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Minutes of the Monetary Policy Meeting

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

December 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 Friday, November 13, 1998, from 9:02 a.m. to 12:19 p.m., and from 1:13 p.m. to 4:54 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 Finance2
Mr. H. Imai, Parliamentary Vice Minister, Economic Planning Agency3
Mr. S. Shimpo, Director-General of the Research Bureau, Economic Planning Agency4

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. 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. M. Amamiya, Chief Manager, Money and Capital Markets Division, Financial Markets Department5
Mr. H. Tanaka, Chief Manager, Planning Division 2, Policy Planning Office5
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 December 15, 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 1:13 p.m. to 4:54 p.m.
  3. Mr. Imai was present from 9:02 a.m. to 12:19 p.m.
  4. Mr. Shimpo was present from 1:13 p.m. to 4:54 p.m.
  5. Messrs. Amamiya and Tanaka were present from 1:13 p.m. to 4:54 p.m.

I. Approval of the Minutes of the Monetary Policy Meeting Held on October 13, 1998

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting, the "Green Paper," of October 13, 1998 for release on November 18, 1998.

II. Summary of Staff Reports on Economic and Financial Developments6

A. Money Market Operations in the Intermeeting Period

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

As a result, the weighted average of uncollateralized overnight call rate in the reserve maintenance period from October 16 to November 15 stood at 0.22 percent as of November 12, the day before the meeting.

The uncollateralized overnight call rate rose slightly from the end of October to the beginning of November, but recently fell below 0.20 percent and, continuing a downward trend. On November 12, the weighted average of the uncollateralized overnight call rate marked a record low of 0.15 percent. This easing of market conditions might have been due to various factors including (1) the fact that financial institutions had held a large amount of reserves in the early part of the reserve maintenance period, reflecting the Bank's injection of ample funds into the market; and (2) a temporary inflow into the markets of a large amount of funds originated from loans of the Deposit Insurance Corporation (DIC) to the temporarily nationalized Long-Term Credit Bank of Japan (LTCB).

As for term instruments, interest rates on those with a maturity of two months or more followed an upward trend until early November, reflecting the continued active moves by market participants to secure year-end funds. Recently, however, these interest rates had shown signs of peaking out, reflecting (1) the Bank's aggressive injection of more ample funds maturing beyond the year-end in view of the strong demand; (2) considerable progress made by Japanese financial institutions in raising foreign currency funds for the year-end; and (3) the recent stabilization of the global financial markets. However, there still remained many factors that could possibly disturb the markets, such as the release of the financial statements of financial institutions for the first half of fiscal 1998 scheduled for some time in late November. The Bank, therefore, would continue to take all measures to contain upward pressures on interest rates on term instruments.

  1. 6Reports 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 U.S. dollar strengthened against the yen from November 3, reaching the 124-125 yen level on November 12 on overseas markets. The rise of the dollar reflected (1) expectation of an early arrangement by the International Monetary Fund (IMF) and donor countries of an assistance package for Brazil; (2) the strong performance of the Democratic Party in the United States' congressional mid-term elections; (3) a comment by Mr. Greenspan, chairman of the Board of Governors of the Federal Reserve System (FRB), that significant signs of some favorable reversals in the conditions of U.S. financial markets; and (4) a buildup of tension in the Iraqi situation. Subsequently, the yen recovered the 122-123 level, reflecting factors such as expectation of an additional economic package in Japan and anticipation of a further interest rate reduction by the Federal Open Market Committee on November 17.

Meanwhile, the deutsche mark followed a downward trend against the U.S. dollar reflecting factors such as the prospect of an interest rate cut by the Bundesbank and the unstable situation in Russia. After the Bundesbank's decision on November 5 to leave interest rates unchanged, however, the deutsche mark remained generally level. Asian currencies appreciated from the end of October to the beginning of November then weakened slightly partly due to the yen's depreciation against the U.S. dollar.

2. Overseas economic and financial developments

In the United States, GDP grew in the July-September quarter by an annualized 3.3 percent. This, however, was due largely to inventory accumulation. Business fixed investment declined for the first time since the October-December quarter of 1991, and the pace of increase in private consumption slowed compared to the April-June quarter of 1998. The non-farm payrolls in the United States increased in October by more than 110 thousand, but in manufacturing industry the number declined. With no sign of an upturn in external demand, manufacturing industry in general was inactive, as shown by the National Association of Purchasing Management (NAPM) index of new orders, which fell below 50 for the first time since May 1996. In light of these economic conditions, the view was becoming prevalent in the markets that deceleration of the U.S. economy was inevitable.

As for financial conditions in the United States, the markets regained some stability after the FRB reduced interest rates further on October 15. Funds were to some extent returning to stocks and corporate bonds, and credit risk spreads between bond yields contracted to close to the level prior to the collapse of a large hedge fund. Credit risk spreads, however, still remained larger than in the past and there were many uncertain factors such as the situations in Brazil and Russia. Therefore, instability in the financial markets remained, and the financing conditions continued to be generally harsh.

C. Economic and Financial Developments in Japan

1. Economic developments

With respect to final demand, public investment orders increased significantly. However, business fixed investment continued to decline and housing investment became even more stagnant. In addition, weakness in private consumption once again became conspicuous. As for inventories, adjustment pressure persisted despite some progress in reducing the pressure, mainly in consumer durables, and therefore, production continued to decline moderately. There was growing anxiety among firms about fund-raising, and this served to restrain firms' activities such as business fixed investment. In this situation, firms cut employment and wages, and the resulting worsening in households' income conditions intensified their cautious spending attitude. Prices in general followed a declining trend reflecting the expansion in the output gap.

Japan's economy was thus experiencing a simultaneous decline in economic activity and prices. Such developments in the economy were interacting negatively with the increasing risk aversion among the financial institutions and investors in the markets.

With regard to the economic outlook, the effects of the increase in public investment were expected to materialize more evidently and slow the pace of economic deterioration. Considering the current economic situation, however, the effects of public investment in stimulating private-sector demand were likely to be limited. Moreover, taking account of signs of a further contraction in household spending and the unclear prospects for developments in foreign exchange markets and overseas economies, it was difficult to expect for some time that the downward trend in domestic private-sector demand would be contained and the output gap would contract. As for prices, the pace of decline in prices in general was likely to accelerate, considering the effects of the appreciation of the yen in addition to the large output gap.

2.Financial developments

In the financial markets, Euro-yen interest rates maturing after the year-end rose slowly but steadily after mid-October. This was because Japanese financial institutions--facing intensified severity in raising foreign currency funds as reflected in the expansion of the Japan premium--raised yen funds vigorously to convert them into foreign currency funds. Meanwhile, Japanese Treasury bill (TB) rates fell to close to zero percent due to an increase in TB purchase by foreign banks reflecting the decline in the cost of raising yen funds. As observed in such developments, the heightened market concern about Japanese banks' foreign currency liquidity risk materializing at the year-end was affecting Japan's financial markets by expanding the interest rate differential between Euro-yen and TBs.

Recently, however, Euro-yen interest rate futures had begun to decline and the Japan premium showed signs of peaking out. This seemed to reflect (1) progress made by Japanese financial institutions in raising foreign currency funds mainly by procuring yen funds for conversion into foreign currency, and (2) alleviation of the worldwide credit contraction observed in the international financial markets. However, it was as yet uncertain whether such interest rate developments in the interbank markets would improve firms' financing conditions.

With respect to monetary aggregates, the lending stance of private-sector banks became even more cautious reflecting anxiety about their foreign currency position at the year-end. On the other hand, firms made precautionary moves to secure ample on-hand liquidity, and in addition, large firms in particular increased procurement of yen funds in anticipation of difficulty in raising foreign currency funds.

Under these circumstances, superficially the decline in the amount outstanding of private bank lending from a year earlier expanded in October. However, taking into account the bank's writing off of nonperforming loans at the end of September and the assumption by the govenrment of loans to the former Japanese National Railway Settlement Corporation, both of which contributed to reducing loans outstanding, the underlying pace of decline from a year earlier remained generally the same as in September.

Firms' fund-raising in capital markets was increasing steadily. However, interest rate differentials expanded reflecting differences in firms' creditworthiness, and some of the firms whose ratings were downgraded faced difficulty in issuing commercial paper (CP) and corporate bonds. Therefore, developments in firms' financing conditions toward the end of the calendar year and the fiscal year warranted attention.

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, members generally shared the view that the economy continued to deteriorate although there were some favorable developments in such areas as public investment.

One member commented on public investment that especially works related to bridges, rivers, and harbors, which were financed by the initial 1998 budget, risen significantly since September, and as for private consumption, there were signs of a recovery in the sales of some household electric appliances (e.g., air conditioners, refrigerators, and washing machines), mainly new models. However, another member pointed out that, rather, the general trend in private consumption began to exhibit further weakness. The first member, who referred to the favorable signs in private consumption, was also of the view that such positive factors were only a small part of the picture and that the overall economy continued to be placed under strong downward pressure.

Another member considered that, while there had been an appreciable surge in public investment, the projected significant drop in corporate profits in the first half of fiscal 1998 suggested the existence of strong negative interactions of production, income, and expenditure.

A different member, while admitting that some stability which had been regained in the domestic and overseas financial markets was one of the few positive developments, judged that there was no sign of a possible halt in the decline in economic activities. The member also pointed out that (1) liquidity constraints were negatively affecting business fixed investment; (2) anxiety over the current and future income conditions was depressing private consumption; and (3) the output gap expansion was causing prices to decline. Based on the above views, this member expressed concern that, with these three factors squeezing corporate profits and thereby impairing the balance sheets of financial institutions, the economy might have entered a very difficult phase.

B. Financial Developments

With regard to financial developments, many members mentioned that domestic and overseas financial markets had recently regained some stability. At the same time, however, members generally shared the view that the domestic markets remained vulnerable in many respects, and corporate financing conditions would therefore become increasingly severe toward the calendar and fiscal year-ends.

On financial market conditions, one member judged that conditions had improved slightly in financial markets home and abroad. Another member commented that Japanese financial institutions had made progress in foreign-currency financing in some degree, and as a result, Euro-yen rates were showing signs of peaking out. The first member attributed the improvement in the domestic markets to the Bank's provision of ample liquidity as well as the clearer prospect of injection of public funds into financial institutions. The same member, however, also noted that the domestic markets were still very vulnerable, citing the persistent uncertainty about the sustainability of the rebound in stock prices and the possible existence of a negative interaction between the deterioration in economic conditions and the decline in financial intermediary functions.

Regarding the negative interest rates on some transactions including Euro-yen deposits between some foreign banks, one member remarked that, while the direct cause was the increased conversion of yen by Japanese financial institutions into foreign currency, more fundamentally it was attributable to the extraordinarily low level of interest rates on yen instruments. With respect to these negative interest rates, another member explained that because the Bank had tried to contain the increase in term interest rates on yen funds which Japanese financial institutions were borrowing, the increase in risk premium on Japanese financial institutions had inevitably led to the substantial decrease in rate on TBs, which were free of credit risk. As a result, some transactions involving foreign banks were temporatily made with interest rates slightly below zero. Based on this understanding, the member made the point that, since it was unlikely that the negative interest rates on TBs would continue to expand, the Euro-yen interest rates applied for Japanese financial institutions might not be expected to decline further unless the Bank conducted market operations that would directly influence their risk premium.

In the Board's discussion on corporate financing, a member expressed the view that confusion in the banking sector had calmed, but it remained uncertain whether this stability had positive implications for corporate financing. This member added that it was necessary to observe closely the effects of the expanded credit guarantee programs, which were already being implemented, and additional anti-credit contraction measures for firms, as well as firms' capability to raise funds smoothly in capital markets toward the fiscal year-end, when massive redemption of bonds was scheduled.

Another member made the observation that firms with high credit ratings had secured necessary year-end funds, and small firms were benefiting from the expansion of credit guarantees by credit guarantee associations. The member was concerned, however, that fund-raising would still be the most critical issue around the end of the calendar year and the fiscal year for large firms whose credit ratings were downgraded and also for medium-sized firms.

With regard to money stock, a member remarked that the relationship between the monetary base and M2+CDs was changing, as observed in the continued decline in the money multiplier in recent years. This member, noting that the shift was associated with structural changes in banks' activities, pointed out that it suggested that the Bank's injection of funds into the money markets was not easily leading to an increase in money stock.

Another member commented on the relationship between M2+CDs and GDP. The member remarked that long-term trends showed that the elasticity of GDP with respect to M2+CDs had increased after the bursting of the economic "bubble," and suggested that therefore the recent moderate increase in the growth rate of M2+CDs implied a possible acceleration of economic growth. A different member, however, argued that the recent rise in the growth rate of money stock reflected firms' precautionary demand for on-hand liquidity amid strong concern about a credit contraction. Considering that there were many firms experiencing difficulty in fund-raising, developments in money stock should be monitored carefully.

C. The Economic Outlook

Members also discussed the economic outlook based on the above discussion on the current economic activity and financial developments. The members' judgment was similar to that at the previous meeting: they generally agreed that the rapid pace of economic deterioration as shown in the past year was likely to slow as the effects of monetary and fiscal policy measures materialized, but it remained uncertain whether this would lead to a self-sustained economic recovery.

One member predicted that public investment would remain at a high level in the January-March and April-June quarters of 1999 without a seasonal drop because the investments included in the initial 1998 budget, which had already begun to increase, would be immediately followed by the implementation of investments associated with the first supplementary budget. This member, however, also expressed concern that inventory adjustment was taking longer than initially expected, and that there was no factors that might trigger a recovery in private-sector demand. Further, many firms seemed likely to implement drastic restructuring measures in their management plans for fiscal 1999. The member concluded by emphasizing that tax reduction of a permanent nature and tax cuts in specific areas were necessary in order for the support given to the economy by public investment to effectively induce a recovery in private-sector demand. The member also stressed that it was necessary to implement appropriate fiscal and monetary policies as well as financial system revitalization measures to encourage firms to form expansionary business plans.

Another member forecasted that, judging from factors such as the weakness of private consumption and the substantial output gap as indicated by the high level of inventory ratio to shipment, it would take some time before the economy showed any appreciable recovery, even with support from monetary and fiscal policies.

A third member mentioned three possible routes that might lead to an economic recovery, and explained how each one was subject to considerable risk: (1) stimulative effects of fiscal policy on the economy; (2) injection of public funds into financial institutions (this would lead to favorable developments such as a recovery in prices of financial institutions' stocks and in turn produce positive effects for economic activity); and (3) an increase in the current account surplus. This member then explained that each was subject to uncertainty: (1) while fiscal spending was expected to increase more conspicuously in the near future, the content of tax-cut policies and their impact on corporate and household confidence were unpredictable; (2) the effects of an injection of public funds depended on the details of its implementation; and (3) any sizable increase in the current account surplus was unlikely considering the recent developments in foreign exchange markets and overseas economies. Thus all of the three possibilities had uncertainty with regard to their effectiveness in bringing about an economic recovery.

A fourth member expressed the view that, although the economic situation was virtually level, it was only experiencing a fragile stability in the overall picture of instability. Considering the fact that labor productivity and capital efficiency were at very low levels and that the entire economy was in a transition process to an economy in which market mechanism fully function, another large-scale adjustment was unavoidable. Specifically, the member commented that capital stock was already in a severe adjustment phase, and predicted that business fixed investment would decrease by over 10 percent in fiscal 1998 and also drop in fiscal 1999. This member also remarked that, in view of the possibility that the budget deficit and government debt outstanding might reach critical levels in the near future, drastic restructuring in the private sector was essential to a revival of the Japanese economy. Therefore, the economy had to undergo another difficult adjustment phase.

In relation to the economic outlook, a few members expressed concern about the risk of deterioration in employment conditions.

One member pointed out that, (1) the personnel cost-to-sales ratio had reached historically high levels both in manufacturing and nonmanufacturing sectors; (2) the ratio of employees income to corporate earnings had risen in the face of declines observed in other countries; and (3) firms were accordingly making large cuts in employees' bonus payments. Based on the above developments, the member projected that large reductions in employees would become inevitable, and that unemployment rate would continue to mark new record highs and reach an even higher level.

Another member explained the features of the employment situation since the financial system crisis surfaced in Japan in autumn 1997. They were (1) the rapid increase in the involuntarily unemployed compared to the voluntarily unemployed since the end of 1997; (2) strong employment adjustment pressure persisted with adjustment being made only at a slow pace, whereas in Korea, which had also experienced a financial system crisis, the unemployment rate had surged following it; and (3) workers without permanent employment status not covered by employment insurance had increased reflecting, for instance, growth in the number of part-time workers. In light of these developments, this member expressed concern about the slow implementation of employment policy measures, including establishment of a safety net, amid anticipation of a further worsening of the employment situation.

The general feeling of uncertainty prevailing among households was also analyzed from angles other than the employment problem. One member introduced an empirical analysis by a private-sector research institution which showed that, in households with relatively low income, the propensity to consume was smaller in those that did not have confidence in the public pension system than in those that did. This member commented that the bleak prospects for pensions were not independent of the extremely low level of interest rates, and suggested that the Bank pay attention to the possibility that the level of interest rates, through such channels, might affect the propensity to consume.

In relation to the above, another member pointed out that institutional factors such as the tax, pension, and care insurance systems, might fundamentally affect the weakness in private consumption and housing investment. The member added that economic activities of households must be examined giving due consideration to issues in the overall social system, including the inter-generational burden sharing.

One member emphasized that uncertain future developments in the U.S. economy were sources of downside risk to Japan's economy. The member was of the view that in the United States, the structural trend of over-consumption and under-saving would go through a change, and that a considerable deceleration in economic growth was inevitable next year. The same member also mentioned the following as important points for the immediate furture: (1) how the stock prices, which had curently shown a rebound but seemed to be approaching a ceiling, would develop in early 1999; (2) the possibility that intermediary functions of financial markets had deteriorated substantially as suggested by the persistently large credit spreads between corporate bond yields; and (3) the possibility that business fixed investment might be entering an adjustment phase as implied by the capacity utilization and other manufacturing-related indicators.

Regarding price developments in Japan in the immediate future, different views were presented and discussed on whether the price declines induced by the yen's appreciation would have potentially favorable effects on the economy. In the end, however, member generally shared the view that, under the current economic circumstances, any price declines was likely to further depress economic activity, and therefore, it was necessary to monitor price trends carefully.

One member, while acknowledging that the economic situation warranted a concern about a negative interaction between price developments and economic activity, pointed out that price declines, as far as they resulted from an appreciation of the yen, should ultimately benefit households. Based on such a view, the member said that the possibility could not be ruled out that price falls, if they coincided with development of new products and materialization of pent-up demand, contribute to supporting private consumption, and thereby, among other factors, provide foundation for an economic recovery.

Another member, however, pointed out that price decreases were not effective in stimulating consumption unless they occurred in tandem with such phenomena as technological innovation and increases in real income. This member claimed that, with the economy experiencing a large output gap and a downturn in asset prices, the impact of decreasing prices was likely to be negative on balance. A different member also made a similar remark.

One member made the point that, because prolonged downturns in prices had been very unusual in major industrialized countries since World War II, the Bank should keep a close watch on, and also analyze, the effects of such price trends on the economy, paying close attention to the relation between the cause and the effects of the price decline.

Meanwhile, a member emphasized the fact that the declining trend in land prices were again becoming evident. The member expressed the view that land prices could not be expected to bottom out in the immediate future considering that they tend to move with a lag of more than one year relative to stock prices.

With regard to the injection of public funds into financial institutions under the Financial Function Early Strengthening Law, many members, while anticipating a certain degree of positive effects, acknowledged that substantial uncertainty remained as to how it would influence economic activity.

A member stated that injection of public funds was a necessary but not sufficient condition for an increase in financial institution lending, and it was essential to take related measures to make it effective in inducing an economic recovery. Another member also remarked that, amid the heightened necessity for a properly designed overall economic policy, the Bank needed to make necessary efforts to maximize the effects of the injection of public funds.

A different member mentioned three possible outcomes of injection of public funds: (1) disposal of nonperforming assets might progress, creating deflationary pressure in the short term; (2) room might be given to financial institutions to expand new lending; and (3) loans to inefficient borrowers might be maintained, deferring the solution of the problems. The member then posed a question which of the three potential outcomes was assumed in implementing financial system measures, including the Bank's provision of liquidity, and whether the prerequisite to public funds injection would be consistent with the intended outcome.

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

Based on the Board's assessment of the economic and financial situation, members discussed the basic thought on monetary policy for the immediate future. At the end of the discussion, members generally agreed that it was appropriate to maintain the current decisive easy stance of monetary policy adopted on September 9 while it would be desirable to make better use of monetary policy tools to alleviate severe financing conditions of firms expected toward the end of the calendar year and the fiscal year.

Detailed discussions on the policy directive were as follows. A member expressed the view that, considering the severe economic and financial conditions, the current decisive easy stance should be maintained for the time being.

As for a further monetary easing, however, a member was of the opinion that the Bank should take a wait-and-see stance, monitoring carefully the developments and effects of fiscal measures to stimulate the economy and the injection of public funds into financial institutions. The same member further commented that, although the monetary easing on September 9 had yet to exert its positive influence on final demand, the resultant decline in the various interest rates might have been effective in alleviating the pains associated with economic adjustments. In addition, the member contended that the Bank should be cautious in lowering interest rates further as they had already reached the extremely low levels. Another member mentioned that business circles fully appreciated the Bank's current monetary policy stance. The member also said that the interest rates reduction and other monetary policy measures that would normally be conceivable might have been almost used up. A few other members expressed the same view.

A different member remarked that, if the economy contracted further toward the fiscal year-end, the Bank might need to think of an additional easing. The same member said, however, that the financial markets had been recently stabilizing due partly to the ample supply of funds by the Bank, and therefore, the current policy should be maintained as far as the current stability continued despite its subtlety in the face of overall unstable environment.

Meanwhile, there was an exchange of views regarding the supplementary clause of the current policy directive ("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"). A member claimed that, as the expression of the condition ("if judged necessary") was not sufficiently clear, the supplementary clause might lead to a misunderstanding of the public that an additional easing without the Board's approval was possible anytime. The member was of the opinion that the supplementary clause should be applied only in emergencies, for example, a shortage of liquidity in the CP market. In this regard, the Board had already acknowledged at the meetings on September 9 and September 24 that the Bank would accept any divergence of the call rate from the target level in case of abrupt movements in the money market and other emergencies. This was clarified again and confirmed by the Board.

Apart from the policy directive, there was also a discussion about the diversification of monetary policy tools. A member took the position that, considering the lowering financial intermediary function of Japanese banks, corporate financing at the end of the calendar year and the fiscal year was the most critical issue, and it was timely for the Bank to take action focusing on this.

However, a member objected this opinion, claiming that corporate financing should be facilitated through the financial intermediary function of financial institutions and that the injection of public funds should be the main policy measure to deal with the so-called "credit crunch." In this recognition, the same member argued that the Bank should supply funds only to the banking sector and no such policy measures that directly dealt with corporate financing should be conducted.

While agreeing on the point that the Bank's funds should be provided directly to the financial sector, another member contended that the effect of market operations on the non-financial sector might differ depending on the tools used for the operations. Based on this argument, the member advocated that it deserved further discussion whether the Bank should choose policy tools with the different effects on the non-financial sector in mind. One member supported this opinion.

In the discussion about monetary policy tools, major issues included the soundness of the Bank's assets and the flexibility of market operations. A member raised a point that it should be borne in mind that the fixed portion of the Bank's asset was increasing due partly to the increase in assets reflecting the implementation of prudential policies. Recognizing this problem, the member emphasized that the ongoing review of monetary policy tools should be a good starting point for the Bank to examine how to secure the overall liquidity of its assets. This member expressed the view that, to maintain flexibility of market operations, there was room for better managing the Bank's balance sheet, referring to such options as liquidating the loans to the Deposit Insurance Corporation (DIC) and replacing matured Japanese Government bonds with some short-term instruments.

A different member also expressed concern over the increase in the fixed portion of assets as a result of the implementation of prudential policies. For this member, the question was whether it would be appropriate for a central bank, the assets of which should be sufficiently liquid, to extend long-term funds that would serve as quasi-capital for receiver financial institutions. The member also pointed out that, as the term of an operation would inevitably become longer when the operation was corporate finance-oriented, it was all the more important for the Bank to secure the flexibility to absorb funds from the market and change the contents of assets. The same member additionally raised a question about how to deal with the relation between the supply of longer-term funds and the day-to-day operations controlling the overnight call rate.

A different member emphasized the importance for the Bank to maintain the soundness and sufficient liquidity of its assets on the ground that deterioration of assets of a central bank could lead to concern among market participants over country risk.

V. Remarks by Government Representatives

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

The economy was in a prolonged stagnation and in a very severe situation. Based on this understanding, the Prime Minister had ordered the government to put together an emergency economic package by November 16. Accordingly, the Ministry of Finance, in cooperation with other ministries and agencies, was doing its utmost to draft effective measures for inclusion in the package. The government would, based on a close examination of progress in the implementation of the initial and the first supplementary budget, see to it that the third supplementary budget for fiscal 1998--which would embody the package--adequately address the current economic situation.

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

  1. (1) The Prime Minister had ordered the government at the end of October to put together an emergency economic package. Under this order, the government was striving to draft effective measures by November 16. To ensure positive economic growth in fiscal 1999, the government attached importance to financial system stabilization measures and anti-credit crunch measures. Further, for the real economy front, the government intended to implement policies based on the three principles: prompt effectiveness, smooth permeation of effects, and positive implications for the 21st century.
  2. (2) The government would put its maximum effort into the formulation and expeditious implementation of economic measures. Since there was a possibility that the credit crunch would further intensify in the process of stabilizing the financial system, the government asked the Bank to manage monetary policy appropriately including continued efforts to supply the markets with ample funds.

VI. Votes

At the conclusion of the above discussions, many members supported the following view. Under the deteriorating economic conditions, (1) the Bank should closely monitor the development and effects of the policies to maintain the stability of the financial system, especially the injection of public funds, and of the expected emergency economic stimulus measures of the government; and (2) it should maintain the current decisive easy stance of monetary policy from September, making best use of monetary policy tools with the intention to facilitate corporate financing toward the end of the calendar year and the fiscal year.

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

Chairman's Policy Proposal:

The guideline for money market operations in the intermeeting period would be as follows, and publicized by the attached press release (see Attachment 1)

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 target level of the uncollateralized overnight call rate, which was reduced in September. This was based on the thinking that (1) disadvantages resulted from the extremely low level of interest rates over such a long period should be recognized; (2) the effects of the monetary easing in September on both real economy and the financial system had been unclear; and (3) the low level of interest rates had only resulted in the decrease in the money multiplier.

VII. Summary of Discussions on the Bank's Loans and Other Operation Instruments

A. Summary of Staff Reports

It was likely that the state of corporate financing would be increasingly severe toward the end of the calendar year and the fiscal year. The Staff proposed, to facilitate corporate financing under this situation, the Bank implement the following measures in terms of its loans and other money market operations and/or study how to implement them while paying attention to the soundness of its assets. The Staff would like the Board to decide to announce this intention to the public.

1. Active use of CP repo operations

To enable CP repo operation to be used more actively, the Bank would, effective from November 16, (1) purchase CP with a remaining maturity of up to one year, extended from up to three months; and (2) speed up the process of eligibility evaluation. The Staff proposed that the principal terms and conditions stipulating procedures for conducting this business and internal rules thereunder be revised as necessary to implement those measures. However, the credit-risk standard to evaluate the eligibility of CP and the period of an operation (within three months) would remain unchanged.

2. Establishment of a Temporary Lending Facility to Support Firms' Financing Activities

The Bank would make use of its loans with intention to encourage financial institutions to extend loans to firms. More specifically, the Bank would establish a new lending facility for refinancing of 50 percent of the increase in loans provided by each financial institution during the October-December quarter of the year. The Bank would accept, as collateral, Japanese Government bonds and private firms' debt obligations which the Bank determines eligible. In principle, 50 percent or more of the collateral must be private firms' debt obligations, and lending term should be set so that the maturity date is in the first month of the next fiscal year (April). The applied interest rate should be 0.5 percent per annum. This lending facility would be available by mid-December for financial institutions that have increased the lending amount in October and November. This new facility was a temporary measure designed to facilitate firms' financing activities toward the end of the calendar year and the fiscal year. The Bank would immediately determine details to implement this lending facility.

3. Establishment of a New Market Operation Scheme which Utilizes Corporate Debt Obligations as Eligible Collateral

The Bank would utilize corporate bonds and loans on deeds in its money market operations. Because it was practically difficult to purchase these private debt obligations, the Bank would purchase bills issued by financial institutions through a bidding process against pooled collateral solely composed of corporate bonds and loans on deeds. The Bank would determine details to implement this scheme to introduce it in early 1999.

None of the above three schemes included relaxation of the standard to evaluate the eligibility of collateral nor the central bank's direct financing to private firms. All these schemes aimed at the facilitation of financial activities of firms, which are necessary from macroeconomic point of view, while maintaining the soundness of the central bank's assets.

B.Summary of Discussions by the Policy Board

Many members supported the schemes proposed by the Staff and the proposal to announce them to the public.

First, the active use of CP repo operations was discussed. A member forecasted increasingly severe financing conditions for Japanese firms toward the year-end, especially those in the overseas market, and expected shifts from the issuance of CP and bonds in the overseas market to the issuance of CP in the domestic market. Another member commented that more active CP repo operations were likely to have positive effects in light of the past performance. In such recognition, members, including these two, agreed that the Bank used CP repo operation more actively.

Most members were also of the view that it was appropriate to establish the temporary facility to support firms' financing activities and the new operation scheme using corporate debt obligations as collateral. A few members commended these schemes. They noted that these schemes were well thought of, prudently reflecting on how far the central bank could do in terms of the method of operations including eligibility of assets as collateral and about the effect the Bank's operations bring about to the non-financial sector. One of these members remarked that these schemes would not hurt the soundness of the Bank's assets, noting that this was because (1) the maturity of the Bank's credit provided under these schemes was about three months, and the resulting lengthening of the average maturity of the Bank's assets was limited; and (2) these schemes effectively employ collateral acceptable under the existing standard, and thus the Bank would not obtain assets with more credit risks.

Most members agreed to make public all the above schemes, as a package, including those in preparation. These members listed the reasons for this as follows. First, it was not appropriate to postpone making the schemes public in light of the basic thinking to ease concern over corporate financing toward the end of the calendar year and the fiscal year. Second, as these schemes were intended, to some extent, to affect the activities of financial institutions, earlier announcement was necessary to make financial institutions ready. The members shared the idea that, in announcing the schemes, presentation should be carefully made to avoid leading to a misunderstanding that the Bank would support corporate financing directly.

In the discussions, a member objected the Staff's proposals except for the active use of CP repo operations. This member listed the following reasons. First, any measures to support loans to firms on deeds might delay the restructuring of firms. Second, the public might have an impression that the Bank--the last resort of the financial system--would do everything that it could do. Third, only the active use of CP repo operations, which was already prepared, should be announced, and other schemes in preparation should be made public one by one after they were officially decided. Fourth, traditional policy measures should be employed when easier monetary policy was necessary. Furthermore, the same member proposed an alternative scheme. The member emphasized that it was desirable to use bill operations more actively, rather than the scheme using loans on deeds as collateral. According to this member, a reduction in the stamp duty would enable the Bank to use more actively bill operations, because it would facilitate transactions in the bill market through replacement of loans on deeds with loans on bills.

C.Remarks by Government Representatives

The representative from the Economic Planning Agency expressed a hope that the schemes discussed would be utilized actively as they would certainly support corporate finance.

D.Votes

1. The staff's proposal on CP repo operations

With regard to the active use of CP repo operations, the Board unanimously decided to revise the principle terms and conditions stipulating procedures for conducting the business and internal rules threreunder to enable the Bank to purchase CP with a remaining maturity of up to one year, extended from up to three months.

2. Public statement

The members did not share a common opinion about how to make public the three schemes discussed including the active use of CP repo operations. Therefore, two proposals were put to the vote.

Mr. Nakahara proposed a draft public statement that only included the active use of CP repo operations. This proposal was defeated with one vote in favor and eight against.

To reflect the majority view, the chairman proposed an alternative draft public statement (see Attachment 2).

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 on the following grounds. First, the establishment of the temporary lending facility contained a risk that the amount of the Bank's loan to financial institutions would increase rapidly and steadily. Second, the establishment of the scheme using corporate debt obligations as collateral needed further discussion as the scheme would become a permanent tool. Third, establishing the above two schemes might lead to (1) an impression of the public that the central bank would step into the business area of private financial institutions and (2) escalated requests to the Bank for market operations with higher-risk assets. Fourth, the Bank should employ the traditional policy measures if easier monetary policy was necessary.

VIII. 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 November 17, 1998 in the Monthly Report of Recent Economic and Financial Developments (the "Ivory Paper," consisting of "The Bank's View" and "The Background").7

  1. 7The original full text, written in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on November 17, 1998 together with the English version of "The Bank's View." The English version of "The Background" was published on November 30, 1998.

Attachment 1

For immediate release

November 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.


Attachment 2

For immediate release

November 13, 1998
Bank of Japan

Introduction of New Measures for Money Market Operations in Response to the Recent
Situations in Firms' Financing Activities

The Bank of Japan has been maintaining quite accommodative monetary policy stance in order to prevent further deterioration of economic conditions. In conducting its day-to-day money market operations, the Bank of Japan, in consideration of the necessity to facilitate firms' financing activities, has been decisive in providing ample funds through several measures such as CP repo operations. However, the lending attitude of private financial institutions has generally tightened as they face a severe hardship in fund-raising and the worsening performances of borrowers. In addition, capital market participants have become more sensitive to credit risks. Therefore, borrowers will likely to encounter more difficulties in raising funds, especially toward the end of this calendar year and the end of this fiscal year (March).

In light of these situations, the Monetary Policy Meeting of the Policy Board has today, by majority vote, decided to take measures, as described below, to contribute to facilitating firms' financing activities, both in the lending market and the capital market, while maintaining the soundness of the Bank's balance sheet.

1. Expansion of CP repo operations

The Bank of Japan, in its day-to-day money market operations, will expand the size of CP repo by enlarging the scope of eligible CPs and speeding up the process of eligibility evaluation.1 These measures will be introduced on November 16, 1998.

2. Establishment of a temporary lending facility to support firms' financing activities

Toward the end of this calendar year and the end of this fiscal year, the Bank of Japan, with intent to encourage financial institutions to make loans to firms, will establish a new lending facility for refinancing 50% of the increase in loans provided by each financial institution during the fourth quarter of the year (October to December), when the financial institutions' lending generally shows a seasonal increase. The Bank of Japan will accept Japanese Government bonds as collateral, as well as private corporations' debt obligations which the Bank determines eligible (bills <including CPs>, corporate bonds and loans on deeds). In principle, 50% or more of the collateral must be private corporations' debt obligations and the lending term shall be set so that the maturity date is in the first month of the next fiscal year (April). The applied interest rate shall be 0.5%. This lending facility will be available by mid December for financial institutions that have increased the lending amount in October and November.

This new facility is a temporary measure designed to facilitate firms' financing activities toward the end of this calendar year and the end of this fiscal year. The Bank of Japan will immediately focus on how to implement this lending facility and announce this measure in detail, upon decision by the Policy Board, as soon as the necessary arrangements have been made.

3. Establishment of a new market operation scheme which utilizes corporate debt obligations as eligible collateral

In order to further utilize private corporations' debt obligations in its money market operations, the Bank of Japan will study the feasibility of a new operation scheme. In this scheme, the Bank will purchase bills issued by financial institutions through a bidding process against pooled collateral solely composed of corporate bonds and loans on deeds. The Bank of Japan will use this scheme as a new measure to provide funds, upon decision by the Policy Board, as soon as the necessary arrangements have been made.

  1. Note:1.Present condition : the maturity date of the eligible CP must be within three months from the day after purchase
    New condition : the maturity date of the eligible CP must be within one year from the day after purchase