Minutes of the Monetary Policy Meeting

on June 28, 1999
(English translation prepared by the Bank staff based on the Japanese original)

August 18, 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 28, 1999, from 9:00 a.m. to 12:35 p.m.¹

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

Government Representative Present
Mr. 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. T. Kurihara, Manager, Policy Planning Office
Mr. H. Yamaoka, Manager, Policy Planning Office

The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on August 13, 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 May 18, 1999

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting, the "Green Paper," of May 18, 1999 for release on July 1, 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 June 14 were conducted in accordance with the guideline determined at that meeting.³ As a result, the money market was stable throughout the intermeeting period, with the overnight call rate steady at 0.03 percent and interests rates on term instruments flat.

Interest rates on term instruments, such as Euro-yen deposits and treasury bills (TBs), had increased following the release on June 10 of the GDP figures for the January-March quarter. This reflected the strengthening of market expectations that the Bank would end its zero interest rate policy earlier than had been anticipated. However, given the Bank's continued injection of ample funds into the market and the Governor's statement at a press conference on June 16 confirming that the Bank would maintain the current easy monetary policy until deflationary concern was dispelled, many market participants concluded that economic developments, including the results of the next Tankan--Short-Term Economic Survey of Enterprises in Japan--to be released on July 5, should be monitored carefully. Reflecting this market sentiment, interest rates on term instruments thereafter were flat.

There were three conspicuous developments related to the change in the outlook for money market interest rates. First, fund-investors became cautious about investing in term instruments, although previously they had aggressively conducted such investments based on the projection that the zero interest rate would continue for some time. Reflecting this shift, fund-raisers such as city banks reduced the amount of funds raised through term instruments, and instead, increased the weight of overnight transactions. Second, investments in TBs and financing bills (FBs), which had increased notably at one time, settled down. For example, the average accepted bid rate for newly issued FBs rose from 0.026 percent on June 9 to 0.042 percent on June 23. Third, the accepted bid rates of the Bank's fund-providing operations also increased slightly. In line with the rise in interest rates, the Bank's operations, bids for which had at times fallen short of the Bank's offers, were again attracting investors.

Furthermore, market participants were gradually becoming concerned about the financing risks arising from the Year 2000 problem. Reflecting this concern, firms' and banks' cost of raising funds maturing beyond the year-end was increasing gradually.

2Reports were made based on information available at the time of the meeting.
3The 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."

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

1. Developments in foreign exchange markets

In the intermeeting period, investors, especially foreign investors, aggressively purchased the yen in the foreign exchange markets. However, due to reports of intervention selling the yen against the U.S. dollar and against the euro, the yen weakened gradually with some fluctuations.

More specifically, the widespread move, especially among foreign investors, to purchase the yen pushed it up to the 117-118 yen level against the U.S. dollar. Investors had been motivated by (1) increased anxiety about future stock prices in the United States accompanying a rise in long-term interest rates, which reflected growing concern about inflation, and (2) the unexpectedly high growth of Japan's GDP in the January-March quarter. However, given reports of intervention selling the yen, the yen subsequently weakened to the 120-122 yen level.

2. Overseas economic and financial developments

In the United States, economic expansion continued to be robust, showing no signs of a slowdown. The consumer price index for May was stable, but the rise in wages was accelerating reflecting the tightening of labor markets. As a result, concern about inflation remained strong. Under these circumstances, long-term interest rates in the United States rose to around 6.15 percent for the first time since November 1997. Reflecting this rise, stock prices weakened. As these developments showed, the U.S. financial markets were already expecting a 0.25 percent rise in the federal funds rate at the next Federal Open Market Committee meeting on June 29 and 30.

As for East Asian economies, there were now stronger indications of recovery, except in China. Previously, there had been strong concern about downside risks, such as deflationary pressures from corporate restructuring and anxiety about the smooth return of foreign capital. However, recently, the downside risks seemed to be subsiding given (1) the overall stability of financial markets, as reflected in the firming of these countries' currencies and declines in interest rates, and (2) the economic upturn of the major industrialized countries. Another favorable factor was that the election in Indonesia had proceeded without any major disruptions, and a rekindling of social instability had therefore been prevented for the time being. Under these conditions, stock prices in general were on the rise, in many countries marking their highest levels so far this year.

C. Economic and Financial Developments in Japan

1. Economic developments

The economic indicators released in the intermeeting period did not offer any grounds for changing the Bank's judgment at the previous meeting--that Japan's economy had stopped deteriorating, but clear signs of recovery had not been observed yet.

With regard to public investment, public works orders in May declined for the second consecutive month. According to anecdotal evidence, it was highly likely that this downward trend would continue in June. Nevertheless, actual execution of public works seemed to be maintaining a high level.

Exports had recently been flat. The decline in exports to the European Union was accelerating while exports to the ASEAN countries were firm. Meanwhile, imports had increased slightly since the beginning of 1999. Especially, imports of information technology-related goods from East Asia were expanding.

According to the Survey of Capital Investment by Small Sized Manufacturers conducted by the Japan Finance Corporation for Small Business, the initial plans of business fixed investment for fiscal 1999 of small manufacturers had been cut as significantly as those for fiscal 1998. This suggested that adjustment in business fixed investment would persist for some more time.

Private consumption as a whole continued to show mixed developments. According to anecdotal evidence, sales rose in June boosted by a closing sale at a large department store in Tokyo. However, the prospect of a recovery in private consumption was still remote, given the persistly severe employment and income conditions, as observed in the fall in summer bonus payments.

With regard to prices, the consumer price index was about the same level as the previous year and the corporate service price index remained weak.

2. Financial developments

In the financial markets, two developments observed in the intermeeting period warranted attention: (1) the subtle change in market participants' outlook for interest rates; and (2) the slight increase in money stock (M2+CDs) in May.

The yield curve of TBs had been flat at the 0.02-0.03 percent level before the release of the GDP figures for the January-March quarter. Recently, however, the yield curve steepened slightly and shifted upward, yields on three-month TBs marking 0.04 percent and those on one-year TBs rising to 0.07 percent. Previously, market participants had invariably forecasted an economic deterioration or a decline in interest rates, seeing no risk of interest rates rising in the year ahead. However, recent market developments implied that market participants had started to perceive such a risk.

Long-term interest rates rose to the 1.7-1.8 percent range, which was the level marked in early April. Since it was unlikely that they would surge, however, and given the strength in stock prices, it could be judged that the rise would disturb neither economic activities nor the financial markets.

The year-to-year growth of money stock (M2+CDs) increased in May for the third consecutive month. This was attributable in part to the decline in the opportunity cost of holding money due to the permeation of the effects of zero interest rate policy. The accelerated growth in liquid deposits held by firms supported this view.

The year-to-year growth in banknotes was currently firm at 6-7 percent. How this would be affected by forthcoming summer bonus payments, which were expected to drop from the previous year's level, was a matter which warranted attention.

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

A. The Current Economic Situation and the Economic Outlook

The Board's discussion was focused on the assessment of economic indicators released since the previous meeting. As a conclusion, the majority of members generally agreed that the basic judgment made at the previous meeting did not need to be changed --i.e., on the economic situation and the outlook, Japan's economy had stopped deteriorating, but clear signs of recovery had not been observed yet; and regarding prices, downward pressure remained.

Some members expressed the view that the economy was still underpinned by public investment and housing investment, that is to say, demand stimulated by policy measures. They explained that the value of public works contracts decreased in May, but construction continued to be at a high level based on past contracts.

On the trend in exports and imports, a few members expressed the positive view that an increase in exports was likely to support the economy in the future, considering the recent improvement in global economic conditions, as seen in the recovery in Asia. One member, however, expressed a cautious view on the outlook for exports, saying that (1) exports to the European Union, the main contributing factor in 1998, were recently declining as the economy slowed, and (2) prospects for the U.S. economy were uncertain.

With regard to business fixed investment and private consumption, which are the main components of private demand, most members took the position that self-sustained recovery in these areas was still not observed.

All of the members agreed that business fixed investment remained weak. Many retained this gloomy view on account of the fact that (1) the initial plans of business fixed investment for fiscal 1999 by small manufacturers was as constricted as those for fiscal 1998, and (2) leading indicators had been declining again since April. One of the members pointed out the possibility that there was still some pent-up demand for business fixed investment at small firms. Further, a different member pointed out that nonmanufacturers were slightly increasing their investment in offices and stores, and some large-scale development projects were starting ahead of schedule in Tokyo. However, many members, including these two members, expressed the view that these positive developments were not enough to change their basic judgment on business fixed investment.

The majority of members also maintained a gloomy view on private consumption, commenting that the severity of employment and income conditions persisted, as reflected in the full-scale implementation of corporate restructuring and the decline in summer bonus payments.

Some members commented favorably on consumption expenditure, which continued to show mixed developments, pointing out that it was notable that consumption had not dropped despite the decline in income. As one of the factors behind this, these members pointed out the possibility that the rise in stock prices was positively influencing consumer confidence. One of these members pointed out that, according to the Opinion Survey on Lifestyle and Financial Behavior conducted by the Public Relations Department of the Bank in March, the number of those who considered that the economy would eventually turn upward due to firms' restructuring efforts had increased from six months ago.

Nevertheless, these members and others shared the understanding that, although the downside risks to overall private consumption were subsiding, it was not strong enough to lead an economic recovery. Therefore, developments in private consumption continued to warrant attention.

Taking account of the above-mentioned developments in final demand, members commented on the environment surrounding production. A few remarked that inventory adjustment had progressed due to the reduction in firms' production and the increase in demand stimulated by policy measures, and therefore an increase in shipment could now lead to a rise in production. However, a few other members expressed the view that firms' stance toward production had still not improved, given that production in the April-June quarter was projected to decline slightly from the previous quarter.

With regard to prices, given the weakness in the corporate service price index, most members shared the view that the basic judgment at the previous meeting--that downward pressure on prices remained--did not need to be changed.

A few members added that the leveling out of the year-to-year change in consumer prices indicated that the decline in prices was unlikely to accelerate. Another member also remarked that, if prices continued to be stable, this stability itself might ease deflationary concern. A different member further pointed out that the recent progress in inventory adjustment and the recovery in international commodity prices due to an improved balance of supply and demand in Asia indicated that the environment finally allowed firms to successfully pursue a recovery in prices. Nevertheless, most members, including those who commented positively on the recent developments, considered that downward pressure on prices persisted given the large output gap and the decline in wages.

Meanwhile, a member remarked that recent price developments suggested a weakening of the downward pressure on prices. The member noted that concern about the downward pressure had been based on the presence of a large output gap. However, since it was technically difficult to accurately measure the potential economic growth rate, which is the basis for calculating the output gap, the member commented that the outlook for prices based on the estimated output gap should be considered with some allowance for error.

Another member commented on the trend in crude oil prices. The member remarked that they were very likely to remain firm if the current agreement among oil-producing countries was observed, and future developments deserved attention.

In sum, on the current economic situation, most members shared the view that positive signs were appearing in the economy. However, there was still no prospect of private demand showing a self-sustained recovery in the second half of fiscal 1999, and attentive monitoring was therefore required of the downside risk.

In relation to this point, one member commented that an increasing number of business leaders had become convinced that the economy was at a turning point. However, the member emphasized that the economy could still be judged to be plodding along at the bottom with positive and negative factors intertwined. Further, a different member commented that there was still a possibility that the extent of the downside risk might change in the second half of fiscal 1999 following the developments in the first half of the fiscal year, and some factors hinting at such a possibility were appearing. However, they were not strong enough to change the basic judgment on the economy.

One member emphasized the risk of the economy stalling in the second half of fiscal 1999 and concern about the resulting deflationary pressure. This view was presented on the following grounds. First, demand other than public investment and housing investment was weak according to the index of business conditions and the index of tertiary industry activity for April. Second, shipment and inventory had been out of balance since April, and therefore, the planned increase in production of automobiles gave rise to the possibility that the economy would enter a second round of inventory adjustment. Third, the implementation of full-scale restructuring would support corporate profits but would exert a negative impact on private consumption and business fixed investment. Fourth, if the yen should appreciate and long-term interest rates rise in response to the release of strong economic indicators, the economy would be seriously hit.

B. Financial Developments

On the financial front, many members were in general agreement with the basic judgment made at the previous meeting that the financial environment was improving. The members expressed hopes that this development would positively affect economic activity.

In the financial markets, a few members elaborated on the subtle change in market participants' outlook for interest rates, as observed in the slight rise in the rates on term instruments and long-term interest rates following the release of GDP figures for the January-March quarter. Many members judged that the market situation was not a concern for the following reasons. First, the change suggested that market participants' formerly pessimistic view of the economic outlook had improved and they had come to see some possibility of economic recovery. Second, the pace of the rise in interest rates was not very fast, and stock prices continued to be firm.

One of these members focused on the firmness in stock prices. The member, while acknowledging that this was attributable to the alleviation of anxiety about financial system stability, the positive effect of the zero interest rate policy, and the strength of U.S. stock prices, expressed the view that the gradually increasing expectations of a recovery in corporate profits had had the most impact. However, the member added that there were still not many indicators giving signs of a clear economic recovery, and the current stock market seemed to be driven by expectations. Therefore, with regard to the future, the member focused on whether the stock prices would fall back reflecting the weakness of the economy, or whether the economy would ameliorate in line with the market's expectations.

In addition, many members, including the above member, shared the understanding that the recent firm stock prices were contributing to the improvement in corporate and household confidence.

One member presented the following view on long-term interest rates. First, the recent level of 1.5-2.0 percent was not necessarily high according to a regression analysis of long-term government bonds (see "Annual Review of Monetary and Economic Developments in Fiscal 1997" in the Bank of Japan's Annual Review 1998). Second, in theory, long-term interest rates are determined not only by the prospects for economic growth and price developments but also a risk premium, and taking this into consideration, it could be concluded that the recent rise in these rates reflected to some extent the positive change in the economic situation.

In the discussion on the monetary aggregates, a few members pointed out that, reflecting the positive effect of the zero interest rate policy, banks had gradually eased their previously cautious lending stance and investors had become more active in risk-taking in the capital markets. As a result, the financial markets had begun to function smoothly, and firms were able to secure ample funds. One of the members noted that there were negative aspects to the fact that firms' funds management had been facilitated by market participants' active risk-taking. These were the survival of inefficient firms, preservation of excess plant and equipment, and the consequent delay in structural adjustment. However, the member was of the opinion that priority should be given to maximizing the positive effect of the monetary easing to strengthen the foundation of economic recovery.

One member saw different negative outcomes of monetary easing. The member pointed out that monetary easing was causing moral hazard among economic entities, and that management of pensions, insurance, and foundations had become increasingly difficult due to the extremely low interest rates. Such unfavorable aspects of the current low interest rates could not be ignored.

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 dominant view of the economic and financial situation remained unchanged from the previous meeting. First, although Japan's economy had stopped deteriorating, private demand remained weak and clear signs of an economic recovery had not been observed yet. Second, downward pressure on prices persisted. And third, the improved financial environment was expected to positively affect economic activity.

Based on this assessment, many members judged that deflationary concern had not been dispelled yet and that developments in private demand continued to warrant careful attention as to whether it was gaining momentum for a self-sustained recovery.

In the management of monetary policy in the immediate future, the majority of members considered that it was appropriate to maintain the current guideline for money market operations in line with the Bank's stance to keep policy unchanged until deflationary concern was dispelled.

Two members expressed different opinions on the monetary policy stance for the intermeeting period ahead and on the judgment regarding deflationary concern, which constituted the basis for the policy decision.

One of the members, who considered that deflationary concern persisted, advocated further monetary easing through inflation targeting and expansion of the monetary base. Specifically, the member remarked as follows. First, the current halt in the deterioration of the economy merely reflected policy effects such as increased public investment, boosted housing investment, and expanded credit guarantee system. Therefore, it was highly probable that the economy would stall in the second half of fiscal 1999. Second, considering that the Bank was able to set a policy target and select policy tools at its own discretion, it should specify a target and clarify the Bank's responsibility for the consequences. Specifically, it was appropriate for the Bank to set a target for the consumer price index (CPI). Third, the Bank would be able to head off pressure for additional measures as long as it successfully achieved the target. Fourth, the growth of the monetary base was slowing, and this could impair the market's expectations for quantitative easing, and thereby bring about a rise in the yen and a drop in stock prices. Fifth, since interest rates and quantity of money are not "two sides of the same coin" under the zero interest rate environment, the policy target should be shifted from interest rate to quantity of money to make clear the extent of monetary easing. And sixth, such monetary easing would raise expected inflation, and since the rise is usually greater than that in nominal interest rates, real interest rates would decline as a result.

A few members commented on the argument on expected inflation. One member remarked that quantitative easing was generally misunderstood as a policy that would restrain a rise in nominal long-term interest rates, but in theory, it would bring about a rise in nominal long-term interest rates, as the above member had stated. A different member was skeptical about the argument that a rise in nominal interest rates would be acceptable as long as real interest rates declined, saying that economic activities were affected by both nominal and real interest rates.

Another member 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. This member gave four reasons. First, the financial markets were reacting favorably to developments that could possibly lead to an economic recovery. This market tendency was likely to produce a positive economic drive through improvements in business and household confidence. Second, abatement of deflationary concern seemed to be in prospect, given the upturn in commodity prices due mainly to the economic recovery in Asian countries and signs of a bottoming out of wholesale and consumer prices. Third, considering the above two points, it was doubtful whether the current zero interest rate policy should be continued despite such negative outcomes as distortion of income distribution, moral hazard among market participants, loss of good investment opportunities for institutional investors, and the malfunctioning of the price mechanism accompanying excessive monetary easing. And fourth, there were cases in the past where economic fluctuations were amplified by implementation of additional easing measures during recovery phases. This was because macroeconomic indicators, based on which policy decisions are made, lag behind the actual developments in the economy.

Regarding the above argument, one member stressed that, in making monetary policy decisions, it was important to take into consideration not only the current economic situation but also the various risks that lay ahead. Having said so, the member pointed out that the downside risk to the economy remained substantial although favorable developments had gradually appeared in the economy. The member added that, if the Bank, after raising interest rates, shifted back to the zero interest rate policy because of renewed economic deterioration, policy effects would be smaller the second time, and such conduct by the Bank would impair the credibility of monetary policy.

During the discussion, members also exchanged opinions on the Bank's stance of maintaining the current policy until deflationary concern was dispelled.

One member gave comments in favor of this stance, saying that it could be regarded as a monetary policy commitment that successfully avoided technical problems associated with inflation targeting, and it had contributed greatly to improving market conditions. Having said so, the member pointed out that the recent slowdown of the decline in commodity and other prices could push up interest rates since market participants were very sensitive about the definition of "deflationary concern." The member therefore raised the issue of whether it would be appropriate for the Bank to stress its intention of maintaining the current policy until signs of a self-sustained recovery were observed.

In relation to the above, one member stated the opinion that the expression "until deflationary concern was dispelled" was appropriate for the following reasons: (1) it incorporated the Bank's intention to focus not only on current price developments but also on the outlook for the economy and prices; and (2) it did not preclude such flexible policy response as giving priority to pursuing economic growth when prices rose as a result of some strong supply shock--a flexibility sometimes exercised by countries employing inflation targeting. A few members, including the one who first called this into question, agreed with this opinion.

The member who advocated setting a target for the CPI commented that the issue of focusing on deflationary concern was not merely a matter of avoiding technical problems associated with inflation targeting, but also a fundamental issue of whether the Bank attached importance to prices or economic growth in conducting monetary policy. With regard to the employment of a CPI target, the member explained that it would leave room for flexible policy action at times of emergency because the policy framework was established on a principle that was someway in between rule-based and discretionary.

One member raised another issue of how the Bank should manage the situation if expectations of a policy shift arose too early--for example, if the market reacted strongly to improvements in the business conditions D.I. in the next Tankan survey, scheduled to be released on July 5. Another member noted the difficulty in containing interest rate rises when the economy starts to follow a full-scale recovery path or when concern about the future fiscal condition heightens. On this basis, the member raised a similar issue of how the Bank should manage a situation where unjustifiably strong economic indicators and temporary deterioration in the supply-demand balance of Japanese government bonds led to an increase in interest rates.

On this point, one member commented that, if the next Tankan results affected the market as significantly as did the GDP figures for January-March 1999, the Bank would face difficulty in handling the situation under the current policy framework, and stressed the importance of preemptively realizing further monetary easing through quantitative targeting.

Most members, however, shared the view that interest rates should basically be decided through the market mechanism and the Bank should not try to counteract the market's reaction to improvements in economic indicators. One of the members holding the above opinion stressed the importance of the timing of monetary policy decisions, saying that, under the current situation, the Bank's stance "not to change" the current policy had great significance. This member, together with some other members, confirmed that the Bank should firmly keep to the current policy until deflationary concern was dispelled. Further, another member added that it was important to provide an environment in which market participants were able to calmly assimilate various information. This member commented that, for this purpose, it had become increasingly important for the Bank to firmly keep to the current policy stance, adequately explaining its thinking behind this.

V. Remarks by the Government Representative

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

(1) The government's view on the economy was unchanged from the last meeting.

At the summit held from June 18 to 20 in Cologne, Germany, Prime Minister Obuchi explained Japan's economic policy, receiving praise from the leaders of the participating countries. The government considered that this favorable assessment by other countries would improve confidence in the prospects for Japan's economy.

(2) The government would like to request the Bank to continue to carry out appropriate monetary policy and thereby contribute to realizing an economic recovery.

VI. Votes

The views of many members of the economic and financial situation were summarized as follows. First, Japan's economy had stopped deteriorating. Second, the improved financial environment was expected to positively affect economic activity. Third, despite the above points, private demand remained weak and clear signs of an economic recovery had not been observed yet. Fourth, downward pressure on prices remained. And fifth, given the above four points, the economic and financial situation was the same as that at the time of the previous meeting, when the Bank decided to maintain the current policy because deflationary concern had not been dispelled.

Based on this understanding of the economic and financial situation, 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 implement further monetary easing by setting an inflation target and adopting an apparent quantitative targeting. Another member claimed that it was appropriate to raise the overnight call rate.

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 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.

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 0.25 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.

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 1).

The Bank of Japan will provide more ample funds and encourage the uncollateralized overnight call rate to move as low as possible.

To avoid excessive volatility in the short-term financial markets, the Bank of Japan will, by paying due consideration to maintaining market function, initially^(note) aim to guide the above call rate to move around 0.15%, and subsequently induce further decline in view of the market developments.

Note:"Initially" means the time of the Monetary Policy Meeting, February 12, 1999.

Votes for the proposal: Mr. M. Hayami, Mr. S. Fujiwara, Mr. Y. Yamaguchi, Mr. Y. Gotoh, Mr. S. Taketomi, Mr. T. Miki, and Mr. K. Ueda.

Votes against the proposal: Mr. N. Nakahara and Ms. E. Shinotsuka.

Mr. Nakahara dissented for four reasons. First, under the zero interest rate policy, interest rates and quantity of money were not "two sides of the same coin." Therefore, should quantitative indicators such as excess reserves decline and expectation of quantitative easing disappear, this could lead to a drop in stock prices and a rise in the yen. Second, since there was no room for an additional interest rate reduction, the Bank would not be able to take countermeasures against further economic deterioration and unexpected events. Third, considering the lag between implementation of monetary policy and materialization of its effects, it would be too late to alter monetary policy after the economy had gathered negative momentum. And fourth, it was necessary to set an inflation target and thereby keep a close watch on price stability.

Ms. Shinotsuka gave the following four reasons for voting against the proposal. First, the prolonged low interest rate environment was causing distortion in income distribution and market participants' moral hazard. Second, continuation of the zero interest rate policy was impairing the price mechanism of interest rates and leading to unlimited monetary easing. Third, the current economic and financial situation showed incipient signs of a recovery, which were not observed in February 1999, when the Bank decided to further ease the policy stance. And fourth, considering the above three points, the longer the Bank maintained the current zero interest rate policy, the larger the shock of an interest rate rise would become.

VII. Approval of the Scheduled Dates of Monetary Policy Meetings in July-December 1999

At the end of the meeting, members approved the dates of Monetary Policy Meetings in July-December 1999, for immediate release (see attachment 2).

Attachment 1

For immediate release

June 28, 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: