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Minutes of the Monetary Policy Meeting

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

December 2, 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 Wednesday, October 28, 1998, from 9:00 a.m. to 1:55 p.m.1

Policy Board Members Present
Mr. M. Hayami, Chairman, Governor of the Bank of Japan
Mr. S. Fujiwara, Deputy Governor of the Bank of Japan
Mr. Y. Yamaguchi, Deputy Governor of the Bank of Japan
Mr. Y. Gotoh
Mr. S. Taketomi
Mr. T. Miki
Mr. N. Nakahara
Ms. E. Shinotsuka
Mr. K. Ueda

Government Representatives Present
Mr. T. Mutoh, Deputy Vice Minister for Policy Coordination, Ministry of Finance
Mr. E. Kawade, Director-General of the Coordination Bureau, Economic Planning Agency 2

Reporting Staff
Mr. I. Kuroda, 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. N. Inaba, Adviser, Policy Planning Office
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 27, 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. Kawade was present from 9:00 a.m. to 11:58 a.m.

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

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting, the "Green Paper," of September 24, 1998 for release on November 2, 1998.

II. Summary of Staff Reports on Economic and Financial Developments3

A. Money Market Operations in the Intermeeting Period

Market operations in the period since the previous meeting on October 13 were conducted in accordance with the following guideline determined at the 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.

As a result, the weighted average of the uncollateralized overnight call rate in the reserve maintenance period from September 16 to October 15 was 0.25 percent. The weighted average in the reserve maintenance period from October 16 to November 15 stood at 0.23 percent as of the day before the meeting, October 27.

The Bank's market operations in the intermeeting period featured the following. First, on October 15, the last day of the previous reserve maintenance period, in response to signs of increasing upward pressure on the uncollateralized overnight call rate, the Bank announced in the morning that it would not absorb excess reserves that afternoon. As a result, the rate on that day showed only a slight increase to 0.27 percent. Second, on October 23, the Bank extended a loan to the Deposit Insurance Corporation (DIC) pursuant to the Law Concerning Emergency Measures for the Revitalization of the Functions of the Financial System, which became effective that day. With this loan, the DIC provided the temporarily nationalized Long-Term Credit Bank of Japan (LTCB) with operating funds. Since the LTCB invested a portion of these funds in the call market, downward pressure was exerted on the uncollateralized overnight call rate for a day or two.

Meanwhile, interest rates on three-month Euro-yen increased gradually, reflecting heightened concern over the financing conditions of year-end funds, including those in foreign currencies. The Japan premium also expanded on news that an overseas credit rating agency was reviewing the credit ratings of several major Japanese banks for possible downgrading. There was a risk that upward pressure on interest rates on term instruments would intensify toward the year-end, which would affect the financing conditions of firms. Taking account of such situation, the Bank had been conducting market operations to provide funds maturing beyond the year-end in amounts that greatly exceeded those in the same period a year ago. The Bank intended to continue its efforts to maintain the stability of the markets, paying attention to the financing conditions of firms.

  1. 3Reports 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 recently shown little fluctuation against the U.S. dollar, generally moving around the 118-119 yen level. Although factors placing downward pressure on the yen persisted, such as the unclear outlook for Japan's economy, the view prevailed in the markets that the yen would be purchased gingerly in the immediate future, reflecting factors such as expectation of an additional emergency economic package, anticipation of an additional interest rate cut in the United States, and uncertainty regarding the situation in Brazil.

Meanwhile, the deutsche mark depreciated against the U.S. dollar, reflecting factors such as the market expectation of interest rate cuts in Germany that strengthened following the reduction of the official discount rate in Italy, and also the unclear prospects for the situation in Russia.

East Asian currencies generally remained firm against the U.S. dollar, partly influenced by declines in U.S. interest rates. The Indonesian rupiah appreciated to the level of January 1998, in part due to inflow of funds, whose provision was decided at the Consultative Group Meeting for Indonesia held in July, following the implementation of the program of the International Monetary Fund (IMF). Meanwhile, the Brazilian real and the Russian rouble continued to depreciate against the U.S. dollar.

2. Overseas economic and financial developments

The economic growth projections for the United States and European countries for 1998 by private-sector institutions and the European Commission had remained almost unchanged since the summer of 1998. The 1999 economic outlook for these countries, however, had been revised downward across the board, with a notable slowdown projected for the United Kingdom. Under these circumstances, a few of these countries reduced interest rates.

For the Asian economies, private-sector institutions forecasted negative growth in 1998 with the exception of Taiwan and China. The economies were expected to continue to shrink in 1999 in almost all these countries, although with a considerably smaller rate of contraction. As for Latin American countries, including Brazil, the economic outlook for 1999 was harsher than for 1998.

Meanwhile, stock prices showed firm developments in many countries, one example being a surge in the Hang Seng index of Hong Kong, reflecting the recent interest rate cuts and the expectation of interest rate cuts in the United States and major European countries.

C. Economic and Financial Developments in Japan

1. Economic developments

Among the economic indicators released in the period since the previous meeting, the value of public works contracts showed a significant increase in September. This could be considered to reflect (1) a rush of public works orders included in the initial fiscal 1998 budget that were supposed to be placed at an earlier stage; and (2) the effects of the additional public-sector investment included in the first supplementary budget for fiscal 1998. As for private consumption, however, indicators in and after September 1998 showed declines in sales and deterioration in consumer sentiment. This suggested that private consumption, which had remained level for some time, was starting to take a downward path. Employment and income conditions, which were behind the worsening of private consumption, appeared to be extremely severe. The unemployment rate was close to its historically-high level and the ratio of job offers to applications marked a new record low.

Amid such developments in final demand, production in the July-September quarter showed a considerably smaller decline than in the April-June quarter. The downward trend, however, was not likely to be reversed in the October-December quarter, judging from information from various sources, including the Bank's contacts with firms.

As for prices, declines in commodities prices were accelerating partly due to the rise of the yen against the U.S. dollar, and their effects on prices of goods and services in the immediate future required attention. Meanwhile, it was becoming increasingly apparent that the corporate service price index was on a moderately declining trend.

2.Financial developments

One feature of the recent developments in the money markets was an increase in concern over the availability of funds for the year-end amid generally calm market developments. While the three-month Euro-yen rate was on a slow but steady rise, its decomposition into one-month implied forward rates revealed a conspicuous increase in the one-month rate maturing beyond the year-end.

Another feature was an expansion in the spread between Euro-yen Tokyo Interbank Offered Rates (TIBOR) and the Japanese Treasury bill (TB) rates, with declines in TB rates accounting for most of the expansion, reflecting a flight to quality in the financial markets in Japan. This development was possibly being affected by similar developments across financial markets worldwide, as observed in the drop in the rates on U.S. Treasury bills.

With respect to monetary aggregates, the growth rate in M2+CDs from a year earlier in September registered 3.9 percent on a preliminary basis, more or less the same as the 3.8 percent in August. This was because a further decline in lending by financial institutions preparing for the end of the semiannual accounting period in September was generally offset by an increase in direct financing such as issuance of commercial paper (CP). It should be noted, however, that the financing activities of firms mainly reflected precautionary demand for ample on-hand liquidity, amid anxiety over prospective financing conditions, rather than any plans to increase expenditure.

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

A. The Current Economic Situation

In the Board's discussion on the current economic situation, many members noted some developments reported earlier by the staff, such as the appreciable increase in public works orders and the further weakness in private consumption-related indicators. Members generally agreed that, considering these factors and the reports presented at the meeting of the general managers of the Bank of Japan branches on October 26, the Board's judgment at the previous meeting on October 13--that economic conditions continued to deteriorate--required no significant change. Taking into account both the economic situation described above and some improvements in the financial markets, one member was of the view that the overall picture of instability contained elements showing delicate stability, and the economy was declining steadily.

On public-sector investment, a few members commented that the sharp increase in the value of public works contracts in September was good news. Another member mentioned that results of various business conditions surveys of small firms showed slight improvements, indicating that the positive effects of the increase in public-sector investment were starting to materialize. A different member, however, remarked that, according to reports presented at the meeting of the general managers of the Bank of Japan branches, the industries that usually benefit from public-sector investment had in fact felt little increase in demand, with materials traffic and orders received by subcontractors remaining particularly lackluster. Another member welcomed the surge in the value of public works contracts in September, but added that this surge had basically been expected for a long time and did not serve to improve the economic outlook.

With regard to developments in the private sector, many members expressed a gloomy view, mainly referring to the further weakness in private consumption.

One member pointed out the significant weakness in department store sales and automobile sales since the beginning of October, citing daily figures up to the most recent ones available. Some members agreed strongly with the staff's report that private consumption, which had remained virtually level, was starting to follow a downward trend. There was also the opinion that uncertainty about the future was one of the major causes of the sluggishness in private consumption. As for employment-related indicators, one member expressed concern over the decline in the ratio of job offers to applications in September to a new record low. The same member explained that the decline in the unemployment rate for women in September reflected an increase in the number of discouraged job seekers, and this therefore underlined the severity of the employment situation. Some other members also commented that employment and income conditions had become extremely severe and that consumer sentiment and private consumption had deteriorated further.

On business fixed investment, one member pointed out that, in addition to a decline in profits, uncertainty regarding the economic outlook and anxiety about fund-raising placed significant constraints on investment. The member was of the opinion that the environment for business fixed investment had become so harsh that interest rate cuts alone were not enough to bring about a recovery.

As for prices, many members expressed concern that the deflationary trend was intensifying.

A few members referred to the accelerating declines in international and domestic commodities prices, and expressed the view that they would lead to a decrease in domestic product prices. Further, a few members, referring to the downturn in the corporate service price index, pointed out that price declines were observed widely across goods and services, and expressed concern about the probability that the falls would continue or that the deflationary trend would intensify.

B. The Economic Outlook

With regard to the economic outlook, many members, while expecting fiscal policy effects to support the economy, expressed as gloomy a view as in the previous meeting or, if anything, somewhat gloomier. Such opinions were based on the strength of the negative momentum in the private sector and the downside risks associated with the situations abroad and weak financial developments.

With regard to the positive effects of fiscal policy, some members pointed out that public-sector investment was likely to remain on a steady rise since the public works associated with the comprehensive economic package of April 24 would be fully implemented. On these grounds, some members expressed the view that the present rapid deterioration in economic conditions would gradually slow.

Members, however, generally agreed that, although the economic downturn might decelerate, it was uncertain whether the decline could be completely contained, as the negative cycle in the economy might already have gained substantial strength. Many members commented on this possibility from different viewpoints.

One member warned that inventory adjustment, although it had shown signs of progress, was once again in a difficult situation. The member pointed out that (1) although inventory adjustment in durable goods such as automobiles and household electric appliances had virtually been completed, there was a concern that inventories would pile up again due to the weaker than expected final demand; and (2) under these circumstances, inventory adjustment in raw materials was slow to progress. The member contended that, because inventory adjustments could not keep up with the pace of decline in demand, firms had to continue cutting production in the second half of fiscal 1998, as in the first half. Another member remarked that the indexes of industrial production for September seemed to suggest a bottoming out of production, but in view of the fact that final demand continued to deteriorate, developments in production in the October-December 1998 and January-March 1999 quarters called for attention.

One member mentioned the possibility that employment conditions would worsen precipitously. The member expressed the view that, with disclosure and firms' credit ratings assuming greater importance, it would become increasingly difficult to sustain conventional Japanese employment practices, such as lifelong employment, and therefore the possibility could not be precluded that employment conditions would deteriorate conspicuously.

One member, based on the projection a month earlier, compared the positive and negative factors that had materialized since then. The member mentioned that the increase in public-sector investment and establishment of the financial revitalization framework, which were positive factors, were basically within the range of predicted developments. However, the appreciation of the yen and the further decrease in private consumption, which were negative factors, had not been fully anticipated a month earlier. The member therefore concluded that, on balance, it was appropriate to judge that the economic outlook had deteriorated somewhat.

One member supported the view that economic prospects had slightly worsened, noting the changes observed in the reports at the meeting of the Bank's branch general managers. The member remarked that in the July meeting, many reports projected favorable developments in the second half of the fiscal year, but in the latest meeting in October, there were few such reports. Instead, some pointed to the projected severity of the situation in fiscal 1999. Another member mentioned the possibility that the private sector's expectations for medium- to long-term economic growth were gradually being reduced as the present economic situation worsened, and this called for attention in considering the economic outlook. There was also a member who pointed out the increasing probability that the leading business indicator of the Economic Planning Agency in September would decline from August. In light of this trend, the member remarked that, even if the economy should show a rebound some time next year, the upturn would be short-lived, followed by another downward path.

In connection with the above arguments on the economic outlook, members also discussed the downside risks to the economy. One such risk was developments in overseas economies, particularly the financial situation in the United States. (Risks associated with the domestic financial situation are discussed in the next section.)

A few members remarked that, although the earlier turmoil in the U.S. financial markets had recently calmed, the situation continued to require careful attention because (1) risk averseness and liquidity preference were still prevalent in the markets, and (2) stock prices remained unstable. One noted that, compared to 1987, the year of Black Monday, the share of stocks held directly and indirectly by individuals in their financial asset portfolios had increased markedly. In light of this fact, the member warned that, if stock prices in the United States plunged, it would have serious repercussions for the entire U.S. economy.

This member also commented that, when assessing the downside risks associated with overseas developments, it was necessary to be alert to developments not only in the United States, but also in Russia and Brazil.

Although various causes for concern were mentioned regarding the economic outlook, including specific downside risks, many members also expressed hopes for some positive developments in connection with additional fiscal policy measures. Partly because specific measures had not been revealed, however, many members acknowledged that it was as yet extremely difficult to assess their effects.

One member expressed appreciation of the fact that it had become highly likely that the government would deliberate before the end of the year additional fiscal policy measures, a large part of which would be reflected in a third supplementary budget for fiscal 1998. However, with the content of the measures not determined, this member warned against any optimism at present about their effectiveness in containing the downward pressure on the economy. Another member expressed the view that, since the options with regard to monetary policy measures were limited, it would ultimately be necessary to increase firms' cash flow to deal with the problem of corporate financing (discussed in detail in the next section), and therefore, it was essential to implement economic measures that would increase firms' sales.

Regarding the contents of economic stimulus measures, a member emphasized the importance of tax reduction. The member stated that corporate profits were likely to contract considerably in fiscal 1998 and this would place downward pressure on scheduled cash earnings in fiscal 1999, and therefore the most important policy in the immediate future would be to reduce taxes to compensate for decreases in household income. From a somewhat different viewpoint, another member stressed the importance of tax reduction and other measures to strengthen the supply side of the economy. The member pointed out that the fundamental problem of the Japanese economy lay in low capital efficiency and labor productivity, as observed in the United States in the early years of the Reagan Administration. Based on this consideration, the member remarked that Japan needed not only demand-side policies but also supply-side policies, particularly sizable income tax reductions and tax-cutting policy measures in specific areas.

C. Financial Developments

With regard to financial developments, members noted the fact that concerns about the financing conditions of firms and financial institutions were a substantial downside risk to economic activity.

A few members pointed out that, amid a global trend of credit contraction, the availability of year-end funds was a significant risk factor for Japanese firms and financial institutions. Another member also stated that the difficulty faced by Japanese financial institutions in the procurement of foreign currency was starting to affect their financing of yen, as they were compelled to raise yen funds for conversion into foreign currency. This, together with constraints imposed by the capital ratio, was contributing to the sluggishness in financial institution lending.

A number of comments pointed out that the severity of financing conditions was increasing. One member expressed the view that small firms and even some listed firms which did not have a firm basis for intra-group financing were experiencing greater financing difficulties. A member emphasized that, in addition to the shrinking availability of bank loans, the fund-raising conditions in the direct-financing markets were becoming increasingly severe. The member pointed out that, as economic conditions deteriorated, more and more firms were experiencing difficulty in issuing bonds due to a downgrading of their credit rating. Against this background, the member expressed concern that these firms might not be able to smoothly refinance the massive amount of bonds maturing toward the end of the fiscal year. Further, this member noted that firms that were required to pay a higher bond issuance cost than before would attempt to shift to CP financing to secure bridge funds at the lowest possible cost, and in this respect, the conditions for CP issuance were extremely important for firms.

One member expressed concern about the interaction between such corporate financing conditions and economic activity. The member pointed out that the possibility could not be ruled out that the stricter financing conditions would increase the number of corporate bankruptcies toward the calendar and fiscal year-ends, and this, by bringing about a decline in stock prices and a deterioration in the asset quality of financial institutions, would further intensify the credit contraction. Another member also noted this vicious cycle, stating that the weakness of the financial sector was propelling the negative cycle in the economy, in which a decrease in demand was squeezing corporate profits, this in turn reducing employment and income, leading to a further decline in demand.

One member referred to the difference in the financial conditions across regions revealed by reports presented at the branch general managers' meeting of the Bank. The member remarked that, in some regions, strong local financial institutions still existed and they were able to extend loans to replace those that had been collected by branches of large nation-wide financial institutions. Thus, significant differences were observed across regions in the tightness of credit. As a whole, however, this member also acknowledged the prevailing pressure for collection of loans.

Thus many members mentioned the risks associated with financial developments, particularly the availability of year-end funds. In the discussion, one member expressed the view that the issue of year-end funds depended significantly on (1) the progress in recapitalization of financial institutions based on public funds; and (2) alleviation of the credit contraction overseas.

In view of the above risks, many members expressed their hopes for the effects of financial system revitalization measures. They regarded the fact that concrete action had started to be taken under the Law Concerning Emergency Measures for the Revitalization of the Functions of the Financial System and the Financial Function Early Strengthening Law, which came into effect on October 23, as significant progress.

However, members generally agreed that the timing of and conditions for implementation of measures under the prompt correction scheme remained uncertain, and therefore their impact on the lending behavior of financial institutions was difficult to predict. With regard to the lending behavior of financial institutions, a member noted that the following points warranted attention: (1) the lending attitude of financial institutions toward firms whose debt was classified as Category II loans, exposures requiring risk management on a one-by-one basis; (2) the behavior of financial institutions other than the main bank; and (3) how the main bank would react to its increasing share in a firm's borrowing, which might result from (2).

Many members also commented on stock prices in relation to the problems in the financial system. Some members pointed out that the establishment of a legal framework for financial system revitalization and the rebound in stock prices in the United States, among other factors, had served to contain the fall in stock prices in Japan. In connection with this point, a few members expressed the view that, as a result, the risk of stock price declines amplifying the negative interaction between economic activity and financial developments was contained at least for the time being.

As to the prospects for stock prices, these members basically took a cautious view in part because the injection of public funds, as mentioned earlier, was still subject to considerable uncertainty.

Members also discussed how the monetary easing measure implemented on September 9 should be assessed.

One member expressed the view that the interest rate reduction in September had not led to increases in business fixed investment or employment, and sources such as reports at the Bank's branch general managers' meeting suggested that firms, on the whole, did not appreciate the interest rate cut. The member also mentioned that the monetary easing had motivated households to put off housing investment. The member stated that, while this might only be a temporary postponement in expectation of a further decline in housing loan interest rates, it also indicated a possibility that households' confidence in the future was further impaired by the reduction of interest rates, which had already been extremely low for some years. This member further added that the most difficult task at present for Japanese financial institutions was procurement of foreign currency. The member noted that reductions of credit lines by foreign financial institutions were making it increasingly difficult for some Japanese banks to engage in further foreign exchange swaps. Therefore, the continued supply of yen funds by the Bank, no matter how generous, would not solve the fundamental problem of foreign-currency financing.

Many members objected to these arguments. One member pointed out that the decline in interest rates would basically have a positive effect on housing investment, even if it temporarily had a negative impact. Another member noted that the monetary easing of September was aimed at preventing a double-dip decline in the economy and alleviating as much as possible the burdens on firms such as the impact of restructuring. With the condition of the Japanese economy as severe as it was, the member stated that it had not been expected in the first place that monetary easing alone would encourage a conspicuous increase in business fixed investment. This member further pointed out that the effects of the monetary easing on households should not be discussed only in terms of the impact on households' interest income. It should rather be viewed in terms of the effects the monetary easing had on overall economic activity, and how these, by influencing employment, spread to the household sector. A third member expressed the opinion that, while a lowering of interest rates alone could not induce an economic recovery, the easing should be evaluated from the viewpoint of what the economy would have experienced without it. On the relation between the financing cost of the yen and foreign currency financing, a member pointed out that an increase in the financing cost of the yen would squeeze the earnings of Japanese financial institutions and tighten their domestic financial conditions, thereby lead to a downgrading of their credit ratings, and in turn make their procurement of foreign currency even more difficult.

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, the majority of the members considered that, in the implementation of monetary policy for the immediate future, it was appropriate to maintain the current decisive easy stance of monetary policy. This judgment was made, even though members shared a gloomy view about the economy and were concerned that the deflationary trend might intensify, on the following grounds: (1) it was necessary to wait and see the progress in implementation of fiscal policy and financial system revitalization measures; (2) it was appropriate to continue to monitor closely the effects of the monetary easing measure of September 9; and (3) almost all possible monetary policy measures had already been implemented.

With regard to the third point, one member remarked that the view prevailed among firms that the Bank had conducted sufficient monetary easing, and it was difficult to expect the Bank to take additional measures.

On the Bank's policy response to the difficult financing conditions of year-end funds, which was the issue of utmost concern for the immediate future, one member pointed out that the Bank had already adopted various measures in response to the situation. Specifically, the Bank had (1) provided ample funds under the guideline for money market operations, which had contributed to the foreign-currency financing of financial institutions by making yen funds available for conversion into foreign currency; (2) made efforts to facilitate corporate financing mainly by implementing CP operations; and (3) expanded operations to supply relatively long-term funds maturing beyond the year-end. Another member noted that the policy directive, which laid down the guideline for money market operations, issued to the bank's staff at the previous meeting clearly stated that "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" (hereafter referred to as the "supplementary clause"). The member expressed the view that, since the Bank could take action flexibly under this clause, it would be able to respond to a significant extent under the current policy stance to a possible further worsening of the conditions for year-end financing.

During this discussion, a few members supporting the current easy stance of monetary policy placed particular emphasis on the Bank's commitment to provide ample funds maturing beyond the year-end through, among other measures, active implementation of CP operations.

One went so far as to claim that the current guideline for money market operations did not convey clearly enough the Bank's stance on market operations to the public and markets. The member contended that the Bank should therefore explicitly state in the policy directive its specific stance on money market operations, such as its intention to provide the markets with ample funds maturing beyond the year-end through, for instance, expanded CP operations.

The majority of the members, who supported the Bank's active use of CP operations toward the year-end, were hesitant to write this down in the policy directive. The objection was based on the thinking that (1) the Bank had already been implementing CP operations and providing year-end funds to the greatest extent possible; (2) the current policy directive, including the supplementary clause, allowed for flexible policy responses through a wide variety of measures; (3) the markets were already aware of the Bank's stance on market operations toward the year-end; (4) due to all of the above, the suggested modification of the policy directive would not bring any changes to the actual implementation of market operations; and (5) the policy directive was supposed to indicate the basic policy stance of the Bank, and therefore, frequent changes in the wording of the directive in the absence of a shift in the policy stance would confuse the public about the Bank's intention. One member, while showing strong support for clarifying the Bank's stance on CP operations, was of the view that the Board should first deliberate carefully on the schemes of the Bank's market operations and on the eligible collateral to be submitted to the Bank. And only when the Bank decided to change its policy stance, it should alter the wording used in the public announcement accordingly.

At the end, many members agreed that the Bank's intention to continue to actively utilize CP operations should be clearly conveyed by the Governor in speeches and at press conferences, and it should be stated in the minutes of the Monetary Policy Meeting that such an intention was implied by the Chairman's policy proposal.

As a related issue, one member pointed out that monetary policy could not be fully responsible for firms' financing conditions. The member stressed that the sluggish growth in money stock was attributable to the low lending capacity of the indirect financing sector, and therefore, the problem basically had to be solved by strengthening the capital base of financial institutions. The member continued that, in principle, monetary policy was able to directly influence only the interbank money market, and as for the financing conditions of firms and households, which were beyond the interbank market, monetary policy could exert a certain degree of effects but naturally had its limits.

Thus, there were some differences in the degree of emphasis members placed on corporate financing in the implementation of monetary policy. However, many members directed the staff to study promptly the various issues that would arise if the Bank were to further ease market conditions with a view to facilitating corporate financing. These included (1) what options there were in terms of the schemes of market operations and eligible collateral; and (2) how each option could be evaluated in terms of their effectiveness and their impact on the soundness of central bank assets, with the pursuit of effectiveness possibly conflicting with maintenance of the soundness of assets.

One member expressed the view that the Bank should examine what it could do, without impairing its credibility, to address the current situation, where the flow of funds to financial institutions was secured, but the channels from the banking system to firms were damaged. Another member noted that, if there were some available monetary policy options, the Board should have an understanding of the effects of each option on corporate financing and its implications for on the soundness of the Bank's assets. A third member, acknowledging that there were limits to the effectiveness of monetary policy responses to the current economic situation, stressed the importance of examining every possible monetary policy measure in accordance with the extent of economic deterioration.

In conclusion, the majority of the members judged that the Bank should deliberate expeditiously on possible market operations schemes and eligible collateral, although, for the immediate future, the Bank should maintain the current easy stance of monetary policy and make every effort to facilitate corporate financing toward the year-end. One member, however, took the position that the current level of interest rates was too low. The member, thinking that the extremely low level of interest rates over such a long period was extraordinary, expressed the view that it was difficult to expand money stock solely by means of low interest rates and there was nothing monetary policy could do to address the current economic situation. This member further raised a point that the most important task for the Bank would be to reinforce its prudential policy vis-a-vis individual financial institutions with a view to stabilizing the financial markets and revitalizing financial intermediary functions.

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) The impaired financial intermediary functions were acting as a drag on the economy, and therefore prompt restoration of these functions was a key to a firm economic recovery. Following intense discussion in the Diet, the Law Concerning Emergency Measures for the Revitalization of the Functions of the Financial System and the Financial Function Early Strengthening Law were passed on October 23. The government acknowledged that these two laws together would provide the framework for maintaining the stability of the financial system.

(2) To address the economic situation, Prime Minister Obuchi had ordered the government to deliberate by mid-November specific measures to be included in an additional emergency economic package. The government intended the package to include additional public works, policies to counter the credit crunch, and various other measures. The government would do its utmost to have a third supplementary budget, necessary to implement these measures, passed with unprecedented expeditiousness.

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

Given the extremely severe economic situation, Prime Minister Obuchi had ordered the government to deliberate by mid-November specific measures to be included in an additional emergency economic package. The Economic Planning Agency, together with other ministries and agencies concerned, was making every effort to come up with the details in time. Under the current circumstances, it was important to employ every possible measure in the management of economic policy, and therefore the government hoped that the Bank would continue to manage monetary policy appropriately.

VI. Votes

At the conclusion of the above discussions, the majority of the members believed that the Bank should maintain the current decisive easy stance of monetary policy while closely monitoring implementation of measures under the new legal framework for financial revitalization and the effects of fiscal policy on the economy. The members emphasized that the Bank should continue providing ample funds maturing beyond the year-end under the current guideline for money market operations, so as to facilitate corporate financing as much as possible amid intensifying concern about availability of liquidity in global financial markets.

Meanwhile, a member proposed adding a phrase to the policy directive while keeping the current stance of monetary policy unchanged. Therefore, two policy proposals were put to the vote.

Mr. Nakahara expressed the view that the current policy directive did not convey clearly enough the Board's commitment to actively implement CP operations and to supply ample funds maturing beyond the year-end. Accordingly, he proposed adding a phrase at the end of the policy directive, stating that "in implementing money market operations under the above guideline, the Bank will provide as much year-end funds as possible through various measures including active CP operations." The proposal was defeated with one vote in favor and eight against.

To reflect the majority view, the chairman formulated the following proposal. Members confirmed that the policy proposal implied that the Bank would provide ample funds maturing beyond the year-end through, for example, continued active implementation of CP operations.

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. K. Ueda
Votes against this proposal:
Mr. N. Nakahara
Ms. E. Shinotsuka.

Mr. Nakahara dissented on the grounds that, in the policy directive, (1) the Bank's objective for the immediate future, such as active use of CP operations, should be more clearly stated; and (2) the expression used in the current supplementary clause was too abstract and comprehensive to be clearly understood.

Ms. Shinotsuka dissented, claiming that the current low level of interest rates was extraordinary and could not agree to its maintenance


Attachment

For immediate release

October 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.