Minutes of the Monetary Policy Meeting

on June 14, 1999
(English translation prepared by the Bank staff based on the Japanese original)

July 22, 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 Monday, June 14, 1999, from 9:00 a.m. to 12:02 p.m., and from 12:52 p.m. to 3:04 p.m. ¹

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

Government Representative Present
Mr. S. Tanigaki, State Secretary for Finance, Ministry of Finance²
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. S. Murayama, Director, Research and Statistics Department
Mr. E. Hirano, Director, International Department
Mr. M. Amamiya, Chief Manager, Planning Division 1, Policy Planning Office
Mr. T. Yoshida, Research and Statistics Department

Secretariat of the Monetary Policy Meeting
Mr. K. Koike, Director, Secretariat of the Policy Board
Mr. S. Hida, Manager, Secretariat of the Policy Board
Mr. H. Tanaka, Chief Manager, Planning Division 2, Policy Planning Office³
Mr. T. Kurihara, Manager, Policy Planning Office
Mr. H. Yamaoka, Manager, Policy Planning Office
Mr. J. Iwasaki, Manager, Financial Markets Department⁴

The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on July 16, 1999, as "a document which contains an outline of the discussion at the meeting" stipulated in Article 20, Paragraph 1 of the Bank of Japan Law of 1997. Those present are referred to by their titles at the time of the meeting.
Mr. Tanigaki was present from 9:00 a.m. to 12:02 p.m.
Mr. Tanaka was present from 9:00 a.m. to 9:36 a.m.
Mr. Iwasaki was present from 9:00 a.m. to 9:12 a.m.

I. Approval of the Minutes of the Monetary Policy Meeting Held on April 22, 1999

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting, the "Green Paper," of April 22, 1999 for release on June 17, 1999.

II. Staff Proposal and Votes on a Revision of the Criteria for Selecting Bidders in Repo Operations

A. Staff Proposal

Bank's staff proposed that the criteria for selecting bidders in the Bank's repo operations (borrowing of government securities against cash collateral) be revised as below before its second selection of bidders, and that the revision be publicly announced.

The Bank will set an additional criterion that bidders should be users of the Bank of Japan Financial Network System (BOJ-NET), through which the Bank, from September 1999, will announce auctions, accept and process bids, and notify bidders of auction results for repo operations, commercial paper (CP) operations, and operations utilizing corporate debt obligations as eligible collateral.

B. Votes

The Board unanimously approved the proposal and decided to publish the revision immediately.

III. Summary of Staff Reports on Economic and Financial Developments⁵

A. Money Market Operations in the Intermeeting Period

Market operations in the period since the previous meeting on May 18 were conducted in accordance with the guideline determined at that meeting.⁶ As a result, throughout the intermeeting period, the "morning projection for reserves" was 1.0-1.1 trillion yen, and the overnight call rate was stable at 0.03 percent, which was virtually zero percent taking account of brokerage fees.⁷

On June 4, no bids were submitted for the Bank's 200 billion yen bill purchasing operation. On June 7, the amount of accepted bids for the Bank's TB/FB purchasing operation fell 74 billion yen short of the initially offered 200 billion yen. These, however, did not affect the overnight call rates or any other rates in the market.

The preliminary GDP figures for the January-March quarter of 1999, released on June 10, showed higher growth than the market's forecast. This created the expectation in the market that the Bank's zero interest rate policy might be changed before long. Consequently, interest rates on longer-term instruments, such as those with six-month and one-year maturities, increased somewhat.

The following three developments observed during the intermeeting period warranted attention.

First, interest rates on futures contracts maturing beyond the end of 1999 rose conspicuously. This was due to the increasing market expectation of a change in the zero interest rate policy and growing concern about the Year 2000 problem.

Second, the amount outstanding of funds in the call money market, which had briefly stopped decreasing in May, started to decline again in early June. However, this had not caused any particular problem in funds settlements.

Third, the amount of reserves held by city banks had been steady in recent reserve maintenance periods.⁸ In those starting in mid-February and mid-March, city banks generally held a large amount of reserves at the early stage of the maintenance period, and then held a smaller amount in the remainder of the period to avoid holding excess reserves. However, in the reserve maintenance periods starting in mid-April and mid-May, such front-loaded securing of substantial reserves was not observed, reflecting banks' confidence that the Bank of Japan would continue to supply ample funds.

Two points required attention in the implementation of money market operations in the immediate future.

The first was developments in interest rates on term instruments, which had recently been on the rise. If the market's view of the prospects for the economy proved too optimistic, term interest rates would fall back again. On the other hand, if financial institutions, being concerned about the Year 2000 problem, stepped up their procurement of funds maturing beyond the end of 1999, term interest rates might be pushed up further.

The second was the trend in the bidding for the Bank's operations. In early June, there were situations where the Bank received no bids or smaller-than-intended bids for its operations. However, after interest rates on term instruments turned upward following the release of GDP figures for the January-March period, bidding became slightly more active.

5Reports were made based on information available at the time of the meeting.
6The guideline was 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 ("initially" means the time of the Monetary Policy Meeting, February 12, 1999) aim to guide the above call rate to move around 0.15%, and subsequently induce further decline in view of the market developments."
7The "morning projection for reserves" is the projection announced each morning of the amount by which the reserves will exceed/fall short of "remaining required reserves"--the daily average of reserves that should be deposited in the remaining days of the reserve maintenance period--at 5:00 p.m., when reserves are officially calculated.
8"Reserve maintenance period" is a one-month period from the 16th of the month to the 15th of the following month.

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

1. Developments in foreign exchange markets

The yen had fluctuated around the 121-122 yen level against the U.S. dollar up to early June. Subsequently, the yen appreciated slightly against the U.S. dollar as optimistic views about Japan's economy emerged. At one time, the yen touched the 117 yen level against the U.S. dollar reflecting the market's expectation of a recovery of Japan's economy, an expectation kindled by the release of the January-March GDP figures. The uptrend in the yen, however, came to a halt recently with reports of intervention.

Meanwhile, the euro marked a record low against the U.S. dollar on June 7, but turned upward against the background of improvement in the Kosovo crisis. Asian currencies in general strengthened reflecting the recovery of the economies in the region. As a result, the U.S. dollar generally weakened against other currencies.

2. Overseas economic and financial developments

With regard to overseas economies, two developments warranted attention.

First, stock and bond prices fell in the U.S. financial markets. At a Federal Open Market Committee meeting on May 18, the U.S. Federal Reserve adopted a policy directive that was tilted toward the possibility of a firming in the stance of monetary policy. Economic indicators released since then had corroborated the strong domestic demand. Under these circumstances, anticipation of a tighter monetary policy grew, causing a gradual rise in long-term interest rates and an increase in interest rates on federal fund futures. The Dow Jones Industrial Average had been falling since June 8 for four consecutive days.

Second, the economic recovery in Asia's newly industrialized economies (NIEs) and the countries of the Association of South East Asian Nations (ASEAN) had become evident, and optimism prevailed in financial markets.

Stock prices in Asian countries had, in general, risen by more than 20 percent since the beginning of this year. In Korea, they had risen by almost 50 percent. Overall, Asian stock markets had recovered to nearly 90 percent of the price levels before the currency crisis in July 1997. This was due to a recovery in corporate profits, and an increase in inflow of foreign capital reflecting improved financial market conditions such as the stabilization of foreign exchange rates and declines in interest rates. In China, a fall in private consumption and a deterioration in the balance of payments had been reported, and under such economic conditions, interest rates on deposits had been lowered.

C. Economic and Financial Developments in Japan

1. Economic developments

Looking at final demand, net exports (exports minus imports) were decreasing slightly due to an increase in imports. Business fixed investment had basically been on a downtrend, although there was a slight improvement in early 1999. Private consumption showed mixed developments. Public investment was increasing, and housing investment was recovering. With such developments in final demand and progress in inventory adjustment, production had stopped declining and had thereafter remained level.

Overall, Japan's economy had stopped deteriorating.

As for the outlook, implementation of public works and the recovery in housing investment would continue, and exports were expected to increase slightly in summer 1999. With regard to business fixed investment, recent leading indicators suggested that the downward trend would slow at least temporarily in the summer although replacement investment at small firms, which appeared to have been concentrated in early 1999, would decrease. Meanwhile, private consumption would remain level. Reflecting such trends in demand, it was likely that the economy would remain stable for some time.

However, firms' business plans showed that they were still inclined to restrain fixed investment as part of their restructuring, and therefore developments in business fixed investment over the year were expected to be weak. Although some recovery in exports was expected, it was uncertain whether it would be sustainable. Further, the anticipated fall in summer bonus payments from the previous year's level might dampen private consumption through its impact on consumer sentiment and income. Therefore, it was unlikely that private demand would swiftly achieve a self-sustained recovery.

With regard to prices, the pace of decline in domestic wholesale prices had slowed due to a rise in the prices of some imported products, such as crude oil. However, corporate service prices continued to decline, and consumer prices remained weak.

As for the outlook for prices, the decline was expected to moderate in the immediate future due to the rise in crude oil prices and the halt in the deterioration of Japan's economy. The decline in consumer prices was also highly likely to decelerate, and could even stop at some point.

In the medium term, downward pressure on overall prices would remain unless a self-sustained recovery in private demand and a consequent narrowing of the large output gap came into prospect.

2. Financial developments

In the financial markets, the overnight call rate remained close to zero, and many financial institutions had become increasingly confident about the availability of liquidity. Interest rates on term instruments had declined further since the previous meeting, reflecting the market's expectation that the Bank would maintain its accommodative policy stance for some time. The Japan premium had continued to be nearly zero. In addition, the yield spread between government bonds and private-sector bonds (bank debentures and corporate bonds)--i.e., the credit spread--had narrowed, which suggested that market participants had gradually become more active in taking credit risk.

Yields on long-term government bonds, which had risen since late May, moved around 1.6-1.7 percent. This increase had been triggered by debates over a supplementary budget for fiscal 1999 and the resulting anxiety about a possible deterioration in the supply and demand conditions of government bonds. Stock prices, which had generally been within the range of 16,000-17,000 yen, rose recently above 17,000 yen on account of the favorable GDP figures for January-March 1999.

With regard to the monetary aggregates, private banks had basically retained their cautious lending attitude. However, the constraint on bank lendings previously caused by the severe fund-raising conditions of banks themselves and their insufficient capital base had eased considerably. Under these circumstances, major banks had gradually become more active than before in extending loans.

However, credit demand for economic activities such as business fixed investment remained weak. In addition, firms' moves to increase their on-hand liquidity had apparently settled down. As a result, credit demand in the private sector had weakened further. Private bank lending showed narrow fluctuations when adjusted for irregular factors. Its year-to-year decline expanded in May after having contracted until April 1999.

The year-to-year growth rate of money stock (M2+CDs) had recently been increasing moderately, mainly because firms' cutting back of on-hand liquidity had been less significant than in the same period in the previous year.

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

A. The Current Economic Situation

On the current economic situation, members generally agreed with the staff's view that Japan's economy had stopped deteriorating but clear signs of recovery had not been observed yet.

As grounds for judging that economic deterioration had stopped, many members pointed out that public investment was at a high level and housing investment was recovering. Reflecting these developments in final demand, production had stopped decreasing.

Many members further noted the following. The preliminary figures for GDP for the January-March quarter of 1999 marked high growth, with private consumption and business fixed investment increasing from the previous quarter. Some private consumption-related indicators, such as sales of personal computers, had recently been on an upward trend. Further, East Asian economies were showing clearer signs of recovery.

A member elaborated on the positive signs recently observed in the economy. First, plans for automobile production in and after April had been revised upward reflecting the recovery in sales of trucks. Second, production of construction-related machinery, refrigerators (excluding those for residential use), and office machineries was on an uptrend. Third, prices of materials at home and abroad had been increasing reflecting the recovery of Asian economies, and this had opened the way for an improvement in the earnings of materials manufacturers. The member commented that, as a result, some business leaders seemed to have become slightly more convinced than before that the economy might be at a turning point. However, a different member commented that, in the same period of the previous year, some business leaders had expressed optimistic views that the economy was showing signs of a bottoming out, but they did not materialize. Based on this experience, the member remarked that the opinions of business leaders should be viewed with caution.

Despite the positive developments mentioned above, members generally agreed that clear signs of a recovery had not been observed yet. As the background to this judgment, members pointed out that (1) the economy still relied heavily on the increase in demand stimulated by policy measures, such as the expansion of public investment and housing investment, and (2) evident signs of a recovery in private consumption and business fixed investment were hardly observed.

Some members pointed out that the rise in business fixed investment in the January-March quarter might have been due to a temporary factor. They remarked that replacement investments by small firms, which had been deferred until recently, might have been concentrated in this period reflecting the easing of concern about funds management. Based on this view, members generally agreed that business fixed investment would continue on a downward trend given the current sluggishness in private-sector demand for funds.

The majority of members considered that private consumption would remain basically flat although some positive signs were observed.

Regarding the high GDP growth rate in the January-March quarter, most members were of the opinion that, while this growth could be considered as one piece of evidence of the halt in the economic deterioration, this alone did not provide grounds to expect a self-sustained recovery in private demand. One member commented that the strength of economic activity should be judged in the July-September quarter based on developments in the April-June period, such as the implementation of fiscal measures and the permeation of the effect of monetary policy through economic activities.

Meanwhile, a different member expressed the view that the economy was unstable, moving at the bottom with large fluctuations. On this basis, the member commented that the high GDP growth in the January-March quarter had relied heavily on policy measures such as the expansion of public investment, reduction in housing investment-related taxes, and the expansion of the credit guarantee system, and these positive effects were likely to subside eventually.

B. Financial Developments

On the financial front, many members noted that the effects of the Bank's zero interest rate policy had spread further. For example, (1) financial institutions' concern about the availability of liquidity had abated considerably, (2) banks and investors were becoming more willing to take risks, and (3) the previously tight conditions in corporate financing had been eased. In view of these developments, the members judged that the conditions necessary for the positive effects of financial developments to spread to economic activities had been provided.

With regard to long-term interest rates, one member noted that they were still significantly lower than in early 1999, and expressed the opinion that the recent rise could be a rebound from the considerable decline until May. Another member commented that the recent increase basically reflected the expectations of economic recovery that had emerged following the release of the GDP figures for the January-March quarter. The member added that there was a risk that interest rates might be pushed up further due to expectations of a supplementary budget and apprehension about a resulting deterioration in the supply and demand balance of JGBs.

A few members pointed out that the strength in stock prices was underpinning consumer sentiment and improving business confidence. However, one member stated that the outlook for the stock market was unclear. The member noted that the recent recovery in stock prices was partly driven by expectations of future improvements in corporate profits, but there remained considerable uncertainty as to the future developments in profits and in U.S. stock prices.

With regard to bank lending, many members expressed the opinion that banks had gradually become more active in risk-taking due partly to the cumulative effect of the Bank's monetary easing. However, one member commented that banks, still burdened with the nonperforming-asset problem, had not yet adequately restored their credit intermediary function. The conclusion of many members was that, with the prevailing sluggishness in demand for funds, the favorable change in banks' lending stance alone was not enough to induce an increase in bank lending.

C. The Economic Outlook

On the economic outlook, members generally agreed that the economy was very likely to remain stable in the immediate future. However, with the prospect of a recovery in private demand still unclear, they also acknowledged the risk of the economy showing a double dip in or after the second half of fiscal 1999, when public investment was expected to decrease. The Board's discussion was then focused on the prospects for business fixed investment and private consumption, which would be the engine of a self-sustained recovery in private demand, and also on the related risk factors.

First, a few members pointed out that the economy was encumbered with structural problems, and still partially plagued with the vicious circle observed since autumn 1997. These members added that firms' restructuring could also place deflationary pressures on the economy in the short term.

In relation to the above, a different member pointed out that an increase in demand stimulated by policy measures had previously started a virtuous circle in the economy. This time, however, the nonperforming-asset problem of firms and financial institutions was impeding such a cyclical upturn. The member remarked that, in order to achieve a self-sustained economic recovery, it was therefore important to proceed steadily with the solution of structural problems, such as disposal of nonperforming assets.

Next, members discussed specific points relating to the prospect of a recovery in business fixed investment and in private consumption.

One member commented that the increase in business fixed investment in the January-March quarter was notable in the sense that the easing of liquidity constraint had induced a rise in real investment to some extent. Based on this recognition, the member pointed out that future change in banks' lending stance, especially that toward small firms, was one of the crucial factors determining the economic outlook.

Another member also expressed the opinion that business fixed investment by small nonmanufacturers warranted special attention. This was based on the consideration that such investment had previously led the recovery in overall fixed investment and was relatively sensitive to changes in financial market conditions.

A different member referred to the changes that had been observed in the environment surrounding corporate profits. The member pointed out that corporate restructuring had had only negative effects on the economy until last year, but as the sales of large manufacturers bottomed out, cost reduction realized through restructuring was beginning to have a positive effect on their profits. As for the future, the member placed the focus on whether such positive outcome from restructuring would be seen widely among small firms and nonmanufacturers.

A few members pointed out that the fact that private consumption had not shown any significant decrease despite falls in employees' income could be an indication that the propensity to consume was rising. The members considered that the alleviation of concern about financial system stability and the rise in stock prices might be supporting consumer sentiment, and therefore the relationship between improvements in the financial environment and the propensity to consume deserved due attention.

Regarding the possible recovery path of the economy, members discussed the issue of income distribution between the corporate and household sectors.

First, one member expressed concern that, if the income distribution between the corporate and household sectors maintained a delicate balance, it was inevitable that any recovery of the economy would be very weak. On this point, a different member commented that the labor share would unavoidably fall as corporate restructuring progressed, and the critical point was whether some other factor would be capable of underpinning private consumption during that time. The member, taking the example of the "jobless recovery" in the United States, expressed the opinion that one possible support for private consumption was the recovery in stock prices, which reflected the favorable outlook for corporate profits based on firms' restructuring, and therefore attached importance to future stock market developments. In response to this argument, a few members, including the member who first raised the issue, expressed the view that it was necessary to monitor closely whether corporate restructuring would be implemented thoroughly enough to sustain the ongoing recovery in stock prices.

Meanwhile, a member projected that the economy would only bottom out in the October-December quarter at the earliest.

As grounds for this judgment, the member cited four points. First, the increase in business fixed investment by small firms in the January-March quarter had been attributable in large part to the support of the credit guarantee system, but this effect was subsiding gradually. Second, the anticipated rise in the unemployment rate due to the lack of demand for labor was expected to exert an adverse impact on the propensity to consume, affecting private consumption.⁹ Third, an air of instability had emerged in the U.S. financial markets reflecting the expansion of the credit risk premium and the surfacing of losses at a large hedge fund, and this, together with the rise in long-term interest rates in the United States, could pose a risk to Japan's economy. Fourth, a turnaround of the economy would only become apparent in seven to eight months at the earliest, according to the composite leading indicator constructed from various economic indicators. Further, the member added that it would be difficult for the economy to recover unless corporate profits improved beforehand.

With regard to the outlook for price developments, the majority of members acknowledged the possibility that the fall in prices would moderate and level out, at least temporarily, in the immediate future. They were of the view, however, that deflationary concern would remain given the weak prospects for economic activity.

One member pointed out that it was notable that the decline in prices did not appear to be accelerating even with the significant output gap in the economy, and this was likely to have some implications for future price developments.

A few members commented that the current price stability might have contributed to avoiding a fall in private consumption despite decreases in employees' income. Based on this recognition, one of these members emphasized the importance of price stability, stating that, although there had been arguments that the Bank should promote inflation through monetary policy, inflation could exert negative impact on economic activity, such as by dampening private consumption.

9"Unemployment rate due to the lack of demand for labor" is defined as the "equilibrium" unemployment rate--i.e., the rate of structural and frictional unemployment--subtracted from the prevailing unemployment rate.

V. Summary of Discussions on Monetary Policy for the Immediate Future

Based on the above assessment of the economic and financial situation, members discussed the basic thinking on monetary policy for the immediate future.

The dominant view of the economic and financial situation could be summarized as follows. First, Japan's economy had stopped deteriorating, supported by public investment and housing investment. Second, the monetary easing to date had produced further appreciable effects in the financial markets and market participants had become more active in taking risks. Third, some positive signs were seen in private consumption, business fixed investment, and the export environment. Fourth, despite the above three points, the prospect of a self-sustained economic recovery remained unclear. Lastly, in sum, the risk could not be ruled out that the economy would show a double dip in or after the second half of fiscal 1999, and as a result, deflationary concern remained.

Based on this assessment of economic and financial conditions, the majority of members agreed that the Bank should keep to the current extremely accommodative monetary policy in line with the Governor's statement at a press conference on April 13 that the Bank would maintain the policy until deflationary concern was dispelled. One member commented that it was important to show clearly that the Bank had no intention of changing its policy stance in the current economic and financial environment.

Many members attributed the recent stability and slight improvements in the economy to the favorable financial market conditions. They claimed that the current policy should be retained in order to sustain this favorable financial environment.

Some of these members considered that it had become increasingly important for the Bank to maintain its current policy stance given the fact that long-term interest rates and the yen were being affected by the market's anticipation of a change in the Bank's zero interest rate policy.

One member stated that it was important for the Bank to adhere to the current zero interest rate policy to promote a positive interaction between financial developments and economic activity, stressing that the effects would continue to permeate throughout the economy for as long as the policy was maintained.

Meanwhile, one member questioned, given the likelihood ahead of price declines moderating and leveling out at some point, on what basis the Bank should judge that deflationary concern had been dispelled. The member pointed out that the various structural problems encumbering Japan's economy intermingled with cyclical and overseas factors to engender the prevailing deflationary concern. Sharing this understanding, a few members remarked that it would be difficult to judge from a specific indicator whether or not deflationary concern had been dispelled. They concluded that judgment would have to be based on the economic outlook, the financial environment, and various other factors and risks related to price developments.

Separately, a few members pointed out several phenomena that could be perceived as negative effects of zero interest rate.

One member noted four negative effects of the prolonged zero interest rate policy: (1) it had weakened the pricing mechanism of interest rates; (2) it risked delaying firms' structural adjustment; (3) it had shifted income from the household to the corporate sector, producing distortion in income distribution that could not be disregarded; and (4) it had caused market participants to act postulating the continuation of the zero interest rate policy, making their balance sheet vulnerable to interest rate rises.

Another member pointed out that the extremely small issuance rate spreads between CP with different ratings suggested a possible decline in the risk-awareness of market participants. This member, however, stated that, despite such unfavorable effects, it was appropriate to maintain the current accommodative stance on monetary policy given the prevailing economic condition and the risks that lay ahead.

Members also discussed the auction results of the Bank's operation in early June where the total amount of bids fell short of the amount the Bank had offered.

One member who had stressed the adverse effects of the zero interest rate policy earlier pointed out that these auction results were another such negative effect. The member remarked that the Bank would have to shift its operation instruments to financial assets with longer maturities if this situation continued, but that this change could be detrimental to the flexibility of the Bank's market operations and the soundness of its balance sheet.

Another member acknowledged that the above-mentioned shortfall in the amount of bids in the Bank's operations suggested that it had become difficult to inject funds beyond the market's demand. At the same time, this member commented that the phenomenon implied that it now required less funds to encourage the overnight call rate down to nearly zero percent. On this basis, the member expressed the opinion that such results rather suggested that the Bank's monetary policy management had been successful.

A different member acknowledged the need to review the way in which the Bank implemented its market operations to avoid such auction results. However, this member was basically of the view that it was important for the Bank to show its determination to continue providing ample funds in the market in accordance with the operation guideline, even though it might at times encounter such problem. This member, in consideration of the unfounded criticism that the Bank's insufficient liquidity provision was delaying economic recovery, also regarded it important that people be informed of the actual supply and demand conditions of funds through such results.

One member expressed the member's view by summarizing the majority's view in the above discussions as follows: (1) the Bank had taken every possible monetary policy measure; (2) the Bank should maintain the current policy until deflationary concern was dispelled; (3) the Bank should not employ measures that would lead to the loss of fiscal discipline and, as a result, burden future generations; and (4) progress in structural adjustment was important for Japan's economy. The member noted the significance of the Bank doing its best to convey to the public its thinking, such as the above points.

At the end of the entire discussion above, the majority of members were of the opinion that, in the management of monetary policy in the immediate future, it was appropriate to maintain the current guideline for money market operations.

One member who had stressed the unfavorable effects of continuing the zero interest rate policy claimed that the Bank should guide the overnight call rate up to the level before the monetary easing on February 12--that is, around 0.25 percent on average--at the current timing when the view that the economic deterioration had stopped was becoming prevalent. The member continued that the above change, even if made, would still provide an extremely low interest rate environment, and the Bank should conduct fine-tuned monetary policy management within the revised framework.

A different member expressed the opinion that the Bank needed to further ease monetary policy and for this purpose to implement quantitative easing. As reasons for this claim, the member cited the following: (1) the economy was likely to decelerate again in the future and could even stall if no additional policy support was given; (2) given the structural problems burdening Japan's economy such as excessive labor and corporate debts, further monetary expansion through quantitative easing was needed to alleviate the pain accompanying structural reform by encouraging risk-taking of investors; (3) nominal interest rates were at the lowest possible level and the monetary base recently seemed to be on a downward trend; and (4) further quantitative easing was necessary to sustain the favorable developments in exchange rates and asset prices, which were the primary outcomes of the easy policy stance since February.

In order to realize quantitative easing, this member advocated employing inflation targeting. The member explained that, by adopting this measure, the Bank would be able to clarify the meaning of "the pursuit of price stability" stipulated in the Bank of Japan Law, and also, by setting a target on the Bank's own initiative, would be able to remove the risk of being forced into accepting an inflation target passively.

The member claimed that the Bank should target an approximately 10 percent annual growth in the monetary base. This calculation came from a modified form of Taylor's rule, using the current output gap and assuming a long-term equilibrium interest rate in real terms of 2 percent and an inflation target of 1 percent. Further, the member claimed that, within this framework, the Bank could secure flexibility in its monetary policy management in cases of emergency by adding a supplementary clause that the Bank would further expand money regardless of the monetary base target should financial markets destabilize.

One member argued against the above claim.

First, this member commented that the common understanding was that effects of monetary policy ultimately permeate the market via interest rates regardless of whether its operating target is interest rates or some quantitative indicator, and pointed out that currently no room was left for a further decline in interest rates.

Second, the member remarked that "quantitative easing" could be understood as a form of long-term commitment to monetary easing in that the Bank was committed to continuing to ease money until a quantitative target was attained. Then, the member argued that equivalent effects were already secured within the current monetary policy framework, stressing that the Governor's statement on April 13 that the Bank would maintain the current policy stance until deflationary concern was dispelled could be regarded as a commitment that had almost the same effects.

Further, this member added a comment on the ideas generally held about "quantitative easing."

First, concerning the argument that "quantitative easing would increase expected inflation and thereby decrease real interest rates," this member remarked that, if quantitative easing did boost expected inflation, one should expect a subsequent rise in nominal interest rates. This member also expressed doubt whether the current economic situation required further monetary easing and, even if it did, whether the Bank should employ a policy that was uncertain as to how it could influence the economy. For this reason, the member objected to employing such a policy.

Lastly, this member commented that various different ideas were being discussed as "quantitative easing." The member pointed out that some advocated increasing the Bank's government bond purchases under quantitative easing but that this idea was different from the common understanding that quantitative easing was a way of making a long-term policy commitment.

VI. Remarks by Government Representatives

The representative from the Ministry of Finance made the following remarks.

(1) In Japan, the effects of the supplementary budgets for fiscal 1998 were materializing more evidently in addition to those of various policy measures such as the expansion of the credit guarantee system and the implementation of financial system stabilization measures. Real GDP in the January-March quarter marked a 1.9 percent quarterly growth.
(2) In order to remove concerns about unemployment, thereby promoting rehabilitation of Japan's economy, and also to strengthen the supply side of the economy, a task force set out a comprehensive plan on June 11 to improve employment conditions and strengthen industrial competitiveness. With the unemployment rate at its record high, the government considered the employment problem as the most important and urgent issue. The government intended to provide the economy with an employment safety net by implementing measures to provide job opportunities for more than 700 thousand people and to expand the job-searching assistance policy to cover 100 thousand more people than at present, encouraging the job-seeking of the unemployed. The government would like to ask the Bank for its understanding on the government's economic and fiscal policy management.

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

(1) The government judged that the economic activities had stopped declining and had been generally stabilized, supported by various policy measures. Real GDP for the January-March quarter marked a 1.9 percent quarterly increase, and as a result, real economic growth in fiscal 1998 turned out to be -2.0 percent, higher than the government's projection of -2.2 percent. As for fiscal 1999, the government considered that the economy was at a critical juncture and, therefore, developments, particularly those in the April-June quarter, should be monitored with careful attention.
(2) Strengthening the supply side of the economy was a critical issue in order to place Japan back on a path of self-sustained economic growth, given the increasingly severe employment situation. In light of the above, the government set out, on June 11, a comprehensive plan to improve employment conditions and strengthen industrial competitiveness.
(3) The government would like to request the Bank to provide ample funds in the market through appropriate money market operations until self-sustained economic growth became apparent, and thereby contribute to realizing an economic recovery.

VII. Votes

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 raise the overnight call rate. Another member claimed that it was appropriate to adopt a full-scale quantitative easing and set an inflation target.

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

Ms. Shinotsuka proposed changing the guideline for money market operations back to the one that had been employed before the monetary easing on February 12. Specifically, she proposed the following as the guideline for the intermeeting period ahead:

The Bank of Japan will encourage the uncollateralized overnight call rate to move on average around 0.25 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, eight against.

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 will 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 June 16 through July 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). Regardless of the above target for the monetary base, the Bank will expand money further should the financial markets destabilize, for example, should the uncollateralized overnight call rate rise substantially.

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.

Ms. Shinotsuka gave the following four reasons for voting against the proposal. First, the adverse effects of the zero-percent interest rate were manifesting. Second, the longer the zero interest rate policy was continued, the more difficult it would become to alter it. Third, to ensure leeway in policy management, it was necessary to adjust the level of interest rates when possible. And fourth, compared to the situation as of February 12, deflationary concern had subsided, and the possibility of a self-sustained recovery in private demand had increased.

Mr. Nakahara dissented for the following four reasons. First, given the risk of the economy stalling in or after the second half of fiscal 1999, when the effects of public investment and the expansion of the credit guarantee system were expected to decrease, additional policy action was necessary. Second, in view of the time lag between implementation of policy and permeation of its effects, it would not be appropriate to be forced into further monetary easing after the economy had marked a renewed downturn. Third, the growth of the monetary base had been slowing since the beginning of June, and therefore the Bank should reinforce its quantitative easing at this timing. And fourth, the zero interest rate policy was no longer effective, and therefore flexibility of monetary policy management should be secured through quantitative easing.

VIII. 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 June 16, 1999 in the Monthly Report of Recent Economic and Financial Developments (the "Ivory Paper," consisting of "The Bank's View" and "The Background").¹⁰

10The original full text, written in Japanese, of the "Ivory Paper" was published on June 16, 1999 together with the English version of "The Bank's View." The English version of "The Background" was published on June 28, 1999.

Attachment

For immediate release

June 14, 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: