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Minutes of the Monetary Policy Meeting

on December 15, 1998
(English translation prepared by the Bank staff based on the Japanese original)

February 17, 1999
Bank of Japan

A Monetary Policy Meeting of the Bank of Japan Policy Board was held in the Head Office of the Bank of Japan in Tokyo on Tuesday, December 15, 1998, from 9:01 a.m. to 12:19 p.m., and from 1:10 p.m. to 3:28 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 Representative Present
Mr. S. Tanigaki, State Secretary for Finance, Ministry of Finance 2
Mr. H. Imai, Parliamentary Vice Minister, Economic Planning Agency 2
Mr. S. Shimpo, Director-General of the Research Bureau, Economic Planning Agency 3

Reporting Staff
Mr. I. Kuroda, Executive Director
Mr. M. Matsushima, Executive Director
Mr. I. Yamashita, Director, Financial Markets Department
Mr. T. Murakami, Director, International Department
Mr. S. Murayama, Director, Research and Statistics Department
Mr. H. Hayakawa, Research and Statistics Department
Mr. 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. H. Tanaka, Chief Manager, Planning Division 2, Policy Planning Office 4
Mr. K. Momma, Manager, Policy Planning Office
Mr. T. Kurihara, Manager, Policy Planning Office
Mr. S. Ushiro, Manager, Financial Markets Department 4

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on February 12, 1999, 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. Messrs. Tanigaki and Imai were present from 9:01 a.m. to 12:19 p.m.
  3. Mr. Shimpo was present from 1:10 p.m. to 3:28 p.m.
  4. Messrs. Tanaka and Ushiro were present from 9:01 a.m. to 9:25 a.m.

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

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

II. Discussion and Decision on a Revision of the Rules and Criteria for the Selection of Bidders in the Bank's Money Market Operations Using Treasury Bills, Financing Bills, and Commercial Paper

A. Staff Proposal

The Bank's staff made the following proposals with a view to improving the transparency and efficiency of money market operations.

  1. (1) That the rules and criteria for selecting bidders in the Bank's money market operations using Treasury bills (TBs), financing bills (FBs), and commercial paper (CP), should be revised in line with the revision of its repo operations in June 1998.
  2. (2) That a competitive auction system should be introduced for FB operations. The staff also proposed publishing the new rules and criteria, the outline of which was as follows.

1. The Bank will first state clearly the objective of its market operations and the functions expected of bidders, and then select the bidders from among applicants.

  1. (a) The objective of market operations: Flexible and effective implementation of market operations.
  2. (b) Functions expected of bidders:
    1. (i) Active bidding on the Bank's offers.
    2. (ii) Expeditious and accurate processing of transactions.
    3. (iii) Provision of market information or analysis useful to the Bank in its implementation of monetary policy.

2. The Bank will select 50 institutions as common bidders for its TB and FB operations (previously there were 46 bidders for TB operations and six bidders for FB operations). It will also select 35 bidders for its CP repo operations (previously there were 30).

3. The Bank will select bidders based on the following criteria.

  1. (a) They must be depository financial institutions, securities companies, securities finance companies, or tanshi companies (money market broker-cum-dealers) that hold current accounts at the Bank's head office.
  2. (b) They must be on-line participants in both the BOJ-NET (Bank of Japan Financial Network System) funds transfer system and JGS (Japanese government securities) services.
  3. (c) They must be direct participants in the JGS book-entry system.
  4. (d) They must be of adequate creditworthiness, that is, they must satisfy certain capital ratios.
  5. (e) They must be active players in the respective markets. The roles they play will be evaluated based on four factors: (1) total value of transactions; (2) average transaction outstanding (average value outstanding of repurchase agreements on TBs and other transactions); (3) number of transaction counterparties; and (4) amount of information disclosed and disseminated to other market participants.
  6. (f) For those who have previously bid in the Bank's operations, the average value of past successful bids per offer will be considered.

Criteria (b) and (c) will not be applied to CP repo operations. Criteria (e) and (f) will be applied only in cases where the number of applicants for TB and FB operations or for CP repo operations exceeds the number of bidders to be selected.

4. FBs will be sold through yield auctions; yields will be determined through competitive bids instead of being fixed by the Bank.

B. Discussion and Vote on the Staff's Proposal

Following the staff's explanation, one member commented that the proposal was appropriate in that the revision of the rules would clarify the scope of the Bank's discretion and thereby facilitate legal and regulatory compliance. Another member remarked that the selling of FBs through auctions was in line with the plan to introduce a public auction system for FB issuance.

At the end of the discussion, the proposal was put to the vote. The Board unanimously approved the proposal and decided to publish the rules and criteria immediately.

III. Summary of Staff Reports on Economic and Financial Developments 5

A. Money Market Operations in the Intermeeting Period

Market operations in the period since the previous meeting on November 27 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 uncollateralized overnight call rate was generally at the 0.2-0.25 percent level throughout the intermeeting period. The weighted average of the uncollateralized overnight call rate in the current reserve maintenance period (from November 16 to December 15) stood at 0.22 percent as of December 14, the day before the meeting.

The uncollateralized overnight call rate rose temporarily in the following three periods: (1) from the end of November to early December; (2) December 7 and 8 when market participants secured ample on-hand liquidity, facing the introduction of the real-time gross settlement (RTGS) scheme for some transactions in the Foreign Exchange Yen Clearing System; and (3) on December 14, immediately after the decision concerning the temporary nationalization of the Nippon Credit Bank. During each of these periods, the Bank injected ample funds into the market. The Bank supplied an amount of funds smaller than the market's demand when considered necessary on intermeeting business days other than (1)-(3) above, against the background of the continued advantage of fund-raisers over fund-investors.

As for term instruments, interest rates slightly increased in late November partly due to the fact that market participants actively raised yen funds maturing beyond the end of the calendar year. However, the interest rates decreased gradually from the beginning of December. This was because Japanese financial institutions secured funds maturing beyond the year-end as necessary thanks to the Bank's continued active provision of funds maturing beyond the year-end (as of December 14, the amount outstanding of such funds supplied through market operations was 18.2 trillion yen, compared to 12.0 trillion yen as of the same day of the previous year). In these circumstances, the market's concern seemed to have shifted from fund-raising for the end of the calendar year to that for the end of the fiscal year (March 1999).

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

1. Developments in foreign exchange markets

The sale of the U.S. dollar for other currencies had been dominant in the foreign exchange markets since the previous meeting. The yen and the deutsche mark both rose against the U.S. dollar from late November, and Asian currencies also trended to appreciate against the U.S. dollar.

The market attributed this depreciation of the U.S. dollar to the following factors: (1) anxiety about the worsening economic and financial conditions in Latin America (e.g., the delay in the fiscal reform in Brazil and the decline in prices of primary products); (2) uncertainty about the future business performance of U.S. firms (deterioration in corporate profits of multinational firms and widespread moves toward labor cuts at large firms); (3) the movement toward impeaching President Clinton in the U.S. Congress; and (4) optimism about a successful introduction of the euro in January 1999.

2. Overseas economic and financial developments

In the United States, the economy, especially household spending, continued to expand moderately. However, production continued to be on a downward trend reflecting the decrease in external demand. Especially in the manufacturing sector, economic indicators showed deterioration in business sentiment and employment conditions. Private consumption was so robust that the savings rate turned negative; sluggish corporate profits and a low growth rate in wages per hour were observed. Considering these circumstances, the risk of the economy showing adverse developments seemed to have increased.

As for financial conditions in the United States, stock prices continued to record high levels. As a result, the price-earnings ratio was over 30, and this made many market participants cautious. The yield differential between low-rated corporate bonds and Treasury bonds remained relatively large, suggesting the continued instability of the market.

In East Asian countries, both external and domestic demand remained sluggish, and their economies continued to record negative growth. In these circumstances, some of these countries were continuing monetary easing against the background of the fall in interest rates in other countries. Deterioration in economic conditions overall seemed to be moderating.

On December 3, the eleven central banks of the members of the European Monetary Union (EMU) conducted a coordinated interest rate cut, and the benchmark rates were lowered to 3.0 percent with the exception of that of one country. Consequently, interbank interest rates of the EMU member countries converged to the 3.3-3.4 percent level. The European Central Bank (ECB) stated that"the joint reduction in interest rates has to be seen as a de facto decision on the level of interest rates with which the ESCB [European System of Central Banks] will start Stage Three of Monetary Union and which it intends to maintain for the foreseeable future."

C. Economic and Financial Developments in Japan

1. Economic developments

As for final demand, business fixed investment had been declining significantly, and housing investment continued to be sluggish. In addition, private consumption showed some weakness. Meanwhile, exports were on a moderate upward trend, and public investment had started to increase noticeably. Under such economic conditions, some progress in inventory adjustment, especially in durable goods, was made and the decline in production was slowing. With regard to prices, due to the continued expansion in the output gap, the wholesale price index was on a downtrend, and the corporate service price index remained low. Consumer price index, excluding a rise in prices of perishables, was basically weak.

In view of the above developments, it could be concluded that, even though economic conditions continued to worsen, the pace of the deterioration slowed. Furthermore, due to the considerable progress in firms' procurement of funds maturing beyond the end of the calendar year, the previously intensified uncertainty about the business prospects was somewhat easing. However, corporate profits were decreasing, and firms' spending activities were weak due to some remaining uncertainty about the availability of funds toward the end of the fiscal year. Reflecting this, employment and wages were declining, and consumer sentiment was becoming even more cautious. In this environment, a recovery in private demand could hardly be expected.

With regard to the economic outlook, including the effects of the implementation of the third supplementary budget based on the emergency economic package released on November 16, public investment was expected to underpin the economy until the first half of fiscal 1999. However, considering the current low level of economic activity, it was highly likely that the increase in public investment would have a limited effect on private demand. Furthermore, the current appreciation of the yen would act as a factor to reduce corporate profits. In these circumstances, it was expected that (1) firms would maintain their restrictive stance on personnel expenses; (2) household income conditions would continue to worsen; and (3) the growing anxiety of households about the future would persist. Hence, recovery in private consumption was highly unlikely for the time being.

In the longer perspective, the effect of the continued decline in prices required monitoring. Given the sluggishness of private demand, a distinct narrowing in the output gap could hardly be expected. In this environment, if the effect of the appreciation of the yen surfaced, a gradual acceleration of the decline in overall prices might be possible.

2. Financial developments

Financial institutions and firms which were previously suffering from severe fund-raising conditions made significant progress in procuring year-end funds, and the tension in the money markets was gradually subsiding. However, financial institutions still expressed strong anxiety about the procurement of funds over the fiscal year-end (March 1999), and market participants' concern was shifting from the end of the calendar year to the end of the fiscal year.

The Japan premium on three-month contracts recently decreased to around 0.3 percent from the peak of around 0.7 percent in early November, as Japanese banks were successful in raising foreign currency funds maturing beyond the end of the calendar year, by converting the yen into foreign currency. However, spot rates on Euro-yen deposits --especially on long-term contracts maturing beyond the fiscal year-end--remained high, suggesting strong concern among market participants over liquidity risk.

Long-term interest rates continued to surge from late November, and the yield curve was pushed back to the level just before the monetary easing of September 9, 1998. Many market participants attributed this to the worsening of the supply-demand balance of Japanese government bonds. This had been caused by the planned increase in their issuance, and the decrease in the amount of newly issued ones absorbed by the Trust Fund Bureau and its suspension of their purchase from the market. However, considering the fact that stock prices recovered to the level recorded in early September, there seemed to be some reversal in market sentiment, which had earlier been extremely pessimistic. For example, in October, when long-term interest rates marked the record low, implied forward rates of yen-yen swaps on one-year contracts starting nine years later declined to below 2 percent. This low level was hardly compatible with the potential growth rate of the economy, and there seemed to have been extremely bullish perspectives in the bond market.

The expansion of the credit guarantee system seemed to have facilitated lending by Japanese private banks. In addition, the positive effects of the expansion of CP repo operations were becoming clear, and CP issuance was steadily increasing as well. Nevertheless, firms, especially those with low credit standings, were still considered to face severe fund-raising conditions.

  1. 5Reports were made based on information available at the time of the meeting.

IV. 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 judged that the pace of economic deterioration had moderated. Their judgement was based on economic developments such as the surge in public investment and the leveling out of the sharp decline in industrial production.

As other factors moderating the economic deterioration, many members cited the effects of various financial measures such as the expansion of the credit guarantee system by the government; and the supply of ample funds and the introduction of new measures to facilitate firms' financing activities by the Bank.

With regard to public investment, some members were of the opinion that the effects of the comprehensive economic stimulus package released on April 24 were materializing very clearly and were therefore underpinning the economy. One of these members remarked that public investment could be expected to remain high even after the turn of the year, with the implementation of public works scheduled for the first half of the year 1999 as part of the execution of the emergency economic package.

As for exports, a different member considered their upward trend as an additional demand factor.

Further, on household expenditure, several members expressed hopes concerning developments in private consumption, saying that a recovery could be expected if manufacturers and distributors were able to grasp exactly what consumers wanted to buy. This hope was based on (1) the steady sales of some new models of household electrical appliances and"mini-cars" (up to 660cc displacement cars), and (2) the successful sales promotion campaign staged by supermarkets, in which they offered a five percent discount, equivalent to the consumption tax rate. On housing investment, a different member judged that mainly construction starts of owner-occupied houses had hit bottom and was moving at a low level.

With the above final demand developments, one member commented that the trend in production had changed from a rapid decline to a levelling-out. This, according to the member, could lead to the judgment that economic deterioration had moderated, at least temporarily. Another member remarked that it could be regarded favorable that the cut in production had finally come in line with the contraction in demand, and that reduction in inventories had come under way.

Many members, while judging that the pace of economic deterioration had moderated, also expressed their cautious views on the prospects of the economy as a whole.

With regard to business fixed investment, members shared the view that the current downward trend would continue for a while, given the decrease in corporate profits. One member projected that business fixed investment for fiscal 1999 could be less than that for fiscal 1998.

Turning to employment and income conditions, many members expressed the view that a further deterioration would restrain household expenditure to a great extent, and therefore the prospects for economic developments overall required attention, although a few favorable developments had been observed recently. One member expressing this view saw the outlook for employment as severe. This member cited the results of the Bank's December 1998 Tankan survey that job offers by principal enterprises to new graduates might possibly decline by approximately 200 thousand in fiscal 1999 from the previous year--a reduction of 20 percent. The member commented that this would aggravate the already difficult employment situation, in which the annual average of the number of new graduates still seeking jobs was estimated to reach around 150 to 160 thousand in 1998.

As for prices, one member commented on the continued decline in commodity prices such as iron and steel, as well as that in domestic wholesale prices. The member claimed that, in the current situation in which corporate performance was deteriorating, price developments required due attention as factors depressing sales and profits. Another member was concerned that, if the expected rate of inflation were revised downward as a consequence of the downward trend in prices, real interest rates (nominal interest rate minus the expected rate of inflation) would increase, possibly dampening economic activity.

Following the above discussion on economic developments, a few members gave their opinions on the indexes of business conditions released by the Economic Planning Agency, of which the diffusion-index coincident indicator had marked over 50 for two consecutive months, and the composite-index coincident indicator had not deteriorated for four consecutive months. They judged that these figures, although usually taken as signs of an economic recovery, did not necessarily provide grounds, this time, for concluding that the economy had recovered. They considered these figures merely reflected improvements in components related to production, reflecting the increase in exogenous demand (public investment and exports). One of these members added that developments in long-term leading indicators also showed that the economy would not bottom out for at least another eight to eleven months. Another member also claimed that the economy remained in an adjustment phase, calling attention to the high inventory-sales ratio.

A different member commented that the economy seemed to have recovered to its level in September 1998. According to this member, factors that had caused a worsening of business conditions since September 1998 included (1) the heightened anxiety about liquidity risk in the financial markets at home and abroad; (2) the intensifying uncertainty over the outlook for corporate performance, reflecting the rise of the yen since October 1998; and (3) the weaker-than-expected private consumption. The member judged that the conditions behind these factors had significantly changed for the better for the following three reasons. First, the heightened anxiety about the financial markets had been largely alleviated by developments at home and abroad. Examples were, at home, the expansion of the credit guarantee system, and the implementation of financial system stabilization measures set out by the government, and the financial support by the Bank; and abroad, monetary easing by the Board of Governors of the Federal Reserve System (FRB), and the financial assistance package extended to Brazil by the International Monetary Fund (IMF). Second, the negative effects deriving from the rise of the yen could be cancelled out to some extent by the increase in public investment in the emergency economic package, at least temporarily. Third, private consumption was showing some recovery. However, the same member added that the current economic situation should not be evaluated too optimistically because, although the economy had recovered to the level of September 1998, that level itself had been low, below the potential growth rate at that time.

Many other members, although acknowledging that the economy was close to the bottom and that the possibility of sliding into a further deterioration was small, evaluated the current economic situation more harshly. Their harsher view stemmed from the presence of a large output gap and the lack of favorable factors pushing the economy back onto a recovery path.

B. The Economic Outlook

On the economic outlook, many members held the view that, with the effects of fiscal spending materializing and the financial markets maintaining stability reflecting various measures on the financial front, economic deterioration would cease temporarily toward and during the first half of 1999. This view was more or less the same as the general view at the last meeting on November 27. The majority of members, however, were cautious in forecasting for the economy thereafter, saying that there still existed a strong downside risk.

Most members agreed that public investment and exports would continue to underpin the economy. On this point, some members noted the following as developments requiring attention: (1) depletion of the financial resources of local governments; and (2) a rise of more than 20 percent in the value of the yen against the U.S. dollar since the summer of 1998.

In relation to developments in exports, several members expressed their views on the considerable effects the economic developments abroad could have on Japan's economic outlook.

First, many members claimed that a deceleration in the U.S. economy would be the largest risk to the Japanese economy.

One of the members holding the above view was doubtful whether the growth in the U.S. economy would continue in the long run. This member remarked that (1) the current U.S. economy showed continued firmness in household expenditure, but negative signs were apparent in manufacturing industry, and that (2) the savings rate turned negative and the current deficit was accumulating. The same member referred to the extremely vulnerable state of Japan's economy, which might not be able to endure shocks, such as a fall in U.S. stock prices or the U.S. dollar arising from a reversal in the current upward trend in the U.S. economy.

A different member was not too optimistic about the prevailing view regarding the outlook for the global economy, which projected that the global economy as a whole would expand slightly, with economic growth decelerating in the United States and the euro area, and GDP in the Asian countries recovering to the level in 1997. This member called attention to the point that, if the Asian economies did not recover as projected, external demand for Japanese goods could decrease.

On the outlook for the Asian economy, one member expressed a very cautious view, saying that the South-East Asian countries (1) had accumulated excessive capital stock, which would require several years of adjustment; and (2) had relied heavily on exports for the past few years, with the region's ratio of gross export value to nominal GDP four times larger than that of Japan. The same member also commented on the European economy that financial and economic developments also continued to require attention, considering the slowdown in economic activities and the huge exposure of European financial institutions to the developing countries and countries in transition, such as some Asian and Latin American countries, and to Russia.

The focus of the discussion turned to household expenditure. Members exchanged opinions on the evaluation of the current situation, in which there were feeble signs of a recovery in private consumption while employment and income conditions continued to worsen.

One member judged that developments in private consumption did not offer any grounds for an optimistic outlook for the following reasons: (1) the recent steady sales in household electrical appliances were merely a reflection of demand to renew goods bought in great quantity during the"bubble" period in the late 1980s, and such demand would only last until the middle of 1999; (2) the cycle of replacement demand of automobiles would reach a peak in 2001; and (3) consumption in high income brackets had recently shown a substantial drop. A different member considered that the recent positive signs in household expenditure might be merely a front-loading of demand. Further, another member commented that a number of favorable developments observed were temporary and their effects would therefore be limited, and given the deterioration in corporate profits and employment and income conditions, the outlook was not bright. Having said so, however, this member added that it would be premature to conclude that there was no chance of a recovery in consumption. The member commented that improvement in the labor market was not the only channel for a recovering of consumer confidence and that a slight increase in aggregated demand, which could be stimulated mainly by public works, could trigger a recovery of consumer confidence.

Concerning the outlook for Japan's economy, one member held an even more cautious view than those outlined above. The member projected that in fiscal 1999 firms would no longer be able to hope for capital gains on stocks, and would therefore have to go through a drastic restructuring by tackling the long-unsolved problems of excessive capital stock and employment. This member continued that Japan's economy would enter a phase of severe contraction if such drastic restructuring took place toward and during fiscal 1999, since additional demand from the Asian and European economies could not be expected. The member projected that nominal GDP for fiscal 1999 could decline as much as 5 percent from a year earlier.

In the meeting, members also actively exchanged opinions on the key to an economic recovery.

On this issue, many members agreed that progress in structural adjustment would be the key to an economic recovery. Specifically, one member pointed out that a recovery in corporate profits would be crucial in bringing about positive developments in private consumption and business fixed investment, either of which could trigger an economic recovery. This member then turned to the question of what factors could ignite a recovery in corporate profits while prices were expected to follow a downward trend. In this member's opinion, technological innovation across industries could be a strong force. The member also noted that there had been examples in the past where a change in market environment triggered technological innovation. Taking account of the current economic situation, however, the member considered neither scenario likely. The member concluded that, realistically speaking, structural adjustment would proceed only if firms, in parallel with financial institutions' disposal of nonperforming loans, continued to reduce costs through drastic restructuring. This, together with other policy measures, would gradually build a foundation for an economic recovery.

Another member also admitted that cost reduction by firms through restructuring would be the most realistic factor for an economic recovery. The member reached this conclusion because there was little prospect of a positive turn in the cycle of production, income, and expenditure, and progress in technological innovation. The member also commented that adjustment of excessive capital stock and employment would be required to raise the very low profitability of Japanese firms. Having said so, however, the member continued that, in the short run, the adjustment process would be extremely harsh, although the restructuring process would result in positive outcomes in the long run.

Several other members stressed the importance of structural adjustment on the grounds that there were not much room for additional fiscal measures to support the economy. One member commented that the expansion of the credit guarantee system, and the extension of financial assistance by the Deposit Insurance Corporation (DIC) currently taking place, would add to the future fiscal burden, which was already heavy as a result of various economic measures and the emergency economic package. Another member claimed that, if the use of massive funds through various economic measures proved unsuccessful in stimulating the economy, there should be no further use of fiscal funds to create public demand, but they should rather be used on the supply side of the economy, for example for the adjustment of capital stock and employment. In relation to this, a different member stated that it would be important to establish a social safety net for the unemployed, because employment adjustment was inevitable.

Concerning the establishment of a social safety net for the unemployed, a different member responded negatively, referring to examples in Europe. In this member's view, such a system--although it might be considered necessary to prepare for the increase in the number of the unemployed during the restructuring process--could weaken the dynamism of the economy by discouraging self-reliance among the unemployed or by holding back the birth of new industries and technology.

In relation to the scenario of realizing an economic recovery mainly through structural adjustment, another member emphasized that, although restructuring was an inevitable process for firms, a full-scale recovery in corporate profits could not be expected based solely on this process. The member stressed that a simultaneous effort to create a certain degree of demand was necessary. This member added that it was difficult to conduct such a process during a period of deterioration in the economy, and a halt in the deterioration of the economy would be a prerequisite for corporate restructuring.

The member who raised the issue of structural adjustment agreed on the need to take various policy measures to underpin demand, arguing that, if every economic entity simultaneously reduced costs through, for example, employment cuts, the economy as a whole would contract, leaving no chance of an economic recovery. However, saying that a large output gap existed in a great number of industries, and without structural adjustment, including weeding-out of feeble firms, their capital-profit ratio would not improve, this member again voiced the view that an economic recovery could not be hoped for without a dynamic reorganization of industries.

C. Financial Developments

As for financial developments, members shared the view that stability was being restored in the financial markets as regards the procurement of funds maturing beyond the end of the calendar year. As the background to this development, each member cited the effects of various measures, which were materializing to a certain degree. These were (1) the expansion of the credit guarantee system; (2) the financial system stabilization measures set out by the government, including the use of public funds to strengthen the capital base of financial institutions; and (3) measures set out by the Bank, including the supply of ample funds and the introduction of new measures to facilitate firms' financing activities.

One member, however, pointed out that market participants were already shifting their attention to financing conditions around the end of the fiscal year, March 1999, and that it was too early to hold an optimistic view on the development of corporate financing conditions. The member specifically noted that (1) many firms were still anxious about their financing conditions toward the fiscal year-end, especially because of the deterioration in their business performance; and (2) it was not yet clear to what extent the risk-taking ability of financial institutions would be strengthened if they accepted public funds. Another member commented that financing conditions of individual financial institutions and firms required further attention.

With respect to financial system stabilization measures, there were some comments on the effects of the temporary nationalization of the Nippon Credit Bank. Several members commented that this case had proved the smooth and proper functioning of the new framework to stabilize the financial system, and hoped this would lead to a recovery of market confidence in the financial system at home and abroad. On the other hand, several other members pointed out that lending by financial institutions might decline further, if financial institutions started to make stronger efforts to improve their balance sheet after observing the case of the Nippon Credit Bank.

In addition, some remarks were made about the interpretation of current developments in stock prices and long-term interest rates.

One member commented on stock prices, which had temporarily recovered and moved above 15,000 yen after hitting bottom in early October 1998, but were again on a declining trend. This member remarked that these stock price developments did not provide any evidence that the implementation of various economic measures had led to an upturn in the economy. The member added that developments in the prices of banking stocks also gave no sign of a recovery of the financial sector.

The same member then commented on the current rise in the long-term interest rates. The member understood that this rising trend possibly indicated that the extremely pessimistic economic outlook was being revised as a result of the implementation of the various policy measures. The member continued that, if this understanding was correct, the negative effect of the rising long-term interest rates on the economy would be limited. The member also commented that if the economy, after hitting bottom, was unable to start a self-sustained recovery, the possibility of a surge in long-term interest rates would be small. A different member expressed the opinion that the rise in the yields of Japanese government bonds reflected a swing back from the earlier intensified"flight to quality." Many members considered that a further surge in the long-term interest rates was unlikely. Many members, however, were anxious that, if the rise in long-term interest rates continued and caused a further appreciation of the yen, the negative effects on the economy would become considerable.

V. 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 thinking on monetary policy for the immediate future.

Many members acknowledged that (1) the economic deterioration was moderating as a result of macroeconomic policies and liquidity support for financial institutions; but (2) there was no definite sign of economic recovery.

Based on this view, the majority of members asserted that it was appropriate to maintain the current easy stance on monetary policy for the immediate future. And in doing so, the Bank should keep a close watch on the permeation of the effects of the various measures implemented and the spreading of the favorable developments recently observed in some parts of the economy.

Many members also expressed the view that the Bank should contribute to stabilizing the financial market by implementing new measures decided on November 13, and facilitating corporate fund-raising for the end of the calendar year and the fiscal year. Specifically, following its expansion of CP repo operations, the Bank should bring into effect before the end of the year the temporary lending facility currently under preparation, and also materialize and implement the new market operation scheme utilizing corporate debt obligations as eligible collateral.

Regarding financial market developments, many members emphasized that the continuing rise in long-term interest rates warranted careful attention.

Apart from this majority view, one member proposed, as in the previous meeting, a further easing of the guideline for money market operations--an additional lowering of the target call rate. The member stated that (1) in fiscal 1999, firms would be impelled to carry out drastic restructuring and, as a result, the economy might fall into a very difficult situation, experiencing a further contraction of nominal GDP under a persistently wide output gap; and (2) there was little room for additional fiscal policy. Based on this perception, the member again emphasized that the lesson learnt from the Great Depression of the United States was to employ every means to avoid declines in the prices of goods and service. Therefore, it was a suitable timing for the Bank to implement an additional monetary easing, so that its effects would materialize in the second half of 1999, when the downside risks to the economy were anticipated to increase.

The member who took the position that the monetary easing of September 9 was unnecessary commented that, in view of the current business conditions of firms, restructuring centered on employment reduction was unavoidable. This member argued that, while it was necessary to establish a social safety net against the resulting unemployment, this was not an area in which monetary policy could play a role.

The member also cited two developments as having raised doubts about the effectiveness of the September easing: (1) the results of the December 1998 Tankan suggested a continued deterioration in corporate financing-related diffusion indexes (DIs), such as the financial position DI and the lending attitude of financial institutions DI; and (2) the average contracted interest rate on loans and discounts declined only slightly in September and October and, as for long-term rates, the average contracted interest rates showed a slight increase.

In response to the above doubts, a member who deemed it appropriate to maintain the current easy stance on monetary policy remarked that financial institutions were setting interest rates rigorously according to the borrower's creditworthiness. The member thus argued that, against the background of worsening business performance, it was inevitable that they were raising lending rates reflecting increased credit risks. The member added that, if the Bank had not implemented monetary easing in September, lending rates would very likely have risen more significantly. Another member consented to this opinion, stating that, while it was difficult to solve the credit risk problem solely with a reduction of the overnight call rate, the policy change was significant in the sense that interest rates would have increased more conspicuously without it.

VI. Remarks by Government Representatives

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

  1. (1) The economy as a whole remained in a very severe situation. To escape the slump, the government decided on November 16 an emergency economic package having total expenditure of well over 20 trillion yen (including the permanent tax reduction). The Diet passed on December 11 the third supplementary budget for fiscal 1998, which was necessary to implement the package.
  2. (2) As a result, issuance of government debt in fiscal 1998 increased by 12.3 trillion yen to a total of 34 trillion yen, which pushed up the ratio of new issuance of government debt to the total budget to 38.6 percent. Fiscal structural reform continued to be an important issue, but, to place top priority on achieving an economic recovery, a law to suspend the Fiscal Structural Reform Law was passed in the latest Diet session. In fiscal policy management for the immediate future, the government considered it important to implement measures uninterruptedly from the end of fiscal 1998 into fiscal 1999. Therefore, the government would work to construct the fiscal 1999 budget following the third supplementary budget, essentially forming a"15-month budget," to address the current economic situation.

The representative from the Economic Planning Agency made the following remarks, referring mainly to the outline of the government's Monthly Economic Report of December.

  1. (1) The economy was in a prolonged slump and in a very severe situation. However, signs of change were detected, with some developments indicating mild improvements while others implied continued deterioration. The government would do its utmost to terminate the vicious circle by firmly promoting implementation of policies including the emergency economic package decided on November 16. Also, the government hoped that the Bank would conduct monetary policy appropriately.
  2. (2) On the financial front, there had been news that the expanded credit guarantee programs had alleviated the credit crunch somewhat. However, the December 1998 Tankan showed that financial institutions' lending attitude had not changed. Considering the fact that concern about financial system stability had not been completely dispelled, it could be judged that there remained the risk of financial institutions' lending stance becoming stricter again. Therefore, the government requested that the Bank continue to provide ample liquidity in the management of monetary policy.

VII. Votes

At the conclusion of the above discussions, the majority of members agreed that the deterioration in economic conditions appeared to be slowing down due partly to the effects of monetary and fiscal policies. However, there was no definite evidence or information of this leading to an economic recovery, and the financial market still contained some element of instability. Therefore, the Bank should maintain its current decisive easy stance on monetary policy for the immediate future, while monitoring closely the permeation of policy effects and further progress in financial system revitalization.

Meanwhile, a proposal claiming a further reduction in the target rate for money market operations was made giving consideration to the fact that fiscal 1999 would be a critical period for firms' restructuring, and that this might place the economy in an extremely severe situation. Therefore, two policy proposals were put to the vote.

Mr. Nakahara proposed the following as the policy directive in the intermeeting period ahead:

The Bank would encourage the uncollateralized overnight call rate to move on average around 0.10 percent, aiming in the medium term at raising the percentage change from a year earlier in the 12-month backward moving average of the consumer price index (CPI, all items) to 1 percent. Regardless of the above guideline for the call rate, the Bank would provide more ample funds, if judged necessary, to maintain the stability of the financial markets.

Mr. Nakahara made a similar proposal at the previous meeting. This time, however, the following two changes were made to his proposal: (1) he raised the target for the annual rate of increase in the CPI from zero to 1 percent, taking into account the upward bias in the rate of increase in CPI--the rate is larger than the actual price increase, as the index is unable to reflect the rapid price declines resulting from ongoing technological innovation; and (2) he lowered the target for the uncollateralized overnight call rate from 0.15 percent to 0.10 percent. Mr. Nakahara added that this proposal was an interest rate reduction, the conventional measure of the two means of monetary easing, the other being an expansion of the monetary base.

The proposal was defeated with one vote in favor and eight against.

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

Mr. Nakahara dissented, claiming that (1) Japan's economy was in a severe situation, as indicated by the quarter-to-quarter decline in nominal and real GDP for four consecutive quarters; (2) fiscal 1999 would be a crucial period for firms, and in the process of their restructuring, the economy might experience a further decline in economic conditions and prices, but fiscal policy could not be expected to continue providing substantial support; and (3) in these circumstances, the decline in prices could not be stopped without further monetary easing.

Ms. Shinotsuka dissented, claiming that (1) it was not monetary policy but fiscal policy that should be implemented to abate the shock of employment adjustment, which was inevitable to an economic recovery; and (2) there still were doubts about the effects of the prolonged extremely low level of interest rates.

VIII. Approval of the Scheduled Dates of Monetary Policy Meetings in January-June 1999

At the end of the meeting, members approved the dates of Monetary Policy Meetings in January-June 1999, for immediate release(see Attachment 2).


Attachment 1

For immediate release

December 15, 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

December 15, 1998
Bank of Japan

Scheduled Dates of Monetary Policy Meetings
in January - June 1999

Table : Scheduled Dates of Monetary Policy Meetings in January - June 1999
  Date of MPM Publication of
Monthly Report
Publication of
MPM Minutes
Jan.1999 19 (Tue.) 21 (Thur.) Mar. 2 (Tue.)
Feb. 12 (Fri.) 16 (Tue.) Mar.17 (Wed.)
  25 (Thur.) -- Mar.30 (Tue.)
Mar. 12 (Fri.) 16 (Tue.) Apr.14 (Wed.)
  25 (Thur.) -- Apr.27 (Tue.)
Apr. 9 (Fri.) 13 (Tue.) May 21 (Fri.)
  22 (Thur.) -- Jun.17 (Thur.)
May 18 (Tue.) 20 (Thur.) Jul. 1 (Thur.)
Jun. 14 (Mon.) 16 (Wed.) To be announced
  28 (Mon.) -- To be announced