Minutes of the Monetary Policy Meeting
on February 12, 1999
(English translation prepared by the Bank staff based on the Japanese original)
March 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 Friday, February 12, 1999, from 9:00 a.m. to 12:17 p.m., and from 1:04 p.m. to 5:34 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. T. Mutoh, Deputy Vice Minister for Policy Coordination, Ministry of Finance 3
Mr. T. Sakaiya, Minister of State for Economic Planning, Economic Planning Agency 4
Mr. E. Kawade, Director-General of the Coordination Bureau, Economic Planning Agency 5
Mr. I. Kuroda, Executive Director
Mr. M. Matsushima, Executive Director
Mr. S. Nagata, 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
Mr. K. Momma, Manager, Policy Planning Office
Mr. T. Kurihara, Manager, Policy Planning Office
Mr. S. Ushiro, Manager, Financial Markets Department 6
- The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on March 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.
- Mr. Tanigaki was present from 9:00 a.m. to 12:17 p.m., and from 1:04 p.m. to 2:58 p.m.
- Mr. Mutoh was present from 3:03 p.m. to 5:34 p.m.
- Mr. Sakaiya was present from 9:29 a.m. to 10:28 a.m.
- Mr. Kawade was present from 9:00 a.m. to 9:29 a.m., from 10:28 a.m. to 12:17 p.m., and from 1:04 p.m. to 5:34 p.m.
- Mr. Ushiro was present from 9:00 a.m. to 9:23 a.m.
I. Approval of the Minutes of the Monetary Policy Meeting Held on December 15, 1998
The Policy Board approved unanimously the minutes of the Monetary Policy Meeting, the"Green Paper," of December 15, 1998 for release on February 17, 1999.
II. Discussion and Decision on a New Market Operation Scheme which Utilizes Corporate Debt Obligations as Eligible Collateral
A. Staff Proposal
In accordance with the decision at the Monetary Policy Meeting on November 13, 1998 concerning the"introduction of new measures for money market operations in response to the recent situations in firms' financing activities," the Bank's staff proposed to establish the principal elements of a new bill purchasing operation scheme utilizing corporate debt obligations as eligible collateral and to publish them. The scheme is intended to (1) give the Bank additional means of providing liquidity, and (2) complement the weak financial intermediary functions of the financial markets. The arrangements proposed were as follows.
1. Outline of the scheme (a) Location of the operation: Head Office of the Bank of Japan (Operations Department).
- (b) Counterparties: depository financial institutions, securities companies, securities finance companies, and tanshi companies (money market broker-cum-dealers).
- (c) Purchasing method: direct purchasing by the Bank of Japan.
- (d) Determination of interest rates: through competitive yield auction.
- (e) Maturity of bills to be purchased: overnight to 3 months. Operations will mainly concentrate on bills with maturity of one week or over.
- (f) Eligible collateral: corporate bonds and loans on deeds. The eligibility criteria for loans on bills shall be applied.
- (g) Form of collateral: pooled collateral against all claims that may arise from this bill purchasing operation scheme.
- (h) Collateral value: corporate bonds shall be valued at a maximum 100/130 of the face value; and loans on deeds at a maximum 100/135 of the remaining principal of loans.
2. Selection of bidders
(1) As in the case of repo operations, the Bank will first accept applications, stating clearly the functions expected of bidders to achieve the objectives of its market operations, and then select the bidders from the applicants. Functions expected of bidders: (a)Active bidding on the Bank's offers.
- (b)Expeditious and accurate processing of transactions.
- (c)Provision of market information or analysis useful to the Bank in its implementation of monetary policy.
(2) The Bank will select bidders based on the following criteria: (a)They must hold current accounts at the Bank's head office.
- (b)They must be of adequate creditworthiness.
- (c)They must be able to submit a certain amount of corporate bonds and loans on deeds as collateral.
The criteria for selection of bidders differ from other operations in that (i) a criterion based on the performance of bidders in the market will not be employed because there is no market for bills secured by corporate debt obligations; and (ii) the number of bidders will not be limited because it will be desirable that as many bidders as possible participate to achieve the objective of this scheme, which is to facilitate corporate financing.
(3) The list of selected bidders will be reviewed, in principle, once a year. The first review, however, will be made approximately six months after the first selection. The staff wished to start the selection of bidders immediately, finish the process of selection and the acceptance of collateral by the end of March, and carry out the bill purchasing operation as soon as they had received sufficient collateral.
B. Discussion and Vote on the Staff's Proposal
Following the staff's explanation, some members commented that this new market operation scheme, through its use of corporate debt obligations as collateral, could be expected to contribute to facilitating firms' financing activities. They added that diversifying market operations means would be beneficial in the long-term perspective.
One member, however, opposed to introducing the scheme, claiming that there were many potential problems in the Bank's involvement in corporate financing. In reply, another remarked that it was quite natural for central banks to hold sound corporate debt obligations as their assets, as seen in the examples of central banks in Europe.
At the end of the discussion, the proposal was put to the vote. The Board approved the proposal and decided to publish the outline of the scheme on the same day.
Votes for the proposal: Mr. M. Hayami, Mr. S. Fujiwara, Mr. Y. Yamaguchi, Mr. Y. Gotoh, Mr. S. Taketomi, Mr. T. Miki, Ms. E. Shinotsuka, and Mr. K. Ueda.
Votes against the proposal: Mr. N. Nakahara.
Mr. Nakahara dissented on the following grounds: (1) the Bank's involvement in corporate financing had the potential to create many problems; (2) the new operation would have limited effects because corporate bonds were not very actively traded in the secondary markets; (3) there was a concern that the share of corporate bonds accepted by the Bank in the total corporate bond market volume might considerably increase as in the case of the CP operations; and (4) the Bank should make the utmost effort by employing the traditional policy measures.
III. Summary of Staff Reports on Economic and Financial Developments 7
A. Money Market Operations in the Intermeeting Period
Market operations in the period since the previous meeting on January 19 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 January 16 to February 15) stood at 0.23 percent as of February 10, one business day before the meeting.
The money market was fairly stable since the previous meeting. The Bank had injected ample funds into the market on intermeeting business days from the end of January to the beginning of February when demand for settlement funds increased. On other days, the Bank either conducted"neutral" operations (which meant that the Bank had supplied/withdrawn funds in an amount that exactly met the shortage/surplus of funds in the market) or supplied an amount of funds smaller than the shortage of funds in the market, against the background of the continued advantage of fund-raisers over fund-investors. These money market developments reflected the following factors: (1) a considerable improvement in the financial position of major Japanese banks due to a decline in lending and an increase in sales of securities; (2) expectation that the supply and demand balance of funds would considerably ameliorate toward the end of the fiscal year due to the injection of public funds scheduled to be carried out in March; and (3) the alleviation of the concern over procurement of funds maturing beyond the fiscal year-end, owing to the improvement in market conditions for the procurement of foreign currency by Japanese banks. Due to the above developments, interest rates on term instruments declined gradually.
B. Recent Developments in Foreign Exchange Markets and Overseas Economic and Financial Conditions
1. Developments in foreign exchange markets
The yen had fluctuated against the U.S. dollar since the previous meeting reflecting the prospects of the U.S. economy and the volatile long-term interest rates in Japan. The yen fell from the 114-115 yen level observed before the previous meeting to the 116-117 yen level toward the end of January, as prospects for the U.S. economy turned optimistic with the release of strong economic indicators. The yen, however, rebounded temporarily to the 111-112 yen level at the beginning of February, reflecting the surge in long-term interest rates in Japan. During the few days before the Monetary Policy Meeting, the yen weakened once again to around 115 yen reflecting the decline in Japan's long-term interest rates. As for developments ahead, the recent trend in the risk-reversal of option trading indicated that the majority of market participants projected the yen to appreciate against the U.S. dollar in the immediate future but to depreciate in the twelve months ahead.
The euro remained weak against the U.S. dollar due partly to the prospect of a slowdown of economic growth in the euro area. The constant downward trend of the euro against the pound sterling had come to a halt after the monetary easing by the Bank of England on February 4 (a reduction in the repo rate by 0.5 percent to 5.5 percent).
The Brazilian real had continued to fall against the U.S. dollar toward the end of January, reflecting the mounting cautiousness over future political and economic developments. However, in early February, the real had risen slightly after the release of the joint statement of the Ministry of Finance of Brazil and the International Monetary Fund (IMF) team outlining the ways to bring inflation under control and to achieve fiscal consolidation. At present, countries in Latin America and Asia had not yet been affected by this disturbance in foreign exchange markets.
2. Overseas economic and financial developments
In the United States, the economy, especially household spending, had continued to expand. New orders received by manufacturers had increased somewhat. Real GDP in the fourth quarter of 1998 marked a significant increase of an annualized 5.6 percent from the previous quarter, due to irregular factors such as the increase in sales of automobiles after the strike at an automobile manufacturer ended in July 1998. Regarding these economic conditions, Mr. Alan Greenspan, Chairman of the Board of Governors of the Federal Reserve System (FRB) remarked:"Though the pace of economic expansion is widely expected to moderate as 1999 unfolds, signs of an appreciable slowdown as yet remain scant."
As for financial developments in the United States, stock prices (Dow Jones Industrial Average) fluctuated over $9,000. This resulted from a mixture of contrary pressures: (1) downward pressures reflecting market participants' cautiousness toward high stock prices, and uncertainty about the economic and financial developments in Brazil; and (2) upward pressures reflecting optimism given the releases of reports on brisk corporate performance and economic indicators.
In the euro area, the slowing of the economic expansion was becoming distinct in Germany as was seen in the continued decrease in orders received by manufacturing industry. In France, retail sales statistics showed signs of weakening. In the United Kingdom, a decline in external demand, sluggishness in private consumption, and a slowdown of production became apparent. Given such developments, the Bank of England reduced its repo rate by 0.5 percent on February 4.
In East Asian countries, exports and production in Korea showed signs of improvement, but the economies of most countries in the region continued to undergo adjustments.
C. Economic and Financial Developments in Japan
1. Economic developments
As for final demand, business fixed investment continued to follow a sharp declining trend. As for household expenditure, private consumption and housing investment were leveling off recently, but in general remained sluggish. Meanwhile, net exports basically continued to follow a moderate upward trend, and public investment was showing a noticeable increase. Reflecting these developments in final demand and the continued progress in inventory adjustment, industrial production was leveling off. With regard to prices, domestic wholesale prices continued to be on a downtrend and consumer prices were weak.
Affected by the above developments, economic deterioration was slowing down considerably compared with that of the period toward autumn 1998. Furthermore, there was a sign of a possible halt in the deterioration in business sentiment of small firms.
Firms' restrictive stance on spending activities, however, seemed to show no change. As for household spending, applications for housing loans provided by the Housing Loan Corporation increased, but private consumption remained generally weak due to the decrease in income, although there were both weak and strong indicators. Therefore, it was considered that private demand had not yet improved.
With regard to the economic outlook, the increase in public investment due to the comprehensive economic stimulus measures of April 1998 and the emergency economic package of November 1998 was expected to underpin the economy. Furthermore, probability had increased that the expected progress in inventory adjustment and the rise in housing investment around the fiscal year-end would contribute to a pause in economic deterioration in the near future.
It was, however, difficult to expect that such an economic development would lead to a recovery in private-sector demand, considering the severe income conditions of firms and households.
Effects of the surge in long-term interest rates and the continuation of their high level warranted careful monitoring. Although the effects would be limited in the short term, the cost of borrowing would eventually be affected if high long-term interest rates persisted. Also, the above-mentioned developments could negatively affect corporate profits and investment plans through movements in exchange rates and stock prices.
In the longer perspective, there remained a high possibility of a gradual acceleration in price declines toward the next fiscal year, due partly to the effects of the appreciation of the yen and the expected acceleration of the decline in service prices reflecting the fall in wages.
2. Financial developments
Regarding the financial markets, developments in the money market contrasted with those in the bond and stock markets.
In the money market, the Japan premium and spot rates on Euro-yen deposits remained stable despite the approach of the fiscal year-end. This reflected the abatement of the market's anxiety about liquidity and credit risks of Japanese banks against the background of the Bank's maintenance of a decisive stance on easy monetary policy as well as the market participants' favorable response to the progress in the financial system stabilization measures.
Yields on Japanese government bonds were rising again. In the foreign exchange market, the yen had recently appreciated slightly. Stock prices continued to be weak reflecting the surge in long-term interest rates and the appreciation of the yen. These developments added to the uncertainty about the outlook for Japan's economy.
Growth in money stock was generally holding steady. However, growth in monetary base (the sum of currency in circulation and reserves) declined reflecting the slowdown in the issuance of banknotes. Since autumn 1997, firms and households had increased their holding of cash due to anxiety about the stability of the financial system. However, this trend was subsiding. These developments were regarded as having contributed to the slowing of the growth in banknotes.
As for corporate financing, demand for credit to finance firms' activities remained weak. Firms' moves to increase their on-hand liquidity in the face of severe fund-raising conditions were gradually settling down. Private banks maintained their cautious lending stance, but they continued to actively utilize the credit guarantee system.
As a result, the previously intensified tension in corporate financing was easing.
- 7Reports 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 , each member expressed understanding that the economic deterioration had moderated, compared with the period until autumn 1998. However, at the same time, many members presented a severe view that economic activity in the private sector still remained sluggish.
Some members regarded the increase in public investment as a positive sign. One of these members stated that such trend in public investment was contributing to holding down the number of corporate failures.
With regard to household expenditure, many members focused their attention on recent developments in housing investment. Some of these members commented that there were signs of housing investment hitting bottom due mainly to (1) a last-minute increase in the number of applications for loans just before the coming rise in the interest rate on loans of the Housing Loan Corporation; and (2) the expected effects of tax cuts related to housing investment, which would be applied to the period of two years starting January 1999. Furthermore, there was a comment expressing high expectations for favorable developments in housing investment, because it could induce demand in many related areas, especially in durable consumer goods.
As for private consumption, some members pointed out that the previous extremely weak conditions were improving, saying that favorable signs were observed in the sales of household electrical appliances and automobiles after the successful sales promotion campaign staged at major supermarkets in 1998.
Furthermore, some members regarded it favorable that inventory adjustment had progressed and industrial production was leveling off reflecting the above developments in final demand.
As indicated above, members shared the view that the recent deterioration in the economy was moderating. However, at the same time, many members shared the view that signs confirming that the economy was moving toward a recovery were yet to be found.
Many members referred to the continued significant decrease in business fixed investment. One member projected that corporate profits, which would be a major determinant of business fixed investment, would be more than 20 percent lower in fiscal 1999 than in the previous fiscal year, and would continue to decrease in fiscal 2000. This member added that, considering the excess capital stock, the decline in business fixed investment was not expected to stop.
As for employment and income conditions, one member pointed out that, although there was some improvement in the unemployment rate and the ratio of job offers to applications in December 1998, this was not sufficient to confirm a definite reversal of the downward trend in employment. Furthermore, some other members shared the view that firms' spending activities continued to be constrained and that they still faced extremely severe conditions. One of them commented that corporate and household confidence was still weak due to the continued deterioration in corporate profits and employment and income conditions.
As for prices, one member expressed the opinion that the weakness in domestic wholesale prices and consumer prices persisted, and that the economy seemed to remain in deflation. Another member expressed concern that the recent decline in wages would further push down prices.
In addition to the above-mentioned factors indicating the sluggishness of the economy, another member pointed out that even factors which were considered to have contributed to alleviating economic deterioration did not seem to be fully self-sustainable: (1) the positive signs in private consumption were partial and temporary, not having spread to other economic activities; (2) the favorable aspects of housing investment were underpinned partly by the front-loading of demand; and (3) the prospects for public investment and exports were unclear toward the second half of fiscal 1999, because of the severe fiscal situation at home and the uncertainty about the developments in the U.S. economy. With these points in mind, this member concluded that the economy remained extremely vulnerable.
Further, another member pointed out the following: (1) there was little hope for a substantial increase in housing investment given the shift in the age bracket of major first purchasers down to 30-34 years old, a group with a limited capability to repay loans; and (2) the coincident composite indexes had remained around the same level during the period from August to December 1998, but did not show any signs of economic recovery.
B. Financial Developments
With regard to financial developments, members generally shared the view that the tight credit conditions in the money market and in corporate financing had subsided considerably. However, there were many comments emphasizing concern about the surge in long-term interest rates observed again from late January and the strength of the yen.
One member commented on the significant contraction of the Japan premium and the overall stability in the money market. The member considered that various measures implemented by the Bank since last year, as well as the formulation of the framework to restore the stability of the financial system, had contributed to these developments. On these grounds, the same member predicted that the market would further stabilize if public funds were actually injected.
Some other members exhibited their recognition that the heightened tension had been alleviated in corporate financing. With the above-mentioned stability in the money market and the effects of the government's policy measures including the expansion of the credit guarantee system, firms were no longer actively piling up their on-hand liquidity.
However, some members noted that private banks were still cautious of extending loans and expressed the view that, even if public funds were injected, a dramatic change in their lending stance could not be expected. The member thus stated that firms with low credit standings might continue to be uncertain about their financing. Another member was of the opinion that the alleviation of the tension in recent corporate financing was, on one hand, due to the fact that firms became less eager to increase on-hand liquidity, but on the other, also a reflection of the firms' weak demand for funds to be used in economic activities. Thus, the member added that it was difficult to evaluate the recent stability in corporate financing.
With regard to the recent deceleration of the growth in the monetary base (the sum of currency in circulation and reserves), one member pointed out that this might indicate an insufficiency of monetary easing and funds provision by the Bank.
In response to the above comment, many members shared the idea that, taking into account the fact that banknotes made up the majority of the monetary base, the slowdown in the growth of banknotes reflected the following: (1) the decrease in income, notably in winter bonuses; (2) the relatively short holiday period from the year-end of 1998 to early January 1999; and (3) the decline in moves to increase the holding of banknotes due to the easing of the concern about the instability of the financial system. One of these members added that, although it could not be determined which factor had the largest impact, recent money market operations did not seem to be contributing to the slowdown in the growth rate of the monetary base. Another member commented that the money multiplier (money stock divided by the monetary base), which reversed its decline recently, required careful monitoring to judge the causes behind these developments in the monetary base.
As outlined in the above discussions on financial developments, members shared an understanding that the excessive cautiousness about credit risks and tightness in financing conditions were subsiding.
Many members, however, showed strong concern over the renewed rise in long-term interest rates.
First, some members commented that the level of long-term interest rates last autumn, which marked far below 1 percent, was too extreme, but that the recent level of above 2 percent, which was equivalent to the level marked around summer 1997, was not particularly high. One of these members commented that the possibility of a further increase in long-term interest rates could not be ignored, taking into account that an unprecedentedly sharp declining trend in the yields on bonds had ended. However, another member argued that the current level of long-term interest rates could not be seen as consistent with developments in the economic condition where negative growth had continued for four consecutive quarters.
Next, some members presented the results of their analysis and thinking on the factors underlying the recent rise in long-term interest rates.
One member, based on the theory of long-term interest rate determination--i.e., long-term interest rates equal the sum of the average of the expected short-term interest rates and the risk premium--presented some possible explanations for the rise in long-term interest rates as follows. First, the rise might reflect a correction of the earlier plunge in long-term rates. Second, the rise might be a result of heightened expectation of an economic recovery. However, such expectations would lead to an appreciation of the yen and an increase in stock prices, the latter of which had not occurred. Therefore, this explanation could not adequately clarify the recent rise in long-term rates. Third, the increase in fiscal deficit might have brought about concern in the market about future inflation. However, a depreciation of the yen, a possible outcome resulting from such a development, had not been observed, and therefore this explanation was not satisfactory either. Fourth, the supply-demand balance of government bonds might have some effects on the short-term development in long-term rates. The member remarked that this might be the likely cause, mentioning the possibility that a decline in the risk-taking capacity of financial institutions--resulting from such factors as the shortage of the capital base and preparations for the fiscal year-end--might have reduced demand for government bonds and thus have worsened the supply-demand balance.
Some other members set out their position that extremely unclear prospects for fiscal conditions and investors' cautiousness toward price risks of Japanese government bonds had a strong bearing on the surge in long-term interest rates. Furthermore, another member expressed the opinion that the situation where the ratio of fiscal deficit to nominal GDP might exceed 10 percent was already critical from the perspective of maintaining the soundness of fiscal conditions.
In the discussion, one member gave an explanation of the rise in long-term interest rates under conditions where intensified tension in the money market and corporate financing was subsiding. Credits risks of the private sector might have been transferred to the government due to the government's policy measures, i.e., the expansion of the credit guarantee system and other measures to restore the stability of the financial system, including the public funds injection. As a result, market participants might have become aware of risk of fiscal deficits growing further in the future, and thus this effect pushed up long-term interest rates. The same member also added that the rise in long-term interest rates triggered by these risk factors might have negative effects on the economy. Many other members seconded this view.
Based on the above discussion, many members presented the view that further attentive monitoring was required of future developments in long-term interest rates. In addition, one of these members expressed concern that the coming massive issuance this spring by local governments of privately-placed bonds (issues based on underwriting by financial institutions in the local area) might bring about a further rise in long-term interest rates.
As for foreign exchange markets, one member commented that the strength of the yen at around 110-115 yen against the U.S. dollar was influenced considerably by the rise in long-term interest rates. Similar remarks were made by other members.
C. The Economic Outlook
Concerning the economic outlook, the discussion focused on whether Japan's economy, which still showed no clear signs of economic recovery, could tackle the additional downward pressure coming from the rise in long-term interest rates and the appreciation of the yen. The majority of members concluded that the economy would face difficulty in containing the downward pressure and that the downside risk to the economy would further intensify.
Some members remarked that the economy could be expected to stop deteriorating at least temporarily in the near future given that the government and the Bank were implementing every possible measures.
One of the above members, however, stated that it was difficult to envisage the currently seesawing private consumption clearly turning upward at this stage, considering the continued deterioration in employment and income conditions.
Another member viewed the situation in business fixed investment as very severe. The member said that firms were being forced to carry out structural adjustment, pressured by declining profits and the large output gap. The member continued that, in this situation, far from making additional investments, some firms were considering scrapping their capital stock. This member also commented that firms were drawing up quite modest export plans in light of the anticipated reemergence of trade frictions between Japan and some industrialized countries and the unclear outlook of the U.S. and European economies. The member added that further inventory adjustment was needed under such demand situations, and therefore firms had to maintain their cautious stance for production.
In relation to exports, another member commented on the developments in the U.S. economy, which posted high growth in the fourth quarter of 1998. The member pointed out that, although the economy maintained its positive cycle of growth, there were surfacing signs of upward pressure on labor cost as seen in the rise in the relative share of labor. Based on this recognition, the member stated that it was difficult at this stage to judge whether the U.S. economy would expand further at the current high pace or stall suddenly. Further, the member referred to the euro area and said that the economies of the area might decelerate, especially in Germany and France, and therefore the euro might fall against the U.S. dollar and other currencies.
Following the above discussion, the member, who considered firms' business conditions to be very severe, commented that economic activities were still at an unprecedentedly low level although the economy was hitting the bottom. The member continued that, since there was not yet any prospect of an economic recovery, there was a possibility of the low level of economic activities lasting for a long time. This member remarked that, taking into account the very little capacity left for the government to carry out further expansive fiscal policy measures, the possibility was lessening somewhat that the private sector, instead of the public sector, would become the new driving force of an economic recovery in the latter half of 1999.
A different member commented that, although it was encouraging that the pace of decline in prices had not accelerated, the risk of the economy deteriorating further approximately six months later still existed. Another member remarked with regard to the private-sector economy that it was becoming unlikely that it would revive while fiscal expenditure underpinned the economy.
With regard to the economic outlook, the majority concluded that emergence of a substantial downside risk to the economy would have to be acknowledged. In this regard, members exchanged their views on the negative effects of the rise in long-term interest rates and the appreciation of the yen.
One member commented that the markets and economic entities had probably taken into account to some extent the possible negative effects of the appreciation of the yen, from the time when the yen had surged and almost touched the 110 yen level after autumn 1998. However, this member considered that the rise in long-term interest rates from the end of 1998 was a new downside risk to the economy, and that its negative effects were likely to surface from around the April-June quarter to the July-September quarter of 1999.
Another member stated that long-term interest rates had risen due to the increase of risk premium reflecting intensifying concern over unclear future prospects of fiscal condition, and remained at a high level diverging far from a level that would be consistent with the current developments of the economy and prices. The member expressed a concern that such movements of long-term interest rates would give negative impacts on the economy. The member added that the value of the yen, which had risen and remained high influenced by the rise in long-term interest rates, would add to the already existing negative impacts on the economy.
A different member compared the current economic and financial situation with that of September 1998, when the Bank eased its monetary policy. The member stated that long-term interest rates were approximately 1 percent higher, the level of stock prices was almost the same, and that the value of the yen was approximately 14 to 15 percent higher against the U.S. dollar. The member analyzed that the economic activities of the private sector were now weaker as shown in the decline in corporate profits and the deterioration in the employment situation. Based on the above assessment on the economy, the member concluded that the current developments in the financial markets would be a downside risk, offsetting the positive effects expected from all policy measures so far employed.
Another member presented an estimate that the rise in long-term interest rates and the appreciation of the yen since autumn 1998 would push down real GDP by approximately 1 percent. The member stated that these factors could also depress Japan's economy, which had already fallen into deflation, and there was a risk of nominal GDP for fiscal 1999 decreasing considerably.
V. Summary of Discussions on Monetary Policy for the Immediate Future
Based on the above assessment of the economic and financial situation, members discussed the basic thinking on monetary policy for the immediate future.
Many members projected that the economic deterioration would gradually come to a halt as the measures included in the emergency economic package were fully implemented. However, they agreed that there was still no clear prospect of an economic recovery, with corporate and household confidence in the economic outlook persistently weak and private-sector economic activity still sluggish.
Some members expressed strong concern about the possibility that the rise in long-term interest rates and the appreciation of the yen would become a burden on the economy in and after the latter half of 1999, when fiscal policy support to the economy would lessen. They therefore expressed the opinion that it was necessary to consider an additional monetary easing.
One member remarked that (1) Japan's economy was already caught in a vicious circle of deflation, and the rise in long-term interest rates and the appreciation of the yen were adding to the downward pressure on economic activity; (2) under this situation, there was an urgent need to further ease monetary policy with a view to enhancing the effects of the expansive fiscal policy and thereby promoting self-sustainable economic activity in the private sector; and (3) the policy action might even be too late.
Another member also stated that, although the economy finally seemed to be hitting bottom due to the implementation of monetary and fiscal policy measures, the level of economic activity was lower than ever. Many firms anticipated smaller-than-projected profits and some of them even a deficit, and their restructuring such as disposal of capital stock and reduction of employment was expected to exert a considerable negative impact on the economy. On this basis, the member claimed that it was quite likely that the economy would not show an upturn for some time. Furthermore, the member pointed out the possibility that the recent increase in long-term interest rates and the appreciation of the yen would cancel out the effects of fiscal and monetary policies that had been implemented. In view of these risks, the member claimed that it was time to take necessary monetary policy action.
A third member remarked that the outlook for the economy was highly uncertain, considering the sluggish economic activity in the private sector, the uncertainty regarding developments in overseas economies, and the possible negative side-effects of financial system revitalization efforts. The member also noted that the rise in long-term interest rates, the appreciation of the yen, and weak stock market developments added to the downside risk to the economy, intensifying the prevailing uncertainty. Therefore, to curb the risk of an increase in deflationary pressure and to ensure that the economic deterioration was contained, the member stated that it was appropriate to further ease the Bank's policy stance and thereby provide maximum monetary policy support to the economy. Having said this, the member added that, if the Bank eased monetary policy, it would have to give adequate explanation to secure the understanding of those households that rely heavily on interest income.
A fourth member pointed out that, since the previous meeting on January 19, market participants had become alert to the increase in credit risk pertaining to the government. This was because the government had taken on a considerable amount of private-sector risk--which should intrinsically be assumed by the private sector--due to the decision to inject public funds into financial institutions and the expansion of the credit guarantee system. The member also stated that the rise in long-term interest rates, the appreciation of the yen, and the sluggishness of stock prices indicated a possibility of deflation, and it was therefore appropriate to consider measures for further monetary easing.
A fifth member remarked that deliberation on monetary policy management depended substantially on evaluation of the extent to which developments in the markets would impede the bottoming out of the economy, which was expected to occur at least temporarily in the near future reflecting the implementation of all conceivable economic policy measures. The member suggested that maintaining a wait-and-see posture was one option. The member, however, noted that the additional downward pressure from developments such as the rise in long-term interest rates and the appreciation of the yen had made it more likely than before that the downside risk to the economy would amplify while the Bank was waiting to act. Therefore, the member expressed the view that it was essential to take possible monetary policy measures to counter the added pressure.
Some members elaborated their thinking on whether it was the right timing to preemptively adopt an easier monetary policy. These members placed great weight on the mixed indications for the economy: on one hand, the pace of economic deterioration had recently moderated and the tightness of the financial market had been alleviated; but on the other, it was foreseen that the downside risk to the economy would increase from the second half of 1999.
One member remarked that, if the adverse effects of the rise in long-term interest rates and the appreciation of the yen were the chief concern, the suitable response was to ease monetary policy. The member, however, noted that the economy and prices were not showing a downturn at the present and the increase in long-term interest rates might only be temporary. In view of these circumstances, the member suggested that one conceivable option was to keep a close watch on economic developments while maintaining the current policy stance. The member added that, with financial conditions already very accommodative, additional monetary easing could not be expected to have much effect. At the same time, however, this member also noted that long-term interest rates had risen again after declining in January, and therefore the possibility was not small that a wait-and-see posture would prolong the period of high long-term interest rates, in which case monetary policy responses might come too late. Based on this view, the member claimed that it was a proper and reasonable reaction to lower short-term interest rates and to thereby increase provision of funds, in order to underpin the economy.
Another member stated that, if focus was placed solely on developments during the one month since the previous meeting on January 19, which suggested that the economic deterioration would stop at least temporarily in the near future and that the financial markets had stabilized somewhat, an easing of monetary policy could not be justified. Further, the member warned that a lowering of interest rates could cause disruption in the money market, as discussed later, and therefore such action required careful deliberation. This same member, however, expressed the view that it had become increasingly urgent that some monetary policy action be decided at this meeting or the next to counteract the risk to the economy arising from high interest rates and the appreciation of the yen, in consideration of the following points. First, the prospect of economic recovery was remote. Second, the markets considered that risks associated with fiscal spending had increased as a result of the implementation of large-scale fiscal policy measures. Third, there was a growing perception that additional fiscal measures on such a large scale could not be expected, and this perception was hindering a recovery in confidence. Fourth, there was a lag between the implementation of monetary policy and the permeation of its effects.
A third member, while acknowledging the necessity of paving the way for a self-sustained recovery of the economy, which was close to hitting bottom, reserved judgment on whether to implement a further monetary easing, based on two considerations. First, the negative influence of the rise in long-term interest rates and the yen's appreciation on economic activity had been given due consideration at every Monetary Policy Meeting since mid-November 1998, and there had not been any notable change in circumstances in the past month. Second, what was required of Japan's economy was to strengthen the supply side by reforming the public sector--through, for example, the streamlining of governmental organizations and enhancement of the efficiency of fiscal expenditure--and restructuring the private sector.
Amid these arguments referring to the possibility of a monetary easing, one member pointed out that households were very upset about the current low level of interest rates, and they were not at all convinced of the effects on economic activity of keeping the uncollateralized overnight call rate at 0.25 percent. The member also recognized that there was an inconsistency between the judgment at this meeting that the pace of economic deterioration was slowing and the discussion about seeking an additional monetary easing. Based on these points, the member expressed a concern that, if the Bank neglected the position of depositors--who supplied their funds to the economy--in managing monetary policy, their aversion to low interest rates might prompt them to shift their funds out of Japan.
As outlined in the above discussion on monetary policy management, each member expressed strong concern about the negative impact of the rise in long-term interest rates on the economy. Reflecting such concern, many members exchanged views, as in the previous meeting, on whether the central bank could directly influence long-term interest rates, and how to consider the discussion on increasing the Bank's outright purchase of Japanese government bonds. In sum, on the outright purchase of long-term government bonds, members shared the view that the Bank should retain the basic stance that such activity should be conducted in accordance with the long-term trend of increase in banknotes issued.
One member noted that long-term interest rates were a kind of asset price--which reflected various expectations including the outlook for the economy and price developments--and were therefore outside the control of the central bank. Based on this recognition, the member took the position that the Bank should not increase its outright purchase of long-term government bonds or carry out"operation twist." Another member stated that a central bank's market operations, in a sense, all constituted"operation twist," and acknowledged the possibility that it might have temporary effects. Having said so, the member recognized that (1) past data suggested that"operation twist," aimed at controlling long-term interest rates, had limited effects; and (2) the implementation of such an operation was subject to various uncertainties and risks. A few members, including this member, noted that history had taught that engaging in such an activity tended to lead central banks into situations from which it was difficult to extricate themselves. Further, one of these members referred to the condition of the Bank's balance sheet, pointing out that, in addition to long-term government bonds, the Bank already held 7-8 trillion yen in loans to the Deposit Insurance Corporation. The member warned that, as a central bank, whose money market operations were to be carried out through the sale and purchase of short-term financial assets, the Bank's holding of long-term assets was at a critically high level.
Other opinions given during the meeting on how to counter the rise in long-term interest rates were that the government, as the issuer of government bonds, needed to work seriously toward the realization of small government, and devise ways to alleviate the impact of bond issuance on market conditions--for example, by changing the volume of each bond issuance or diversifying the maturity of bonds.
Following this argument, another member made three points. First, active purchase of government bonds, by whatever means, would lead to the lack of fiscal discipline and generate vicious inflation in the future. Second, this was precisely why the central banks of major industrialized countries concentrated on short-term operations and placed a certain restraint on the outright purchase of government bonds. Third, the Bank had adjusted its government bond outright purchasing operations to match the long-term trend of increase in banknotes issued, and this stance should not be changed for the time being.
Another member added that, although it was normal for the Bank's outright purchase of government bonds to be carried out to supply cash required for economic growth, it might be appropriate to reconsider how the operations should be conducted when economic growth was negative.
Members next held an in-depth discussion on possible means of monetary easing. Many members judged that it was appropriate to further lower the uncollateralized overnight call rate. Their discussion concentrated on two points. The first was whether the proper functioning of the money market would be impeded if the uncollateralized call rate declined to close to zero. The second was that, if this was the case, whether a smaller interest rate reduction would be able to produce sufficient effect.
Some members stated that, with the uncollateralized overnight call rate close to zero, investors in the call market would become unwilling to make investments, which involved counterparty risk and various costs, but instead keep their funds in their current accounts at the Bank, which bore no interest but were free of risks. These members expressed the concern that, as a result, structural changes such as contraction of the market might occur, impairing the functioning of the money market. A different member also remarked that, since financial markets had finally stabilized, it might be wiser to avoid implementing measures that could lead to new instability. However, many members, including these members, agreed that, having no experience, they could not predict the precise proportional relationship between a decline in the interest rate and the contraction of the money market. They, therefore, shared the view that the only option they had, if they reduced interest rates, was to lower the call rate gradually giving due consideration to market developments.
Based on this conclusion, a member suggested that an appropriate method might be to initially target the uncollateralized call rate at 0.15 percent, and then, giving consideration to market developments, to induce the rate to decline further to close to zero. Another member supported this idea, saying that a guideline merely stating that the Bank should bring the rate down to as close to zero as possible could lead to the misunderstanding that the Bank had abandoned its targeting of nominal interest rates for quantitative targeting. However, by setting an initial target of 0.15 percent, the Bank could make clear that it still targeted nominal interest rates and thereby prevent confusion in the markets.
Members then exchanged views on the expected effects of a monetary easing when room for reducing interest rates was very limited. One member mentioned the possibility that the Bank's efforts to stabilize the overnight call rate at around 0.25 percent had prevented interest rates from declining across the board and the quantity of money from increasing. And if this was the case, removing this constraint would have great significance. On this point, a few members questioned whether a 0.1 percent reduction in interest rates could bring about an appreciable change in the Bank's provision of funds and in economic activity. A different member stated that an initial target of 0.15 percent was not low enough. The member suggested that the Bank should aim at a larger reduction in the call rate by setting the initial target at 0.10 percent, in order to encourage the declines in interest rates across the board to accelerate. With regard to the above discussions, a few members, including the member who mentioned the significance of removing the restraint of the 0.25 percent target, stated that the 0.1 percent reduction in the overnight call rate could not itself be expected to have any sizable effect. However, they considered that ample provision of liquidity by the Bank consistent with the decline in interest rates could induce falls in interest rates on term instruments, and thereby exert some influence on the lending stance of financial institutions and on capital markets such as the CP market. They expected that this would ultimately have favorable consequences for corporate financing and economic activity. These members took the position that, even if the interest rate reduction did not produce any appreciable outcome in the immediate future, it was very important that the Bank showed its resolution to do its utmost to fight increases in deflationary pressure.
In the course of such discussions, the member who initially deemed it necessary to weigh carefully the risk of disrupting the money market and the member who had reserved judgment on whether the timing was right for a further monetary easing had both come to support the implementation of an easier monetary policy.
During the discussions, one member suggested that it might be appropriate to carry out repo operations using government bonds (provision of short-term funds through the borrowing of government bonds) to provide the money market with ample funds, and thereby facilitate the financing of participants in the bond market. Another member supported the suggestion on the grounds that repo operations were a means of short-term money market operations and therefore different from outright purchases of long-term government bonds. Also, making active use of repo operations was in line with the Bank's efforts to diversify its monetary operations tools, one such effort being the introduction of a new market operation scheme utilizing corporate debt obligations as collateral.
A third member mentioned that, faced with unstable economic conditions, firms had to do their best to continue business by somehow acquiring necessary funds. The member stated that, therefore, the Bank's injection of ample funds into the market was essential. The member expressed the view that one option might be to hold back as much as possible from absorbing funds in its daily operations. On the Bank's operations for absorbing funds, another member questioned what might happen in the money market if the Bank ceased its bill-selling operation. The staff present explained that, with the Bank providing a substantial amount of funds, including loans to the Deposit Insurance Corporation, operations for absorbing funds were necessary in order for the Bank to adhere to the guideline for money market operations determined by the Board--that is, in order to prevent the uncollateralized overnight call rate from declining to close to zero and maintain the level of around 0.25 percent.
Furthermore, some members commented that, if it was decided to further lower the call rate, it was highly likely that interest rates on term instruments would decline. Therefore, from the viewpoint of facilitating corporate financing, it might be appropriate to also reduce the interest rate on the temporary lending facility.
Meanwhile, one member pointed out two problems with sticking to the traditional monetary easing method of reducing interest rates: (1) effects could not be expected of an interest rate reduction; and (2) the phrase"provision of ample funds" was ambiguous. Based on these considerations, the member expressed the opinion that, with interest rates already extremely low, the Bank should explicitly implement a quantitative easing by targeting the monetary base (the sum of currency in circulation and reserves). This member, while recognizing that there were various arguments against quantitative easing, further added that information obtained from corporate interviews suggested that, if reserves were increased, funds would be channeled to overseas affiliates and to healthy small firms with financing demand.
On this point, some members expressed the view that, as long as there was room left to lower the overnight call rate, the Bank should use that means first to support economic activity, inject ample funds into the financial market, and induce an expansion of money stock. One expressed doubt about the feasibility of targeting the monetary base, since about 90 percent of this was currency in circulation. Another member, while acknowledging the possibility that quantitative targeting might be effective, also commented that quantitative easing contained many issues that required consideration, citing the following points. First, the relationship between interest rates and the quantity of money stood unless interest rates fell to zero across the board. Therefore, even if the overnight rate was lowered to close to zero, the Bank could increase funds by reducing interest rates on term instruments. Second, a quantitative easing alone would be ineffective unless people's expectations and demand for funds changed. Third, targets for nominal interest rates had a clearer relationship with economic activity than those for the monetary base, which fluctuated significantly with various shocks in the financial markets. Fourth, a firm theoretical basis had to be established in setting a concrete quantitative target.
VI. Remarks by Government Representatives
Government representatives also made comments at the meeting. A representative from the Ministry of Finance made the following remarks.
(1) The economy as a whole was unable to overcome the slump and its development warranted careful monitoring, although a few economic indicators had shown improvements. Under this situation, the Ministry of Finance was firmly carrying out measures included in the emergency economic package launched last year, doing the best that could be done under the current fiscal condition. The Ministry of Finance would also strongly promote an early passage of the fiscal 1999 budget being deliberated at the Diet.
(2) With regard to the rise in long-term interest rates, the Ministry of Finance had been making efforts to firmly and smoothly proceed with the redemption of government bonds. However, long-term interest rates fluctuated against the background of deep-rooted concern about the worsening in the supply-demand balance of government bonds in the market. In view of this development, the Ministry of Finance was deliberating on countermeasures.
The government believed that appropriate monetary policy was necessary in response to the current economic situation. Therefore, the Ministry of Finance would like to ask the Bank to decide its policy by taking into account the various discussions held from various perspectives.
A representative from the Economic Planning Agency made the following remarks.
(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 further deterioration. Under such a situation, the government had decided to formulate a large-scale"15-month budget" that combined the third supplementary budget for fiscal 1998 and the initial budget for fiscal 1999 in order to terminate the vicious cycle of the economy.
(2) The government believed that it shared with the Bank more or less the same view concerning the current severe economic situation. The government would like to ask the Bank to carefully consider ways to prevent a double-dipping in the economy.
On monetary policy management, the government would like the Bank to provide ample liquidity and conduct appropriate monetary policy. The deliberation on tools to attain such a goal would be left in the hands of the Policy Board.
The views of many members on current economic and financial developments could be summarized as follows: (1) economic and financial conditions had stabilized due to the effects of the various monetary and fiscal policy measures, and the economic deterioration was expected to gradually come to a halt; (2) however, the private-sector economy continued to stagnate and there was no clear prospect of an economic recovery; and (3) moreover, the recent rise in long-term interest rates and the appreciation of the yen were substantial risk factors for the economy that could once again cause a downturn.
Based on the above understanding, the majority of members shared the view that, in order to counteract the possible intensification of deflationary pressure and to ensure the economic downturn coming to a halt, it would be appropriate to further reduce the money market interest rate and thereby provide the utmost support for economic activity.
However, advocating a further monetary easing, one member pointed out that (1) the purpose of the interest rate reduction was to further expand the monetary base; and (2) if this was clearly stated, the market would not take the view that the Bank had already taken all possible action. The member then submitted a policy proposal, which stated in the guideline for money market operations that the Bank would encourage the overnight call rate to decline and also aim to expand the monetary base. The member added that, since the member had been advocating monetary easing thus far, the member would vote for the proposal that reflected the majority opinion on monetary easing, provided that the proposal included a sentence stating that there would be a larger increase in the funds provided by the Bank.
Another member expressed an intention to submit a policy proposal that included the following: (1) the Bank would encourage the uncollateralized overnight call rate to move at the lowest possible level below 0.15 percent with the aim of providing ample liquidity, and, in doing so, it would lower the rate gradually to avoid confusion in the money market; (2) the Bank would hold back as much as possible absorbing funds in conducting money market operations, paying due attention to maintaining the functions of the money market; and (3) the Bank would reduce the interest rate applied to the temporary lending facility to support firms' financing activities if this proposal was adopted. This proposal, in the end, was not submitted because the principles stated by this member were included in the chairman's proposal following the Board's discussion.
One member who was doubtful about the effects of monetary easing voiced the member's intention to vote against the proposal for a further reduction in the money market rate.
Following the above discussion, two policy proposals were put to the vote.
With regard to the guideline for money market operations in the intermeeting period,Mr. Nakahara took the position that the Bank should provide ample funds aiming at quantitative easing, taking into account the current severe economic situation. Therefore, he submitted the following proposal:
The Bank would conduct quantitative easing (expansion of the monetary base) by maintaining the uncollateralized overnight call rate as low as possible. In doing so, the Bank would first target the call rate at 0.10 percent and then encourage further declines.
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. The public statement concerning the policy change would be determined separately following this vote.
The Bank of Japan would provide more ample funds and encourage the uncollateralized overnight call rate to move as low as possible.
To avoid excessive volatility in the short-term financial markets, the Bank of Japan would, by paying due consideration to maintaining market function, initially aim to guide the above call rate to move around 0.15 percent, and subsequently induce further decline in view of the market developments.
Votes for the proposal: Mr. M. Hayami, Mr. S. Fujiwara, Mr. Y. Yamaguchi, Mr. Y. Gotoh, Mr. S. Taketomi, Mr. T. Miki, Mr. N. Nakahara, and Mr. K. Ueda.
Votes against the proposal: Ms. E. Shinotsuka.
Ms. Shinotsukadissented, claiming that the effects of a further lowering of the already extremely low level of interest rates on economic activities were unclear.
VIII. Discussions on the Public Statement,"Change of the Guideline for Money Market Operations"
Members discussed the public statement to announce the change of the guideline for money market operations.
With respect to the outright purchase of long-term government bonds, members supported including the phrase"the Bank of Japan will continue to maintain the current frequency and amount," in consideration of the great attention directed toward the Bank's stance.
The Board unanimously approved the publication of the change of the guideline for money market operations by the attached statement (seeAttachment 1).
IX. Discussions and Decision on Changing the Interest Rate Applied to the Temporary Lending Facility to Support Firms' Financing Activities
A. Chairman's Proposal
Given the change in the guideline for money market operations, the chairman proposed to amend the Principal Terms and Conditions on a Temporary Lending Facility to Support Firms' Financing Activities in order to reduce the interest rate applied to the temporary lending facility to support firms' financing activity from 0.5 percent to 0.25 percent, and to publicize this change by the attached statement(Attachment 2). This lending facility was decided last November and was already being implemented.
The chairman explained that the current rate of 0.5 percent had been set in line with the guideline for money market operations which stated that"the Bank of Japan will encourage the uncollateralized overnight call rate to move on average around 0.25 percent." He therefore concluded that, given the further easing of the guideline decided at this meeting, a reduction in the lending rate to 0.25 percent would be appropriate.
B. Discussions and Decision by the Board
Many members supported the chairman's proposal to reduce the lending rate. This reduction was claimed necessary by some members during the discussion on monetary policy.
One member, however, opposed the proposal.
At the end of the discussion, the proposal was put to the vote. The Board approved the proposal by majority vote.
Votes for the proposal: Mr. M. Hayami, Mr. S. Fujiwara, Mr. Y. Yamaguchi, Mr. Y. Gotoh, Mr. S. Taketomi, Mr. T. Miki, Ms. E. Shinotsuka, and Mr. K. Ueda.
Votes against the proposal: Mr. N. Nakahara.
Mr. Nakahara dissented on the following grounds: (1) the central bank should not step into the area of corporate financing; and (2) the reduction to 0.25 percent of the lending rate employed in the temporary lending facility would not be justified unless the new guideline for the uncollateralized overnight call rate was immediately set at 0 percent.
X.Discussion on the Bank's View on Recent Economic and Financial Developments
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 February 16, 1999 in the Monthly Report of Recent Economic and Financial Developments (the"Ivory Paper," consisting of"The Bank's View" and"The Background"). 8
- 8The original full text, written in Japanese, of the Ivory Paper was published on February 16, 1999 together with the English version of"The Bank's View." The English version of"The Background" was published on February 26, 1999.
For immediate release
February 12, 1999
Bank of Japan
Change of the Guideline for Money Market Operations
- (1) The Bank of Japan today held a Monetary Policy Meeting, a regular meeting of the Policy Board on monetary policy. By majority vote, the Policy Board determined to ease further the stance of money market operations for the inter-meeting period ahead as follows: The Bank of Japan will provide more ample funds and encourage the uncollateralized overnight call rate to move as low as possible.
To avoid excessive volatility in the short-term financial markets, the Bank of Japan will, by paying due consideration to maintaining market function, initially aim to guide the above call rate to move around 0.15%, and subsequently induce further decline in view of the market developments.
- (2) The pace of deterioration of Japan's economy is moderating, mainly due to the increase in public investment. As the implementation of the government's economic stimulus gains pace, deterioration of the economy is expected to slowdown gradually. However, corporate and household sentiments remain cautious and private sector activities stagnant. Prices are on a downward trend. Clear prospects for rebound of the economy have yet to emerge.
With respect to financial developments, tight conditions once observed in inter-bank transactions and corporate funding have subsided. However, long-term interest rates have risen considerably, and the yen has been appreciating against the dollar. Stock prices, on the whole, have been weak. Such market developments could have an adverse impact on the future prospect of our economy.
- (3) Taking into account current economic and financial conditions, the Bank of Japan has judged it appropriate to provide, through monetary policy operations, an utmost support for the economic activities in order to avoid possible intensification of deflationary pressure and to ensure that the economic downturn will come to a halt.
- (4) The Bank of Japan, through more injections of ample funds under the above-mentioned policy guideline, will encourage the expansion of money supply and make every effort to maintain the stability in financial markets.
- (5) In conducting actual money market operations, the Bank of Japan will attempt to provide more ample liquidity through existing short-term operational instruments, paying due attention to the maintenance of the successful functioning of the short-term financial markets. The Bank of Japan, in particular, intends to actively utilize government bonds repo operations, which provide short-term liquidity in exchange for government bonds.
With respect to outright purchase of long-term government bonds, the Bank of Japan will continue to maintain the current frequency and amount.
- (6) In order to bring Japanese economy back to a solid recovery path, it is important not only to provide support from monetary and fiscal sides but also to steadily promote financial system revitalization and structural reforms. The Bank of Japan strongly hopes that the decision to make money market operations more accommodative will, combined with various efforts made by the parties concerned, contribute to surmounting the economic difficulties we face.
For immediate release
February 12, 1999
Bank of Japan
Changes in interest rate applied to the Temporary Lending Facility to Support Firms' Financing Activities
The Monetary Policy Meeting of the Policy Board of the Bank of Japan has today decided to lower the interest rate applied to the temporary lending facility to support firms' financing activities from 0.5% to 0.25% per annum. This decision was made in line with change to the guideline for money market operations also decided at today's meeting.
The new interest rate shall apply starting from February 22, 1999, when the next loans shall be provided. If there is prepayment of previous loans, the new interest rate shall apply from the next loan provision. With respect to loans provided on December 21, 1998, the new interest rate shall apply, even in the absence of prepayment, on March 23, 1999, upon rollover.