Minutes of the Monetary Policy Meeting
on March 25, 1999
(English translation prepared by the Bank staff based on the Japanese original)
April 27, 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 Thursday, March 25, 1999, from 9:00 a.m. to 12:42 p.m., and from 1:30 p.m. to 3:35 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. T. Sakaiya, Minister of State for Economic Planning, Economic Planning Agency 2
Mr. E. Kawade, Director-General of the Coordination Bureau, Economic Planning Agency 3
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, Advisor, Policy Planning Office 4
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
- The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on April 22, 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. Sakaiya was present from 9:00 a.m. to 11:02 a.m.
- Mr. Kawade was present from 11:03 a.m. to 12:42 p.m., and from 1:30 p.m. to 3:35 p.m.
- Messrs. Inaba, Tanaka, and Ushiro were present from 9:00 a.m. to 9:17 a.m.
I. Approval of the Minutes of the Monetary Policy Meeting Held on February 25, 1999
The Policy Board approved unanimously the minutes of the Monetary Policy Meeting, the "Green Paper," of February 25, 1999 for release on March 30, 1999.
II. Staff Proposal and Votes on Revisions to the Framework for Market Operations
A. Staff Proposal
The Bank staff proposed revisions of the framework for market operations utilizing treasury bills (TBs), financing bills (FBs) and Japanese government bonds (JGBs) as follows.
1. Consolidation of treasury bill and financing bill operations
TB and FB operations should be consolidated as "short-term Japanese government securities (JGSs) operations" with the details as in the table below. This revision is proposed in light of the introduction of public tender for FB issuance and to facilitate money market operations.
|Existing TB operations||Existing FB operations||The consolidated "short-term JGSs operations"|
|Form of transaction||Purchases under repurchase agreements||Sales under repurchase agreements||Purchases/sales under repurchase agreements (consolidating the existing TB and FB operations as "short-term JGSs operations")|
|Term of transaction||No limitation||No limitation||Within six months|
|Determination of interest rates||By competitive yield auction or fixed-rate offering by the Bank of Japan||By competitive yield auction||By competitive yield auction|
2. Revisions to the framework for outright purchases/sales of JGSs including the criteria for selecting counterparties
The operations should be revised as follows.
|Location of the operation||Head office and branches of the Bank of Japan
(The last operation conducted at the branches was in 1979.)
|Head office of the Bank of Japan|
|Counterparties in the operation||Depository financial institutions and securities companies||Depository financial institutions, securities companies, securities finance companies, and tanshi companies (money market broker-cum-dealers)
(Those qualified as counterparties are the same as those for the Bank's other operations.)
|Securities to be purchased||JGSs and government-guaranteed bonds
(No government-guaranteed bonds have been purchased in the last 20 years.)
|Determination of interest rates and purchasing prices||Decided in view of market developments
(To date, decided by competitive yield auction.)
|By competitive yield auction|
Criteria for selecting the counterparties for operations should be formally announced in order to ensure more transparency in the market operations procedure. Basically, the criteria below are equivalent to those applied to other operations conducted by the Bank.
The basic criteria for selecting the counterparties are as follows: (1) they must hold current accounts at the Bank's head office; (2) they must be on-line participants of the BOJ-NET (Bank of Japan Financial Network System); and (3) they must have adequate creditworthiness. If the number of applicants who meet these criteria exceeds the number determined by the Bank as appropriate to ensure smooth management of the operations, the roles played by the applicants in the secondary market of the securities concerned will also be taken into account. The list of counterparties will be reviewed, in principle, once a year.
The review of procedures for selecting counterparties in the various market operations, which was planned and started in spring 1998, will be finished with this revision regarding the outright purchases/sales of JGSs.
3. Change in the criteria for accepting FBs as collateral
FBs should be eligible as collateral for a wider range of credit instruments offered by the Bank, in light of the introduction of public tender for FB issuance. That is, FBs should be accepted as collateral for loans on bills by the Bank and as pooled collateral for overdrafts. Evaluation standard of FBs (e.g., at maximum, 95 percent of the market value) will also be decided in due course. These details will be announced to the public by the attached statement (attachment 1).
The proposal was put to the vote. Members unanimously approved the proposal.
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 March 12 were conducted in accordance with the guideline determined at that meeting:
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 (note) aim to guide the above call rate to move around 0.15 %, and subsequently induce further decline in view of the market developments.
Note: "Initially" means the time of the Monetary Policy Meeting, February 12, 1999.
The Bank continued to encourage the interest rate to remain at a low level in the new reserve maintenance period starting March 16. Specifically, the Bank constantly conducted market operations based on its morning projection for reserves at the end of the day, which was as much as 1.4-1.5 trillion yen more than the "remaining required reserves" (the daily average of reserves that should be deposited in the remaining days of the reserve maintenance period). As a result, the overnight call rate moved around 0.03-0.04 percent. This would be the lowest possible rate considering the brokers' margin included in the rate. In other words, the overnight call rate was virtually stabilizing around zero percent.
As for term instruments, Euro-yen interest rates continued to trend downward. As a result, the interest rate differential between the Euro-yen, which reflects transactions between private banks, and treasury bills (TBs), which have no credit risk, shrank to almost zero. There was even a case in which an interest rate on certificates of deposit (CDs) issued by a major bank was lower than that of TBs. This showed that participants in the money market were becoming less conscious of credit and liquidity risks.
The following three developments, which had been observed since the monetary easing on February 12, required attention.
First was the continued decrease in call money market transactions reflecting a shift of funds to direct dealing (DD), transactions in which financial institutions trade directly with each other without the intermediation of tanshi companies, and to ordinary deposits. For example, the transaction volume in the uncollateralized overnight call money market had decreased by approximately 30 percent since the monetary easing. The generally stable developments in money market interest rates at an extremely low level also caused a large fall in the trading volume of financial futures.
Second was the shift of a vast amount of funds from reserves--deposits held at the Bank by financial institutions subject to reserve requirements--to deposits held at the Bank by those not subject to reserve requirements, especially to deposits of tanshi companies, in a situation where abundant funds were available and fund-raisers faced no difficulty in procuring funds. As a result, the amount of reserves at the end of the day was constantly far smaller than the Bank's projection made each morning. This seemed to imply that it was difficult for the Bank to create reserves equivalent to its morning projection at the end of the day, and therefore, control over the amount of reserves and excess reserves would be more difficult than had been considered.
Third was the fact that bidding rates in the Bank's market operations were already close to zero, which underscored the lack of demand for funds sometimes resulting in a smaller size of operations than the Bank had initially planned.
As for the market function, there had not been any problems in funds settlement of individual transactions. However, it would be necessary to give due consideration to maintaining the functions of the market focusing on the following points: (1) flow of funds in the money markets could change greatly depending on the effects of the decline in interest rates on ordinary deposits, on the portfolio management of investment trusts, the largest lender of funds, and on the behavior of tanshi companies, which possessed surplus funds; (2) major banks could change their long-accustomed principle of not holding excess reserves; and (3) flow of funds could be affected by various factors, for example, fiscal year-end factors in the immediate future, and the change in the market structure accompanying the introduction of public tender for FB issuance after the turn of the fiscal year.
B. Recent Developments in Foreign Exchange Markets and Overseas Economic and Financial Conditions
1. Developments in foreign exchange markets
The yen was on a slightly upward trend against the U.S. dollar reflecting the increase in the holding of yen assets in European and American investors' portfolio as the pessimism regarding Japan's economic outlook abated slightly. However, a further appreciation was restrained by factors such as the perception of the market that the Japanese authorities would not tolerate a large appreciation of the yen, and the market's preference for the U.S. dollar at times of crisis, this time associated with the North Atlantic Treaty Organization (NATO) bombing of Yugoslavia. The yen stayed in a narrow range of around 117-118 yen and was likely to follow this trend for the time being, considering the approaching fiscal-year-end settlement.
The euro had remained almost unchanged against the U.S. dollar but was becoming unstable reflecting the bombing of Yugoslavia by NATO. The euro weakened slightly against the pound sterling. This might have reflected the economic slowdown in the euro area, which was more pronounced than that of the United Kingdom.
2. Overseas economic and financial developments
With regard to U.S. stock prices, the Dow Jones Industrial Average (DJIA) surged to above the US$10,000 level immediately after trading started on March 16. The DJIA, however, fell back later against the following background: (1) downward revisions of forecasts for corporate earnings mainly in the high-tech field; (2) selling of stocks for profit taking; and (3) intensification of the crisis in Yugoslavia. In the U.S. bond market, the yields on 30 year Treasury bonds declined partly affected by the decline in orders for durable goods. The yields on two-year Treasury notes also declined slightly reflecting the "flight to quality" associated with the crisis in Yugoslavia.
In Russia, an agreement was close to being reached with the International Monetary Fund (IMF) on revising the IMF program, and a meeting of high-level officials was expected to be held in the near future. Developments of the negotiation on the IMF program required close attention, considering Russia's external debt of US$17.5 billion that was reported to be due in 1999.
In Latin American countries, developments in exchange rates and stock prices on the whole were relatively stable. These developments were partly attributable to the smooth implementation of the IMF program for Brazil and the rise in crude oil prices due to production cuts by the members of the Organization of Petroleum Exporting Countries (OPEC).
Among the East Asian countries, economic adjustments were progressing in Korea, Thailand, and Indonesia, where IMF programs were being steadily implemented. In China, sluggish exports were leading to market rumors that the Chinese yuan might be devalued. The Chinese government had denied such rumors, pointing out that the country had continued to mark a trade surplus.
C. Economic and Financial Developments in Japan
1. Economic developments
The economic indicators released in the intermeeting period developed in line with the Bank's judgment that Japan's economy had appeared to have stopped deteriorating.
The public works contracts significantly increased in February, reflecting full-scale implementation of orders based on the third supplementary budget for fiscal 1998. The figure for March was also expected to be at a high level.
With regard to net exports, both real exports and real imports were virtually unchanged, although there were month-to-month fluctuations and some irregular movements.
Business fixed investment continued to be on a sharp downtrend. According to the results of surveys conducted by The Nihon Keizai Shimbun and those by the Japan Development Bank on business fixed investment plans for fiscal 1999, considerable decreases were expected to continue.
Regarding private consumption, department store sales in Tokyo decreased in February, after a sharp increase in January due to the closing sale of a store. However, considering that the February figure still maintained the October-December 1998 level, department store sales seemed to have stopped declining. Indicators relating to consumer confidence also appeared to have stopped deteriorating. In March, indicators so far showed a mixed sign. Sales of household electric appliances, especially those of personal computers, continued to be firm. On the other hand, department store sales remained low, below those of the previous year, and the number of passenger cars sold continued to be stagnant. In sum, private consumption had not shown a sign of improvement, although the risk of further deterioration was decreasing.
2. Financial developments
In the financial markets, interest rates on term instruments of private banks declined significantly. Specifically, compared with the rates before the monetary easing in February, the overnight call rate declined by a little more than 0.2 percent, and Euro-yen interest rates (three-month contracts) declined by about 0.5 percent. Analyzing three-month Euro-yen interest rates by decomposing them into one-month implied forward rates, the one-month rate covering the fiscal year-end marked more than 1 percent in January, but the rate declined sharply to the recent level, below 0.2 percent. The Japan premium almost disappeared with the difference among Japanese banks being small, owing to the following factors: (1) the further monetary easing implemented by the Bank of Japan; (2) steady progress in preparation for the injection of public funds into major banks; and (3) a decrease in external assets held by Japanese financial institutions.
Three-month CP rates for issuance declined to about 0.1 percent for highest-rated firms. Many city banks already reduced interest rates on ordinary deposits and short-term prime lending rates. These developments indicated that the monetary easing by the Bank started to have effects on corporate financing conditions gradually through the interbank market.
The growth rate of M2+CDs from a year earlier was 3.6 percent in January and 3.5 percent in February, both of which were lower than preceding months. This was largely because the growth rate for January and February 1998 was exceptionally high. During these two months in 1998, there was a large shift of funds from the assets outside M2+CDs (investment trusts, trusts, and bank debentures) to those included in M2+CDs reflecting the growing concern about financial system stability, but no such shift was observed this year. The annualized growth rate from three months earlier---unaffected by the previous year's development---for both January and February showed a firm increase of around 4-5 percent.
At the same time, factors such as firms' concern about the availability of funds in the future and the redemption of large amounts of corporate bonds at the end of March encouraged firms to increase their on-hand liquidity. Thus, close attention should be paid to the growth of money stock along with the abatement of anxiety regarding the financial system.
The growth rate of the monetary base (the sum of currency in circulation and reserves) from a year earlier fell sharply in December 1998 and January 1999, but rose slightly in February. The March figure was expected to show further recovery, judged from the already available figure for banknotes.
Meanwhile, the number of corporate bankruptcies declined by 40-50 percent from the previous year's level in January and February, reflecting the expansion of the credit guarantee system.
- 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
On the current economic situation, members generally agreed that economic indicators released in the period since the previous meeting supported the Bank's judgment at the previous meeting that Japan's economy had appeared to have stopped deteriorating.
As grounds for this judgment, some members cited the following assessments: (1) public works orders were increasing considerably; (2) housing investment was expected to recover in the near future; and (3) private consumption-related indicators, on the whole, seemed to have stopped deteriorating.
One member, however, emphasized that private consumption remained sluggish, based on information obtained from the Bank's contacts with firms on sales at department stores and supermarkets and the sales of passenger cars since the beginning of March. This member further commented that it was questionable whether the real economic growth rate of the January-March quarter would turn positive, in view of (1) the above developments in private consumption; (2) the continued significant decline in business fixed investment; and (3) the basically flat exports.
A few members also expressed concern that the anticipated record-low raise in the annual spring wage negotiation could have a negative effect on private consumption. However, one of these members pointed out that the stability in prices had contributed to the labor unions' tolerance of such harsh conditions without much resistance, and this reemphasized the important responsibility of the Bank to maintain price stability. Meanwhile, the same member stressed concern about the deferred discussion about the fundamental issues in the employment system, such as corporate pensions, extension of retirement age, and achievement-based compensation.
B. Financial Developments
Many members commented that the situation in the financial markets had improved significantly as seen in the emergence of positive developments that could have favorable effects on economic activity. On this point, members generally agreed that it was appropriate to monitor carefully the sustainability of these market developments.
Specifically, many members pointed out that favorable developments had appeared in the financial markets reflecting the positive effects of the monetary easing and public funds injection, such as (1) the significant abatement of concern about liquidity risk and credit risk in the interbank market; (2) stabilization of long-term interest rates and foreign exchange rates; and (3) the recovery in stock prices.
Many members focused particularly on the significant alleviation of concern about liquidity risk and credit risk especially in the interbank market as reflected in the sharp decline in interest rates on term instruments and the rapid contraction of the Japan premium. They pointed out that these developments were attributable to the following factors: (1) the effect of the decisive monetary easing, which brought the overnight call rate down to virtually zero percent, was creating a stronger sense of security about the availability of liquidity and expectation of a sustained monetary easing; and (2) the fact that the financial system was stabilizing due partly to the injection of public funds.
On this point, one member expressed the view that the main reason for the contraction of the Japan premium was the increased stability of the financial system, and the monetary easing was not a major factor. The same member added that the rapid downsizing of Japanese financial institutions' overseas operations seemed to have had a stronger effect on the narrowing of the Japan premium than the monetary easing.
Another member expressed the opinion that it was clear that the stabilization of the financial system had contributed to the decline in interest rates on term instruments, taking into account the fact that these rates started to decline prior to the monetary easing of February 12, responding to the announcement that the amount of public funds to be injected into banks would be increased. The same member, however, commented that financial institutions had lost the incentive to bid up interest rates on term instruments because there was a strong perception that the overnight call rate would be kept at close to zero percent. This represented a contraction of the liquidity risk premium. In this regard, it was clear that the Bank's monetary easing had had a considerable impact on interest rates on term instruments.
The same member also commented that excess funds were being held by market participants not subject to reserve requirements such as tanshi companies due to the Bank's constant supply of funds exceeding the amount necessary to satisfy the reserve requirement. As a result, there was a possibility that these excess funds were exerting downward pressure on interest rates on term instruments. The member stated that the Bank had previously absorbed the excess funds through its bill-selling operations in the afternoon while such funds were now held by tanshi companies at the end of the day. The member presented the hypothesis that tanshi companies' current deposits at the Bank had more effect on the decline in the liquidity risk premium than the Bank's bills would have had because the former could be considered as funds more readily available to market participants than the bills. Nevertheless, the member commented that continued observation of developments was appropriate for the time being because there was no evidence to prove this hypothesis at present.
As for stock prices, there were some comments relating to the expectations on monetary policy. One member expressed the opinion that the recent rise in stock prices was led by foreign investors who believed that the Bank had decided to implement quantitative monetary easing.
Another member pointed out that there might have been too great expectations with regard to monetary policy in the market. This opinion was based on the judgement that the extent of the rise in stock prices was large considering the small decline in short-term interest rates. Nevertheless, the member pointed this out only as a possibility and avoided making any definite judgments.
A different member stated that recent stock prices were underpinned not only by the purchases by foreign investors but also by private investors and institutional investors in Japan.
As for bank lending and corporate financing, there was a view stressing that the once-tight financing conditions had been alleviated significantly, but there was a cautious view that the situation still required attention.
One member presented the view that the major effect of the monetary easing of February 12 was the abatement of the concern about liquidity. The member further commented that banks' lending appeared to be no longer constrained by liquidity concerns at least.
Another member, emphasizing the change in this aspect, expressed the opinion that the lending stance of major banks was easing significantly due to (1) the Bank's injection of ample liquidity into the market; (2) moves to restore the stability of the financial system mainly through the injection of public funds into banks; and (3) banks' plans for improved management submitted to the Financial Reconstruction Commission as a precondition for receiving public funds. The member was of the opinion that such changes in the attitude of major banks and the expansion of the credit guarantee system had made corporate financing conditions so relaxed that there was no longer any concern over the fiscal year-end.
Another member also pointed out that financial factors negatively affecting economic developments had abated as seen in the following: (1) the easing of the once-intensified concern about financial system stability had contributed somewhat to the recovery in consumer sentiment; and (2) banks were becoming less aggressive in collecting loans, due to the weakened concern about their capital constraint. However, the same member was of the opinion that the lending stance of banks would not change drastically in the immediate future. Therefore, the member concluded that due attention should be paid to whether the recent changes in the environment surrounding financial institutions would lead to improvement in the business conditions of small firms and encourage their business fixed investment. Regarding this matter, the importance of the progress in implementing plans for improved management was also noted.
On this point, a different member was even more cautious. This member commented that the extent to which banks' loans would encourage business fixed investment in promising small firms was extremely uncertain even if the amount of overall loans increased under their plans for improved management. This uncertainty made the member worry about the possibility that a further expansion in the credit guarantee system would be called for.
Meanwhile, a few members acknowledged that credit risk seemed to be subsiding as far as the interbank market was concerned. However, judging from the credit spreads between government and corporate bonds and those among corporate bonds with different ratings, the market appeared to remain cautious about the difference in credit risk between individual firms.
Some members presented their views on the relationship between monetary policy and the risk premium under the above-mentioned circumstances where liquidity risk and credit risk had substantially abated, and where there were favorable effects appearing in corporate financing.
One member commented that attention should be paid to whether market participants had become so less cautious about credit risk as to engage in excessive risk-taking actions in the interbank market, considering the fact that the interest rate differential between Euro-yen and Treasury bills (TBs), both of a three-month maturity, even declined to below 0.1 percent.
Related to this point, another member commented that it required monitoring whether the present situation where market participants hardly perceived any credit or liquidity risks would continue even with the approach of payoffs starting in April 2001, or whether this situation was only temporary.
A different member admitted that the present situation where corporate bankruptcies were decreasing considerably due to the Bank's monetary easing and the expansion of the credit guarantee system might have gone too far. However, the member considered that, in light of the severe situation last autumn, policy measures taken since then had been necessary even if they might have gone too far in certain respects. The member regarded it as important that the effect of these measures, such as monetary easing, had relieved the heightened anxiety in financial markets, and as a result, the market was stabilizing smoothly at present.
As for money stock, one member posed a question related to the interpretation of the relationship between money stock (M2+CDs) and the real economy. The member pointed out that the relationship was fairly unstable, as seen in an annualized growth of minus 3 percent in the real GDP in the October-December quarter of 1998 while the M2+CDs of the same quarter recorded an approximately 4 percent growth from a year earlier. The same member, furthermore, commented that due consideration should be given to the recent rise in the Marshallian k (money stock divided by nominal GDP) above the long-term trend, because this situation had only been experienced twice before in recent decades: in the early 1970s, when there was excessive liquidity, and in the late 1980s, when the economy was experiencing a "bubble."
As it was difficult to measure the degree of monetary easing simply by money stock, the above member had tried using the monetary conditions index (MCI)--the weighted average of real short-term interest rates and real effective exchange rates, which is often used in other major countries--and the method that compares the level of real short-term interest rates to Japan's potential economic growth rate. However, this member concluded that it was too difficult to judge the degree of monetary easing by any single indicator.
Meanwhile, another member commented that, under the monetary policy where the overnight call rate was virtually zero percent, it required monitoring whether and how the large shift of funds from call loans to ordinary deposits--including the technical factors associated with definition of money stock--could affect money stock figures.
C. The Economic Outlook
On the economic outlook, the majority of the members were of the opinion that, basically, no change to the judgment made at the previous meeting was required, although there were possibilities that the above-mentioned improvements in the financial market might have positive effects on the economy in the future. Based on the understanding that corporate profits and employment and income conditions had deteriorated considerably and the implementation of full-scale corporate restructuring was expected, members generally agreed that there was still no clear prospect of economic recovery as the favorable effect of public investment was expected to subside in and after the second half of fiscal 1999.
As for business fixed investment, a few members commented on the results of the survey conducted by the Japan Development Bank and The Nihon Keizai Shimbun. They pointed out that business fixed investment in fiscal 1999 was most likely to record another considerable decline.
One member commented that there was hardly any prospect of the economy showing a recovery by autumn 1999 according to the leading indicators composed by various economic indicators, and thus the economy was currently moving around the bottom and there was still no sign of a turnaround in the near future. The same member also commented that there was a downside risk that could result from a rebound in crude oil prices following the further cut in oil production decided by OPEC, and having negative effects on the world economy through a decline in U.S. stock prices. This was one of the points that were crucial and required the most attention this year.
Based on their understanding that improvements were currently being seen in the economy and the financial markets while uncertainties remained on the economic outlook, several members made comments considering that the coming April-June quarter could be a critical point for the economy.
One member, who had the most pessimistic view, noted that (1) the unemployment rate would reach the 4.5-5.0 percent level in April at the earliest, with the full-scale implementation of corporate restructuring; and (2) there was also a high possibility that the decline in land prices would accelerate further in the April-June quarter. Based on these points, the same member expressed the opinion that it was uncertain whether the economy would show positive growth in the April-June and July-September quarters, given that there were many negative factors offsetting favorable effects from public investment and housing investment.
Another member remarked that structural adjustment was inevitable to reduce supply capacity, considering the fact that production in the April-June quarter in some materials industries was projected to fall to the level of 30 years ago, and that the negative effect of structural adjustment on the economy would be a concern at least in the short run. The member further added that public investment would undoubtedly underpin the economy in the first half of fiscal 1999, but uncertainty about the economic outlook would remain unless some signs emerged by May or June that private demand would take the place of public investment, which was expected to decrease in the second half of 1999.
Meanwhile, there was a comment putting more emphasis on the positive developments observed recently in the economy. One member expressed the view that it was unlikely that the gap between the information available on current economic conditions and on the outlook would remain for a long time. Based on this premise, the member pointed out that the possibility should not be ruled out that some improvements currently observed would induce a moderate increase in production accompanied by a slight recovery in corporate earnings in the April-June quarter, possibly leading to the next phase in the working of the economic dynamism. Bearing the above in mind, this member commented that considerable attention should be paid to the outcomes of the intertwining of negative and positive factors in the April-June quarter.
In sum, members generally agreed that the positive developments recently seen in the economy warranted attentive monitoring, as well as the developments in the April-June quarter, which would be affected by the financial results for the fiscal year ending in March.
Meanwhile, some members commented, from the longer-term perspective, on the structural changes of Japan's economy, which also related to the cyclical development in the near future.
One member reemphasized that the structural reform of the supply side was indispensable to a full-scale recovery of the economy from a medium- to long-term perspective although it might have negative side-effects on the economy in the short term, such as the deterioration in the employment situation accompanying corporate restructuring. The member noted that, in carrying out the above process, it was important to (1) strengthen the international competitiveness of Japanese industries for the 21st century; (2) implement corporate restructuring under the market mechanism, instead of pro rata curtailment of capacity, by encouraging firms with inferior technology or poor cost structure to exit the market smoothly. Based on the understanding that monetary and fiscal policies had been implemented to close to their limit, the member expressed high expectations for efforts by the private sector and measures by the government to provide a better environment for firm's activities through, for example, the newly organized Conference on Industrial Competitiveness.
Another member commented that, even if the ongoing adjustment in employment and capital stock was completed, tasks to expand new business areas and strengthen Japan's economy would still remain. The member listed the following points as important in dealing with these problems: (1) encouraging venture business and similarly challenging investments; (2) enhancing the safety net for the unemployed; (3) reforming the pension system by changing the revenue source for the fixed-benefit part of the public pension from insurance premium to tax and by privatizing the earnings-related part of the public pension; and (4) promoting further deregulation to strengthen the profitability of the non-manufacturing sector.
Meanwhile, a different member noted the possibility of positive developments in the structural change. The member commented that it was important to pay close attention to areas with high-growth potential such as information and service-related areas, and that developments in these areas might hold great significance for the overall economic development in about the next twelve months. The member also commented that high value-added products could be expected to lead structural changes because the ratio of personnel expenses to total cost was small and thus the high wages in Japan presented relatively little problem in international competition with other Asian countries.
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.
At the end of the discussions, the majority of members were of the opinion that it was appropriate to maintain the current stance on monetary policy, mainly for the following reasons: (1) the Board's judgment on the economic situation was almost the same as in the previous meeting; (2) the current policy was producing appreciable effects in the financial markets; and (3) the money market was still in the process of adjusting itself to a new environment of a virtually zero-percent overnight call rate.
The third argument--the observation that the money market was still in an adjustment process--was partly based on the recognition that it was necessary to continue to pay due attention to the maintenance of the function of the money market.
On this point, one member noted that there had been a concern that a policy to encourage the overnight call rate to move at close to zero percent might significantly destabilize the financing conditions of individual financial institutions. The member pointed out that the risk, however, had not materialized, in part because the Bank's guideline for money market operations clearly stated that the Bank would give due consideration to maintaining the market function. The member projected that the risk could remain contained as long as the Bank continued providing the market with ample liquidity. At the same time, however, the member kept a cautious view that the Bank needed to stay alert to a possible acceleration in the contraction of the call money market. Another member also touched on the need to pay attention in the immediate future to the scale and speed of any further shift of funds from the call money market to ordinary deposits.
Another issue related to the ongoing adjustment of the money market was financial institutions' demand for reserves under the current guideline for money market operations. One member pointed out that the Bank's experience in the past two to three weeks was not enough to determine how much excess reserves financial institutions intended to hold under a virtually zero-percent overnight call rate. The member expressed the view that, therefore, developments continued to warrant close monitoring, especially with the fiscal year-end approaching. Members expressed various other opinions on financial institutions' demand for reserves in their discussion on the target of money market operations, outlined later.
There were also a few members who questioned the current policy stance reflected in the guideline for money market operations.
One member claimed that the member still did not understand why the Board had decided the monetary easing on February 12. This argument was based on the acknowledgment that, at the time, (1) steady progress had been made toward the reconstruction of the financial system, and the financial markets had already started to stabilize as observed in the contraction of the Japan premium; and (2) the deterioration in economic activity had begun to slow reflecting the favorable financial market developments, and the Bank had in fact acknowledged a slight improvement in the economic situation in the Monthly Report of Recent Economic and Financial Developments (Ivory Paper) for February. The member further claimed that it was appropriate to bring interest rates, which were currently at an extraordinary level of zero percent, as close to a reasonable level as possible. This was in part based on the view that the Bank had to continue to anchor monetary policy on interest rates due to the difficulty in controlling reserves or other quantitative indicators.
In relation to this opinion, another member, while being in favor of maintaining the current policy stance for the immediate future, noted that the extraordinarily low interest rate level of almost zero percent was a problem in that it affected people's everyday lives and encouraged moral hazard of firms. This member pointed out that sufficient funds for corporate activities had become accessible to sound firms, e.g., through bank loans, and there were surplus funds in the interbank market due to the Bank's provision of ample funds. The member regarded these developments as indicating that the current easy policy had duly achieved its objective. Based on this recognition, the member claimed that the Bank should promptly raise interest rates as soon as signs of a self-sustained economic recovery appeared and, to this end, it was necessary to keep a careful watch on economic and financial developments giving consideration to the appropriate timing and measures for switching to a tightening policy.
By contrast, one member advocated a further monetary easing. The member strongly disagreed with the conception that the virtually zero interest rate precluded the possibility of additional monetary easing. The member also disapproved of evaluating the current interest rate level as "extraordinary" without thorough examination of whether it was consistent with the economic outlook. This member claimed that the current monetary easing was merely a transitional measure, and suggested that the Bank promptly shift to a full-fledged quantitative easing. This suggestion was made on the following four grounds. First, Japan's economy would confront a critically difficult situation in the first half of fiscal 1999 as firms proceeded with heavy restructuring. Second, the effects of the current monetary policy were appearing most evidently in favorable developments in stock prices and foreign exchange rates, which reflected expectations of a quantitative easing, and were not spreading through the transmission channel of lower interest rates stimulating economic activities such as business fixed investment. Third, it was appropriate to indicate the medium-term aim of monetary policy using one of the most obvious indicators such as the monetary base. Fourth, it was appropriate to specify, as is done in the United Kingdom, an inflation target to be achieved over a period of two years and thereby increase the Bank's accountability regarding price stability. This member further introduced the findings regarding the growth in the monetary base in Japan based on McCallum's rule (a method of estimating the amount of the monetary base needed to achieve a target for nominal GDP). Compared with the calculated growth rate of the monetary base necessary to maintain a real economic growth rate of 3 percent and an inflation rate of 2 percent, the actual growth rate of the monetary base was very high between 1986 and 1988 while it had been almost consistently very low during the 1990s.
Such significant differences of opinion on monetary policy were one factor that spurred the debate about the role of monetary policy and ways to secure adequate accountability. Many members shared the view that it was necessary to improve on the Bank's previous explanation of the goal of the current policy and the Bank's basic stance to prevent any misunderstanding. They agreed that such improved explanation would be understood not only by the interbank market but also by a broad range of participants in the entire financial market, including foreign investors. However, no conclusion was reached on how the improvement could be achieved.
One member commented on the role of monetary policy in the structural reform of Japan's economy. The member expressed the view that the role of monetary policy was to maintain financial market conditions that would underpin economic activity until a certain degree of momentum gathered for a self-sustained economic recovery. The member stated that promotion of constructive structural reform was beyond the scope of monetary policy and such reform basically depended on the behavior of financial institutions and other private-sector entities--in other words, the dynamism of market forces. Having said this, the member added that, in order to ensure that this market dynamism worked in the right direction, it was necessary for the Bank and the government to set out an overall picture of economic policies that would be consistent with constructive structural reform.
On this point, another member strongly questioned whether it was possible in the first place for the government or the central bank to know in advance the desirable direction in which the market dynamism should work. The member stressed that structural reform was a process of individual firms adjusting themselves to a new environment based on their own judgment. The member thus concluded that the central bank could only support such an adjustment process by lessening firms' interest burdens and increasing the availability of liquidity.
Regarding the issue of the possible ambiguity of monetary policy which arose from the current guideline for money market operations, one member commented that market participants were interested to know the following three points, all of which were related to one another: (1) what the Bank intended to use in the future as the signal, or the target, of money market operations; (2) under what circumstances the Bank would terminate its zero interest rate policy; and (3) what measures could be used to implement further monetary easing if the need arose.
With the overnight call rate settling at virtually zero percent, other members were also aware of these issues. Members therefore actively exchanged views on whether it would be appropriate, even if the Bank maintained its current policy stance, to use a new indicator as a target for money market operations instead of, or in addition to, the overnight call rate. Possible new targets discussed were either some quantitative indicator, such as reserves or excess reserves, or some kind of interest rate, such as interest rates on term instruments.
On the idea of using reserves or excess reserves as the target for money market operations, one big issue was the feasibility of setting and achieving a specific quantitative target while maintaining the overnight call rate at zero percent.
One member commented that many financial institutions, having a strong sense of security about the availability of funds, continued not to hold excess reserves even though the opportunity cost--the overnight call rate--was almost zero. The member pointed out that, in this situation, surplus funds provided by the Bank were flowing into financial institutions not subject to reserve requirements, such as tanshi companies, and this made it difficult for the Bank to increase reserves as it intended. This member also noted the risk that financial institutions' demand for reserves might surge if some shock emerged that could destabilize the financial system, and took the view that demand for reserves could become quite volatile. The member added that it was difficult to project changes in financial institutions' stance on holding reserves, even under the current stable market conditions. On these grounds, the member claimed that, at least for the time being, it was technically difficult to target reserves or excess reserves.
Another member noted that the market appeared to have some expectation of further monetary policy measures, such as a quantitative easing. In order not to lead to counterproductive disappointment in the market while maintaining the current policy, the member considered that it would be desirable to make some reference to quantitative indicators, such as the amount of reserves, in a way that would be compatible with the current guideline for money market operations. Having said so, the member acknowledged that the money market operations in the past two to three weeks strongly suggested that it was not feasible even to make such reference to reserves.
Meanwhile, a few members objected to the view that any "quantity" could not be controlled. One of them argued that the Bank would be able to control reserves or excess reserves if it clearly announced its intention and made sufficient allowance for deviation from the target.
Another member noted that the Bank's announcement of the "daily morning projection for reserves"--the amount of reserves in excess/falling short of remaining required reserves--appeared to be used as a signal for controlling the overnight call rate. The member, however, pointed out that the morning projection for reserves might lose its function as a signal if the zero percent overnight call rate became established in the market. Based on this view, the member took the position that it was desirable to use, in addition to the overnight call rate, some other quantitative indicator besides the morning projection for reserves to indicate the Bank's policy stance. The member suggested that the best option might be the total amount of current deposits at the Bank, including those of financial institutions not subject to reserve requirements, rather than the amount of reserves, which was proved by recent experience to be difficult to control. Having said this, the member acknowledged that the Bank would face technical difficulties even in its attempt to control the total amount of current deposits as a formal quantitative target. Therefore, the member suggested that it might be worth keeping a careful watch on it so that the amount was not reduced in the immediate future.
Another option discussed was to use interest rates on term instruments as a target of money market operations. However, none of the members at this stage supported adding these rates to the operating target on the grounds that they were already at very low levels.
Specifically, a few members pointed out that interest rates on term instruments had already declined substantially, and therefore it was impractical to set a target on these rates in further easing monetary policy. One of them noted the problem that the targeting of interest rates on term instruments when the yield curve was extremely flat would run the risk of giving the idea that monetary policy could control interest rates up to the medium-term zone of the curve.
In relation to this point, another member commented on the possible influence of monetary policy on longer-term interest rates. The member stated that the fall in six-month interbank rates to the 0.1-0.2 percent level implied that the market expected the current policy of maintaining the overnight call rate at a virtual zero percent to remain unchanged for at least another six months. Based on this market response, the member expressed the view that the Bank might be able to exert influence on a wider range of interest rates by giving more explanation of the Bank's policy stance. This member, at the same time, mentioned that the one-month implied forward rate had declined up to the medium-term zone of the yield curve, while remaining unchanged in the long-term zone. Based on this observation, the member stated that it was difficult to influence the market's expectations for the distant future by means of monetary policy.
As outlined above, the majority of members shared the view that a conclusion could not easily be reached on whether it was possible to set another operating target in addition to the overnight call rate, as this would involve technical difficulties whether that target was a quantitative or an interest rate indicator. Noting the feasibility problem, a few members went so far as to declare that an operating target other than the overnight call rate was not necessary at least for the time being.
One member commented that recent money market operations had been successful in providing the market with the necessary and sufficient funds to keep the overnight call rate at virtually zero percent. Based on this fact, the member expressed the opinion that, if the Bank consistently carried out such operations, it could avoid the problem of money market operations becoming unanchored and unclear to market participants.
Another member weighed the risk that attempts to control reserves or total current deposits at the Bank could cause interest rates to become quite volatile. Accordingly, the member stated that the only solution might be for the Bank to continue to commit itself in a qualitative, not quantitative, way--stating that it would "provide the necessary and sufficient funds in a flexible manner to keep the overnight call rate at a virtual zero percent"--which should be enough as an anchor for money market operations. This member acknowledged that such a non-quantitative commitment might remain subject to criticisms that the Bank's policy stance was unclear. However, accepting the reality that no other indicator besides the overnight call rate could adequately function as an operating target, the member took the position that making a non-quantitative commitment would be the best the Bank could do to win the market's trust.
A third member stated that the Bank could strengthen the Bank's commitment to keep the overnight call rate at a virtual zero percent if it was difficult to control quantitative indicators or interest rates on term instruments. The member suggested that, if a further monetary easing became necessary, one policy option might be to strengthen the Bank's commitment to maintaining the current interest rate level by explicitly stating that the Bank would keep the overnight call rate at the current level until the economy started a full-scale recovery.
VI. Remarks by Government Representatives
A representative from the Economic Planning Agency made the following remarks at the meeting.
(1) Judging from the recent developments, the economy was still in a very severe situation as private demand remained sluggish. However, the downward trend in economic activity was coming to a halt supported by the effects of various policy measures. The government was determined to do its utmost to bring about economic recovery using the budget for fiscal 1999, which had passed the Diet recently. The government was planning to strongly expedite the implementation of public works, aiming to increase the value of public-work contracts in the first half of fiscal 1999 by approximately 10 percent from the same period in the previous year. As for the basic rate for loans of the Housing Loan Corporation, the government decided to raise the rate, only by a small margin, to 2.4 percent and maintain that level for some time. The increase was significantly smaller than the extent that would be consistent with the market developments. The government was also determined to expedite the implementation of various measures such as those to counter the severe employment situation and those to encourage new businesses.
(2) It was urgently needed to place the economy on a recovery path during the critical period from the end of March to May. Bearing this in mind, the government would like to request the Bank to continue its appropriate monetary policy management, such as supplying ample liquidity.
(3) Deregulation of telecommunications and other industries had contributed to the economic recovery during 1995 to 1996. Considering this, removing various rules and regulations in both the public and private sectors would be important, in addition to public works and low interest rate policy, in order to promote economic recovery.
Strengthening competitiveness of Japanese industries, however, would require corporate restructuring including disposal of excess capital stock in addition to encouraging new businesses. This would in turn give rise to employment problems. The government was doing its utmost to address the employment issue, but its effects would not come about immediately restrained by various factors. The government was faced with the difficulty of simultaneously strengthening the competitiveness of Japanese industries and realizing full employment.
Furthermore, faced with the unprecedented situation in which there was no longer an increase in population, it was very important to envision an economy to be constructed from a decade-long perspective and to think about ways to implement fiscal structure reform and other economic policies to realize it.
The views of many members were summarized as follows. First, developments in the economic indicators during the intermeeting period supported the Bank's judgment at the previous meeting that Japan's economy appeared to have stopped deteriorating, but the prospects for a recovery remained unclear given the sluggishness in private-sector economic activity and the full-scale corporate restructuring expected to be carried out in the near future. Second, the monetary easing on February 12 had had a significant impact on the financial markets and its effects were reflected clearly in various indicators including stock prices, foreign exchange rates, and especially in interbank transactions, which showed tremendous weakening of the market's cautiousness toward liquidity and credit risks. Favorable effects were also starting to surface in firms' financing conditions. Third the money market was in the process of adjusting to the new environment in which the overnight call rate remained virtually at zero percent, and therefore, developments in the flow of funds and financial institutions' demand for reserves warranted attention. Based on this understanding, the majority of members were of the opinion that the Bank should maintain, for the immediate future, the guideline for money market operations decided at the previous meeting, giving due consideration to maintaining market function.
One member claimed that it would be appropriate for the Bank to conduct quantitative monetary expansion. 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 aim at realizing an approximately 1 percent annual increase in the consumer price index (excluding perishables) in the medium term. Specifically, the Bank would set the target range of the inflation rate for the year 2000 at 0.5 to 2 percent (change from the average for the October-December quarter of 1999 to the average for the same quarter of 2000). In achieving this target, the Bank would increase the amount of excess reserves by about 500 billion yen in the intermeeting period ahead, and by continuing to increase the amount thereafter, induce a 10 percent annual growth of the monetary base (change from the average for the October-December quarter of 1999 to the average for the same quarter of 2000) to realize quantitative easing (expansion of the monetary base).
Mr. Nakahara mentioned the following two points as changes from his proposal made at the previous meeting: (1) the medium-term target of the consumer price index was changed from that excluding perishables and indirect taxes to that excluding perishables, and (2) the target range of the inflation rate, which had been set for the October-December quarter of 1999 and that of 2000, was set only for 2000, based on the thinking that a focus should be set on the rate of increase in prices two years ahead. He added that the Bank ought to extend loans to financial institutions upon their request should market confusion arise as a result of increase in funds demand stemming from the emergence of credit risks.
The proposal was defeated with one vote in favor, 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 ahead would be as follows, and publicized by the attached statement (see attachment 2).
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(note) aim to guide the above call rate to move around 0.15%, and subsequently induce further decline in view of the market developments.
Note:"Initially" means the time of the Monetary Policy Meeting, February 12, 1999.
Votes for the proposal: Mr. M. Hayami, Mr. S. Fujiwara, Mr. Y. Yamaguchi, Mr. Y. Gotoh, Mr. S. Taketomi, Mr. T. Miki, and Mr. K. Ueda.
Votes against the proposal: Mr. N. Nakahara and Ms. E. Shinotsuka.
Mr. Nakahara dissented on the following grounds: (1) if the Bank was not considering the employment of quantitative easing policy, the Bank should clearly state so in the policy guideline, which was currently ambiguous; (2) the market would be disappointed at the Bank's policy if quantitative easing was not conducted and this would in turn negatively affect the economy; and (3) considering the downside risks to the economy associated with firms' bad financial results for the fiscal year ending this March and the possibility of large-scale corporate bankruptcies, the Bank should further ease money before the effects of monetary easing to date, reflected in stock price and exchange rate developments, dwindled, and promote a synergistic effect on the economy together with public investment and housing investment.
Ms. Shinotsuka dissented, claiming that (1) effects of the current policy of keeping the call rate at virtually zero percent on the economy were unclear, and (2) maintaining of proper functioning of the call money market was important in order to prepare for the time when it became necessary for the Bank to bring the call rate back to a reasonable level.
For immediate release
March 25, 1999
Bank of Japan
Accepting Financing Bills as Collateral Eligible for a Wider Range of Credit Instruments Offered by the Bank
The Bank today decided at a Monetary Policy Meeting to accept the government's financing bills (FBs) as collateral eligible for a wider range of credit instruments offered by the Bank.
This decision was made in light of the introduction of public tender for FB issuance from April 1999.
The Bank will start accepting FBs as collateral when necessary preparations have been made.
For immediate release
March 25, 1999
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.
The guideline for money market operations in the inter-meeting period ahead is 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 (note) aim to guide the above call rate to move around 0.15%, and subsequently induce further decline in view of the market developments.
Note:"Initially" means the time of the Monetary Policy Meeting, February 12, 1999.
March 25, 1999
Bank of Japan
Scheduled Dates of Monetary Policy Meetings in April-September 1999
|Date of MPM||Publication of
|Apr.1999||9 (Fri.)||13 (Tue.)||May 21 (Fri.)|
|22 (Thu.)||--||June 17 (Thu.)|
|May||18 (Tue.)||20 (Thu.)||July 1 (Thu.)|
|June||14 (Mon.)||16 (Wed.)||July 22 (Thu.)|
|28 (Mon.)||--||Aug.18 (Wed.)|
|July||16 (Fri.)||21 (Wed.)||Sep.14 (Tue.)|
|Aug.||13 (Fri.)||17 (Tue.)||Sep.27 (Mon.)|
|Sep.||9 (Thu.)||13 (Mon.)||To be announced|
|21 (Tue.)||--||To be announced|