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Minutes of the Monetary Policy Meeting

on October 13, 1998
(English translation prepared by the Bank staff based on the Japanese original)

November 18, 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, October 13, 1998, from 9:00 a.m. to 12:21 p.m., and from 1:06 p.m. to 3:46 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. S. Tanigaki, State Secretary for Finance, Ministry of Finance 2
Mr. H. Imai, Parliamentary Vice Minister, Economic Planning Agency 3

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

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on November 13, 1998, as "a document which contains an outline of the discussion at the meeting" stipulated in Article 20, Paragraph 1 of the Bank of Japan Law of 1997. Those present are referred to by their titles at the time of the meeting.
  2. Mr. Tanigaki was present from 2:27 p.m. to 3:46 p.m.
  3. Mr. Imai was present from 9:00 a.m. to 12:07 p.m.

I. Approval of the Minutes of the Monetary Policy Meeting Held on September 9, 1998

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting, the "Green Paper," of September 9, 1998 for release on October 16, 1998.

II.Summary of Staff Reports on Economic and Financial Developments4

A. Money Market Operations in the Intermeeting Period

Market operations in the period since the previous meeting on September 24 were conducted in accordance with the guideline determined at that meeting:

The Bank of Japan would encourage the uncollateralized overnight call rate to move on average around 0.25 percent.

Regardless of the above guideline for the call rate, the Bank of Japan would provide more ample funds, if judged necessary, to maintain the stability of the financial markets.

On September 30, the end of the semiannual accounting period, the Bank, concerned that the uncollateralized overnight call rate might come under upward pressure, injected a large amount of funds into the market in its morning operations and created excess reserves of around 2.5 trillion yen, and also announced its intention not to absorb funds from the market for that day. As a result, although the highest rate marked was 0.7 percent, the weighted average of the uncollateralized overnight call rate for September 30 settled at 0.47 percent. No significant market disturbance was seen at the end of the semiannual accounting period presumably because (1) the Bank had continued to supply ample funds maturing beyond the semiannual settlement through market operations using CP and other instruments; and (2) financial institutions had behaved cautiously giving priority to their funds management due to factors such as declines in the prices of their stock.

Since the beginning of October, the markets had been generally calm, and the weighted average of the uncollateralized overnight call rate in the reserve maintenance period from September 16 to October 15 stood at 0.25 percent as of October 12, the day before the meeting.

As for term instruments, interest rates on one-month instruments had trended downward since the beginning of October. Meanwhile, the markets' concern shifted to financial institutions' procurement of year-end funds. Providers of funds were taking a wait-and-see stance toward market developments, and therefore, there had not been many transactions of instruments maturing after the end of the year, such as three-month instruments. In light of the above developments, the Bank started to supply funds maturing beyond the year-end ten days earlier than last year. The Bank intended to remain committed to ensuring the stability of the markets.

  1. 4Reports were made based on information available at the time of the meeting.

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

1. Developments in foreign exchange markets

The yen had been shooting up against the U.S. dollar. On October 8, the yen climbed to the 111-112 yen level on the London market, its highest since June 1997. Recent exchange rate developments featured large fluctuations especially on overseas markets, showing unprecedentedly large swings in one trading day. One factor behind such volatility might be a decline in the transaction volume, reflecting the nervousness of market participants following the collapse of a large hedge fund.

Meanwhile, the deutsche mark had also followed an upward trend against the U.S. dollar since September. Asian currencies also strengthened due to the weakening of the U.S. dollar. As a result, several countries, including Korea, were beginning to have some room for monetary easing. Stock prices rallied, especially on the Hong Kong market.

2. Overseas economic and financial developments

The U.S. economy continued to grow steadily in general, although the pace was slowing. Domestic demand continued to expand, especially household spending, while net exports continued to decrease. It should be noted, however, that recently, (1) the National Association of Purchasing Management (NAPM) index declined, indicating a deterioration in the business conditions of the manufacturing industry; and (2) consumer confidence deteriorated. Further, Mr. Greenspan, chairman of the Board of Governors of the Federal Reserve System (FRB), had pointed out that the downside risks to the economy had increased due to changes in the financial situation. Under these circumstances, the Federal Open Market Committee decided to lower the target for the federal funds rate by 0.25 percent to 5.25 percent.

Specific changes recently observed in the financial situation included increasingly conspicuous risk-averseness of market participants, who showed a stronger preference for assets with high liquidity or subject to small price changes. As a result, yields on 30-year U.S. Treasury bonds marked new record lows while firms faced more difficulties in raising funds on capital markets and the number of initial public offerings decreased significantly. Senior Loan Officer Opinion Survey conducted by the FRB showed that the lending attitude of financial institutions was becoming increasingly cautious. The expanding yield spread between Treasury Inflation Protection Securities, which had low liquidity, and ordinary bonds was also considered by market participants to reflect investors' increased preference for liquidity.

In Europe, several countries including the United Kingdom eased their monetary policies. In Germany, however, the comments of Mr. Tietmeyer, president of the Bundesbank, gave no clear indication of the direction of monetary policy, while Mr. Schroder, the next chancellor of Germany, had referred to possible cuts in interest rates. In any case, a view that prevailed in the markets was that additional reductions in interest rates were inevitable in the United States and the United Kingdom.

C. Economic and Financial Developments in Japan

1. Economic developments

With respect to final demand, net exports followed an upward trend, mainly due to a decline in imports, and public-sector investment began to increase, while business fixed investment continued to decrease significantly and housing investment declined further. Meanwhile, private consumption remained level.

Against the background of such weak final demand, firms continued to cut production drastically, and as a result, inventory adjustment progressed to some extent, especially in consumer durables. Amid the sizable production cuts, however, corporate profits decreased rapidly and employment and income conditions deteriorated further. Under these circumstances, business sentiment worsened considerably and consumer sentiment became increasingly cautious.

As for prices, wholesale prices continued to follow a declining trend against the background of the expanding output gap. Consumer prices also remained slightly below the previous year's level.

In this situation, the financial condition of firms continued to deteriorate and the number of corporate bankruptcies remained at a high level. Firms became increasingly concerned about funds management in the immediate future given financial institutions' cautious lending attitude. Such anxiety was causing firms to cut back on fixed investment and employment. This negative interaction between economic and financial developments was significantly contributing to the ongoing deterioration in economic conditions.

With respect to the economic outlook, the monetary easing implemented on September 9, 1998 and the effects of the comprehensive economic package of April 24 were expected to slow the pace of economic deterioration. However, an immediate halt to the declines in domestic private-sector demand and prices was unlikely, considering (1) the negative momentum that was already in place; (2) the cautious lending attitude of financial institutions; and (3) the recent appreciation of the yen against the U.S. dollar.

If the negative cycle--in which credit contraction depressed the economy, and the economic deterioration and falls in asset prices in turn further weakened the financial intermediary functions--strengthened in the future, it might cancel out the positive effects of monetary and fiscal policies. In the face of this risk, financial system revitalization was the most urgent issue, and in this regard, it was important to keep a close watch on the implementation of various measures under the new framework for financial revitalization, including the prompt correction scheme for the financial intermediary function.

2. Financial developments

In the financial markets, both short- and long-term interest rates declined reflecting the monetary easing on September 9. However, the spread between the Euro-yen Tokyo Interbank Offered Rates (TIBOR) and TB rates, and the Japan premium expanded for funds maturing after the year-end. This mainly reflected the markets' heightened anxiety about Japanese financial institutions' ability to secure foreign currencies for the year-end. Yields on long-term government bonds declined by a greater margin than short-term interest rates, due to a continued deterioration in market confidence regarding the economic outlook. Yields on corporate bonds with high ratings also declined to a historically low level, reflecting the falls in government bond yields. Interest rates on loans and deposits also declined slightly.

With respect to monetary aggregates, the pace of decline from a year ago in private bank lending remained more or less unchanged, as demand for funds to be put into economic activities decreased while more firms, mainly large ones, moved to secure ample on-hand liquidity. Meanwhile, the year-on-year growth in M2+CDs in the July-September quarter was expected to be slightly larger than in the April-June quarter, reflecting an increase in CP and corporate bonds issues.

There was a possibility, however, that financial institutions, facing severe financial market conditions, would become even more cautious about lending toward the end of December. Therefore, it was necessary to monitor closely whether the decrease in bank lending might be compensated by an increase in firms' issues of CP and corporate bonds. For some firms, especially those with little access to the capital markets, the availability of funds had become even more limited. The influence of financial constraints on economic activity continued to warrant careful monitoring.

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, many members agreed with the staff's gloomy view, and made the following supplementary comments.

Some members pointed out that indicators showed an across-the-board deterioration of the economy, except for such developments as inventory adjustment of durable goods. The evaluation of one member was that the second half of the fiscal year had started with the economy bearing downside risks, with no prospect of a bottoming out of business fixed investment and housing investment. Another expressed the view that the pace of deterioration in employment and income conditions was accelerating, and this was creating concern about the economic outlook. A third member noted that the coincident indicator of the Economic Planning Agency had dropped by more than 16 percent from their most recent peak, and this marked a pace comparable to the fall during the adjustment phase following the bursting of the economic "bubble."

One member commented on the negative interaction between economic activity and financial developments. The member remarked that the largest problem for the Japanese economy was the fact that, because firms' net worth had been eroded, they had to resort to income flow for the expenses necessary to streamline excess plant and equipment as well as employment and to realize hidden losses. This member stated that the reduced net worth of firms had increased their credit risk, and was thus closely connected with their difficult financing conditions, which had recently become progressively more severe. Another pointed out that corporate net worth had contracted markedly not only in sectors dealing with land, such as construction and real estate, but also in the wholesale, retail, and service sectors. The member added that the prospects for net income for the first half of fiscal 1998 were dismal in general. Another member pointed out that the business results for the first half of fiscal 1998 were affected significantly by, among other things, capital losses on cross-shareholding due to sluggish stock prices.

B. The Economic Outlook

On the economic outlook, members also generally agreed with the staff's view. Specifically, members agreed that it was highly probable that the effects of monetary and fiscal policies would gradually slow the economic downturn, but considering the strength of the downward momentum in the economy, it was as yet difficult to project a recovery. With regard to the downside risks to the economy, many members commented on (1) the rapid appreciation of the yen against the U.S. dollar; (2) the changes in the financial situation in the United States; (3) the problems in Japan's financial system; and (4) the continued decline in prices in Japan.

One member mentioned that public-sector investment had become fairly active, and, with some reservations, noted the ongoing advance in inventory adjustment. Another member expected that the delay in public-sector investment associated with the comprehensive economic package of April 24 worth 16 trillion yen would make up for the seasonal decline in the January-March quarter, and ensure uninterrupted implementation of public works into fiscal 1999.

One member, however, pointed out that, while it was true that public-sector investment was gradually increasing, it was also a fact that overall economic activity had weakened further. Another member stated that, although the economic downturn was slowing, credit contraction and income constraints had begun to have a negative effect on business fixed investment and household spending respectively, and therefore it was highly uncertain whether the economy would bottom out in the October-December quarter. A third member expressed a concern that adjustments in employment and wages might intensify further toward the year-end.

In the discussion on business fixed investment, one member pointed out that the structural adjustment pressure on small firms had increased, citing the fact that the business conditions diffusion index in the September Tankan survey had, atypically, deteriorated more substantially for small firms than for large ones. The member also noted that the severe business conditions of small firms and declines in the rate of return on investment suggested the possibility that excess capital stock had started to undergo serious adjustment. The member further pointed out that there had already been a substantial cut in employment, a development not seen in the post-"bubble" adjustment phase, and predicted that, considering the low level of labor productivity relative to real wages, further adjustment on a considerable scale would be unavoidable. In view of the profound adjustments in capital stock and employment, the member saw a high probability that the economy would remain in a very severe state, shrinking by more than 2 percent in fiscal 1998 and continuing to post negative growth in fiscal 1999. Even if public-sector investment increased or stock prices recovered due to return of capital from the United States, the economic rebound would only be temporary.

Many members also commented on the downside risks to the economy, pointing out that overall risk, if anything, increased compared to a month earlier.

One of the risks was the possible impact of the recent appreciation of the yen on the economy. One member stated that an exchange rate of the yen of between 115 yen and 125 yen against the U.S. dollar did not significantly impair the international competitiveness of Japan's manufacturers. However, with corporate financing expected to become more difficult, the negative impact of the strong yen on corporate earnings in the second half of fiscal 1998 was a greater concern than it would have been under normal circumstances. Another member expressed the view that continued appreciation of the yen would not be a problem if this stemmed from Japan's economic recovery. However, if it were weak domestic demand and the resulting expansion in the current account surplus as well as concerns about the stability of the U.S. financial markets that were behind it, Japan's economy would be subject to substantial risk. A third member noted that the appreciation of the yen could add to the downward pressure on wholesale prices and even consumer prices. A different member also expressed a concern about the repercussions on prices. Some other members also noted the risk that the yen's appreciation at a time when corporate profits were shrinking rapidly might cause the economy to contract further.

While many comments emphasized the negative impact that the yen's appreciation against the U.S. dollar could have on the Japanese economy, a few members expressed the view that, from a global point of view, a depreciation of the U.S. dollar would have some favorable effects--it would, for example, create room for monetary easing in Asian countries. One member pointed out that, for firms, stability of exchange rates was important rather than their level, and stated that it was unfortunate that capital transactions under the current system were able to create excessive volatility in exchange rates, which could spoil the restructuring efforts of firms.

Various opinions were expressed concerning the prospects for developments in the yen's exchange rate. One member remarked that careful attention needed to be paid to exchange rate developments for some time, considering that (1) the view emerging in the U.S. markets was that the U.S. economy was heading toward a recession; (2) there was a possibility that the markets would become anxious about the external deficit of the United States; and (3) there was more room for interest rate reductions in the United States than in Japan and Europe. Another member commented that, according to some technical analyses, the value of the yen against the U.S. dollar, which had been on a declining trend for over three years since April 1995, might have completely reversed course and entered a phase of substantial appreciation.

In any case, many members acknowledged that large adjustments of positions held by investors such as hedge funds had recently been influencing exchange rate developments, and commented that they should therefore wait to see how exchanges rates settled as such movements calmed.

Many members pointed out that a larger risk to the economy than the appreciation of the yen was one of the factors behind it; namely, developments in the United States, where the financial situation warranted special attention.

One member remarked that an expansion in the risk premium and a strengthening of liquidity preference were observed widely in the U.S. financial markets, and expressed concern about the possible impact on small firms, which carried high risks, and on the emerging economies. This member further stated that, because not enough information was available to accurately evaluate the balance sheets of financial institutions and other critical elements in the markets, it was quite uncertain whether the confusion in the U.S. financial markets would prove temporary or whether the situation would worsen spirally. Another member expressed the view that the "bubble" in the U.S. economy had burst after peaking in the summer, and the capital that had flown from Europe and Japan to the United States had started to return. The member further pointed out that the high-consumption and low-savings structure of the U.S. economy was likely to change, and as a result, economies relying heavily on exports to the United States would be placed in a difficult situation. The member referred to the possibility suggested by some technical analyses that the Dow Jones Industrial Average would fall by about 30 percent after a temporary increase, stating that, if this occurred, it would significantly influence stock prices in Japan. Some other members also mentioned the possibility that the ongoing change in the U.S. financial situation would, by slowing the growth of the U.S. economy and creating concern about the global financial markets, have negative repercussions worldwide.

Regarding changes in international financial markets, one member pointed out that it was necessary to keep a close watch on how the drying up of liquidity and the increase in risk premiums reflecting amplified volatility would affect the liquidity position of Japanese financial institutions toward the year-end as well as firms' fund-raising costs.

As for risk factors within Japan, members unequivocally expressed concern about the persistent uncertainty regarding the outlook for the solution of the financial system problem. Many members commented in particular on the possibility that credit contraction would intensify toward the end of the year, and place stronger constraints on economic activity through a tightening of firms' financing conditions.

One member stated that financial institutions' behavior had gone beyond a mere "credit crunch" to "collection of loans," and predicted that their lending attitude would become even more strict toward the year-end. In response to this situation, the leading firms and trading companies of corporate groups were raising funds in the capital markets and pooling on-hand liquidity in consideration of the overall financing conditions of group companies. Meanwhile, small and medium-sized firms not belonging to a corporate group and large firms whose credit rating had been downgraded faced very severe financing conditions. The member also forecasted that even corporate groups with strong leading companies would confront much more difficulty in funds management toward the end of December than they had toward the end of September.

Under these circumstances, some members, including this member, stressed that, in order to stop the credit contraction, it was urgently necessary that the capital base of financial institutions be strengthened. One member, attributing the liquidity problem to the eroded capital base of financial institutions, commented that, since the markets would react instantly to any concern about liquidity shortages, prompt measures to recapitalize the financial sector were essential.

On this point, many members expressed some satisfaction that a legal framework for revitalizing the financial intermediary functions and for promptly strengthening the capital base of financial institutions was being established, and that a large amount of public funds was being made available for this purpose. However, members shared the view that it was still highly uncertain how the framework would be utilized and how it would alter the behavior of financial institutions. For instance, one member remarked that the situation did not warrant optimism because many points remained uncertain, such as the handling of Category II loans and the relationship between the capital-asset ratio and injection of public funds. Another member also pointed out the uncertainty regarding how public funds would actually be injected, how much progress would be made in financial institutions' disposal of bad assets and restructuring, and how financial institutions intended to cope with the unavoidable reorganization of the financial sector.

In relation to this point, a member emphasized the importance of devising ways to secure prompt injection of public funds. Specifically, the member suggested that (1) clear guidelines for loan-loss provisioning be established to encourage expeditious provisioning and write-offs of bad loans; and (2) firms' managers not be forced to take responsibility for bad management in exchange for the public funds, but they be penalized only if they failed to carry out their restructuring and renewal plans within a given period. Similarly, another member stated that injection of public funds based on the voluntary application of individual banks was not sufficient. The member expressed a concern that the "credit crunch" would intensify toward the end of the year and the fiscal year unless a massive amount of public funds was promptly injected into financial institutions across the board based on a stricter calculation of capital-asset ratios.

In addition to the above risks, a member also mentioned the risk arising from price declines. The member, mentioning that nominal wages had started to decrease, pointed out the possibility that overall prices including even service prices, which had managed to stay on an upward trend, would undergo more distinct declines in the future. The member also expressed a concern that such falls in prices, together with declines in land prices, would increase debt burdens in real terms and thereby further depress economic activity.

C. Financial Developments

In the discussion on financial developments, some members commented on financial markets' reaction to the monetary easing decided on September 9, as in the previous meeting.

One member expressed the view that the sizable declines in long-term interest rates, particularly in government bond yields, demonstrated that the monetary easing had brought about on a considerable scale developments that were essential to improve the current economic situation, and could therefore be evaluated positively. Another member expressed satisfaction that interest rates in general were declining--except for interest rates on instruments maturing beyond the year-end, which remained at high levels--as seen in recent decisions by banks to reduce long-term prime lending rates.

However, a member expressed a concern that, despite the falls in short- and long-term interest rates, prices of assets such as stocks and foreign currencies were moving in the direction of placing stronger downward pressure on the economy. The member mentioned that the falls in the prices of stocks and land, as well as deterioration in asset quality due to the economic downturn in Japan and abroad, were further impairing the capital base of financial institutions. In this situation, the latest monetary easing had not produced strong enough effects to contain the resulting credit contraction. Regarding this point, another member remarked that it was virtually impossible to influence asset prices merely by lowering interest rates when the downward momentum in the economy was so strong.

Meanwhile, a few members pointed out that firms' reaction to the latest monetary easing was that they thought favorably of the Bank's strong commitment to provide ample liquidity, and they also appreciated the declines in interest rates.

In contrast to the above opinions, one member expressed disapproval of the declines in interest rates. The member stated that borrowers with low credit ratings still had to pay high interest to raise funds in the money markets even after the monetary easing, and that the financial condition of life insurance companies, large investors in the money markets, had possibly deteriorated. The member thus questioned the effects of the monetary easing and also referred to the side effects of maintaining interest rates at an extraordinarily low level.

Meanwhile, one member emphasized that the significant fall in long-term interest rates not only reflected the monetary easing, but also deterioration in the confidence of the private sector. The member pointed out that the rate of growth in business fixed investment relative to the amount of capital stock suggested that firms' projection of medium-term economic growth had declined to about 1 percent.

IV. 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.

At the end of the discussion, most members were in favor of maintaining the current stance of monetary policy, reflecting the view that, while economic conditions were extremely severe, the following factors needed to be taken into account: (1) almost all ordinary monetary policy measures had been used, and it was therefore appropriate to consider financial system revitalization measures and fiscal policy to stimulate the economy; (2) it was important to observe carefully how the recent volatility in financial markets settled; and (3) it was necessary to examine the effects of the monetary easing of September 9.

One member commented that a further monetary easing warranted consideration in view of the downside risks to the Japanese and the global economy discussed earlier. The member, however, judged that the expected effects of any ordinary monetary policy measure available at present were minuscule relative to the magnitude of the risks that needed to be addressed. Based on this view, the member remarked that it was appropriate at present to expect financial system revitalization measures and fiscal policy to promote an economic recovery. Another member also claimed that it was recapitalization of financial institutions and fiscal policy that would be effective in countering the increasing deflationary pressures in the economy. The member added that the Board should keep a close watch on the implementation of such measures, paying attention to the risks arising from the low level of economic activity, and should express its opinions as necessary. Some other members expressed similar views.

One member, pointing out that stock prices and exchange rates had recently shown large volatility in Japan and abroad, expressed the view that it was important to see how the markets settled in reaction to Japan's financial system revitalization measures and fiscal policy, as well as changes in economic situations abroad. Another member agreed with this view.

Regarding the monetary easing implemented on September 9, one member remarked that it was necessary to see how the declines in short- and long-term interest rates associated with the easing would influence firms and households, and what limits there were to their impacts. On this point, there was the observation that it would take about six months to assess the effects of the monetary easing, including these aspects.

Discussions were also held on what the Bank could do amid anticipation that financial institutions would face severe financing conditions toward the end of the year. One member expressed strong concern about Japanese financial institutions' financing in foreign currencies toward the year-end, in view of the risk-averse behavior of participants in international financial markets. Accordingly, the member suggested that the Bank implement possible measures to facilitate fund-raising in foreign currencies, and that its intention to do so be explicitly stated in the guideline for money market operations.

Some members took the position that, considering the existence of foreign exchange markets, the availability of foreign currencies could be boiled down to a question of liquidity in the domestic markets. One member pointed out that the Bank could address the problem by fulfilling its commitment to provide more ample liquidity as necessary, which was added to the guideline for money market operations. Another member also expressed the view that the Bank had already announced its commitment to supply ample liquidity and had acted in accordance with it, and therefore, all the Bank needed to do was to continue monitoring the market conditions with the fullest attention.

As outlined above, most members claimed that it was appropriate to maintain the current easy stance of monetary policy, and retain the Bank's commitment to provide ample liquidity. Meanwhile, some comments were made on possible additional monetary policy responses in case the credit contraction should intensify conspicuously toward the year-end.

One member suggested that reduction of reserve requirement ratios was one policy option. Another member argued, however, that, although there indeed was room to lower the official discount rate and reserve requirement ratios, the two actions, even if implemented together, could not be expected to have much impact. Another member also agreed that lowering the reserve requirement ratios would only have a small impact.

Comments were also made on how the central bank could directly complement the paralyzed financial intermediary functions. One member emphasized that firms were expected to face difficult financing conditions in the second half of the fiscal year, and stated that it was desirable that the Bank expand its CP operations while paying due attention to the Bank's financial soundness. The member stated that the Bank should expeditiously consider employing corporate bonds as an additional operations means. Further, a few other members also remarked that, through the evaluation of the risks involved in each alternative measure, the Bank should deliberate on the schemes of the Bank's market operations and on eligible collateral to be submitted to the Bank, paying due attention to the extent to which the Bank could take private-sector risks.

As described above, many comments were based on the judgment that the current easy stance of monetary policy should be maintained. On the other hand, one member claimed that the current interest rate level was too low and was causing side effects. The member argued that the current extremely low interest rates created an unprecedented situation where the foundations of the everyday life of the people were being eroded. Further, the member criticized the latest monetary easing, stating that it was having little effect on firms while it impaired the confidence of households. The member was positive about expanding CP operations, but stressed that there was naturally a limit to what the Bank could do, and therefore the Bank should speak out more on how to carry out the injection of public funds and encourage an expansion of lending by government financial institutions.

V.Remarks by Government Representatives

Government representatives also gave their comments during the meeting. The representative from the Ministry of Finance made the following remarks.

  1. (1) The government acknowledged that the economy was experiencing prolonged stagnation and continued to be in a severe situation, and therefore placed top priority on bringing about an economic recovery and revitalizing the financial system. Under these circumstances, the Financial Revitalization Legislation had been passed in the latest Diet session. Further, the Financial Function Early Strengthening Law and the supplementary budget allowing for the use of public funds under these laws were likely to be passed in the near future. It was necessary to determine expeditiously the details of the organizational framework and actual implementation of measures under the new legal scheme.
  2. (2) With regard to an additional economic package, the government agencies concerned were deliberating measures to bring about an economic recovery following an order given by the Prime Minister at the Cabinet meeting on October 6.

The representative from the Economic Planning Agency made the following remarks.

  1. (1) The economy was experiencing prolonged stagnation, and continued to be in a severe situation. Under these circumstances, it had become apparent that the economy could not achieve the initially projected 1.9 percent growth in fiscal 1998. Therefore, at the Cabinet meeting on October 6, the projected growth rate was revised downward to -1.8 percent based on the changes in economic conditions.
  2. (2) To address the severe economic situation, the government adopted "Toward Swifter Implementation of Public Works" on October 2. To address the financial system problem, the government was expeditiously implementing measures to restore confidence in the financial system by promoting disposal of bad assets under the new legal framework, and also measures to avert further credit contraction under the "Outline of Anti-Credit Crunch Measures for Small and Medium-sized Firms."
  3. (3) To promote an economic recovery, the government intended to construct a supplementary budget and implement permanent tax cuts, as well as to introduce concrete measures under the "Plan to Double the Size of Living Space" and the "Industrial Revitalization Plan." The government would continue to endeavor to speedily and accurately grasp changes in the economic situation and take appropriate measures to place the economy on a recovery path within a year or two.


At the conclusion of the above discussions, many members supported the view that, although economic conditions continued to deteriorate and there were substantial downside risks to the economy, such as constraints caused by weak financial developments, the current extremely easy monetary policy stance, decided on September 9, should be kept unchanged for the intermeeting period ahead. In doing so, the Bank should monitor closely implementation of financial system revitalization measures, including recapitalization of financial institutions, and fiscal policy.

Further, members agreed that the Bank should retain the commitment stipulated in latter part of the Bank's policy decision ("regardless of the above guideline for the call rate, the Bank of Japan will provide more ample funds, if judged necessary, to maintain the stability of the financial markets") bearing in mind the possibility that Japanese financial institutions would face more difficult conditions in procuring foreign currencies toward the end of the year.

To reflect these views, 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 (see Attachment).

The Bank of Japan would encourage the uncollateralized overnight call rate to move on average around 0.25 percent.

Regardless of the above guideline for the call rate, the Bank of Japan would provide more ample funds, if judged necessary, to maintain the stability of the financial markets.

Votes for this proposal:
Mr. M. Hayami
Mr. S. Fujiwara
Mr. Y. Yamaguchi
Mr. Y. Gotoh
Mr. S. Taketomi
Mr. T. Miki
Mr. N. Nakahara
Mr. K. Ueda
Votes against this proposal:
Ms. E. Shinotsuka.

Ms. Shinotsuka dissented, claiming that she could not agree to the maintenance of the current level of the uncollateralized overnight call rate, which was reduced as of September 9. This was based on the thinking that (1) the extremely low level of interest rates over such a long period should be acknowledged as quite extraordinary; (2) the extremely low interest rates had not had sufficient impact in promoting financial institutions' bad-asset disposal, while it had eroded the foundations of people's everyday lives; and (3) the greatest contribution the Bank could make at present was to speak out on implementation of effective fiscal policy and financial system revitalization measures.

VII.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 October 15, 1998 in the Monthly Report of Recent Economic and Financial Developments (the "Ivory Paper," consisting of "The Bank's View" and "The Background"). 5

  1. 5The original full text, written in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on October 15, 1998 together with the English version of "The Bank's View." The English version of "The Background" was published on October 27, 1998.


For immediate release

October 13, 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.