Minutes of the Monetary Policy Meeting

on August 11, 1998
(English translation prepared by the Bank staff based on the Japanese original)

September 29, 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, August 11, 1998, from 9:00 a.m. to 11:30 a.m., and from 12:22 p.m. to 4:04 p.m. ¹

Policy Board Members Present
Mr. M. Hayami, Chairman, Governor of the Bank of Japan ²
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. S. Tanigaki, State Secretary for Finance, Ministry of Finance ³
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
Mr. T. Kurihara, Manager, Policy Planning Office

The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on September 24, 1998. Those present are referred to by their titles at the time of the meeting.
Mr. Hayami was absent from 9:00 a.m. to 9:22 a.m. to attend a meeting of the Ministerial Council which discussed issues including the Economic Planning Agency's Monthly Economic Report. During his absence, Mr. Fujiwara performed the duties of chairman pursuant to Article 16, Paragraph 5 of the Bank of Japan Law of 1997.
Mr. Tanigaki was present from 9:13 a.m. to 10:10 a.m.

I. Summary of Staff Reports on Economic and Financial Developments ⁴

A. Money Market Operations in the Intermeeting Period

Market operations in the period since the previous meeting on July 28 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.

In the second half of July, upward pressure on interest rates increased as market participants gradually began to take into consideration the semiannual settlement due at the end of September. The Bank therefore injected a large amount of funds into the market, maintaining the amount of excess reserves as of the morning of each business day at around 1 trillion yen. Due to such operations, upward pressure on interest rates weakened gradually. Therefore, from the end of July onward, the Bank decreased the excess reserves of each business day to 100-400 billion yen. As a result, as of August 10, the day before the meeting, the weighted average of the overnight call rate in the reserve maintenance period from July 16 to August 15 stood at 0.43 percent.

As for interest rates on term instruments, upward pressure receded somewhat from the end of July. This seemed to be due to the following developments: (1) a growing perception that, with the establishment of the new administration, drastic financial system revitalization measures had become less likely to be taken; (2) indication in a speech by the Governor on July 29 of the Bank's commitment to implementing carefully considered money market operations to contribute to smooth corporate financing toward the semiannual settlement in September; and (3) the Bank's conduct of CP operations for six consecutive business days from the beginning of August.

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

1. Developments in foreign exchange markets

The yen depreciated against the U.S. dollar from the end of July and closed at 146.37 yen in New York on August 10. There was a strong market concern about the possibility of a further decline in the yen against the background of (1) anxiety about a depreciation of Asian currencies in general triggered by recent rumors of a devaluation of the Chinese yuan and of an abandonment of the Hong Kong dollar's peg to the U.S. dollar, in addition to (2) the difference between the economic performance of Japan and the United States.

Meanwhile, the deutsche mark followed an upward trend against the U.S. dollar reflecting relative stability in Russian financial markets and declining U.S. stock markets.

East Asian currencies in general remained steady against the U.S. dollar, with a notable continued appreciation of the Indonesian rupiah. The Korean won, however, followed a declining trend. The Chinese yuan and the Hong Kong dollar recently faced intensified selling pressure reflecting a clear slowdown of the two economies, due mainly to declines in exports of both countries and floods in China.

2. Overseas economic and financial developments

In the United States, net exports deteriorated apparently reflecting the decline in exports to Asia, and inventory investment and production were negatively affected by the strike at General Motors. Employment statistics for July, however, indicated a continuation of favorable employment conditions, and there appeared to be a sustained expansion of domestic demand, particularly household spending. Meanwhile, prices on the whole remained stable, but there seemed to be slight upward pressure on firms' employment costs.

Stock prices, which had been under adjustment pressure since Mr. Greenspan's testimony to the Congress on July 21 and 22, dropped sharply in early August mainly reflecting heightened concern over a possible decrease in corporate earnings in light of the weakness of Asian economies and appreciation of the U.S. dollar. Market participants in general, however, were not perturbed because they perceived the size of the fall in stock prices to be more or less proportionate to the decline in firms' earnings. In the bond markets, a"flight to quality" once again became conspicuous subsequent to this development in stock prices, bringing about a decline in long-term interest rates.

In Europe, Germany and France continued to exhibit moderate economic expansion as a whole. In the United Kingdom, concerns about possible price increases persisted although private consumption showed signs of deceleration.

In East Asia, countries such as Thailand and Korea, whose currencies were gradually regaining stability, started to slightly relax their tight macroeconomic policy to address the ongoing deterioration in their economies. In Indonesia, prices continued to rise and the authorities maintained their tight macroeconomic policy.

C. Economic and Financial Developments in Japan

1. Economic developments

Public-sector investment seemed to have bottomed out. However, business fixed investment continued to decrease significantly, especially in small firms, and housing investment weakened further. Private consumption continued to fluctuate. Meanwhile, net exports showed an upswing reflecting a decline in imports while exports remained almost unchanged. Reflecting such weak final demand, firms continued to cut production, and as a result, inventory adjustments in some durable goods progressed. The overall level of inventory, however, was still high. Moreover, sizable production cuts led to a decrease in corporate profits, and employment and income conditions deteriorated considerably as apparent in the increased unemployment rate and in the level of employees' income, which remained below that of a year ago. As for prices, the pace of decline in domestic wholesale prices slowed somewhat, but they generally continued to follow a downward trend reflecting the output gap. 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), were also below their level of a year ago. In sum, reflecting the considerable decline in final demand, adjustments in production, employment, and income intensified. These developments appeared to be now impairing firms' willingness to invest and consumer sentiment toward spending. Thus, Japan's economic conditions in general continued to deteriorate.

It was expected that the effects of the comprehensive economic package of April 24 would stop the deterioration in the economy, at least temporarily, some time after the early autumn, and thereby avert the economy falling into a deflationary spiral. However, the very low level of economic activity, as suggested by the low capacity utilization and the high unemployment rate, gave rise to concerns that the positive influence of the package on private demand was likely to be limited even when fully implemented, and that the economy had become vulnerable to additional shocks.

The new administration proposed drawing up a second supplementary budget for fiscal 1998 and set out a plan to launch personal and corporate income tax cuts amounting to more than 6 trillion yen. Effects of these measures on the economy would depend on the content and the timing of implementation. Details and the implementation of these measures, therefore, needed careful examination.

2. Financial developments

In the money market, the general feeling of anxiety gradually eased reflecting the Bank's injection of ample funds, although participants remained cautious about the financial system's problems. Specifically, a persistently cautious attitude toward liquidity risk was observed in spot transactions maturing after the semiannual settlement at the end of September, while interest rates began to decline for one-month instruments and Euro-yen interest rate futures contracts.

Long-term interest rates declined to a level close to the historical low marked at the beginning of June. This was compatible with the yen's depreciation to the level of mid-June. Stock prices also declined, but were still about 1,000 yen above the level in mid-June.

It was noted that the markets had so far shown little reaction to the significantly expansionary fiscal policy of the new administration. The markets attributed the decline in stock prices to factors such as (1) the continued deterioration in economic conditions; (2) the drop in the U.S. stock markets; (3) rumors of a possible devaluation of the Chinese yuan; and (4) the unpredictable outcome of the Diet's deliberation on bills related to the Comprehensive Plan for Financial Revitalization, the so-called Total Plan.

With regard to corporate financing, private bank lending on the whole remained sluggish while corporate bond issues continued at a high pace as large firms moved more actively to secure on-hand liquidity. Issuing rates of corporate bonds were declining slightly, implying that firms with a high credit standing were raising funds relatively smoothly. On the other hand, small and medium-sized firms were cautious in making investments in view of the selective lending attitude of financial institutions. This suggested that not a few firms continued to face severe financing conditions, suffering from high funding costs and limited availability of funds.

4Reports were made based on information available at the time of the meeting.

II. 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, many members expressed the view that economic conditions in general had continued to deteriorate. This judgment was based on the fact that economic indicators released after the previous meeting on July 28 showed a considerable decline in business fixed investment and deterioration in employment and income conditions.

Members generally agreed that business fixed investment was falling at a faster pace than predicted. The view was based on the considerable decline in business fixed investment especially in small firms and a sizable drop in leading indicators.

One member commented that business fixed investment was extremely stagnant on the grounds that (1) nonresidential construction starts in terms of floor area continued to decline from a year earlier; (2) there was a substantial decline in machinery orders placed by the manufacturing industry as well as in those via agencies, which generally reflect the number of orders from small firms including sole proprietorships; and (3) sales of trucks remained sluggish. Another member, also referring to the substantial weakness in business fixed investment, forecasted that business fixed investment in fiscal 1998 would decline by 8-10 percent from fiscal 1997. Moreover, a few members pointed out that firms' depressed investment attitude might be indicating a decline in firms' expected growth rate over the medium term.

In the discussion on household spending, members shared the view that housing investment continued to be sluggish, showing no sign of recovery. Members also generally agreed that, although there were a few faint signs of improvement in some goods and services, private consumption as a whole had not shown an upturn but continued to exhibit narrow fluctuations.

Specifically, a few members cited signs that automobile sales had hit bottom as one positive factor. Another member, however, argued that sales of new models of small recreational vehicles accounted to a great extent for this development, and therefore the prospect did not warrant optimism. The member also mentioned points of concern that clouded the prospects for household spending, including the possibility that (1) the current sluggish housing investment would bring about a decline in consumption of durable goods with a six to nine months' time lag; and (2) the cautious spending attitude would persist among workers in the urban areas, as they receive little benefit from increases in public works. Many members, including this member, expected tax reductions to support household spending. But at the same time, they noted the need to pay due attention to the risk that the worsening employment and income conditions would further undermine household confidence, further depressing private consumption in turn.

Members, acknowledging that demand in the corporate and household sectors was weak, also engaged in an active discussion on developments in production, employment, and income.

With regard to production, a few members commented that the completion of inventory adjustment in the automobile industry was good news. One member, however, pointed out that some sectors in the raw materials industry were already producing at their lowest possible levels given the limits imposed by the fixed cost factor.The member therefore anticipated that the completion of inventory adjustment in these sectors would most likely be delayed. The member added that the main factors behind the decline in production were drops in shipments of materials for capital goods and exports to Asia, and under such circumstances drastic corporate restructuring would be unavoidable in the manufacturing sector. Another member commented that, with production declining at an annual rate of over 20 percent and capital utilization at its lowest level in 23 years, the economy, admittedly, was weaker than expected. The member expressed a concern that such a low level of economic activity could reduce the effects of the comprehensive economic package, at the same time triggering a process of large-scale adjustments in plants and equipment, and also employment.

Next, the discussion turned to employment and income conditions. A member expressed the view that the recent deterioration in employment conditions, which featured a particularly high rise in the unemployment rate for the 33-44 age bracket, required special attention. The member commented that the excess in employment might not be resolved until the number of unemployed rose beyond 4 million. The member therefore expressed a concern that unemployment would continue to increase, causing prolonged adjustment over the medium term, particularly in the manufacturing sector. Another member commented on recent developments in corporate failures, saying that failures of medium-sized firms were increasing, and were caused by a slump in core business rather than by the bursting of speculative bubbles, which had been a noticeable factor in the past several years. This member also mentioned that, with the persistent sluggishness of the economy, firms had become less resilient, and therefore, more drastic cuts in employment and further corporate failures might be inevitable in the future.

With regard to net exports, one member commented that the recent expansion in the current account surplus resulted from reduced imports, with exports not strong enough to compensate for the decline in domestic private demand. The member, however, added that the increase in the current account surplus, whatever its background, could be considered as a favorable factor for domestic income. Another member commented that, although the stagnation of the Asian economies constrained demand for Japan's exports, the depreciation of the yen was supporting corporate earnings through the price effect.

Based on such discussion, most members agreed that the cyclical momentum of production, income, and expenditure continued to interact negatively, bringing about a gradual but constant decline in economic activity.

B. The Economic Outlook

With the flexible fiscal policy and various financial system revitalization measures expected to take shape soon, discussions on the economic outlook focused on the effects of these forthcoming policy actions on the economy experiencing a negative cycle.

All of the members expected that the comprehensive economic package already being implemented would put a brake on the economic downturn in the second half of fiscal 1998 as public works included in the package were actually carried out. However, they shared the view that, with economic activity already at a very low level, the package would only have a limited effect in strengthening private demand.

As for the flexible fiscal policy announced by the new administration, most of the members evaluated it as a step to opening the way to a considerably large-scale fiscal package, which would contribute to realizing an economic recovery. The view shared by many was as follows. If fiscal tightening had continued under the Fiscal Structural Reform Act of 1997, substantial uncertainty would have remained regarding economic developments in fiscal 1999, even if the deterioration in the economy was contained in the second half of fiscal 1998. However, judging from the elements of the expansionary fiscal policy that were gradually revealed, such as personal and corporate tax cuts amounting to over 6 trillion yen and public works in fiscal 1999 exceeding the total amount in fiscal 1998, the risk of the economy showing a double-dip decline had perhaps been reduced.

One member mentioned an estimate that the stimulative effects of such flexible fiscal policy measures on the economy would be about 0.5 percent greater than those of the measures in fiscal 1998, and as a result, a real growth rate of approximately 1.5 percent would be achieved in fiscal 1999. On the basis of this estimate, the member stated that a continued expansion of the GDP gap and a slide into a deflationary spiral could be avoided. Another member noted that firms believed that if they were able to weather the severe condition until the end of September, they could reasonably expect an upturn in business in the second half of fiscal 1998. Therefore, the new fiscal policy, by contributing to this upward momentum, would further reduce the risk of the economy falling into a double-dip decline. The member, however, referred to the fact that firms were caught in a dilemma between the temptation to sell off their inventories to obtain cash and concern over a decline in sales prices, claiming that the Japanese economy was still on the verge of falling into deflation.

Meanwhile, another member warned that since details regarding the new administration's management of fiscal policy had not yet been fully revealed, it was too soon to judge its effect on the economy. As for the comprehensive economic package already being implemented, the member referred to the problems in the public works to be carried out by local governments (without government subsidies), whose budget amounted to 1.5 trillion yen. More specifically, the member pointed out the need to improve the effectiveness of such public works, criticizing the fact that in the past, only about 50 percent, on average, of allocated budgets had actually been used, and implementation tended to lag behind the developments in the economy. The member further commented on the present condition of the economy, pointing out that (1) firms were facing severe difficulties, such as a further decline in profits caused by a fall in product prices, and therefore drastic adjustment of capital stock as well as employment curtailment through dynamic restructuring would be unavoidable; and (2) actual land prices were still higher than those calculated based on the discounted cash flow. The member thus concluded that the economy offered no prospect of an upturn, a more cautious view relative to many other members.

Members then exchanged opinions on the interpretation of poor market reactions to the determination expressed by the new administration to take necessary measures to realize an economic recovery, as seen in the lackluster trend in stock prices.

One member raised structural adjustment as an issue. The member commented that in a structural adjustment phase, if priority was given to short-term economic stimulative measures rather than to medium- or long-term adjustment policies, the long-term prospects of economic entities could be impaired, and this might in turn negate the effects of the short-term stimulative measures. On this point, the member mentioned another possibility that the current poor market reaction to the announced policy measures might merely be due to the memories of policy failures in the past few years. Another member commented that the difficulty inherent in structural adjustment was how effectively the changes achieved in various sectors could be integrated at the macroeconomic level to maximize their effects. The member pointed out that this was the kind of problem that the Japanese economy was now confronting.

As a second point, a few members pointed out that the unstable developments in the U.S. stock markets, together with the declines in the stock prices and currencies in East Asia, were depressing market confidence in Japan's financial markets. Another member expressed serious concerns over possible stock market developments from the summer into the autumn, taking into account not only such situations in the United States and other Asian countries but also the problems in Japan's financial system.

One member expressed the view that, with the long-term prospect of fiscal policy management unclear, the government proposal to cut the tax rate by a fixed percentage across the board might be inviting speculation about a future tax increase. Another member commented that the recent weak economic indicators had added to the negative impact on stock prices.

A different member, however, stated that the announcement itself of the new policy had had quite a substantial positive influence, arguing that market reactions could have been far worse without it.

Based on the above discussions, members exchanged views on what was necessary to ensure penetration of the effects of the government's fiscal measures in the economy.

One member presented the opinion that whether the government's measures would have a pump-priming effect depended on their specific content and on the medium-term prospect of fiscal policy. With regard to the content, a few members stressed that investments should be concentrated on such areas as telecommunications, environmental protection, education, and medical care, addressing the need to change the current system which allocates funds across the board. One of them, however, also noted that the benefits of the conventional use of public works to stimulate the economy should not be neglected in that they produce effects immediately after implementation. The member suggested therefore that one option would be to set out a large-scale project to prepare for the 21st century. A few members also mentioned the need to clarify the medium-term prospect for fiscal policy management. One emphasized that to improve consumer confidence, it would be important for the government to spell out not only the source of budget to make up for the various tax cuts but also its plan for future tax and social security systems.

Together with these fiscal measures, all of the members agreed that, to restore confidence in Japan's economy and to shift the economy back onto a firm recovery path, it would be necessary above all to restructure the financial system without delay.

Specifically, many members commented that the markets were paying close attention to the progress in the resolution of a troubled bank. One member pointed out that, under such circumstances, a postponement of the solution of the problem or slow implementation of the Total Plan could prompt undue reactions in the markets. By contrast, another member commented that it was important that the problems related to the financial system be solved one by one with careful consideration and hasty action be avoided, keeping in mind that the solution of one problem would considerably improve overall market sentiment. Another member remarked that it was important for bank managements to recognize the critical situation and initiate as soon as possible financial structure reforms such as voluntary disclosure of the results of self-assessment of assets and prompt disposal of nonperforming loans.

The Board's discussion then turned to the relation between the disposal of nonperforming loans and economic developments. One member commented that, in principle, progress in disposal of nonperforming loans should bring about a recovery of the assets markets by improving the public's sentiment. The member also commented, however, that there was the risk that concerns about a resulting reorganization of the banking industry and selection of borrowers might constrain the activities of market participants and lenders. Another member pointed out that, with firms considerably vulnerable to shocks, reorganization of the banking industry could accelerate employment adjustment in firms. A different member stated that such adjustment might in turn bring about a deterioration in consumer confidence and in business sentiment toward fixed investment. The same member added that there was no time to be wasted in the disposal of nonperforming loans and expressed the hope that the Diet's deliberation on the establishment of the framework for financial system revitalization would proceed expeditiously.

A member referred to developments in monetary aggregates, raising the question of why the growth in money stock had been as high as 3-4 percent while the nominal economic growth rate registered zero percent. On the other hand, another member mentioned that 3 percent growth in money stock was not necessarily sufficient to generate an annual income for Japan's economy of approximately 500 trillion yen, noting the need for additional credit. A different member also stated that, in view of the desired nominal growth rate of GDP and the Marshallian k (money stock divided by nominal GDP), money stock growth of 3 percent was too low, and about 5 percent would be appropriate.

A few members referred to corporate financing conditions. These members referred to the fact that applications for bank loans by small firms to finance fixed investments were rarely accepted and some large firms such as trading companies were raising funds in the capital market and then funneling them into their affiliates, stating that functions that had been served by financial institutions in the past were now being performed by large nonfinancial firms. In relation to this point, one member argued that the lending policy of financial institutions was changing from an across-the-board curtailment of lending to a selective strategy placing weight on each borrower's creditworthiness. Another member also commented that, although financial institutions were indeed cautious about lending to high-risk firms, it was also true that they were desperately seeking good lending opportunities in pursuit of enhanced profitability and soundness of their assets. In this situation, the member pointed out that the critical problem might be the lack of promising investment opportunities.

III. 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 on monetary policy for the immediate future.

As mentioned earlier, many members considered the economic situation to be as severe as or slightly more severe than at the time of the previous meeting. On monetary policy management, a majority of the members expressed the view that the Bank should maintain interest rates at the current level.

The view was expressed on the following grounds: (1) the risk of the economy falling into a deflationary spiral toward fiscal 1999 was not substantial in light of the flexible fiscal policy management adopted by the new administration; and (2) with limited room for further interest rate reductions, the effects and side-effects of an additional monetary easing needed careful examination.

Specifically, one member pointed out that such a low level of economic activity alone places strong stock adjustment pressure on plants and equipment, and employment. Therefore, the member, together with other members, expressed the opinion that for the time being it was most important to keep a close watch on the content and effects of the large-scale fiscal package covering fiscal 1998 and fiscal 1999, as the details of the package were gradually becoming apparent. These members, also noting the recent depreciation of the yen, added that various policy measures and market developments might both be putting a mechanism into operation that would prevent a deflationary spiral.

Another member remarked that there had been few requests from firms for a lowering of interest rates. A different member expressed the opinion that what monetary policy could do would be limited if the medium-term expected growth rate of firms was on a decline. The member added that it would therefore be more important to promote disposal of nonperforming loans and tax system reforms, thereby restoring the confidence of economic entities. Further, a few members pointed out that households had become extremely hesitant to spend since the consumption tax rate was raised in April 1997, and mentioned the possibility that a further reduction of interest rates would intensify the downward pressure on the households' propensity to consume, hampering the effects of income tax cuts.

Thus, many members were cautious about implementing a further monetary easing at the time. One member holding this view, however, remarked that it might become necessary to consider an additional monetary easing if, for instance, fiscal policy did not produce the expected effects, triggering a disruption in the markets.

A different member referred to the remark by the Governor in a speech on July 29 that the Bank would commit itself to providing the markets with ample liquidity toward the semiannual settlement in September. The member thought that the remark was quite appropriate in that it gave some relief to the markets at a time when the financial system was exposed to various risks. The member further added that the Bank should continue to demonstrate its strong commitment to making every effort to deal with the severe economic situation. The member also claimed that, even if the Board decided that interest rates should be unchanged, the Bank should show its determination to continue injecting sufficient liquidity into the markets by stating it in the minutes immediately before the policy proposal. Many members supported this idea. The member who made this point and some others shared the view that, in the event some shock triggered an emergency situation, the Bank should employ every possible policy measure, including a lowering of interest rates, provision of a massive amount of liquidity, and reduction of reserve requirement ratios.

With regard to money market operations means, a few members suggested that the Bank consider accepting asset-backed securities held by financial institutions as eligible collateral, in order to encourage diversification of firms' financing means.

Amid the discussion, one member pointed out that money stock growth should be accelerated to about 5 percent in order to alleviate the credit crunch that was hindering smooth corporate financing. In this regard, the member commented that it was indispensable for the Bank to inject ample funds into the markets, but there would be a limit to the extent to which the Bank could provide funds without changing the interest rate level.

Further, members actively exchanged views on the relation between monetary easing and the depreciation of the yen, and between monetary easing and developments in other Asian economies.

First, one member raised an issue that market participants might be firmly convinced that there was a very strong correlation between the yen and other Asian currencies. On this point, a few members including this member claimed that (1) since horizontal division of labor had progressed between Japan and other Asian countries, their products no longer competed against each other in third countries, and therefore, the direct influence of a decline in the yen on other Asian economies was not as significant as in the past; and (2) it was the recovery of the Japanese economy that would possibly increase imports from Asia. A different member noted that the recent downward trend in the Asian currencies including the Japanese yen primarily reflected the weakness in each country's economic fundamentals.

Based on these views, the member who raised this issue expressed the opinion that, even if the yen had declined further when the time came for the Bank to consider monetary easing, monetary policy should focus solely on achieving a recovery of Japan's economy. One member, however, argued that, in formulating monetary policy, it was difficult to be indifferent to the possible responses in the foreign exchange markets and their repercussions on the economies of Japan and overseas, although in principle monetary policy should be managed in accordance with the domestic economic situation.

While many views were presented, members shared the opinion that the best way to contain the decline in the yen was to strengthen Japan's economy expeditiously through monetary and fiscal measures, and thereby shore up domestic and international confidence.

Regarding monetary policy for the immediate future, most members considered that it would be appropriate to maintain the current easy stance of monetary policy. One member, however, suggested that the Bank lower the target level of the overnight call rate to 0.25 percent. In the previous two Monetary Policy Meetings, the same member had proposed reducing the target level to 0.35 percent. The member elaborated that the proposal for a larger reduction this time was based on the fact that economic conditions had deteriorated further, as shown by the intensified adjustments in business fixed investment and employment. The member also pointed out that the current economic situation was worse than in September 1995, when monetary easing was last implemented, and therefore, it seemed quite unreasonable not to further ease monetary policy. The member also added that monetary easing was necessary to prepare for all emergency situations in light of the unstable developments in the Japanese and the U.S. stock markets, and that it would be too late to take action in or after the latter half of the fiscal year.

Many members reacted negatively to the proposal, however, noting that it was first necessary to examine the outcome of the government's fiscal measures. One member presented the view that pressures exerted on the financial system during the process of nonperforming loan disposal could only be addressed case by case. Another member remarked that it would be difficult to restore the risk-taking ability of financial institutions, which was currently extremely low, solely by interest-rate policy. This member stated that, in the last monetary easing phase in September 1995, interest rate reduction was duly expected to improve assets market conditions. According to the member, however, it was difficult to expect such an effect in the current phase because the markets were considerably pessimistic about the medium-term economic prospects.

IV. Remarks by the Representatives of the Ministry of Finance and the Economic Planing Agency

Mr. Tanigaki, a government representative who attended the morning session of the meeting, made the following remarks on the current economic situation:

(a) As for the current situation of Japan's economy, the cautious sentiment of households and firms weakened final demand, which in turn was affecting production and employment. The government, therefore, judged that the economy was in a prolonged slump, and in quite a severe situation.
(b) The government was putting all its efforts into realizing an economic recovery and was determined to implement steadily and expeditiously the comprehensive economic package, the largest ever, and the Total Plan. In addition, the government was drafting a second supplementary budget for fiscal 1998 exceeding 10 trillion yen with a view to realizing uninterrupted fiscal spending into fiscal 1999. Furthermore, the Minister of Finance had established two basic guidelines for the fiscal 1999 budget, giving priority to promoting an economic recovery: (1) public works should be implemented without interruption from the end of fiscal 1998 into fiscal 1999; and (2) the total amount of public works in fiscal 1999 should exceed that in fiscal 1998.
(c) The government planned to implement a permanent reduction of personal and corporate income taxes of over 6 trillion yen with a view to giving the greatest possible support to the economy, with a drastic tax system reform in prospect. As for the Total Plan, six bills on five different issues, including the introduction of the bridge bank scheme and the establishment of a council for coordinating real estate-related rights, had been submitted to the Diet.

In addition to commenting on the new administration's moves toward adopting the second supplementary budget for fiscal 1998 and reforming the tax system, the representative of the Economic Planning Agency made the following remarks:

(a) In the Monthly Economic Report released today, the government described the economy as being in a prolonged slump, and in quite a severe situation. The change in the expression from the previous report was made in an effort to use plain language more familiar to the public, and did not indicate a drastic downward revision of the government's judgment.
(b) In such a severe economic situation, the government was determined to ensure the implementation of the comprehensive economic package. The effects, however, had not yet surfaced in many local areas, where the supplementary budgets for fiscal 1998 remained to be approved by local assemblies in September.

V. Votes

At the conclusion of the Board's discussion, most 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, examining closely economic and financial developments such as (1) the specific contents and effects of the flexible fiscal policy; and (2) the outcome of the Diet's deliberation on the Total Plan and its impact. Meanwhile, there was also a policy proposal for an interest rate change in the direction of monetary easing. 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 0.25 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 proposal intended that, under the adopted guideline for money market operations, the Bank inject ample funds into the money market in light of the market conditions.

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 the Bank should lower interest rates in order to provide the markets with more funds. His argument was made on the grounds that economic conditions had deteriorated notably, and considering the significant time lag between the implementation of government policies and the materialization of their effects, it was necessary to prepare for contingencies such as a plunge in stock prices.

VI. Discussion on 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," for publication on August 13, 1998 in the Monthly Report of Recent Economic and Financial Developments (consisting of"The Bank's View" and"The Background"). ⁵

5The original full text, written in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on August 13, 1998 together with the English version of"The Bank's View." The English version of"The Background" was published on August 28, 1998.

VII. Approval of the Minutes of the Monetary Policy Meeting Held on July 16, 1998

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting held on July 16, 1998, for release on August 14, 1998.

Attachment

For immediate release

August 11, 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.