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Minutes of the Monetary Policy Meeting

on July 28, 1998
(English translation prepared by the Bank staff based on the Japanese original)

September 14, 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 Tuesday, July 28, 1998, from 9:00 a.m. to 12:40 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. E. Kawade, Director-General of the Coordination Bureau, Economic Planning Agency

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, Research and Statistics Department
Mr. K. Yamamoto, Adviser and Chief Manager, Planning Division 1, Policy Planning Office

Secretariat of the Monetary Policy Meeting
Mr. K. Koike, Director, Secretariat of the Policy Board
Mr. S. Hida, Manager, Secretariat of the Policy Board
Mr. K. Momma, Manager, Policy Planning Office

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on September 9, 1998. Those present are referred to by their titles at the time of the meeting.

I. Approval of the Minutes of the Monetary Policy Meeting Held on June 25, 1998

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting held on June 25, 1998, for release on July 31.

II. Summary of Staff Reports on Economic and Financial Developments2

A. Money Market Operations in the Intermeeting Period

Market operations in the period since the previous meeting on July 16 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.

After the previous meeting, both lenders and borrowers in the money markets became cautious in their funds management. This reflected such factors as a gradual strengthening of the participants' awareness of the semi-annual settlement at the end of September against the background of their anxiety about a rekindling of concern over the stability of the financial system. Consequently, interest rates on term instruments such as the 3-month Euro-yen trended upward, and the overnight rate remained vulnerable to upward pressure.

In these circumstances, the Bank provided the markets with ample liquidity on a daily basis, injecting increased amounts of excess reserves in its morning operations. As a result, the overnight rate remained stable in general at around the 0.40-0.45 level, and its weighted average in the reserve maintenance period from July 16 to August 15 was 0.42 percent as of July 27. In addition, in order to contain the rise in interest rates on term instruments, the Bank increased its provision of long-term funds maturing after the semi-annual settlement on September 30. In response to expanded CP issuance by firms in preparation for the semi-annual settlement, the Bank increased its CP operations with a view to facilitating smooth corporate financing.

For the immediate future, it was expected that factors causing uncertainty in the money market would remain, including deliberation by an overseas credit rating agency on downgrading Japanese government securities and unstable price movements in bank stocks reflecting ongoing discussions on the Comprehensive Plan for Financial Revitalization, the so-called Total Plan. The Bank, therefore, would continue to ensure the stability of the overnight rate and endeavor to avert rises in interest rates on term instruments.

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

1. Developments in foreign exchange markets

In the intermeeting period, the yen strengthened temporarily against the U.S. dollar. This reflected expectations that the reduction in the number of seats held by the ruling Liberal Democratic Party in the House of Councilors following the election on July 12 would lead to the fundamental solution of the nonperforming-asset problem and tax system reforms. Subsequently, however, the yen weakened to the 142-143 yen range against the U.S. dollar as the yen was sold on news that an overseas credit rating agency was considering downgrading Japanese government securities.

During the intermeeting period, the deutsche mark appreciated somewhat against the U.S. dollar following a decision by the International Monetary Fund (IMF) and other authorities on an international financial support package for Russia.

Among East Asian currencies, the Korean won appreciated against the U.S. dollar while other currencies depreciated in general, reflecting their domestic situations.

2. Overseas economic and financial developments

In the United States, domestic demand showed sustained strength, particularly household spending. However, the trade deficit expanded due to such factors as economic adjustments in Asia, and production decreased in June in part because of strikes at a major auto maker. Regarding the economic situation, Mr. Greenspan, Chairman of the Board of Governors of the Federal Reserve System, stated that, while the risks of a pickup in inflation remained significant due to the very tight labor markets, economic adjustments in Asia would continue to exert negative influence on the U.S. economy in the immediate future. Following such a statement, expectation of a monetary tightening in the immediate future retreated somewhat in the U.S. financial markets, and yields on 30-year U.S. government bonds declined. The Dow Jones Industrial Average fell back from its historical high reflecting Mr. Greenspan's remark which suggested that adjustment was inevitable, and a deterioration in the earnings prospects of some firms.

In Europe, Germany and France continued to exhibit a moderate economic recovery. The United Kingdom showed some indication of a slowdown in domestic demand, but the labor market remained tight. In East Asia, economic adjustments continued, and China experienced slower export growth and sluggish private consumption.

C. Economic and Financial Developments in Japan

1. Economic developments

Economic indicators released after the previous meeting showed (1) a sizable decrease in imports; (2) continued rapid deterioration in the business conditions diffusion index of the Economic Planning Agency; and (3) a considerable contraction in the growth in summer bonus payments shown by the Japan Federation of Employers' Associations (Nikkeiren). These confirmed the downward trend in economic activity.

In these circumstances, it was necessary to monitor carefully how the Total Plan and various fiscal measures including tax system reforms would unfold. Attention should also be paid to the effects of the comprehensive economic package of April 24, which were expected to materialize gradually, on public investment-related indicators, production-related indicators--which show progress in inventory adjustment--and commodities prices.

2. Financial developments

Stock prices and long-term interest rates were pushed up temporarily by heightened expectation of tax system reforms. Recently, however, they softened somewhat as the markets reinforced their wait-and-see stance toward the new administration's economic policy management. In the money markets, there was stronger awareness of liquidity risks surfacing at the time of the semi-annual settlement at the end of September, and as a result, interest rates on term instruments such as those on the 3-month Euro-yen followed an upward trend. Meanwhile, the ongoing deliberation by an overseas credit rating agency on downgrading Japanese government securities had not exerted any substantial impact on the financial markets.

With respect to money stock, year-to-year growth in M2+CDs maintained its moderate decelerating trend. The year-to-year growth in broadly defined liquidity also appeared to indicate a slowing trend since mid-1997, although considerable monthly fluctuation was observed. Base money continued to expand sharply as a result of increased banknote issuance in the low-interest-rate environment. Consequently, the decline in the money multiplier (M2+CDs divided by base money) accelerated.

  1. 2Reports were made based on information available at the time of the meeting.

III. Summary of Discussions by the Policy Board on Economic and Financial Developments

A. The Current Economic Situation

In the Board's discussion of the current economic situation, members generally agreed that the additional information obtained in the intermeeting period confirmed their judgment at the previous meeting on July 16 that economic conditions were deteriorating. One member pointed out that production remained weak as shown by a substantial decline in large-volume consumption of electric power in June. Various comments were made on how such economic conditions could be construed, including views from a medium-term perspective.

With respect to the corporate sector, one member mentioned the possibility that the steep downturn in firms' expected growth rate would intensify various adjustments, including fixed investment and employment adjustments. The member pointed out that the magnitude of various shocks that had emerged in the current adjustment phase--that is, the adoption of fiscal consolidation measures, deterioration in various Asian economies, and concern about the stability of the financial system--was not as significant as the impact associated with the bursting of the economic "bubble" in the early 1990s. The argument continued that it was probable, however, that firms' expected growth rate had fallen considerably from slightly above 3 percent in the early 1990s to 1-2 percent recently, placing pressure on firms to adjust their cost structure to be consistent with such a low growth rate. On this point, another member expressed a more pessimistic view that firms' expected growth rate had dropped even lower. Another member raised the question of what could be behind the decline in the expected growth rate, and mentioned the following as possible causes: (1) prevalence of anxiety, which sometimes seemed groundless, in the household and corporate sectors; (2) growing skepticism in the private sector about fiscal policy and financial system stabilization measures; and (3) slowing of technological innovation. The member further suggested that if the third factor was the primary element contributing to the fall in the expected growth rate, it would be difficult to bring about an economic upturn solely through demand-side policies.

There was also the observation that the economy was experiencing strong adjustment pressures which were different from those in the early 1990s, when the economic "bubble" burst. Specifically, a member identified two sources of such pressures: (1) progress in globalization, which was driving firms to adapt to a market economy and placing stronger pressure to increase returns on equity (ROE), returns on assets (ROA), and labor productivity; and (2) depletion of firms' unrealized capital gains due to falls in assets prices. The member referred to the possibility that these would prolong adjustments in capital stock and employment. This member also remarked, in relation to the pressure arising from globalization, that careful attention should be paid to the impact on businesses of a shift to international accounting standards--a more extensive shift to consolidated accounting was scheduled to start from the accounting term ending March 2000 and commencement of mark-to-market valuation of financial assets was being considered for the accounting term ending March 2001.

In connection with these adjustment pressures, members commented on the severe situation facing small and medium-sized firms. One member pointed out that the business condition diffusion index of the Japan Chamber of Commerce and Industry was at its lowest level since the statistics began. A few other members expressed concern that the number of business failures as well as the amount of debt incurred by the failed firms were increasing markedly. One of them pointed out that failures were seen even in relatively large firms. In addition, more firms were failing on account of a slump in their proper business operations caused by depressed economic conditions, instead of unsuccessful real estate investment of the "bubble" period. Another member added that a surge in the number of jobless people as a result of such failures was causing substantial uncertainty in the household sector.

With regard to the household sector, many members' comments concentrated on factors causing the persistent weakness in confidence and the resulting sluggishness in spending, in the context of the adjustment pressures in the corporate sector discussed above. One member expressed the view that the household sector sensed firms' intention of reducing costs over the medium term, which could involve changes in conventional employment practices, and this was one factor restraining household spending. This member also pointed out that uncertainty regarding the costs and benefits to be shared by the household and government sectors in the medium-term--uncertainty about the present value of future household disposable income--was impairing the confidence of the household sector.

Another member cited indicators that clearly showed a worsening of employment conditions. For example, the summer and winter bonus payments for fiscal 1998 agreed this summer posted a decline from the previous year even on the basis of Nikkeiren member firms, which are mainly large, and the number of job advertisements dropped over 20 percent year to year. The member expressed concern that, in view of the considerable adjustment pressure placed on firms to improve productivity, the unemployment rate could climb significantly higher in the future. The member pointed out that, as a natural consequence of such employment conditions, there were signs of a double-dipping of private consumption, which previously appeared to have bottomed out.

Another member claimed that while employment conditions were approaching their worst of the postwar period, the institutional framework to deal with employment problems was very inadequate, and it was therefore necessary to reform the employment system fundamentally, possibly entailing amendments to relevant laws.

With regard to net exports, one member commented that while a further deterioration in other Asian economies appeared not to materialize immediately, some signs of deceleration had been observed in the U.S. and European economies. It was therefore necessary to monitor these developments closely.

B. The Economic Outlook

Members generally agreed that the economic outlook remained unchanged from the previous meeting. Specifically, they considered that the downward trend in the economy would be contained at least temporarily in the second half of the fiscal year, when the effects of the comprehensive economic package of April 24 were expected to materialize. However, the longer-term prospect for the economy into the next fiscal year was still subject to substantial uncertainty.

Regarding the prospects for the immediate future, one member expressed the view that the risk of a double-dip decline in the economy involving a further substantial drop in production had been reduced, and the deflationary trend would also be prevented from accelerating in view of the slowing decline in domestic wholesale prices. The member, however, expressed concern about a possible recurrence of a slide in land prices, which at one time seemed to have stopped declining.

As for the outlook into fiscal 1999, members generally agreed that developments in the economy would depend significantly on how clearly policymakers could set out their plans on fiscal policy and financial system measures.

One member, who earlier mentioned the problems pertaining to the steep fall in the expected growth rate, commented that the outline of the grand frameworks for tax system reforms and a fundamental solution of the nonperforming-asset problem had already been made. The member expressed the view that a recovery in the expected growth rate of firms and households would depend on whether the new administration could effectively develop and utilize these frameworks.

Further, some members welcomed the fact that, since the previous meeting, it had become more apparent that the new administration would relax the Fiscal Structural Reform Act and adopt expansionary fiscal policies into the next fiscal year. One of them, however, added that it was too soon to make a definite judgment on the immediate prospects for fiscal policy as Diet proceedings had become subject to greater uncertainty as a result of the election of the House of Councilors. Another commented that it would be insufficient merely to present how fiscal policy would be managed in the immediate future, because (1) as long as anxiety about future tax increases remained, the stimulative effects of tax reduction on private-sector spending would be limited; and (2) an overseas credit rating agency was starting to show apprehension about Japan's expanding fiscal deficit. The member therefore stressed the need to clearly indicate a medium- to long-term commitment to realizing small government.

Further, another member pointed out that it was more important to establish an adequate initial fiscal 1999 budget than to add a substantial amount to the fiscal 1998 budget. The member expressed concern that, with the fiscal policies of the new administration revealed thus far, it was highly probable that the economy would post negative growth in fiscal 1998 and fiscal 1999.

Regarding measures for the financial system, members shared the perception that disposal of nonperforming loans was becoming even more urgent, and many therefore emphasized that necessary measures should be implemented promptly.

One member expressed the hope that bills related to the Total Plan would be passed as soon as possible. Another member pointed out that every effort was required for realizing the specific merger plan currently under deliberation, which would be of vital significance for the future process of solving the overall nonperforming-asset problem. Further, some members remarked that the Bank should do whatever it could to support the banking sector in promoting an early solution of the problem.

There were also comments that noted the risk of deflationary pressures that would arise temporarily in the process of actually disposing of nonperforming assets. One member mentioned that it was quite uncertain how strong a deflationary pressure would emerge in the process and whether this would outweigh the positive outcomes realized through, for example, improvements in confidence. Another member remarked that small and medium-sized firms, whose business performance had further deteriorated within the recent past, should not be damaged disproportionally in the disposal process of nonperforming assets.

In relation to these points, one member argued that (1) while the possibility could not be denied that the disposal of nonperforming assets would generate deflationary pressures, it was also conceivable that an upturn in asset prices would alleviate such pressures; (2) even if it remained uncertain whether the effects on balance would be positive or negative, this would not justify a delay in the disposal process; but (3) it was absolutely essential to prevent the materialization of systemic risk. Another member commented that, considering that the disposal of nonperforming loans would inevitably produce deflationary pressures, expansionary fiscal policy would provide a prerequisite environment for decisive disposals. The member thus commented that it was important to implement the Total Plan at the earliest possible time so that disposal of nonperforming assets could progress while the effects of the Comprehensive Economic Package were at their maximum.

C. Financial Developments

In the discussion on financial developments, comments were made on, among other things, the continued sluggishness in stock prices and the weakness of financial intermediary functions.

With regard to stock prices, some members pointed out that market developments gave the impression that there was a resistance line for the Nikkei 225 Average at around 16,500 yen. One of them considered that such lackluster stock prices reflected the substantial uncertainties regarding the economic outlook, including the direction of the new administration's economic policies, which had not been sufficiently clarified. The member further indicated the possibility that long-term government bond yields would also decline further for the same reason, possibly approaching once again historically low levels. Another member commented on the weakness of bank stocks. The member pointed out the probability that the weakness was ascribable to the market's perception of risks involved in the process of nonperforming loan disposal and reorganization of the financial industry. This member further stated that, if prices of bank stocks declined further, financial institutions would be placed under pressure to conduct further restructuring, and as a result, their cautious lending attitude would be reinforced. The member stated that it was therefore necessary to monitor developments closely toward the semi-annual settlement at the end of September.

Regarding money stock, one member expressed the opinion that faster year-to-year growth in M2+CDs of about 5 percent would be desirable, and expressed concern about the recent further decline in the money multiplier as it indicated a weakening of financial intermediary functions. By contrast, another member commented that firms' concerns about the "credit crunch" of financial institutions appeared to have been reduced recently, in part because firms, mainly large firms, had secured the liquidity necessary for the semi-annual settlement on September 30. The member pointed out that the low level of lending primarily reflected weak demand for funds. The same member was, however, of the view that financial institutions were still cautious in responding to firms' financing demand, even that for creative business activities, and warned that the soundness of financial intermediary functions had not recovered.

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

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

Many members agreed that it would be appropriate to maintain the current easy stance of monetary policy, as the basic judgment of the economic and financial situation had changed little from the previous meeting. One stated that the combination of the current exchange rate of about 140 yen per U.S. dollar and the official discount rate of 0.5 percent could be construed virtually as "a reflationary policy." The member added that, considering that the effects of economic stimulus measures were expected to unfold in the near future, there was a question as to the necessity and the meaning of implementing policy that would induce further declines in interest rates and the yen, which were already at extremely low levels.

At the same time, not a few members acknowledged that an additional monetary easing might become an appropriate policy option depending on future developments. Some members also suggested studying the feasibility of expanding market operations means, which would contribute to strengthening the intermediary functions of the financial markets, and in some cases combining such measures with other monetary easing measures.

Specifically, one member claimed that, if the risk of a deflationary spiral increased in the future, further monetary easing measures should be considered, including a reduction of reserve requirement ratios.

Another member referred to the argument on the so-called "monetary expansion" presented at previous meetings that, with the impaired intermediary functions of financial institutions, an increase in base money would not effectively lead to growth in money stock. Acknowledging this argument, the member proposed studying, giving due consideration to technical feasibility, the possibility of using private-sector debt instruments--such as asset-backed securities, asset-backed commercial paper, and even corporate bonds--as market operations tools. The member added that such operations employing private-sector debt instruments would make up for the inadequate financial intermediary functions, and therefore, "monetary expansion," if combined with such expansion of market operations means, could be expected to produce noticeable policy effects.

On this point, another member expressed the view that monetary policy action might become necessary in the contingency that, for instance, concerns surged about the stability of domestic and overseas financial markets or difficulties emerged in the legislation process for the new administration's economic policies. In such cases, it would not be sufficient to only lower interest rates, but it would be necessary to implement more decisive monetary easing through, for example, a package of measures including a reduction of reserve requirement ratios and introduction of new market operations tools.

Another member, while sustaining the view that there was little that could be done through monetary policy, commented that it was worth deliberating on how effectively new market operations means could be utilized in case market concerns amplified acutely toward the semi-annual settlement on September 30.

Many other members also mentioned the importance of containing the concerns of firms and financial markets about the availability of liquidity at the end of September. One member remarked that it was necessary to watch market developments very closely, since (1) firms were making early moves to secure liquidity for the end of September, (2) upward pressure was already appearing on interest rates on instruments maturing after the end of September, and (3) various movements related to financial system measures were expected to develop toward the end of September.

Members also exchanged views on the possible impacts of an additional monetary easing on the yen's exchange rate.

One member, based on the recognition that a further monetary easing would inevitably induce a depreciation of the yen, raised the issue of how to weigh the influence of the weaker yen on, for example, other Asian economies. Another member, claiming that it was necessary to make some judgment even on such difficult issues, mentioned the following two points. First, the current value of the yen was not necessarily low in a long-term context. For instance, the yen appreciated from 240 yen per U.S. dollar before the Plaza Accord to 80 yen at one point. If the yen were to reverse that advancement by half, the yen would stand at 160 yen. Further, the share of Japanese exports in the overall export value of the G7 countries, which was level with U.S. exports in 1986, had decreased since then in contrast to the United States. Second, it was criticized that there had been a case in the past when the Bank made inappropriate monetary policy decisions on account of undue consideration for exchange rate developments. Based on these arguments, the member claimed that the Bank should not place weight on the yen's decline in managing monetary policy at this time. Another member argued that it was not easy to evaluate the merits and demerits of a depreciation of the yen focusing solely on the yen's value. The member emphasized that the issue needed to be judged by weighing carefully, for example, the impact it might have on stock prices and, in turn, on the financial system. Further, another member was of the opinion that if monetary easing was deemed necessary to counter an emergency situation, the Bank should not hesitate to adopt such a policy change just because of the possibility of a resulting criticism of the yen's depreciation. It was stressed that such a criticism could be dealt with if the Bank gave earnest explanation that a monetary easing would eventually benefit other Asian economies as well.

At the end of such discussions, while many members recognized the possibility of a further monetary easing in the future, most members considered that it would be appropriate to keep the current easy stance of monetary policy unchanged for the immediate future.

One member proposed, as in the previous meeting, reducing the target level of the overnight call rate to 0.35 percent. The proposal was based on the grounds that (1) the economy was deteriorating markedly; (2) interest rates on term instruments were vulnerable to upward pressure reflecting market participants' awareness of the liquidity needs for the semi-annual settlement on September 30 and, even, for the end of December; (3) it was essential to prevent a deflationary spiral or a double-dip decline of the economy so that the adjustments needed in capital stock and employment would progress smoothly; (4) it was necessary to implement measures leading to an increase in money stock in order to clearly indicate the Bank's resolution to avert deflation; and (5) it was inappropriate to maintain the interest rate level which supported the economic recovery in 1995 and 1996, since the task now was to prevent a double-dip decline of the economy. The member emphasized the importance of expanding money stock, but opposed the idea of setting a specific monetary target, for reasons of controllability.

V. Remarks by the Government Representative

The representative of Economic Planning Agency made the following remarks:

  1. (a) The government acknowledged that it was important to regain the confidence of firms and households, and to this end, it was necessary to continue to work toward steady implementation of various policy measures.
  2. (b) The Bank's staff had reported that the Bank had provided the markets with sufficient liquidity to contain upward pressures on interest rates. The government requested that the Bank continue to manage policy so as to ensure smooth and adequate corporate financing.

VI. 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 stance of monetary policy. And in doing so, the Bank should examine closely economic and financial developments, including the effects of the comprehensive economic package as well as progress in discussions on financial system measures and tax system reforms. Further, all members agreed that the Bank should continue to do its utmost to avoid amplification of market anxiety and to ensure smooth corporate financing toward the semi-annual settlement on September 30. Meanwhile, one member proposed implementing a slight easing of monetary policy. Therefore, two policy proposals were put to the vote.

Mr. Nakahara made a proposal to adopt a guideline for money market operations in the intermeeting period that the Bank should encourage the overnight call rate to be on average around 0.35 percent. The proposal was defeated with one vote in favor and eight against.

Chairman's Policy Proposal:

To reflect the majority view, the chairman formulated the following 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
Mr. T. Miki
Ms. E. Shinotsuka
Mr. K. Ueda
Votes against this proposal:
Mr. N. Nakahara

Mr. Nakahara dissented because he believed that it would be appropriate to increase money stock by lowering the overnight rate, on the grounds that the deterioration in the economy was becoming conspicuous and interest rates on term instruments were vulnerable to upward pressure.


For immediate release

July 28, 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.