Minutes of the Monetary Policy Meeting

on April 22, 1999
(English translation prepared by the Bank staff based on the Japanese original)

June 17, 1999
Bank of Japan

A Monetary Policy Meeting of the Bank of Japan Policy Board was held in the Head Office of the Bank of Japan in Tokyo on Thursday, April 22, 1999, from 9:00 a.m. to 12:17 p.m., and from 1:11 p.m. to 3:19 p.m. ¹

Policy Board Members Present
Mr. M. Hayami, Chairman, Governor of the Bank of Japan
Mr. S. Fujiwara, Deputy Governor of the Bank of Japan
Mr. Y. Yamaguchi, Deputy Governor of the Bank of Japan
Mr. Y. Gotoh
Mr. S. Taketomi
Mr. T. Miki
Mr. N. Nakahara
Ms. E. Shinotsuka
Mr. K. Ueda

Government Representative Present
Mr. S. Shimpo, Director-General of the Research 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. 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

The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on June 14, 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.

I. Approval of the Minutes of the Monetary Policy Meeting Held on March 25, 1999

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting, the"Green Paper," of March 25, 1999 for release on April 27, 1999.

II. Summary of Staff Reports on Economic and Financial Developments ²

A. Money Market Operations in the Intermeeting Period

Market operations in the period since the previous meeting on April 9 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 money market in the intermeeting period was even more stable than before, reflecting the following: (1) the Bank continued to supply ample funds in the market in accordance with the above guideline for money market operations; and (2) the Governor stated at a press conference on April 13 that, until deflationary concern was dispelled, the Bank would keep the overnight call rate at virtually zero percent by injecting necessary liquidity into the market. As a result, the daily weighted average of the uncollateralized overnight call rate was steady at 0.03 percent. Recently, most overnight transactions were made in the market before the Bank's announcement of regular market operations, usually made at around 9:20 a.m. This suggested that both fund-investors and fund-raisers took 0.03 percent as given.

Large banks, especially city banks, feeling confident of procuring funds in the market whenever necessary, were still unwilling to hold reserves beyond the required level --i.e., excess reserves. As a result, a large amount of funds continued to remain at the end of the day in Bank of Japan current accounts held by financial institutions not subject to reserve requirements, such as tanshi companies (money market broker-cum-dealers).

The following three developments since the previous meeting deserved attention.

First, interest rates on term instruments declined further as the Governor's statement mentioned above created expectations of a prolonged zero-interest-rate environment. Second, the pace of decrease in the amount of funds outstanding in the call money market was moderating. However, some foreign banks had expressed concern about the significant contraction of market transactions as representing a decline in the availability of funds, and therefore developments continued to warrant attention. Third, fund-investors were increasing their investments in treasury bills (TBs) and financing bills (FBs) given the virtually zero-percent interest rate environment. As a result, bidding at issuance was becoming extremely competitive (the bid-to-cover ratio for one-year TBs marked 9.94 on April 14, and that for three-month FBs was 7.49 on April 21), and interest rates on TBs and FBs in the secondary market were declining.

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

1. Developments in foreign exchange markets

The depreciation of the euro was the most conspicuous development in the foreign exchange markets in the intermeeting period. Reflecting a considerable decline of the euro against the yen, the yen appreciated slightly against the U.S. dollar.

The decline of the euro was attributable to the following: (1) a significant falling off of the enthusiasm surrounding the launch of the currency in January; (2) increasing concern about an economic slowdown in the entire euro area, given the continuing slowdown in such countries as Germany and Italy, where there was little room to implement fiscal policy with the ratio of fiscal deficit to nominal GDP approaching 3 percent; and (3) anticipation of a further deterioration in the employment situation in Germany given that the spring wage negotiations concluded with a wage increase higher than the rise in productivity. In addition to the above economic and financial developments, the recent escalation of the Kosovo crisis also added to the downward pressure on the euro.

Meanwhile, the yen appreciated against the U.S. dollar. This was due to the fact that, while in the United States there was nervousness about the extremely high stock prices and concern about a further expansion of the current account deficit, in Japan there were favorable factors encouraging foreign investors to purchase Japanese stocks. These included the Bank's maintenance of the extremely easy monetary policy, injection of public funds into banks, full-scale corporate restructuring, and the flow of individual investors' money into the stock market. However, market participants hardly expected the yen to continue its upward trend as there was little prospect of economic recovery and apprehension about a possible intervention.

South East Asian currencies generally strengthened reflecting the gradual stabilization of the economies in the area. Among Latin American currencies, the Brazilian real remained firm against the U.S. dollar reflecting the multilateral financial assistance to the Banco Central do Brasil coordinated by the Bank for International Settlements.

2. Overseas economic and financial developments

In the U.S. stock market, high-technology stocks, which had led the surge in overall stock prices, fell back due to concerns about a possible decline in the sector's earnings. Cyclical stocks, such as machinery- and materials-related stocks, and bank and securities company stocks continued to surge due to these firms' favorable earnings.

In the commodity markets, crude oil prices continued to be firm. This reflected three factors: (1) the resolution of the members of the Organization of Petroleum Exporting Countries (OPEC) to cut production; (2) a projected improvement of the global supply and demand balance due to the bottoming out of the Asian economies; and (3) the escalation of the Kosovo crisis.

According to the World Economic Outlook (WEO) released recently by the International Monetary Fund (IMF), the economic growth forecast for the United States in 1999 was revised upward from the projection of December 1998, on account of the continued expansion and the conspicuous growth marked in the October-December quarter of 1998. As for Asian economies--in particular the newly industrialized economies (NIEs) and the economies of the Association of South East Asian Nations (ASEAN)--a gradual bottoming out was expected. Meanwhile, growth forecasts for 1999 were revised downward for some economies, including the following: (1) the euro area, where the risk of an economic slowdown had increased; (2) Latin American countries, whose interest rates had been raised to counter the depreciation of their currencies; and (3) Japan, whose negative growth in the October-December quarter of 1998 was taken into account.

C. Economic and Financial Developments in Japan

1. Economic developments

The economic indicators released in the intermeeting period were basically in line with the Bank's judgment at the previous meeting that Japan's economy appeared to have stopped deteriorating.

Public works contracts increased sharply in March as in February. This was due to the significant increase in orders from both the central and local governments based on economic stimulus measures. The positive effect of this increase in public investment was expected to spread to economic activities although the uptrend in orders was expected to moderate in and after April.

Both real exports and real imports were generally flat when adjusted for monthly fluctuations and irregular factors. While exports to the United States were firm, those to Europe were decreasing slightly. Trade in parts and finished goods with Asian countries was becoming robust again reflecting the gradual recovery in these economies.

There was a possibility that the significant downtrend in business fixed investment had moderated somewhat considering that the January-February averages of machinery orders, construction starts, and shipment of capital goods had all risen compared to the October-December 1998 averages. Specifically, deferred investments at small firms in the areas of information technology and business equipment might have surfaced reflecting the abatement of anxiety about the financial system and financing conditions.

Private consumption-related indicators were somewhat weak overall although they continued to show mixed developments. The weakness was illustrated by the following: (1) a decrease in sales of department stores in Tokyo in March; (2) little sign of improvement in sales of department stores and chain stores in early April; and (3) a continued decline in outlays on travel. Turning to housing investment, sales of newly built condominiums in the metropolitan areas increased significantly in March. Although construction starts of condominiums were not expected to increase immediately given the number of condominiums not yet sold, the downward trend could bottom out if circumstances changed--for example, if the current level of unsold condominiums was reduced.

As for land prices, the urban land price index for both commercial and residential land in the six major cities declined in March by a larger margin than the previous period. However, it was often pointed out that the decline in residential land prices was slowing reflecting the recent improvement in housing sales.

2. Financial developments

In the financial markets, short-term interest rates were low and stable, long-term interest rates were declining, and stock prices remained firm.

With regard to short-term interest rates, decomposition of Euro-yen interest rates into one-month implied forward rates showed that all implied rates up to the one starting in August were in the 0.16-0.18 percent range, and this suggested that the liquidity risk premium continued to be extremely small. Furthermore, the decomposition of long-term interest rates into one-year implied forward rates suggested that, while the decline in long-term interest rates during the period until early March following the February monetary easing was mainly due to the fall in the implied rates in the short-term zone of the yield curve, the recent decline was due to a fall in the implied rates in the medium-term zone, those starting three to six years ahead. This indicated a spreading of monetary easing effects. Fund-investors seemed to have become more willing than before to take interest rate risks and credit risks, faced with the across-the-board decline in interest rates. As a result, the interest rate differential between Japanese government bonds (JGBs) and bank debentures and between JGBs and corporate bonds had narrowed slightly.

Regarding developments in the monetary aggregates, the decline in private bank lending from a year earlier was contracting while fund-raising in the capital market, such as the commercial paper (CP) and corporate bond markets, remained sluggish.

In corporate financing, demand for credit for economic activities such as business fixed investment remained weak, and firms' moves to increase their on-hand liquidity in the face of severe fund-raising conditions were settling down. Banks were gradually easing their strict lending policy which had been concentrated on collecting loans. As a result, the previously tight corporate financing conditions continued to ease.

2Reports 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 and the Economic Outlook

On the current economic situation, members generally agreed that economic indicators released in the intermeeting period were in line with the Bank's judgment at the previous meeting that Japan's economy appeared to have stopped deteriorating.

As evidence of the halt in economic deterioration, many members pointed out that (1) public works orders in March were at a high level as in February, and (2) indicators relating to housing investment such as sales of condominiums were improving. A few members noted that in business fixed investment, which had been declining considerably, a slight increase was observed in its leading indicators, such as machinery orders, and commented that this might be a favorable outcome of improved corporate financing conditions reflecting such policy measures as monetary easing.

At the same time, each of these members remarked that, although leading indicators were improving, it was too early to judge that the decline in business fixed investment had been contained. They also remarked that private consumption had weakened slightly considering the figures for department store sales in Tokyo and recent anecdotal evidence. On these grounds, they acknowledged that private-sector activity continued to be weak.

Based on the above, a few members remarked that positive and negative signs were currently mixed in many aspects of the economy--i.e., demand items, industries, and firms.

On the economic outlook, members judged, as in the previous meeting, that there was still no clear prospect of an economic recovery given the prevailing weakness in private-sector activity.

One member commented that the critical issue was whether an expansion in private demand could take over as the driving force for the economy in the second half of fiscal 1999, when the positive effect of fiscal policy that had been underpinning the economy was expected to subside. On this point, the member took the position that there was still no clear prospect considering the current low level of private-sector activity. As key points that would determine the outcome, the member cited the following: (1) whether positive signs appeared in production, employment, and income reflecting the increase in demand brought about by the expanded public and housing investments; and (2) whether small firms increased their business fixed investment, which had been deferred due to financial constraints, and whether this led to an economic recovery. The second point warranted attention considering that banks were easing their previously cautious lending stance because of the effects of the measures implemented by the Bank and the government since 1998, and the improvement in financial market conditions.

Another member remarked that the decline in prices had a negative impact on firms' business management and earnings. The member pointed out that firms' managers would neither start to expand business fixed investment nor believe in an economic recovery unless signs appeared that the decline in prices would stop. On this basis, the member raised some of the points that required careful monitoring: (1) as regards the quantitative factor, to what level production would recover as inventory adjustment progressed; and (2) as regards the price factor, to what extent the recent improvement in international materials prices reflecting the economic recovery in Asia would influence domestic materials prices.

In the course of discussing the economic outlook, some members commented on the need for structural adjustment and its effect on the economy. These members were of the opinion that it was essential to reduce the excess production capacity, labor, and liabilities--the"negative legacies" inherited from the"bubble" economy. From this standpoint, one of them emphasized the need to reallocate firms' resources to strategic areas, to boost demand by developing new technology and products, and to foster new industries. Since firms' restructuring would exert downward pressure on the economy in the short term, these members acknowledged that fiscal policy, monetary policy, and the private sector's efforts should be coordinated to tackle structural adjustment--for example, the government should establish a safety net for the unemployed and the Bank should maintain its easy monetary policy to alleviate the negative impact. One member further commented that, although an unprecedentedly large amount of approximately 1 trillion yen was appropriated for employment measures in the emergency economic package of November 1998, this amount was not enough to deal with the employment adjustment currently required.

Another member expressed an extremely gloomy view of the economic situation, presenting the following arguments: (1) it was still too early to judge that business fixed investment had started to recover because temporary and statistical factors had contributed significantly to the recent improvements in the relevant indicators; (2) as for private consumption, the propensity to consume had dropped to a new historical low according to the Family Income and Expenditure Survey of February, and sales of automobiles in April had been sluggish; (3) exports, which had increased in 1998 especially to Europe, had remained level in 1999; and (4) crude oil prices, which had rebounded recently, could rise further to about US$20 per barrel if the agreement among oil-producing countries was observed. In addition, the member presented the following views: (1) a sense of relief about the economy reflected in the recent developments in the stock market might discourage corporate restructuring; and (2) such sentiment was so fragile that it could disappear suddenly with a rise in crude oil prices, a large fall in U.S. stock prices, or further escalation of the Kosovo crisis.

B. Financial Developments

Regarding financial developments, many members generally agreed that, although the favorable developments in the financial markets were underpinning the economy, the sustainability of the support and the extent of the effect on economic activity needed to be followed closely.

As for financial market conditions, some members noted the following developments: (1) in the money market, with the overnight call rate at zero percent, concern about fund-raising had abated and the liquidity risk premium had contracted; (2) in the bond market, an increasing number of investors were purchasing JGBs, taking price risks, and also medium-term corporate bonds and interest-bearing bank debentures, taking credit risk to some extent; and (3) stock prices were firm partly because uncertainty regarding firms' earnings prospects had diminished to a certain degree following the announcement of firms' restructuring plans.

A different member expressed the view that ample funds had been made available for corporate financing, and thus the effect of the monetary easing had spread sufficiently. The member stressed that the interest rate differential between corporate bonds and JGBs and that between CP and TBs were contracting. The member added that this not only implied an abatement of concern about credit risk, but also implied that firms, given the positive change in banks' lending stance, were now able to procure funds smoothly through bank lending and therefore no longer had to rely on the capital market for funds.

Based on the above understanding, many members judged that market participants had resumed risk-taking activities, and that the risk premium was shrinking distinctly.

Following the discussion on the overall financial situation, members made various comments on specific developments in individual financial markets.

Some members elaborated on the factors behind the rise in long-term interest rates from late 1998 and the recent considerable decline, and further commented on the outlook.

One member presented a possible explanation of the rise in the rates from the end of 1998 through February 1999 and the subsequent decline to date. The member commented that the orthodox theory--long-term interest rates are influenced by the expected rate of economic growth and the expected rate of inflation in the medium to long term--did not apply to the recent development because neither of the two factors were likely to change significantly in a period of a few months. The member therefore assumed that, for the most part, the fluctuation in long-term interest rates since late 1998 had been attributable to changes in the risk premium, but it was nevertheless difficult to determine the exact cause of the changes in the risk premium. As the most likely explanation, the member pointed out that the following two factors had caused a contraction in the risk premium associated with holding long-term bonds: (1) the improvement in banks' risk-taking ability and risk-taking stance following the decision to inject public funds into banks, and (2) the Bank's monetary easing that had lowered the overnight call rate to virtually zero percent.

A different member noted that there were various fiscal measures in prospect--including not only public investment to create demand but also measures to ease the pain of structural reform such as establishment of a safety net for the unemployed--that could lead to an increase in fiscal expenditure. The member expressed the view, however, that the increase would not directly result in a rise in long-term interest rates. As grounds for this argument, the member stated that the lowering of the credit rating of JGBs last year and the subsequent rise in long-term interest rates were not due simply to concern about an expansion of the fiscal deficit. Rather, they reflected intensified concern about future fiscal conditions given the fact that fiscal policy continued to rely on public investment, and such conventional policy did not meet the economy's current need for structural reform.

Some members expressed apprehension about developments in stock prices, which continued to be firm.

One member commented that the present situation--where purchases of Japanese stocks by foreign investors welcoming firms' restructuring efforts were underpinning stock prices--was similar to the situation in 1997, the year of the start of fiscal structural reform. At that time, the raising of the consumption tax rate and the discontinuation of the special tax reduction were received favorably by foreign investors, and thus led to a rise in stock prices. The member further commented that, in 1997, foreign investors made a turnabout in view of the subsequent economic slowdown and heightened anxiety about financial system stability, and their selling of Japanese stocks was the major cause of the decline in stock prices. As for the present, the member expressed concern that stock prices might become unstable if corporate restructuring did not produce the expected effects.

As for the yen's exchange rate, a few assessments were presented of the fact that the yen had recently appreciated reflecting the weakening of the euro.

A member commented that the appreciation of the yen was due partly to a reevaluation of the Japanese economy. Another member commented that the recent rise in the yen would not have much negative impact on firms' sentiment. The first member, however, remarked that the downward pressure of the yen's appreciation on exporting firms' earnings could not be ignored when Japan's economy was struggling to eliminate deflationary concern. A different member also acknowledged that attention should be paid to the fact that the weakness of the euro was pushing up the yen.

Meanwhile, the member who had an especially gloomy view of the economic outlook emphasized the importance of quantitative easing. From this standpoint, the member presented the understanding that, while expectations of quantitative easing by the Bank in the bond and stock markets had contributed to the decline in long-term interest rates and the strength of stock prices, the appreciation of the yen reflected dwindling expectations of quantitative easing in the foreign exchange market. The member further expressed concern that factors that could fuel the yen's rise were becoming dominant in the exchange markets. Specifically, the outflow of capital, which had previously matched Japan's current account surplus, was slowing, the U.S. trade deficit was expanding, and the tone of protectionism in the United States was increasing.

As for the monetary aggregates, one member commented that, given the recent financial conditions, quantitative indicators such as the monetary base and money stock might not necessarily increase in the course of economic recovery. Normally, in a recovery phase, demand for funds increases in line with the improvement in economic activity, and the monetary aggregates increase accordingly. This time, however, it was highly probable that the monetary aggregates would decrease due to the compression of firms' on-hand liquidity that had been accumulated because of the instability of the financial system, and a shift of funds from deposits to high-risk assets, which were not included in money stock. The member also commented that the channels through which firms acquired funds--whether it was bank lending or the capital market--determined developments in the monetary aggregates. As an example, the member mentioned that, in the United States in the early 1990s, when the U.S. economy achieved an economic recovery by overcoming the balance-sheet problem, the growth in money stock did not accelerate because firms mainly raised funds in the capital market.

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 were as follows: (1) Japan's economy appeared to have stopped deteriorating, but economic activity in the private sector continued to be weak and the prospect of an economic recovery remained unclear; and (2) the current easy monetary policy was producing appreciable effects in the financial markets and positive effects were expected to spread gradually to economic activity.

Concerning monetary policy management, a few members pointed out that it was becoming widely understood in the market that the Bank was anchoring its policy on interest rates.

Based on these views, the majority of members judged that, in the management of monetary policy, it was appropriate to maintain the current guideline for money market operations. Some of these members emphasized the need to carefully monitor developments in the economy and in the financial markets, saying that the Bank, following the discussion at the previous Monetary Policy Meeting, was"maintaining the overnight call rate at zero percent until deflationary concern was dispelled."

Two members expressed opinions different from the above.

One of them claimed that the Bank should set a medium-term target for the inflation rate and under this target make an early shift to quantitative targeting. This was based on the consideration that, while economic activity would gain some strength in the April-June quarter supported by public investment and housing investment, it could become sluggish in and after the July-September quarter. The member gave the following reasons for advocating a shift to quantitative targeting. First, the Bank should recapture sufficient leeway in monetary policy management by adopting quantitative targeting since there was no room left to utilize interest rate policy with the overnight call rate having declined to virtually zero percent. Second, in order to sustain the favorable conditions in the financial markets, it was necessary to preserve expectations of monetary easing through quantitative targeting. However, an estimate using the Taylor rule--which calculates the appropriate level of the monetary policy variable by applying certain weights to the estimated output gap and the inflation rate--showed that the current monetary easing, which had realized 4-5 percent annual growth in the monetary base, was insufficient. Such a low growth rate of the monetary base might cause market expectations for monetary easing to dwindle. Third, the sluggish growth in money stock to date seemed to have hampered economic growth in some way. Fourth, fluctuations in short-term interest rates, which quantitative targeting was criticized for possibly inviting, would have a small impact on the economy given the current low level of interest rates. Also, even if the market should be destabilized by a surge in demand for funds reflecting factors such as heightened uncertainty regarding financial system stability, the Bank could settle the situation by extending loans when necessary.

Some members objected to the above opinion.

One member pointed out that the Bank had consistently provided the necessary and sufficient amount of reserves under the current guideline for money market operations while it had retained some flexibility in its operations to maintain the market function. As a result of the operations, ample funds had been made available in the market under the current directive on interest rate policy. In light of the fact that financial market stability was being realized through the current money market operations, this member argued that it would be appropriate for the Bank to maintain the current guideline for the immediate future.

A different member, acknowledging that the current monetary policy generated sufficient easing effects, expressed concern that people might be discussing quantitative easing without a proper definition and under the wrong impression that it was an immediate policy option, causing some market participants to hold excessive expectation of further monetary easing. The member opposed the setting of a quantitative target stating that, at this stage, it involved various technical and practical difficulties, as had been discussed in previous meetings. Further, this member stressed the need for the Board to first discuss thoroughly whether an additional monetary easing was truly necessary in the current economic and financial situation before deliberating on a new policy measure. The member continued that, if the majority of members judged that the current monetary policy was producing sufficient effect, the Board should not discuss this ambiguous policy measure any further.

The member who advocated further monetary easing through quantitative targeting argued against the above member's criticism that quantitative easing was being discussed inaccurately and with some misunderstanding. The member presented two arguments. First, the member had made specific proposals for quantitative targeting at Monetary Policy Meetings in the past, and their details had been disclosed in the minutes. Second, market participants were sufficiently equipped with various information concerning the measures of monetary policy.

The second member who objected to maintaining the current policy guideline expressed the opinion that the Bank, while maintaining the current framework for monetary policy management, should specifically indicate in its policy directive that it would target the overnight call rate at 0.03 percent. This member was basically against the extremely low interest rate policy. The member, however, acknowledged that the Bank's policy stance was being well received by the market, and that a consensus had gradually been built that the floor for the overnight call rate was around 0.03 percent as the Bank lowered interest rates giving due consideration to maintaining the market function. Based on the above recognition, the member stated that the only possible revision to the current zero interest rate policy would be in the direction of a tightening but the Bank's current policy directive appeared to be biased toward an additional easing. The member therefore suggested that it was appropriate to specify 0.03 percent as the target for the overnight call rate and thereby remove the market's undue expectations of a further monetary easing, including expectations of quantitative easing.

A few comments were made regarding this suggestion.

One member called attention to the fact that the current policy directive only applied until the next Monetary Policy Meeting and therefore had no implications for the further course of policy management. Many members agreed with this opinion.

Another member commented that it would be meaningful to indicate a specific overnight call rate target from the viewpoint of clarifying monetary policy management. However, this member, together with some others, remarked that (1) rewriting the directive could give the wrong impression that some kind of a policy change had been made, and (2) the Board did not indicate a specific overnight call rate target in the directive when it was first approved on February 12 because the Board had no idea of the level to which the interest rate could be lowered, but this had not given rise to any problems so far.

Furthermore, a different member stated that merely setting the overnight call rate target at 0.03 percent would have no implication for future changes in the overnight call rate. The member pointed out that, if the proposal was intended to reflect the assumption that the interest rate would be raised in the future, it might be better to state in the directive that the current 0.03 percent was the lowest level the Bank would target.

With regard to the Bank's daily money market operations, one member mentioned that, as the Bank continued to supply ample funds in the market, a portion of the funds was accumulating in the Bank's current accounts held by financial institutions not subject to reserve requirements, such as tanshi companies. This member invited opinions on how this trend should be interpreted in relation to the transmission of monetary easing effects and the flow of funds.

The understanding of some members, including this member, of the situation was that, with major market participants keeping a stance of not holding excess reserves above a certain point, some financial institutions such as tanshi companies were absorbing the excessive funds and incurring costs as a result, in order to maintain a good relationship with their clients. They disagreed with recent news reports that this phenomenon was weakening the effects of the monetary easing. They argued that the Bank's provision of ample funds was fully meaningful in that the virtually zero-percent interest rate would not have been realized without it.

The member who brought up the issue also raised the question of whether, given the Bank's continued provision of ample funds, the funds remaining in the accounts at the Bank held by tanshi companies would be utilized for economic activities or whether they would be channeled into the capital market. This member expressed the view that the funds currently remaining in the accounts held by tanshi companies were most likely to flow out. This was based on the consideration that the holding cost of these funds would prevent the tanshi companies from absorbing such funds unlimitedly. The member mentioned two possible scenarios for the outflow of these funds. One was that the funds would pour into the accounts of banks subject to reserve requirements, in which case they might then be directed toward lending, a process of money creation. Another was that the funds would flow into financial institutions such as investment trusts, being directed toward the securities market. One member expressed doubts about these possibilities, saying that city banks and other financial institutions subject to reserve requirements, which currently avoided holding excess reserves, would very likely do so if put under strong pressure by circumstances, even though these funds would not bear interest. This member thus concluded that it was quite unlikely for these funds to be headed directly toward lending or to securities investments.

In relation to the above discussion, some members pointed out that the relationship between the daily interest rate level and the daily supply-demand balance of funds and that between the daily interest rate level and the Bank's morning projection of reserves at the end of the day--the projection announced each morning of the amount of reserves that would exceed the"remaining required reserves" (the daily average of reserves that should be deposited in the remaining days of the reserve maintenance period) at the end of the day--had become quite obscure. Separately from this issue, one member made the observation that the funds accumulating in the current accounts of financial institutions not subject to reserve requirements were constantly about 1.5 times the amount of excess reserves held by financial institutions subject to the requirements.

The few members who claimed that the relationship between interest rates and the supply-demand balance of funds was blurred presented the view that the most influential factor in the determination of the overnight call rate at present was neither the total amount of money in the Bank's current accounts nor the total excess reserves held by financial institutions subject to reserve requirements, but was the Bank's morning projection of the amount of reserves that would exceed the"remaining required reserves." Having said so, they acknowledged that large divergences had been observed between the Bank's morning projection and the actual amount of funds exceeding the"remaining required reserves" at 5 p.m., when the reserves of individual banks are officially calculated, due to the large leakage of funds to tanshi companies. They expressed concern as to whether the Bank, in this situation, would be able to successfully convey its message to the market and exert adequate influence as it had always done. Since insufficient communication between the Bank and the market could impair the transparency of money market operations, some members suggested the Bank's staff to consider releasing not only the daily amount outstanding of reserves, but also such figures as the daily amount outstanding of funds in the Bank's current accounts, including those of financial institutions not subject to reserve requirements.

V. Remarks by the Government Representative

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

(1) The government more or less shared the Bank's view on the current economic situation. The view was that the economic deterioration was coming to a halt supported by various policy measures, such as the comprehensive economic measures, the emergency economic package, the injection of pubic funds into banks, and the implementation of an additional monetary easing. Business and household confidence was recovering considerably as observed in the latest Tankan (Short-Term Economic Survey of Enterprises in Japan) and in the consumer sentiment indexes released on the day of the meeting. However, at this stage, the improvement in business and household confidence seemed to be running ahead of that in economic activity, where the output gap continued to expand and business fixed investment offered no prospect of recovery.

With regard to public investment, the government considered that the current increase was the result of the implementation of the first supplementary budget of fiscal 1998. As for public investment based on the third supplementary budget of fiscal 1998, which included the emergency economic package of November 1998, the government expected that most of the actual public works would start only in the second half of fiscal 1999 as orders were likely to be made in or after April. On this premise, the government did not agree with the prevalent view that public investment would decline sharply in the latter half of fiscal 1999.

(2) The government was preparing a follow-up report of the implementation of the emergency economic package of November 1998 for release in the near future. The government considered it necessary to monitor the execution of the measures it had set out. As for monetary policy, the government would like to request that the Bank also closely examine the effects of the current monetary policy. Further, it requested that the Bank continue to provide ample funds in the market through appropriate money market operations until a self-sustained economic growth became apparent, and thereby contribute to realizing an economic recovery.

VI. Votes

The views of many members were summarized as follows. First, economic indicators released in the intermeeting period were in line with the Board's judgment at the previous meeting that Japan's economy appeared to have stopped deteriorating, although private-sector activity continued to be weak and the prospect of an economic recovery remained unclear. Second, the current monetary easing was producing appreciable effects in the financial markets, and the positive effects were expected to spread to economic activity. Third, the Bank was currently"maintaining the overnight call rate at zero percent until deflationary concern was dispelled," and therefore it was necessary to carefully monitor economic and financial developments. And fourth, regarding the Bank's monetary policy management, it was becoming widely understood that the Bank was anchoring its policy on interest rates.

Based on this understanding, the majority of members considered that it was appropriate to maintain the current guideline for money market operations for the immediate future, continuing to give due consideration to maintaining the market function.

One member, however, presented the opinion that it was appropriate to adopt a clear quantitative targeting and thereby implement further monetary easing. Another member, pointing out that the current directive contained too strong a bias toward monetary easing in the future, claimed that it was appropriate to correct this bias by rewriting the directive while keeping the current framework for monetary policy management.

On the basis of these arguments, three policy proposals were put to the vote.

Mr. Nakahara proposed the following as the guideline for money market operations for the intermeeting period ahead:

The Bank of Japan will 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 will increase the amount of excess reserves by about 500 billion yen in the current reserve maintenance period from April 16 through May 15 (change in the average amount outstanding from the previous reserve maintenance period to the current maintenance period), and by continuing to increase the amount thereafter, induce an approximately 10 percent annual growth of the monetary base (change from the average for the October-December quarter of 1998 to the average for the same quarter of 1999) to realize quantitative easing (expansion of the monetary base).

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

Ms. Shinotsuka proposed the following as the guideline for money market operations for the intermeeting period ahead:

The Bank of Japan will encourage the uncollateralized overnight call rate to move on average around 0.03 percent.

Regardless of the above target for the call rate, the Bank of Japan will provide more ample funds, if judged necessary, to maintain the stability of the financial markets.

The proposal was defeated with one vote in favor, seven against. One member abstained from voting.

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.

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 three reasons. First, it was necessary to keep up the momentum of and further fuel the favorable developments resulting from the monetary easing of February 12, which had produced larger-than-expected effects, in order to prevent the economy from experiencing a double dip or the Bank from being forced into implementing further monetary easing. Second, one of the factors that transmitted the effects of the monetary easing was an increase in the monetary base. Therefore, as the Bank's decisive stance on easy money policy became more firmly established, financial market conditions could be adversely affected if the Bank's provision of funds or the monetary base decreased. Third, there was a concern that interest rates would start rising, canceling out the effects of monetary easing that had accumulated to date, if too much emphasis was put on the fact that there was no room left to realize an additional monetary easing through interest rate policy.

Ms. Shinotsuka gave a couple of reasons for opposing maintaining the current directive. She stated that the current zero interest rate policy was not bringing any noticeable effects to economic activity and projected that this situation might continue for a long time. She also commented that, if the Bank intended to change the direction of monetary policy in the future, that is, raise interest rates, the current stable financial markets offered a good opportunity for the Bank to pave the way for ending the zero interest rate policy.

Attachment

For immediate release

April 22, 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: