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Minutes of the Monetary Policy Meeting

on April 9, 1999
(English translation prepared by the Bank staff based on the Japanese original)

May 21, 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, April 9, 1999, from 9:00 a.m. to 12:23 p.m., and from 1:51 p.m. to 4:11 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. Mutoh, Deputy Vice Minister for Policy Coordination, Ministry of Finance 2
Mr. E. Kawade, Director-General of the Coordination Bureau, Economic Planning Agency

Reporting Staff
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. K. Yamamoto, Adviser and Chief Manager, Planning Division 1, Policy Planning Office

Secretariat of the Monetary Policy Meeting
Mr. K. Koike, Director, Secretariat of the Policy Board
Mr. S. Hida, Manager, Secretariat of the Policy Board
Mr. K. Momma, Manager, Policy Planning Office
Mr. T. Kurihara, Manager, Policy Planning Office

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on May 18, 1999, as"a document which contains an outline of the discussion at the meeting" stipulated in Article 20, Paragraph 1 of the Bank of Japan Law of 1997. Those present are referred to by their titles at the time of the meeting.
  2. Mr. Mutoh was present from 9:00 a.m. to 12:23 p.m., and from 1:51 p.m. to 1:54 p.m.

I. Approval of the Minutes of the Monetary Policy Meeting Held on March 12, 1999

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting, the"Green Paper," of March 12, 1999 for release on April 14, 1999.

II. Summary of Staff Reports on Economic and Financial Developments 3

A. Money Market Operations in the Intermeeting Period

Market operations in the period since the previous meeting on March 25 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 provided the market with a large amount of funds when demand for funds increased for settlements at the end of fiscal 1998 and the beginning of fiscal 1999. As a result, the overnight call rate from the end of fiscal 1998 to the beginning of fiscal 1999 moved in a range of around 0.03-0.05 percent, the rate being exceptionally stable compared with those of the same period in previous years, when the rate surged due to a seasonal tightening of money market conditions. The average of the uncollateralized overnight call rate in the current reserve maintenance period (from March 16 to April 15) stood at 0.03 percent as of April 8, one business day before the meeting.

On March 30, in addition to the increase in demand for funds for the fiscal year-end settlement, procurement of funds by foreign banks in Japan for the purpose of extending loans to the Deposit Insurance Corporation was conspicuous in the markets. Reflecting these developments, the Bank expanded the provision of funds, and as a result the weighted average of the uncollateralized overnight call rate for the day was 0.04 percent. As demand for funds increased further on March 31, the Bank provided a vast amount of funds as much as 3 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) for the first time since June 30, 1998. As a result, the uncollateralized overnight call rate rose only slightly, to 0.05 percent. In the morning of April 1, the Bank supplied large amounts of funds as much as 2.2 trillion yen more than the"remaining required reserves," but the uncollateralized overnight call rate seemed likely to exceed 0.5 percent as city banks were aiming to obtain funds to replace those maturing shortly after the end of fiscal 1998. To contain the upward pressure on the call rate, the Bank carried out an additional daytime operation to provide funds for the first time since December 15, 1998. In the week starting April 5, the market changed to a"buyers' market" due to the end of the seasonal tightening at the turn of the fiscal year, and interest rates declined accordingly. A report on the failure of a bank several days before the meeting did not cause any disturbances in the market.

Interest rates on term instruments rose slightly at the fiscal year-end, and then declined again somewhat.

The following three developments that had been observed during the intermeeting period required attention.

First, against the background of the uncollateralized overnight call rate declining to virtually zero percent, investors who sought high yields shifted their funds from call loans to CP, repo transactions, and longer-term instruments. Also, it seemed that investors were inclined to take some liquidity risk and credit risk, as they increased their purchase of corporate bonds issued by firms with relatively low credit ratings. Second, the amount of funds outstanding in the call money market increased toward the fiscal year-end, but decreased significantly in the week starting from April 5. The restoration of the amount of funds outstanding at the end of fiscal 1998 was due largely to a temporary shifting of funds by life insurance companies back from ordinary deposits to call loans, taking account of their solvency margin ratio (the measure of the financial soundness of a life insurance company in terms of how much the company can pay out should some unanticipated risk materialize). Thus, the call money market basically continued to shrink. Third, despite the Bank's provision of ample funds to the money market, funds remained in the Bank's current accounts held by institutions not subject to reserve requirements, such as tanshi companies, because major city banks maintained their stance of not holding excess reserves.

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

1. Developments in foreign exchange markets

The yen had stayed in a narrow range against the U.S. dollar in the period since the previous meeting. While there was an increase in U.S. dollar purchases with the escalation of the Kosovo crisis and an expansion in foreign bond investment in the new fiscal year by institutional investors, there was also continued sales of the U.S. dollar by exporting firms.

On April 8, the European Central Bank (ECB) reduced the interest rate on main refinancing operations--the key interest rate for monetary policy--by 0.5 percent to 2.5 percent. On the same day, the Swiss National Bank (SNB) followed. In addition, the Bank of England (BOE) reduced its repo rate by 0.25 percent to 5.25 percent.

The euro followed a downward trend against the U.S. dollar reflecting the escalation of the Kosovo crisis, increasing concern over the economic slowdown in the euro area, and the expectation of an interest rate reduction by the ECB. The euro rose slightly with a report of a unilateral declaration of a cease-fire by the Yugoslavian government and statements by officials of European Union expressing concern about the weakening of the euro. However, the euro was declining again, as the ECB's interest rate reduction was larger than the market's expectation. Meanwhile, the euro strengthened against the pound sterling reflecting concern over the economic slowdown in the United Kingdom.

The Brazilian real continued to appreciate against the U.S. dollar with the improvement in the condition of that country's economy and approval of a loan disbursement by the International Monetary Fund (IMF).

2. Overseas economic and financial developments

The U.S. economy continued to expand. Household spending maintained its steady growth reflecting favorable income conditions. Production was recovering in manufacturing industries. In the labor market, the unemployment rate was declining, but no sign of wage increase was evident, with the growth in nonagricultural payroll employment as well as in hourly wages moderating. Under such circumstances, prices were stable.

U.S. stock prices (Dow Jones Industrial Average [DJIA]) surged to above the US$10,000 level, with little concern over inflation and prospect of brisk business performance of U.S. firms in the January-March quarter of 1999.

Among the East Asian countries, the Korean economy was recovering, and the Thai economy appeared to have hit bottom as financial market stability had been secured.

C. Economic and Financial Developments in Japan

1. Economic developments

With regard to final demand, business fixed investment continued to decrease. Net exports remained level and private consumption stayed at a low level. On the other hand, public works orders were increasing significantly and housing investment had started to recover.

Reflecting these developments in final demand and progress in inventory adjustment, industrial production had stopped decreasing, and corporate sentiment had improved slightly although it was still severe.

As the above developments suggested, Japan's economy, at present, appeared to have stopped deteriorating.

Meanwhile, prices on the whole were weak.

As for the outlook for the immediate future, business fixed investment would continue to decline reflecting the full-scale implementation of corporate restructuring, while public investment would increase significantly again and housing investment would continue to recover.

As for the longer-term economic prospects, the key point was whether private demand would start to recover by the second half of fiscal 1999, when the positive effect on the economy of public investment and housing investment was expected to subside. Although it was difficult to judge at the moment, recovery in private demand was still not likely considering the following three points.

First, with the continuing weakness of firms' profits and households' income, it was difficult to expect that the increase in public investment and housing investment would lead to an immediate recovery in business fixed investment and private consumption.

Second, under normal circumstances, progress in inventory adjustment suggested that an increase in final demand would lead immediately to an increase in production. However, firms were still cautious about expanding production reflecting their increased awareness of the need to restructure their balance sheet and their nervousness about the accumulation of inventories.

Third, alleviation of concern about financial system stability with the rise in stock prices and the injection of public funds into banks would ease firms' anxiety about fund-raising in the markets. These could stop cutbacks in business fixed investment, especially at small firms, and further, could mitigate the deterioration in household confidence that was likely to occur when full-scale corporate restructuring was implemented. However, there was no prospect that they would encourage an increase in the expenditure of households and firms.

If final demand started to increase, firms' attitude toward production might change, and there was a possibility that the change, interacting positively with the favorable financial conditions, would produce a virtuous circle. In order to follow such a possibility, careful attention should be paid to developments in final demand and production.

Prices were expected to remain on a downtrend for the immediate future, but it seemed that the decline would not accelerate immediately. Prices of crude oil had surged in the past month, and if high oil prices were sustained, this would possibly cause the rate of decline in domestic wholesale prices to moderate.

2. Financial developments

In the money market, where the overnight call rate stayed around 0.03-0.04 percent, financial institutions' concern about the availability of liquidity subsided. The Japan premium had almost disappeared with the injection of public funds into Japanese banks. Interest rates on term instruments were at low levels. Analyzing Euro-yen interest rates by decomposing them into one-month implied forward rates, it seemed that the market considered that there was little risk of interest rates rising in the following six months.

Long-term interest rates were declining moderately as private banks again increased bond purchases against the background of weak demand for funds in the private sector. Stock prices remained firm, reflecting expectation at home and abroad of positive effects of restructuring by Japanese firms and the upsurge of U.S. stock prices.

Demand for funds in the corporate sector was even more sluggish than before. Funds demand for economic activities such as business fixed investment remained weak, and firms' moves to increase their on-hand liquidity in the face of severe financing conditions were settling down.

Meanwhile, private banks were retaining their cautious lending stance as they were still anxious about borrower firms' credit risk. However, banks' concern about the availability of funds was subsiding, and the restraints arising from their previously insufficient capital base were moderating. Under these circumstances, private banks started to expand lending with small credit risks. Recently, the strict lending policy which had concentrated on collecting loans seemed to have eased slightly.

As a result, the previously tightened financing conditions in the corporate sector were easing somewhat.

However, attention should be paid to future developments, as there were still many firms, such as those with relatively low credit standings, that continued to have difficulty in fund-raising. Furthermore, careful monitoring was required of the extent to which private banks would ease their lending stance, and how the change would affect firms' incentives to invest.

The projected growth rate of money stock (M2+CDs) for April-June 1999 from the same period a year earlier was around 4 percent, slightly more than the rate of growth for January-March 1999 from the same period a year earlier. In April-June 1998, with the temporary stability in the financial market, firms made large amounts of repayments to banks using their on-hand liquidity, as there was strong pressure from banks eager to collect loans. This year, concern about market stability was subsiding, and firms were likely to reduce their on-hand liquidity, but pressure from banks to repay loans would not be as strong as in the previous year.

  1. 3Reports were made based on information available at the time of the meeting.

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

A. The Current Economic Situation

On the current economic situation, members agreed that, at present, Japan's economy appeared to have stopped deteriorating.

As grounds for this judgment, many members pointed out the following: (1) public works orders were increasing considerably; (2) housing investment was recovering; (3) inventory adjustment had progressed further and industrial production had remained level; and (4) corporate sentiment had improved slightly.

Specifically, one member cited the following developments: (1) reflecting the active implementation of public works, orders for trucks were increasing, and favorable effects were also expected to spread to other related industries such as construction machinery; (2) knockdown exports of passenger cars, especially those to South East Asia, had bottomed out and had recently risen above the previous year's level; (3) sales of condominiums in the Tokyo metropolitan area were good and those of prefabricated houses had also started to increase; and (4) sales of some household electrical appliances were increasing due to the rise in housing sales, and this increase was pushing up production in these goods. Another member commented that the coincident index of business conditions had remained level, although at a low level, suggesting that the economy had stopped deteriorating.

Many members, however, also noted the weakness in private demand, as in previous meetings.

Each of these members pointed out that business fixed investment was decreasing and private consumption was generally at a low level, reflecting the extremely severe situation in corporate profits and in employment and income conditions.

One member expressed concern that future economic recovery would be constrained considerably by the harsh employment situation, citing the fact that the number of unemployed had risen to over three million. Another member noted the slight decline observed recently in consumption-related indicators. The member commented that a drop in consumption expenditure had previously been avoided because a rise in the propensity to consume had canceled out the negative impact of the decrease in income. However, as the propensity to consume fell back to a low level in February, the sluggishness in income had directly affected consumption expenditure. Furthermore, the member expressed the opinion that, recently, exports were somewhat weaker than what might have been expected from developments in overseas economies and foreign exchange markets, and that this might be a reflection of anxiety about trade friction. Taking these conditions into account, the member pointed out the possibility that the deterioration in economic activity did not completely stop in the January-March quarter, and might thus have caused the level of economic activity at the start of the new fiscal year to decline somewhat.

B. Financial Developments

Regarding financial developments, many members noted that financial market conditions, which had improved significantly in March, continued to be favorable. The members also recognized that the effects of the government's measures such as the expansion of the credit guarantee system and the injection of public funds into banks as well as the Bank's decisive monetary easing aiming at zero interest rates were becoming clearly evident in the financial markets and in corporate financing, and they were contributing to preventing further economic deterioration.

Many members pointed out that favorable financial market conditions had been maintained since March, listing the following positive developments in the markets: (1) the overnight call rate was near zero percent; (2) interest rates on term instruments were at low levels and the Japan premium had almost disappeared; (3) long-term interest rates were declining; (4) stock prices were firm; and (5) the yen was stable at around 120 yen against the U.S. dollar. Many members made the assessment that these favorable developments in the financial markets were contributing to preventing further economic deterioration.

One of them judged that the risks the Bank had been concerned about when the latest monetary easing was decided in February--that the rise in long-term interest rates and the yen's appreciation would negatively affect economic activities--had been contained to a considerable extent.

On this point, a different member pointed out that the monetary easing of February 12 had been effective because (1) the policy change had not been expected by market participants, and (2) the Bank's stance on money market operations had been aggressive and its implementation of operations had been speedy in the period from February 25. The member, however, added that the effect of such factors was expected to subside gradually in the course of time.

In the discussion, many members expressed cautious views about recent stock prices. A few members pointed out that foreign investors were increasing their purchase of Japanese stocks, as they expected the uncertainty about Japan's economic outlook to subside and structural adjustment of the economy such as corporate restructuring to progress. These members, however, warned that it required attentive monitoring whether the expected improvement in corporate profits that was currently pushing up stock prices would actually materialize. This warning was based on their understanding that (1) corporate restructuring in Japan was not done as drastically as in Europe and the United States, where layoffs are the major approach to reducing personnel costs, and it would therefore not directly lead to an increase in corporate profits, and (2) the restructuring might be overly focused on reducing interest-bearing liabilities, and it therefore might not allow sufficient resources to be allocated strategically and intensively to the areas in which firms should specialize.

As for the call money market, many members shared the view that the contraction in transaction volume had not obstructed funds settlement in the market, but with significant changes occurring in the flow of funds, due attention should be paid to future developments.

Meanwhile, some members commented on the developments in the monetary aggregates.

One member made the observation that the Bank's constant provision of ample funds to the market to realize a zero-percent overnight call rate had brought about a slight rise in the growth rate of the monetary base (the sum of currency in circulation and reserves) from a year earlier. The member explained that the decline in interest rates had induced an expansion of money as a natural course of events, and as a result, the anxiety of financial institutions and firms about the availability of liquidity had subsided considerably. Furthermore, the member added that financial institutions and institutional investors were becoming slightly more willing than before to take risks in the markets.

Another member mentioned that banks were altering their lending stance and were extending loans to small firms if the firms' business performance and loan projects were satisfactory. On this basis, the member emphasized that the effects of such measures as the strengthening of banks' capital base with public funds and the Bank's decisive monetary easing had sufficiently spread to the corporate sector. The member further expressed the view that the problem lay in the fact that firms, even under the current relaxed financing conditions, were still not borrowing funds for constructive activities such as business fixed investment.

C. The Economic Outlook

On the economic outlook, many members shared the understanding that there was still no clear prospect of an economic recovery, given the fact that private-sector activity continued to be weak and that firms were expected to implement full-scale restructuring.

Some members pointed out that the cyclical mechanism inherent in private-sector economic activity--the cyclical forces that work between (1) production, (2) corporate profits, employment, and income, and (3) business fixed investment and private consumption--had still not regained sufficient momentum. Based on this understanding, these members generally agreed with the staff's view of the economic outlook that the economy was highly likely to take a downturn in the second half of fiscal 1999, possibly accompanied by stronger downward pressure on prices.

One of them commented that production could afford to increase given the current level of inventory in the manufacturing sector, but firms still remained cautious about increasing production. For this reason, the member could not rule out the possibility of a double dip in the economy in the second half of fiscal 1999. To support this view, the member, along with a few others, pointed out that many firms were still burdened with excessive production capacity and labor as revealed in the Bank's Tankan--Short-term Economic Survey of Enterprises in Japan--of March 1999.

Some members focused their attention on the fact that firms were expecting a recovery in profits in the second half of fiscal 1999 according to the March Tankan survey. They noted that this was based on firms' expectations of cost reductions through restructuring rather than of an increase in production and sales. One member projected that, if every firm implemented thorough restructuring to increase profits, deflationary pressure would intensify on a macroeconomic level and therefore corporate profits would not improve. Another member, who acknowledged that the profits of the materials industry depended on developments in wholesale prices, judged that it was questionable whether corporate profits could improve in the second half of fiscal 1999 given the downward trend in wholesale prices. Furthermore, a different member expressed the opinion that a possible deterioration in corporate profits was a significant risk to spending activity and to people's expectations, which would be affected by a plunge in stock prices.

One of the above members basically held a strongly pessimistic view that signs of a recovery in business fixed investment and in private consumption could hardly be expected under circumstances where firms disposed of their excess capital stock and implemented full-scale restructuring. The member, however, noted that many large-scale private-sector projects were scheduled to start in autumn 1999, especially in Tokyo. The member commented that attention should be paid to the extent to which these projects could alleviate the downward pressure on the economy when the support from public investment subsided in the second half of fiscal 1999, and expressed hopes for a favorable outcome.

While each member presented cautious views about the economic outlook, some members made comments from the standpoint that improvements in the financial situation might have a positive effect on future economic developments.

One member expressed the view that financial institutions' lending stance was changing somewhat as a result of the abatement of anxiety about the availability of liquidity due to decisive monetary easing and the strengthening of financial institutions' capital base due to public funds injection. Specifically, the member pointed out the following. First, small firms' business fixed investment was less likely to be restrained by credit conditions at least, although financial institutions were not in a condition to immediately increase loans, faced with the need to improve shareholders' return on equity by compressing assets and with little demand for funds. Second, the flow of funds was changing in the low interest rate environment, and part of banks' funds was returning to risk assets, as had been observed in Europe and the United States. The member considered that these financial developments could positively influence economic activity, and the extent of this effect deserved attention.

Another member also focused on the private financial institutions' recent stance on risk-taking, as this could pass on favorable effects of financial developments to economic activity. The member pointed out that financial institutions were not able to increase the amount of loans because they could not immediately ease the strict screening criteria designed to secure the soundness of their financial condition. Further, firms acknowledged the present situation of financial institutions, and therefore still had a gloomy view of their financing conditions, as revealed in the March Tankan survey. The member noted that financial institutions were altering their business policy, which had been concentrated on collecting loans, and were taking more interest in purchasing corporate bonds with low credit ratings. The member furthermore expressed high hopes for favorable consequences.

A third member, acknowledging that the current stock prices, underpinned by the purchases of foreign investors, were a little high considering the level of economic activity, mentioned two possible scenarios with regard to stock prices and economic activity. If corporate profits increased in line with the expectation of the stock market, supported by a series of improvements in the financial markets, the economy would become stronger than the staff had projected. However, if stock prices declined to a level consistent with the sluggishness of economic activity, the economy would become weaker than the staff had forecasted.

With regard to prices, many members were of the opinion that the downward trend would continue. Meanwhile, one member noted the possibility that the decline in prices could be quite small, and another saw a risk that prices might show an upturn.

The first member commented that firms were soon to make their annual revision of wages and, depending on the result, service prices might decline. However, liquidity constraints on firms were abating considerably, and it was possible that this would facilitate firms' financing of inventories, and thereby underpin prices. The member added that this point was closely related to the assessment of the significance of the growth of the monetary aggregates, which was higher than that of nominal GDP.

The second member focused on the rebound in crude oil prices, and commented that it was highly likely that the recent agreement among oil exporting countries to cut production drastically to 7-8 percent less than the estimated world demand would be complied with considering the recent relations between Arab countries. Based on this recognition, the member emphasized that attention should be paid to a further rise in crude oil prices as the risk of such a rise was likely to increase in the summer, when demand for gasoline increased.

Some members commented on the necessity for structural adjustment and firms' restructuring efforts.

One member expressed the opinion that necessary fiscal and monetary policies had already been implemented, and it was now up to firms to reduce excess liabilities, plant and equipment, and labor. In doing so, it was unavoidable that cuts in personnel expenses would cause individual employees pain. Based on the understanding that one of the expected effects of fiscal and monetary policies was to ease the deflationary pressures arising from structural adjustment, the member expressed hopes for the implementation of fiscal policies such as an employment policy, a tax system encouraging disposal of capital stock, and measures to liquidate land, and also for the maintenance of the extremely easy monetary policy. However, the member also expressed concern that, if the credit guarantee system were, as reported by the media, to be expanded further, this would allow the survival of firms that should have been forced out of the market, and thus work against the efforts to achieve structural adjustment.

Another member, citing some of the business indicators relating to Japanese firms, commented that corporate restructuring would inevitably become very drastic. This was based on the fact that the ratios of net income to capital, of net income to sales, and of personnel expenses to sales were considerably worse than in Europe and the United States, and the tangible fixed assets turnover rate had been below that of the United States since the early 1990s. The member further mentioned the possibility that large firms needed drastic restructuring given that their break-even point ratios had risen to those of small firms.

A third member, comparing the employment situation in Japan and Korea, where a similar financial system crisis had occurred, pointed out that employment adjustment in Japan was slow to progress whereas in Korea the unemployment rate had jumped from the 4-5 percent range to the 8-9 percent range in 1998. The member added that, if full-scale employment adjustment was carried out in Japan, large amounts of fiscal funds would be needed. The member expressed the opinion that it was preferable that fiscal expenditure be used to train those who had lost their jobs, although employment policy in Japan so far had consisted of providing unemployment insurance and encouraging firms to keep excess labor (in principle, by granting them employment adjustment subsidies). Regarding another member's earlier comment that pain on employees' part was inevitable in the process of structural adjustment, the member argued that, before imposing such a burden on employees, various regulations should be reviewed so that households would have diverse options in constructing their portfolio of financial assets amounting to 1,200 trillion yen -- for example, changing regulations so that households could purchase TBs and FBs.

In the discussion, the member who claimed that firms were in a difficult situation based on their business indicators presented an extremely pessimistic view of the economic outlook. The member remarked that the outlook was totally unclear for the second half of fiscal 1999, when the favorable effect of public investment was expected to subside, and that there was a risk of the economy sinking into a double-dip decline. The grounds for this view were as follows: (1) public investment in the second half of fiscal 1999 was expected to be 6 trillion yen less than in the first half of the fiscal year, and this difference was so large that a supplementary budget would usually be required; (2) indices for production forecast for April had declined especially in industries, such as automobiles and electrical machinery, whose production levels strongly affected other sectors, and this was expected to affect upstream industries such as parts-manufacturing firms; (3) the economic and financial situation in areas that were major importers of Japanese products--namely, Asia, the United States, and the European Union--was unstable, and there was a possibility that this would have negative effects on Japan's exports and production; (4) the heightened demand for replacement of household electrical appliances was expected to subside this summer, and demand for renewing passenger cars was not expected to emerge until the year 2000 reflecting deferred replacement of cars; and (5) the current level of unemployment suggested that the propensity to consume would decline further.

IV. 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.

The views of many members on the economic situation could be summarized as follows: (1) corporate sentiment had improved slightly against the background of a surge in public investment, a recovery in housing investment, and a continuing flatness in industrial production, and thus the economy appeared to have stopped deteriorating; (2) the monetary easing to date had produced appreciable effects in the financial markets; but (3) the economy was moving around the bottom, and the prospect of an economic recovery was still unclear considering that economic activity in the private sector was persistently weak and firms were expected to carry out full-scale restructuring.

In the discussion, some members acknowledged that structural adjustment was the remedy currently needed for Japan's economy and that the role expected of fiscal and monetary policies was to create conditions facilitating this adjustment. They, however, stressed that it would not be appropriate for monetary policy to take on too much responsibility in promoting structural adjustment.

One of these members stated that, unlike central banks in Europe, which take a clear-cut stance that monetary policy cannot be employed to achieve structural adjustment, the Bank had implemented monetary policy with a view to providing as much financial support as possible to the economy, which was plagued by deflationary pressure accompanying structural adjustment. However, the Bank had already employed interest rate policy to the greatest possible extent, and therefore, it could not give the economy any further support in undergoing structural adjustment.

Another member also expressed the view that monetary easing lessened firms' hardships that came hand in hand with restructuring by alleviating concerns about their financing and reducing their fund-raising costs. Having said so, the member emphasized that (1) monetary policy could not take any further role in supporting structural adjustment; and (2) the support the easy monetary policy had given to the economy should not be overlooked.

One member made two points. First, the market clearly understood that the Bank had provided the necessary and sufficient amount of funds to encourage the overnight call rate to"move as low as possible" under an interest rate targeting policy. Second, the current policy directive stating that the Bank should induce the overnight call rate to"move as low as possible" while giving due consideration to maintaining the market function allowed for due flexibility in responding to situations such as an outbreak of market disturbances and financial institution failures, and this flexibility should be maintained for some time.

Another member claimed that the Bank was now at the stage of observing what changes were coming out from the monetary easing to date. A different member remarked that it was now important to foster the long-awaited buds of confidence that have recently been observed in economic activity.

Based on these discussions, the majority of the members shared the view that, as for the monetary policy for the immediate future, it was appropriate to maintain the current guideline for money market operations.

A few members opposed to maintaining the current guideline.

One of these members commented on the effects of the Bank's provision of ample funds in the market aimed at inducing the overnight call rate to decline to close to zero percent. This member stated that the Bank's provision of ample funds had indeed stabilized the financial markets, but it had not led to an improvement in financial institutions' profits, which was currently the most critical issue. The member added that the funds supplied to the market could be flowing into speculative trading in the asset market, and were therefore not generating favorable outcomes in economic activity. The member concluded that the effects of the extremely low interest rate policy was not clear. On these bases, the member argued against adopting a policy for maintaining extremely low interest rates.

Meanwhile, a different member advocated a further monetary easing. The member, emphasizing that the member's economic outlook was distinctly more severe than that of other members, claimed as in previous meetings that the Bank should change its policy to full-scale quantitative easing by setting a medium-term aim for the inflation rate and thereby targeting a certain level of growth in the monetary base (the sum of currency in circulation and reserves). The member cited the following as reasons for making this claim: (1) the possibility was increasing that the economy would take a downturn again after summer 1999; (2) the growth in quantitative indicators, such as the monetary base, had continued to be sluggish, meaning that the amount of funds currently supplied by the Bank was not sufficient; and (3) the market could be expected to take in funds of at least 20 trillion yen provided through the Bank's market operations, and could therefore be expected to accept the funds necessary for realizing a full-scale quantitative easing. This member also attributed a large part of the recent favorable developments in the financial markets to quantitative easing. The member commented that the effects of quantitative easing under the virtually zero interest rate had been transmitted not only through interest rates but also exchange rates and stock prices, and that quantitative easing policy had an effective transmission mechanism built in. The member cited the following as examples that demonstrated this point: (1) it mitigated the upward pressure on the yen, which had appreciated reflecting inflow of funds to Japan's financial markets against the background of purchases of Japanese stocks by foreign investors and selling of foreign bonds for cash by Japanese institutional investors; (2) it restrained the upward pressure on long-term interest rates associated with concern over the expansion of the fiscal deficit; and (3) it pushed up stock prices.

A few members objected to the above opinion that quantitative easing had had a significant impact on recent financial market developments. According to one member, the recent favorable developments in the markets could be seen as entirely due to the Bank's decisive monetary easing to maintain the overnight call rate at close to zero percent and the market's understanding of the Bank's resolve. The member commented that it was not necessary to attribute the favorable market developments to quantitative easing. Another member put forward the following argument. In theory, the current and expected future interest rates on call money determine medium- to long-term interest rates. The market's perception of the Bank's strong will to maintain the easy monetary policy stance for a certain period had caused a great decline in the expected future interest rates on call money, and this was the spur to transactions of long-term financial assets.

In relation to the market's interpretation of the Bank's monetary policy, members discussed, as in the previous meeting, ways to secure adequate accountability for monetary policy.

One member presented the member's understanding of"quantitative easing," saying that there existed a number of confusing interpretations.

First, the member explained that the quantity of money is determined concurrently with interest rates. Based on this relationship, the Bank, in attaining the target for the overnight call rate, that is, in encouraging the rate to move at close to zero percent, had"provided ample reserves to fully meet demand for overnight funds." The member judged and stressed that, therefore, there had already been sufficient expansion in the quantity of money to date.

Then, the member explained the concept of the"narrowly defined or strictly defined quantitative easing." The member stated that this was a concept where setting a"quantitative target," on the premise that interest rates and the quantity of money are determined concurrently, has a significance for monetary policy. As the pros and cons of such quantitative targeting, the member cited the following: (1) it could be advantageous when the expected rate of inflation fluctuated greatly and it was therefore difficult to target a certain level of nominal interest rates; but (2) it would involve the risk of causing significant interest rate volatility and of amplifying economic fluctuations when demand for funds fluctuated inconsistently with the level of economic activity against the background of factors such as concern about financial system stability. The member concluded that the employment of a quantitative targeting policy should, in the end, be decided giving due consideration to such issues as the stability of the relationship between the quantitative target and economic activity, and the controllability of the targeted indicator.

Another member also commented that the concept of quantitative targeting needed to be clarified. This member noted that the Bank's morning projection of excess reserves for the end of the day announced before the start of each day's operations was seen by the market as a signal given by the Bank in achieving the target of the overnight call rate, but this was not a quantitative target. The member explained that quantitative targeting was a method whereby the Bank set an intermediate numerical target for a quantitative indicator such as money stock or the monetary base, and tried to achieve the target by adjusting, although not always, the call rate. The member, however, acknowledged that there existed various difficulties in determining which quantitative indicator should be used, what numerical target should be set, and whether such a target could be attained.

The member who first elaborated on the concept of quantitative easing referred to the recent argument that"quantitative targeting should be employed after nominal interest rates declined to zero percent." The member expressed doubt about the possibility that increased supply of reserves under a quantitative target would push up the expected rate of inflation and thereby reduce real interest rates. Specifically, the member cited the following points of concern: (1) whether it would be possible to reduce real interest rates while at the same time keeping inflation at a mild pace through monetary policy; (2) whether the anticipated effects would materialize, because a rise in the expected rate of inflation would most likely bring about a rise in nominal long-term interest rates, and therefore no decline in real interest rates would result; and (3) whether it would be acceptable to add to the sufferings of those relying heavily on interest income, considering that inflation expectations boosted by prolonged low interest rate policy would lead to a decrease in the real value of financial assets. The member concluded that quantitative targeting would not be a viable option unless answers to these problems were found.

Another member stated that the Bank had no choice but to employ the current zero interest rate policy to prevent Japan's economy from falling into a deflationary spiral. The member stressed that the current policy was an exceptional one, which would not be employed at times of normal and stable economic growth, but that the Bank should be committed to this policy until deflationary concerns disappeared. This member acknowledged that this exceptional policy was producing sufficient effects in the financial markets. On this basis, the member expressed concern that, if expectations of a further easing increased in the market despite the favorable market developments observed currently, Japan's economic recovery would be negatively affected.

As another issue related to securing adequate accountability for monetary policy, some members presented their thinking on whether the Bank should explicitly state until when the Bank intended to maintain the current zero interest rate policy.

One member presented the view that recent developments in the financial markets, such as the spreading of declines in interest rates from short-term instruments to longer-term ones, suggested that the market assumed the current zero interest rate policy to continue for a long time. On this premise, the member commented that if the Bank explicitly stated that it would maintain the overnight call rate close to zero percent until deflationary concerns disappeared, interest rates of maturities ranging from overnight to relatively long term would stabilize at a low level. The member claimed that this would maximize the effects of monetary easing.

Another member presented the understanding that one of the aims of quantitative targeting and inflation targeting was to influence the expectations of the market by making a medium- to long-term policy commitment. Based on this recognition, the member stated that, if technical problems prevented the Bank from employing such policies, the Bank, under the interest rate targeting policy, could produce effects equivalent to the medium- to long-term commitment under quantitative or inflation targeting by explicitly indicating what economic condition the Bank intended to achieve before terminating the zero interest rate policy. This member asserted the effectiveness of this method, saying that it would alleviate the risk that market participants' feeling of uncertainty about the future course of monetary policy would push up interest rates and thereby affect the economy negatively.

Some other members were also in favor of the above opinion.

A different member claimed that, if the Bank was to clarify its current stance on monetary policy management in"an easily understandable manner," the message would consist of an explanation of the Bank's view on the economic and financial situation and a clear statement that the Bank had done all it could to dispel deflationary concerns. This member added that it was therefore important to continue to scrutinize the economic and financial conditions at each Monetary Policy Meeting, hold fruitful discussions, and disclose these discussions in the minutes.

One member concluded these discussions by stressing that monetary policy in the past several years had been aimed at achieving price stability--that is, non-inflationary and non-deflationary situation--and at realizing sustainable economic growth under price stability. To underline this stance, the member suggested that the Bank explicitly convey to the market its intention to maintain the current zero interest rate policy until deflationary concerns were dispelled, not in the policy directive, but at such occasions as Governor's press conferences. Many members supported this suggestion.

V. Remarks by Government Representatives

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

The economy was still in a very severe situation, with private demand remaining sluggish. However, the downward trend in economic activity was coming to a halt supported by a sizable increase in public investment under the emergency economic package, the expansion of the credit guarantee system, and progress in the implementation of financial system stabilization measures.

The fiscal 1999 budget had been passed by the Diet very rapidly. With this, the cabinet decided on March 23 to actively implement public works in the first half of fiscal 1999 in order to achieve an economic recovery. Specifically, it intended to make public works contracts worth 10 percent more than in the first half of fiscal 1998. Accordingly, it was expected that the contract value in the first half of fiscal 1999 would mark a record high, exceeding 15 trillion yen.

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

The economy was still in a very severe situation, with private demand remaining sluggish. However, the government still considered that the downward trend in economic activity was coming to a halt supported by various policy measures. In the cabinet meeting of that morning (April 9), the Prime Minister had ordered the ministries to follow up the implementation of the emergency economic package of November 1998 and to make a report by the end of this month.

The government would like to request the Bank to continue its appropriate monetary policy management, such as provision of ample liquidity.

VI. Votes

The views of many members were summarized as follows. The economy appeared to have stopped deteriorating. The effects of the monetary easing to date had sufficiently spread and the easing, together with the injection of public funds into banks, was providing substantial support to economic activity. However, economic activity in the private sector was persistently weak, and there was still no clear prospect of economic recovery. The prescription for future economic recovery was to steadily promote the reconstruction of the financial system and structural reform. At the same time, it was important to maintain the current decisive easy stance of monetary policy, firmly underpinning economic activity until deflationary concerns were dispelled. The money market continued to be in the process of adjusting itself to a new environment of a virtually zero-percent overnight call rate, and therefore, it was necessary to remain alert to changes in the flow of funds.

Based on this understanding, the majority of members were of the opinion that the Bank should maintain the guideline for money market operations decided at the previous meeting, giving due consideration to maintaining the market function.

One member, however, claimed that it was appropriate for the Bank to adopt a full-scale quantitative easing.

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 April (change in the average amount outstanding from March to April), 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).
As the grounds for this proposal, Mr. Nakahara reiterated the views he had expressed earlier in the meeting and explained his calculation of the annual growth in the monetary base consistent with the price target. The estimation employed the idea of the Taylor rule--which calculated the appropriate level of the monetary policy variable using the output gap and inflation rate based on certain assumptions.

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). 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 for the following reasons: (1) immediate monetary easing was required considering the increased risk that the economy would start deteriorating again in the second half of fiscal 1999 and the lag between the implementation of monetary policy and the permeation of policy effects; (2) deferred implementation of monetary policy might rekindle pressure inside Japan and from abroad on the Bank to underwrite Japanese government bonds (JGBs) or increase outright purchase of JGBs; (3) it was necessary to adopt a new monetary policy regime since interest rate policy could not be expected to produce any additional effect and the zero interest rate policy was no longer effective.

Ms. Shinotsuka dissented, arguing that the zero interest rate policy, although it had contributed to the halt in the economic deterioration, had not sufficiently stimulated domestic demand such as private consumption or business fixed investment, which were the core economic activities. On these grounds, she claimed that she could not see the point of continuing to provide ample funds.

VII. 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 April 13, 1999 in the Monthly Report of Recent Economic and Financial Developments (the"Ivory Paper," consisting of"The Bank's View" and"The Background"). 4

  1. 4The original full text, written in Japanese, of the"Ivory Paper" was published on April 13, 1999 together with the English version of"The Bank's View." The English version of"The Background" was published on April 23, 1999.


For immediate release

April 9, 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.