would be placed on the banking system, contracting bank credit. As an explanation of cautious economic outlook, it was also pointed out that leading indicators which forecasted developments in the coming nine months suggested that an economic recovery was unlikely this year. Another member stated that overtime working hours, one of the most sensitive labor statistics to economic developments, had continued to decrease.

Comments were also made from a medium- to long-term perspective. One member expressed the opinion that while inventory adjustment was necessary, attention should be paid to the risk involved in the adjustment process: there might be an increase in corporate failures and a further deterioration in employment conditions, developments to which the economy and financial system were considered to be vulnerable. Another member pointed out that the Japanese economy was vulnerable to shocks, having used up its unrealized gains in the process of various adjustments in the 1990s. Another opinion was that with the Japanese economy in a decade-long adjustment phase and with labor productivity and capital efficiency at low levels, even though production might improve moderately in the October-December quarter due to the effects of the economic package, a more deeply rooted adjustment pressure would last until the end of the century.

As an issue closely related to the economic outlook, members also deliberated on the risk of a deflationary spiral based on recent price developments. Some members commented, as in the previous meeting, that the announcement of the comprehensive economic package had significantly reduced the possibility of a deflationary spiral occurring in the immediate future.

On the other hand, some other members noted the risk that the deflationary trend would become more evident if the economy weakened significantly toward the summer, before the economic package started producing effects.

Specifically, such cautious views included the following. One member mentioned that in view of the price decline and the recent rapid deceleration of growth in regular wages, which had fallen to close to zero, a possibility could not be ruled out that the economy was already in a deflationary spiral. Another member commented that in the raw materials industry, the important challenge would be whether firms could maintain the current sales prices until the effects of the economic package began to surface at the beginning of autumn. The member expressed a concern that should these prices be reduced, all other prices would follow, further impairing the sector's weak corporate profits. This member also pointed out that such deflationary concerns alone would induce firms to suspend business fixed investment and fund-raising, drawing attention to the possibility that a mechanism whereby price declines depress private-sector spending was in operation. During this discussion, a member pointed out that the price declines to date had in large part reflected falls in international commodity prices, and had therefore contributed positively, at least in part, to corporate profits. Even this member added, however, that endogenous downward pressure on prices was becoming greater each month, and therefore, it was necessary to keep a careful watch on whether final demand would contract further before the effects of the economic package materialized.

In the context of this discussion, some members introduced provisional estimates of price declines in the immediate future. One pointed out that the Phillips curve relationship (the trade-off between unemployment and inflation) had become apparent again recently. This member cited an estimate that consumer prices could decline year-to-year by as much as 3 percent around the turn of the fiscal year. Another member indicated that according to estimations based on the Phillips curve, the year-to-year decrease in consumer prices would be between 0 percent and 3 percent in six months' time.

With regard to land prices, a member mentioned the possibility that they would weaken further in the future. The argument was based on the fact that office rents, which had once been close to bottoming out, had started to slide again, and that a large retailer expressed difficulty in raising profits unless rent was reduced to half the current level. This member also expressed the view that while liquidation of real estate was an important policy issue, it was necessary to be aware that it could induce further declines in land prices in the short term.

Thus, many members noted the downside risks to the economy, including the possibility of a deflationary spiral occurring. At the same time, however, some of these members referred to positive factors for the economic outlook. One member emphasized that, although the downward pressure on the economy since 1997 might have been unexpectedly strong, the sizable declines in long-term interest rates and the yen's value since April could have favorable effects on the economy. Another member pointed out that, although there was a risk that the economy would weaken further toward the summer, there had been developments that hinted at an economic upturn, such as a bottoming out of public-sector investment and a recent reversal of the decline in the propensity to consume.

As indicated above, each member had a somewhat different view of the economic outlook, depending on how the member perceived the risk of a deflationary spiral occurring. The majority of the members shared the view, however, that they needed additional information, including the results of the Tankan survey to be published at the end of June, to be able to make a more precise assessment of the risks to the economy.

Further, many members commented on the nonperforming-loan problem, which was considered to be a critical issue behind the downside risks to the economy and the uncertain ability of the economic package to ignite a self-sustained economic recovery.

One member pointed out that until anxiety about a recurrence of financial system instability was dispelled, a recovery in corporate and household confidence could not be expected. The member said that, therefore, it was necessary to proceed promptly with the fundamental solution of the nonperforming-loan problem by setting out plans going beyond mere stopgap measures. Another member mentioned that stock prices remained weak even six to seven weeks after the announcement of the comprehensive economic package. The member expressed the view that this reflected (1) the market's evaluation that the content of the package did not offer a clear medium-term prospect for the Japanese economy, and (2) the persistent encumbrance of the financial system problem. Other comments included a remark that it was important to make significant progress in the disposal of nonperforming assets while the fiscal stimulus to demand was at work. There was also the observation that the financial industry must urgently regain strength to support firms which deserved to survive. Thus, members generally agreed that an expeditious solution of the nonperforming-loan problem was most crucial to a clearer prospect of an economic recovery.

As a solution to the nonperforming-loan problem, many members had high expectations for the Comprehensive Plan for Financial Revitalization, the so-called Total Plan, which features promotion of land transactions and loan securitization. One member, however, commented that, since the strategy was not likely to be implemented before the autumn, it would be desirable for individual financial institutions to swiftly and voluntarily disclose as much as possible of their self-assessed nonperforming assets. Another member warned that encouraging the market mechanism to provide impetus for disposal of nonperforming assets through the full-fledged disclosure of such assets might entail negative consequences without a comprehensive scheme to deal adequately with financial institution failures. The member emphasized the risk that it might further intensify firms' financing difficulties. A different member also emphasized that while it was important to discharge the negative burdens of the past, it was necessary to give due consideration to the probability that the corporate failures which might materialize during the process might further depress private-sector confidence. Despite the variety of opinions, members shared the view that the Bank should continue to do its utmost to advance the solution of the nonperforming-loan problem.

In the discussion on financial market developments, many members attributed the weakness of monetary aggregate indicators, such as money supply and private bank lending, mainly to sluggish financing demand. One member expressed the view that although the declining trend in the money multiplier (M2+CDs divided by base money) suggested a weakening of banks' credit creating functions, the recent fall in bank lending was primarily due to weak financing demand. Some other members remarked that financial institutions' increases in lending margins depending on borrowers' creditworthiness represented sound lending practice from the viewpoint of credit risk management. One of the members, however, pointed out that the situation was construed as a "credit squeeze" by the debtor firms concerned, if not a "credit crunch."

Some members considered that, whatever the underlying factors, the weakness of monetary aggregates alone could undermine corporate and household confidence. One member pointed out that the sluggishness of money supply growth could induce households to restrict their spending even more. Another member in favor of this argument suggested that a monetary policy that would expand monetary aggregates might have a positive psychological impact on the private sector.

With regard to stock prices, some members ascribed the lackluster movement around 15,000 yen to the nonperforming-loan problem. One pointed out that although stock prices were supported by public funds such as pension funds in the April-June quarter, such support could not be expected in the July-September quarter, and that the annual pattern of a rise in corporate failures in August would place pressure on stock prices. The member argued that there was therefore a possibility that stock prices would undergo a further drop in the summer.

Many members also commented on foreign exchange rate developments. Members generally shared the view that the recent rapid depreciation of the yen was spurred by the market mechanism reflecting the weak condition of the Japanese economy, and that the depreciation could contribute positively to the economy by supporting corporate profits.

As to the effects of the weaker yen on other Asian currencies and economies, there were somewhat differing views. One member was of the opinion that the falls in other Asian currencies reflected the weak fundamentals of their own economies, and were not necessarily provoked by the yen's depreciation.

Some other members, however, emphasized the need to keep a careful watch on the influence of the yen's decline on other Asian currencies and economies. One noted that because most Asian currencies had depreciated substantially since the latter half of 1997, the yen's fall against all other currencies would not cause any significant damage to the international competitiveness of those countries. The member, however, pointed out that various factors required due consideration. These included (1) the possibility that some countries might have to tighten monetary policy to counter the downward pressure on their currencies; (2) the resulting increase in the repayment burdens of U.S. dollar-denominated debts; and (3) the impact on Hong Kong and China, which peg their currencies to the U.S. dollar.

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

Based on the Board's assessment of the economic and financial situation, the members discussed the basic thought behind monetary policy for the immediate future.

Most of the members were convinced that the economic condition had worsened in the intermeeting period, and many commented that the situation was one that would, under the normal circumstances, require some kind of monetary policy action. Many members, however, remained cautious about reducing interest rates in the immediate future due to the following reasons: (1) the comprehensive economic package could be reasonably expected to bring about an economic recovery; (2) with limited room for further interest rate reductions, further monetary easing should be implemented when truly inevitable and at the most effective moment; and (3) attention was required as to the risk of impairing consumer confidence.

To be specific, one member stressed that, although the downside risks to the economy had actually increased in the past one or two months, the Bank should maintain the current easy monetary policy to be consistent with the conjecture that the economic package would induce an economic recovery in the latter half of the fiscal year. Another member stated that although it was advisable not to rule out the possibility of future monetary easings, including unprecedented measures such as monetary aggregate targeting, an immediate easing was not necessary considering that fiscal policy and financial system stabilization measures had been introduced. A different member stated that although preemptive monetary easing would have been consistent with the apparent downside risks to the economy, it was more important to keep in reserve policy measures that could be implemented in case the downside risks materialized. This member further elaborated that it would be appropriate to maintain an unchanged policy stance for the time being while keeping a careful watch on various factors, such as corporate confidence, stock prices, and financial system developments.

Comments were also made regarding the side effects of interest rate reduction. One member cited the results of an opinion survey on lifestyle and financial behavior conducted by the Bank in March 1998. The survey showed that few consumers appreciated smaller loan repayment reflecting lower interest rates, while many were upset about suppressed interest income. In view of these results, the member stressed the possibility that an additional reduction of interest rates would further impair consumer confidence. Some members, including this member, noted the risk that lower interest rates might delay structural adjustment by discouraging the exits of firms that would otherwise not be able to stay in the markets.

In the discussion, members presented somewhat varying opinions on how they perceived the recent rapid depreciation of the yen in the context of monetary policy management. One member expressed the view that one of the lessons of the "bubble" period was that monetary policy should not place too much emphasis on the exchange rate. Many members supported this argument. Some of them, however, indicated that, considering the potential spillovers on other Asian currencies, the Bank should be cautious about implementing policy that would encourage the yen's decline, or that might provoke speculation that the Bank had such an intention. Another member stressed that if further monetary easing was indispensable, the Bank should be resolute to make the move despite anticipated criticisms about a weaker yen. The member believed, however, that the current economic situation did not call for such an action.

In sum, many members were of the view that they should be cautious about an immediate reduction of interest rates in consideration of the various factors discussed above. A few members, however, offered proposals for monetary policy based on the view that the Bank should endeavor to indicate clearly monetary support for the economy through measures currently feasible.

Specifically, a member proposed lowering the reserve requirement ratios and thereby reducing the required reserves from the current average outstanding of about 3.5 trillion yen to about 2.5 trillion yen. The proposal was based on the understanding that although a lowering of interest rates at this time was constrained by various factors, it was appropriate for the Bank to take some kind of monetary policy action in coordination with the government's large economic package to address the severe economic situation. The member acknowledged that a reduction of the reserve requirement ratios would have limited effects in directly easing monetary conditions. The member, however, elaborated that it would have a positive psychological effect by giving the impression that it would lead to greater lending capacity of financial institutions and thereby to increased monetary aggregates.

Another member proposed establishing a numerical target for the uncollateralized overnight call rate and implementing a slight easing of policy by setting the target around 0.40 percent. The proposal was based on the perception that (1) economic activity had deteriorated rapidly since the beginning of the fiscal year; (2) growth rates of monetary aggregates were declining; and (3) monetary support for the economy should not be belated but implemented preemptively.

Other members were cautious about adopting the proposals. One member pointed out that a lowering of the reserve requirement ratios at periods of high interest rates would alleviate the burdens of financial institutions and boost their profits. The member concluded that with the current low level of interest rates, however, the opportunity cost of holding non-interest reserves was small, and therefore, reduction in the required reserves would have little impact on financial institution profits. This member also questioned the aforementioned psychological effect of decreasing the reserve requirement ratios, in that if the announcement did not produce tangible effects, the credibility of monetary policy might be affected in the long term.

Many members, including this member, considered that neither of the proposals would have significant effects. They believed, therefore, that it would be more appropriate to implement more evident policy changes, such as a distinctive lowering of the overnight call rate, possibly accompanied by a reduction of the reserve requirement ratios, when they became necessary. Further, one member pointed out that minor policy changes would run the risk of disappointing the market. Another member commented that keeping an unchanged policy stance should not be construed the Bank's negligence. The member stressed that maintenance of the current easy monetary policy amid criticisms about the extremely low interest rates, including those based on misunderstanding, should be recognized as active decision making.

Separately from the above deliberation on whether or not a policy change, even if modest, should be implemented, one member proposed maintaining the guideline for money market operations but expressing the guideline in a more explicit way. Specifically, the member suggested indicating the desired level of the overnight call rate by a numerical target range instead of expressions such as the currently used "slightly below the official discount rate." The proposal was based on the following reasons: (1) the phrase "slightly below" was ambiguous, and (2) the expression for the target level of the overnight call rate should be separated from the official discount rate to underline the fact that guiding of the overnight call rate now played the central role in monetary policy management.

One member strongly supported this proposal, based on the view that the current guideline was unclear and a numerical target would be more appropriate. The majority of the members, however, were hesitant about the proposal on account of two reasons: (1) the current guideline seemed to be sufficiently clear in view of the generally stable developments in the overnight call rate, and (2) if the guideline for money market operations was to be unchanged, then the Bank had better keep the expression used in the guideline unchanged to preclude any misinterpretation. Several of these members commented that they acknowledged the need to improve the expression, but this should be considered when implementing a policy shift in the future.

VI. Remarks by Government Representatives

Government representatives made several remarks during the meeting. Concerning the staff's report that swift implementation of the economic package was expected to alleviate the downward pressure on the economy gradually from the early autumn, the representative of the Economic Planning Agency commented that the government expected effects to appear in August. Further, another representative of the Economic Planning Agency commented on the risk of a deflationary spiral which the staff mentioned in its report on economic developments. The representative expressed the opinion that in view of the recovery in the propensity to consume, conditions were in place for the economic package to exert its effects fully, and therefore that the staff's assessment was negatively biased. On this point, one member pointed out that there were even more critical views about the economy in business circles, and stressed that there was no need for the judgment of the Economic Planning Agency and that of the Bank to be identical.

In addition, another representative of the Economic Planning Agency requested at the end of the Board's discussions that the Bank manage monetary policy giving due consideration to sufficient availability of funds to firms.

One member deplored the fact that the representative of the Economic Planning Agency was replaced twice during the meeting, and other members expressed sympathy with this view. Some members stated that in principle, a single person, or at most two persons, should represent one government institution for the reasons that (1) replacements of representatives could impede the proceedings of the meeting by, for example, a representative repeating questions already raised by his predecessor; and (2) it was desirable that a representative expressed opinions as necessary on behalf of the government based on the entire discussion of the Board. A different member remarked that there should be, for one institution, at most one representative for the morning and one for the afternoon session.

On this point, the representative of the Economic Planning Agency stated that the three persons were all present as the representative of the Economic Planning Agency and not as individuals, and therefore, replacements during the meeting should not be a problem. The representative, however, expressed understanding concerning the possibility that such replacements might obstruct the proceedings of the meeting, and, explaining that this had been an exceptional occurrence, expressed the intention of avoiding such frequent replacements as much as possible.

VII. Votes

At the conclusion of the Board's discussions, many members supported the view that in the implementation of monetary policy for the intermeeting period ahead, the Bank should maintain the current easy monetary policy, examining closely economic and financial developments, including the effects of the comprehensive economic package. There were, however, members who expressed different views. Therefore, four policy proposals were put to the vote.

Mr. Miki made a proposal to lower the reserve requirement ratios, reducing the average amount outstanding of required reserves by approximately 1 trillion yen. The proposal was defeated with one vote in favor, seven against, and one abstention.

Mr. Nakahara made a proposal to adopt a guideline for money market operations in the intermeeting period that the Bank should encourage the uncollateralized overnight call rate to be on average around 0.40 percent. The proposal was defeated with one vote in favor and eight against.

Mr. Gotoh made a proposal to adopt an unchanged guideline for money market operations, but to change the expression of the target level of the uncollateralized overnight call rate from "slightly below the official discount rate" to "a low level within the 0.40-0.50 percent range." The proposal was defeated with two votes in favor, six against, and one abstention.

To reflect the majority view, the chairman formulated the following proposal.

Chairman's 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. Fujiwara
Mr. Y. Yamaguchi
Mr. Y. Gotoh
Mr. S. Taketomi
Ms. E. Shinotsuka
Mr. K. Ueda
Votes against this proposal:
Mr. T. Miki
Mr. N. Nakahara

Mr. Miki dissented because he considered that it would be appropriate to implement some measure to reinforce the easy monetary policy in light of the economic, price, and financial situation. He believed that a reduction of the reserve requirement ratios would have an announcement effect by giving the impression that it would expand monetary aggregates through, for example, the enhanced lending capacity of financial institutions, and this, by boosting corporate and household confidence, would gradually dispel deflationary concerns.

Mr. Nakahara dissented because, although he acknowledged that it would be advisable to preserve a distinct reduction of interest rates as a policy option for the future, he believed that it was necessary to demonstrate as clearly as possible the Bank's critical view of the condition of the economy. Therefore, he considered it appropriate to slightly lower the level of the uncollateralized overnight call rate to give what boost possible to monetary aggregates.

VIII. Approval of the Bank's View on Recent Economic and Financial Developments

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 June 16, 1998 in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background").8

  1. 8The original full text, written in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on June 16, 1998 together with the English version of "The Bank's View." The English version of "The Background" was published on June 26, 1998.


For immediate release

June 12, 1998
Bank of Japan

The Bank today held a Monetary Policy Meeting, a regular meeting of the Policy Board on monetary policy.

By majority vote, the Policy Board decided to leave monetary policy unchanged.