Minutes of the Monetary Policy Meeting

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

October 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 Thursday, September 9, 1999, from 9:02 a.m. to 12:22 p.m., and from 1:17 p.m. to 3:14 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. T. Haraguchi, Deputy Vice Minister for Policy Coordination, Ministry of Finance³
Mr. T. Komine, Director-General of the Research Bureau, Economic Planning Agency⁴

Reporting Staff
Mr. I. Kuroda, Executive Director
Mr. M. Matsushima, Executive Director⁵
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 October 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.
Mr. Tanigaki was present from 10:55 a.m. to 12:22 p.m.
Mr. Haraguchi was present from 1:17 p.m. to 3:14 p.m.
Mr. Komine was present from 9:02 a.m. to 10:40 a.m., and from 1:17 p.m. to 3:14 p.m.
Mr. Matsushima was present from 9:02 a.m. to 12:22 p.m.

I. Approval of the Minutes of the Monetary Policy Meeting Held on July 16, 1999

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting, the "Green Paper," of July 16, 1999 for release on September 14, 1999.

II. Summary of Staff Reports on Economic and Financial Developments⁶

A. Money Market Operations in the Intermeeting Period

Market operations in the period since the previous meeting on August 13 were conducted in accordance with the guideline determined at that meeting.⁷

As a result, the overnight call rate remained generally stable at 0.03 percent. Interest rates on term instruments, such as three-month Euro-yen deposits, declined further reflecting the continued permeation of the effects of monetary easing in the market.

Three conspicuous developments were observed during the intermeeting period.

First, from mid-August through early September, tanshi companies (money market broker-cum-dealers) reduced brokerage fees for uncollateralized call transactions to boost their transactions. Although this reduction in fees had not achieved the intended effect, it was likely that this would result in more overnight call transactions being contracted at 0.02 percent. Second, banks, especially city banks, delayed their depositing of reserves during the reserve maintenance period because their funds positions had been improving due to sluggish lending. As a result, funds were being deposited more conspicuously than before in the current accounts held at the Bank by institutions not subject to reserve requirements. Third, in the Bank's fund-providing operations in early September, bids for commercial paper (CP) purchasing operations with repurchase agreements fell short of the Bank's offers. This was a phenomenon previously observed only in the Bank's bill purchasing operations.

On September 8, the day before the meeting, the overnight call rate rose to 0.06 percent. This was because regional banks and investment trusts reduced their funds investment in the market due to concerns that disruptions might occur to computer systems on September 9 for reasons similar to the Year 2000 problem. Given the rise in the overnight call rate, the Bank considerably expanded its funds provision to stabilize the market. Specifically, it made a significantly larger "morning projection for reserves" of an excess of 1.3 trillion yen on September 8 and an excess of 2.1 trillion yen on September 9.⁸

6Reports were made based on information available at the time of the meeting.
7The 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."
8The "morning projection for reserves" is defined as a projection of the "daily excess/shortfall of reserves" announced by the Bank each morning. The "daily excess/shortfall of reserves"--which is affected by the Bank's market operations of the day--is the amount by which reserves exceed/fall short of the "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.

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

1. Developments in foreign exchange markets

The yen, which had remained around 115 yen at the time of the previous meeting, surged against the U.S. dollar from mid-August reflecting market expectations of an economic recovery in Japan, and reached the 108-109 yen level in early September. Thereafter, the yen fell back to the 111-112 yen level, but had risen again that morning (September 9) to the 109.00-109.50 yen range following the release of the preliminary GDP figures for the April-June quarter showing 0.2 percent growth from the previous quarter, which was slightly higher than the market's projection. Against the euro, the yen had been at the 122-123 yen range at the time of the previous meeting, but rose in line with its appreciation against the U.S. dollar, touching the 114 yen level.

2. Overseas economic and financial developments

U.S. financial markets were stable compared to the time of the previous meeting. Specifically, long-term interest rates declined slightly, and stock prices remained high. This was attributable to (1) stability in inflation-related indicators, such as producer prices, consumer prices, and labor costs, and (2) a weakening of market expectation of a further rise in interest rates after another 0.25 percentage point raising of the federal funds (FF) target rate by the Federal Open Market Committee (FOMC) on August 24 following the raise by the same percentage point in June. However, the yield spread between Treasury bonds and corporate bonds expanded as corporate bond yields rose. This was because firms increased bond issuance to procure funds ahead of schedule, anticipating a future rise in interest rates and being concerned about the Year 2000 problem.

The U.S. economy continued to show robust expansion, although housing investment and consumption of some durable goods were showing signs of a slowdown.

Economies in the euro area continued to show an uptrend fueled by strong private consumption and rising exports. Germany, which had been slow to recover, was showing clearer signs of a recovery in production. In the United Kingdom, the Bank of England raised the repo rate by 0.25 percentage point on September 8, taking account of the firmness in household expenditure and the tightening of the labor market.

The Asian NIEs and the ASEAN countries were showing stronger indications of an economic recovery, reflecting the steady growth in exports of information technology-related goods to the United States and Japan and the permeation of the effects of previously implemented economic stimulus measures.

In China, exports were recovering slightly. However, the implementation of the government's policy measures such as the restructuring of state-owned enterprises had kindled anxiety in households about future income, and this was evidently dampening private consumption. The government had therefore formulated a supplementary budget to boost consumption.

The recent features of the international flow of funds were as follows: (1) international funds tended to be invested in stocks rather than bonds; (2) in overseas investors' investments in Japan, purchases of Japanese stocks were especially conspicuous; and (3) the outflow of funds from Japan declined reflecting the sluggishness in life insurance companies' purchases of foreign bonds and the constrained lending by overseas branches of Japanese banks.

C. Economic and Financial Developments in Japan

1. Economic developments

Business fixed investment continued to decline, and housing investment seemed to have leveled off. Private consumption showed mixed developments underpinned by improved consumer sentiment. However, there was still no prospect of a recovery in private consumption given the increasing severity in employment and income conditions as observed in the drop in summer bonus payments. Public works were increasing reflecting the large amount of orders placed in early spring. Net exports started to grow due to a recovery in exports to Asian countries.

Reflecting such developments in final demand and the progress in inventory adjustment, production was starting to rise.

With regard to prices, domestic wholesale prices were flat reflecting a rise in import prices such as those of crude oil as well as the progress in inventory adjustment. Consumer prices were close to the previous year's level. Meanwhile, corporate service prices continued to decline, but the pace was slowing.

In sum, Japan's economy had stopped deteriorating, and some activities such as exports and production were showing improvement.

As for the outlook, housing investment was expected to decrease moderately from the autumn. However, a sizable fall in public investment before the end of the year was unlikely because public works were expected to continue due to a delay in their implementation. Exports were expected to continue increasing reflecting the recovery in overseas economies, especially in Asia. Under these circumstances, production was most likely to rise in the July-September quarter and remain level in the October-December quarter.

For the economy to achieve a self-sustained recovery, it was crucial that private demand--such as private consumption and business fixed investment--recovered while the support from public investment and exports persisted. However, private consumption could hardly be expected to become the driving force of economic recovery considering that the severity in employment and income conditions was likely to persist due to ongoing corporate restructuring. As regards business fixed investment, the pace of decline seemed to be slowing but there was still no prospect of an upturn. Another matter requiring attention was the possible impact on exports and corporate profits of a continued appreciation of the yen.

In these circumstances, the probability that private demand would achieve a smooth self-sustained recovery was still low.

Prices overall were expected to remain flat although some were weakening slightly. However, in the medium term, a point that warranted attention was the risk that, if a self-sustained recovery was delayed and therefore further inventory adjustment became necessary, prices would show a double dip reflecting the expansion of the output gap.

2. Financial developments

In the financial market, the overnight call rate remained close to zero, and the absence of anxiety about the availability of overnight call money continued. Interest rates on term instruments declined further, but those maturing beyond the year-end continued to be relatively high reflecting concerns about the Year 2000 problem.

Yields on Japanese government bonds (JGBs) rose to 2.0 percent reflecting the market's improved confidence in the economy and expectations of a supplementary budget, but fell back afterwards. They had recently been at the 1.8 percent level. Stock prices recovered to the 18,000 yen level but subsequently declined somewhat reflecting the appreciation of the yen and the adjustment in U.S. stock prices. Recently, they had been generally in the 17,500-18,000 yen range.

Meanwhile, a small Japan premium was being charged on transactions maturing beyond the year-end, but otherwise it remained very close to zero. The yield spread between JGBs and private bonds, which had stopped narrowing, was considerably smaller than before. This suggested that market participants were more willing than before to take credit risks.

With regard to the monetary aggregates, the cautious lending stance of private banks remained basically unchanged. However, major banks were gradually increasing their lending, carefully evaluating the creditworthiness of borrowers. This reflected (1) the easing of the constraint on bank lending previously caused by the severe fund-raising conditions for banks and their insufficient capital bases, and (2) banks' efforts to increase loans in accordance with their plans for restoring sound management submitted to the Financial Reconstruction Commission (FRC).

However, credit demand for economic activities such as business fixed investment remained weak. Recently, reflecting the alleviation of concern about the availability of funds, firms were paying back loans from their accumulated on-hand liquidity. As a result, credit demand in the private sector continued to weaken, and private bank lending declined further. The pace of issuance of corporate bonds and CP continued to slow gradually.

In this financial environment, corporate financing conditions were easing. As for the future, attention should be paid to further changes in investors' risk-taking and in private banks' lending stance, as well as to their effect on economic activities.

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

A. The Current Economic Situation

On the current economic situation, many members noted that Japan's economy had stopped deteriorating, and positive signs were gradually appearing in economic activities. At the same time, however, they pointed out that private demand was still not strong enough. Therefore, the members' judgment in general was that the economy had stopped deteriorating, and there were some activities improving such as exports and production, but clear signs of a self-sustained recovery in private demand had not been observed yet. One of the members summarized the situation: "the economy remained flat with positive and negative factors intertwined, but gradually the positive factors were becoming more positive and the negative ones less negative."

As regards public investment, one member pointed out that construction seemed to be progressing at a high level judging from the shipment of public investment-related goods. A few other members projected that this high level would be maintained at least until the turn of the year.

Many members expressed the view that exports had started to increase conspicuously, especially those to Asia and the United States. Some of them found exports stronger than they had expected. One added that trade, especially between Japan and other Asian countries, was on a balanced growth path.

Taking the above views into consideration, a few members commented that exogenous demand--that is, public investment and exports--was firmer than members had projected.

With respect to private demand, although some positive factors were referred to, many members' views were still gloomy.

In relation to business fixed investment, some members pointed out that the pace of decline in corporate profits seemed to be moderating somewhat. A different member commented that large-scale construction projects in the metropolitan area were about to start on schedule. However, most members, including the above members, considered that business fixed investment still continued to be on a downward trend. Specifically, they pointed out that firms, under structural adjustment pressure, were focusing on balance-sheet restructuring, and therefore their spending had not recovered despite an improvement in profits, further easing of financing conditions, and an upturn in sentiment.

A different member expressed hopes that the ongoing improvement in the conditions surrounding business fixed investment could encourage technical innovation in such areas as telecommunications and environmental protection.

Many members considered it favorable that private consumption was not falling despite the severe employment and income conditions. This reflected (1) an improvement in household confidence due to the abatement of concern about financial system stability and to the rise in stock prices, and (2) an increase in overtime payments accompanying an upturn in production. One member pointed out that household confidence was improving, referring to the results of the Public Opinion Survey on Household Savings and Consumption for 1999, conducted during June 25-July 5 by the Central Council for Savings Information. The member remarked that (1) the number of households expecting the financial situation to worsen declined, and (2) the weight of stocks in the financial asset portfolio of households increased. However, many members' overall assessment of private consumption was that it was still not strong enough to be the driving force of economic recovery. They gave the following grounds for this view: (1) the downward trend in employment and income conditions remained unchanged as reflected in the rise in the unemployment rate and in the increase in the number of people who had given up job hunting--in other words, the rise in the number of those not working, and (2) the propensity to consume, which had at one stage fallen away due to anxiety about financial system stability, had recovered and was already at a relatively high level.

Members particularly noted that production in the July-September quarter was turning upward reflecting the above developments in final demand and the progress in inventory adjustment. As examples, one member pointed out that (1) due mainly to the increase in exports, iron and steel manufacturers were producing at full capacity, and (2) at automobile manufacturers, production had recovered to the previous year's level and temporary workers were being hired.

Most members shared the understanding that the positive growth in preliminary GDP figures for two consecutive quarters confirmed that the economy had stopped deteriorating and positive developments were emerging. One of the members commented that the worst might be over for the economy.

As for prices, it was the view of many members that, so far, prices remained generally flat although the output gap remained large and downward pressure on prices persisted. One of the members added that prices were becoming slightly more stable than previous projections, reflecting improvements in some economic activities.

One member took a gloomier view of the economy than the others on the grounds that neither the diffusion index nor the composite index of business conditions suggested a bottoming out of the economy although some long-term leading indicators of business conditions suggested that the economy might bottom out in May 2000. The member cited the following as the basis for this view. First, an immediate recovery in business fixed investment could hardly be expected given the ongoing hollowing-out of Japanese industry. Second, although there might be room for a further rise in the propensity to consume, private consumption could be negatively affected by the ongoing employment adjustment and by a possible increase in corporate bankruptcies arising as firms faced the need in the near future to repay loans extended under the credit guarantee system. Third, it was becoming apparent that the robust economic growth in the United States was highly likely to slow in the future as suggested by the conspicuous rise in unit labor costs, and in Asia, the outlook for the economy and also the development of stock prices were subject to substantial uncertainty. Fourth, the world oil market was tightening and therefore crude oil prices could rise as high as US$25 per barrel by the end of 1999, in which case Japan's terms of trade would deteriorate, negatively affecting corporate profits and in turn stock prices. And fifth, firms and local governments had incurred sizable unrealized losses on their holding of land due to the continued decline in land prices.

B. Financial Developments

On the financial front, members generally judged as in previous meetings that the financial environment was improving. In these circumstances, members' attention was focused on assessment of the recent appreciation of the yen.

Many members presented their views on the basis that developments in the yen's exchange rate should be judged not only in terms of the level of the yen but also in relation to the overall developments in economic activity and financial markets.

One member took the view that it is natural for the yen to rise as market sentiment improves reflecting the permeation of monetary easing effects. On these grounds, the member judged that the negative impact of the yen's appreciation was not yet a major concern, as exports were underpinned by the favorable economic situation abroad and as stock prices and long-term interest rates were stable. A different member who held a similar view added that the structure of Japan's economy seemed to have acquired adaptability to the appreciation of the yen through the severe experience of past surges in the yen.

A few other members pointed out that two factors were behind the recent appreciation of the yen: (1) expectations of an economic recovery in Japan; and (2) uncertainty in the outlook for the U.S. economy. The members commented that, if the yen's rise were driven mainly by the latter factor, risks to Japan's economy would be significant. So far, however, it was the former factor that had mainly fueled the yen's appreciation, and therefore, it was unlikely that the appreciation would have a serious impact on the economy.

Another member expressed the view that, if the yen's appreciation exerted a strong negative impact on the economy, the stabilization mechanism of the economy would function and push the yen back down--that is, stock prices would fall in anticipation of a decline in corporate profits, leading to a weakening of the yen. The member judged from the recent developments in the financial markets that market participants had responded calmly to the yen's appreciation.

There were also a few comments expressing concern about the negative effect of the yen's appreciation on corporate profits.

One member mentioned that the economy was showing favorable signs due to an increase in production accompanying the rise in exports. The member, however, emphasized that, since an exchange rate level of around 110 yen against the U.S. dollar was crucial for firms' profits, the negative impact on industry would become substantial and, consequently, a self-sustained recovery in private demand might be delayed if the yen continued to surge.

Further, a different member expressed the view that, according to a technical analysis, the yen's appreciation would accelerate abruptly if it exceeded the current level. The member pointed out that, if that should occur, the following problems would arise: (1) not only industry but also institutional investors would be affected, incurring larger losses on foreign currency-denominated assets; and (2) imports, particularly from Asia, would increase, adversely affecting the economy. The member also referred to previous comments made by some members, who took account of the firmness of stock prices in evaluating the yen's exchange rate. The member warned that (1) at present Japan's stock market was strongly influenced by the buoyant U.S. stock market, (2) although U.S. stock prices were still at a high level despite the consecutive raising of the target FF rate by the FOMC in June and August, they would eventually enter an adjustment phase, and (3) if Japan's stock prices fell following a peaking-out of U.S. stock prices, the disparity between the yen's current level and economic fundamentals would become very evident.

During the meeting, some members also commented on long-term interest rates. They agreed that long-term interest rates were stable. However, they added that, if anxiety about a deterioration in the supply and demand balance of JGBs was rekindled against the background of discussions about a second supplementary budget for fiscal 1999 as well as concerns about a massive withdrawal of postal savings, or if a steady recovery of the economy came into prospect, it would be necessary to pay careful attention to developments in the rates and the underlying factors.

One of these members expressed the opinion that it was unlikely that a deterioration in the supply and demand balance of bonds would lead to a rise in long-term interest rates since there were ample funds in the private sector. On this basis, this member and others emphasized that it was important among other things to secure the confidence of the market and thereby constrain the expansion of the risk premium in long-term interest rates by pursuing efficient fiscal management and presenting a clear picture of the future fiscal situation.

In relation to this point, a different member expressed concern that additional JGB issuance would most likely increase long-term interest rates since the amount outstanding of JGBs issued had already accumulated considerably.

Members also discussed developments in the monetary aggregates. A few members mentioned that private bank lending continued to decrease although corporate financing conditions had been easing. They pointed out that this was because (1) firms were limiting business fixed investment within the amount of depreciation and were using the improved cash flow to pay back loans, and (2) they were reducing on-hand liquidity as they became more confident of the availability of funds. These members stated that, as a result, the more the effects of the monetary easing permeated, the more sluggish the monetary aggregates such as private bank lending and money stock became. Therefore, the previous relationship between economic activity and the monetary aggregates was no longer valid--in other words, the monetary aggregates could decrease even when the economy was recovering.

One of these members also referred to banks' lending stance. Although the member was impressed with the gradual increase in banks' willingness to lend, the member remarked that their financial intermediary function had not yet recovered sufficiently. Specifically, the member pointed out that, in order to achieve their plans for restoring sound management submitted to the FRC, some banks were increasing their lending to existing borrowers by offering low interest rates despite their low credit standing. The member also mentioned that necessary funds were scarce for firms with high business potential but with insufficient credit standing. The member concluded that future developments therefore required attentive monitoring.

C. The Economic Outlook

With regard to the economic outlook, many members shared the view that downside risk persisted and that deflationary concern had not been dispelled yet. Some members, however, considered that, with some positive developments appearing in the economy, the downside risk might have decreased slightly.

One member remarked that the outlook for the economy depended on whether or not the favorable developments gradually appearing in the economy led to a self-sustained recovery in private demand.

In response to the above, some members remarked that private consumption was expected to maintain the current level but business fixed investment was likely to continue to decline throughout fiscal 1999.

Specifically, one member commented that the firmness in stock prices was supporting consumer sentiment and a recovery in production was expected to increase overtime payments, and therefore, private consumption was likely to remain steady in the immediate future. This member, however, also remarked that, given employment cuts and wage reductions accompanying firms' restructuring, it was difficult for private consumption, which was currently showing mixed developments, to follow an upward trend.

As for business fixed investment, the majority of members shared the view that (1) the downtrend would continue throughout fiscal 1999 judging from the various leading indicators and the sluggish lending of private banks, and (2) an increase in firms' spending was unlikely since there remained medium-term structural adjustment pressure. A few members, however, remarked that developments in profits were paving the way for a recovery in business fixed investment, citing the following: (1) wages were being cut at a relatively fast pace while prices generally remained level; and (2) firms' profits were starting to increase reflecting their restructuring efforts.

With regard to exogenous demand--that is, public investment and exports--some members commented that it had been unexpectedly firm so far and was expected to remain stronger than previously projected.

A few members remarked that a second supplementary budget was necessary in order to avoid a sizable decline in public investment from the end of fiscal 1999 to the beginning of fiscal 2000. A different member pointed out that, given the continuing support from public works whose implementation had been delayed and the growth in exports to Asia and to the United States, the possibility had increased of exogenous demand and production remaining firm through the beginning of 2000. This member also stated that, if a large second supplementary budget for fiscal 1999 was formulated, the underpinning effect of exogenous demand could be expected to continue in fiscal 2000.

Based on the above remarks, one member pointed out that aggregate demand--the total of private and exogenous demand--might increase more than previously expected. This member, however, noted that, even if aggregate demand did increase, it would only imply a decrease in the downside risk reflecting the strong exogenous demand and would not confirm the existence of a cyclical upturn in the economy.

A different member projected that the economy was likely to remain firmly underpinned and be prevented from double-dipping until the end of 2000. The member added that, if the economy remained stable as projected, this could be expected to have some positive influence on the private sector.

In sum, the majority of members held the view that, although a self-sustained recovery in private demand was not in prospect, it was becoming clear that the economy would avoid any further deterioration in the immediate future, underpinned mainly by exogenous demand.

Some members commented on the risks to the above scenario. One member mentioned that it should be noted that full-scale corporate restructuring would boost corporate profits but at the same time would negatively affect private consumption by reducing household income. Another member also mentioned overseas risks such as (1) a downturn in the U.S. economy and a decline in U.S. stock prices, and (2) a decrease in exports to Asia after the turn of the year, when Asian importers would stop increasing their running stock. A different member expressed concern about a possible overshooting of Japanese asset prices, such as stock prices, bond prices, and the yen, based on overly strong expectation of an economic recovery.

As regards price developments, many members shared the view that primary importance should be attached to the downside risk since a self-sustained recovery in private demand was not in prospect. One pointed out that the recent appreciation of the yen and the rise in crude oil prices would squeeze firms' profits, consequently creating deflationary pressure.

It was, however, pointed out that prices were likely to remain level if the economy did not deteriorate further, and the halt in the price decline would contribute to alleviating deflationary concern. Based on the above arguments, one member said it could be judged that the environment for prices was improving gradually.

A different member pointed out that it was technically difficult to project price developments based on the output gap. The member also remarked that the current stability in prices was not temporary but reflected the firmness in the economy, and expressed the view that deflationary concern was being dispelled. The member judged so on the grounds that (1) firms' inventory had decreased, and therefore, a recovery in demand could easily lead to an increase in production, and (2) adoption of a second supplementary budget for fiscal 1999 would further brighten the prospects for a self-sustained recovery in private demand. The member stressed that these points were reflected in the stability of prices.

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.

Many members' view of the economic and financial situation was basically unchanged from the previous meeting. First, Japan's economy had stopped deteriorating, and positive developments were seen in some activities, such as exports and production. However, clear signs of a self-sustained recovery in private demand had not been observed yet. Second, the financial environment was improving. And third, the environment for prices was improving gradually and prices were expected to stay level in the immediate future, but downward pressure on prices remained.

A few members, who shared the above view, raised the issue of how to understand the decrease in the downside risk to the economy in relation to the judgment that deflationary concern had not been dispelled.

One member remarked that, although the economy was likely to remain stable for the rest of 1999 and into 2000, it was still necessary to pay particular attention to the downside risk to economic activity and prices considering that a recovery in private demand was not yet in prospect. Some members expressed the view that the abatement of deflationary concern did not necessarily mean that the economy had recovered or that the output gap had contracted. Rather it meant that, for example, the risk of a further expansion of the output gap had become insignificant and that the inflationary risk outweighed the deflationary risk. A different member commented as follows on the risks to the economy: (1) hardly any inflationary risk was perceived, and (2) deflationary pressure on prices, although it had lessened, remained.

On the basis of the above discussion, members judged, as in the previous meeting, that deflationary concern had not been dispelled yet.

On this premise, some members remarked on the relation between the zero interest rate policy and the expectations of market participants.

One member commented that the significance of the current policy lay in the fact that the Bank had committed itself to keeping the interest rate at zero percent for a while. The member noted that feeling of uncertainty among market participants about the future could trigger a rise in medium- and long-term interest rates and cancel out the effects of the zero interest rate policy, thereby delaying the termination of the current policy. The member stated that, therefore, it was necessary to retain its commitment, which would stabilize market expectations, in order to prevent interest rates from rising due to intensification of uncertainty.

Given the above comment, a different member stressed that market expectations, which were currently based on the assumption that the zero interest rate policy would be maintained, were having favorable effects on economic activity, and therefore, the policy should not be terminated without careful consideration of the possible consequences.

Another member remarked that the current zero interest rate policy was an extraordinary policy that would not be taken under normal economic growth, and should therefore be terminated as soon as its effects had permeated the economy and the necessary conditions had been prepared. The member, however, commented that such conditions were not yet in place considering the prospects for economic activity and prices given the possible effects of the recent appreciation of the yen. The member also commented that expectations and speculations often cause overshooting in the markets, and concluded that it was necessary "not to change" the current zero interest rate policy.

Based on the above discussions, the majority of members considered that, in the management of monetary policy in the immediate future, it was appropriate to keep the guideline for money market operations unchanged.

Some members spoke out the need for the Bank to take necessary measures toward the turn of the year to avert possible disruptions arising from the Year 2000 problem, while preventing an emergence of moral hazard among market participants. One of these members gave the opinion that the Bank should convey to the public its thinking regarding liquidity provision in relation to the Year 2000 problem by October at the latest.

Two members expressed opinions different from the above.

One member advocated that the Bank should (1) guide the overnight call rate up to the level before the monetary easing on February 12--that is, around 0.25 percent on average, and (2) provide ample funds in the market if concern about the Year 2000 problem triggered market confusion. As reasons for this action, the member cited the following: (1) economic activity was gradually but definitely becoming stronger, although a self-sustained recovery in private demand was not yet confirmed; and (2) the anticipated second supplementary budget for fiscal 1999 would improve the prospect of a self-sustained recovery of the economy. As regards the zero interest rate policy, the member, who had repeatedly expressed concern about its negative outcomes, commented that it had now become even less justifiable to continue the policy considering the increased stability in the economy. Further, this member mentioned that, in the Bank's money market operations, the increase in the number of cases where the actual subscription by financial institutions fell short of the Bank's offers suggested that the effects of monetary easing had sufficiently permeated the markets.

Also, this member, while stressing that the member still believed strongly that the Bank should guide the interest rate up to the level before the monetary easing on February 12, expressed the intention not to submit a policy proposal with a view to securing the efficient proceedings of the meeting. Specifically, the member commented that (1) there was sufficient time at Monetary Policy Meetings to present the member's argument on monetary policy, and (2) there would not be much significance in a single member submitting a proposal since the chairman's proposal was formulated based on the majority's view and voting for or against it would be enough to indicate the member's opinion.

A different member advocated further monetary easing saying that the economy was not strong enough to return to a self-sustained recovery path and that the downside risk would materialize in 2000, when the effects of various policy measures would fade. Specifically, this member suggested that the Bank employ monetary base targeting accompanied by an inflation target. The member explained the thinking behind the opinion as follows: (1) in case outright purchase of JGBs by the Bank became an issue in discussions on the second supplementary budget for fiscal 1999, which was very likely, employment of monetary base targeting accompanied by an inflation target would be the best way for the Bank to secure independence and flexibility in the implementation of monetary policy; (2) indication of an inflation target in an easily understandable manner would contribute to stabilizing people's expectations; and (3) prompt monetary easing through quantitative expansion was necessary to counter the impact of the appreciation of the yen, prevent a downturn in the economy, and pave the way for an economic recovery.

V. Remarks by Government Representatives

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

Prime Minister Keizo Obuchi and Finance Minister Kiichi Miyazawa discussed economic policy and fiscal management in the future in view of the preliminary GDP figures for the April-June quarter of 1999 released on September 9. It was said that, based on the discussion, Prime Minister Obuchi expressed the view that the government should promptly utilize the reserve budget allocated to additional public works. He was said to have judged that this was necessary to ensure an economic recovery given the persistently weak private demand and the severe employment situation despite the GDP growth for two consecutive quarters. It was also said that, Prime Minister Obuchi, if he was reelected as president of the Liberal Democratic Party and retained the post of prime minister, was willing to consider the compilation of a second supplementary budget for 1999 under a new Cabinet.

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

On the current economic situation, the Agency's judgment was that the economy was improving somewhat reflecting the permeation of the effects of various policy measures, although the recovery in private demand was weak. Therefore, it was necessary to ignite a recovery in private demand while the economy was underpinned by public demand, and thereby prevent a further deterioration of the economy. For this purpose, the government was making the utmost effort to ensure that appropriate policy measures were implemented on a continuous basis. The government would like to request the Bank to contribute to realizing an economic recovery by providing ample funds in the market through appropriate money market operations until self-sustained economic recovery became apparent.

VI. Votes

The views of many members of the economic and financial situation were summarized as follows. First, Japan's economy had stopped deteriorating, and positive developments were seen in some activities such as exports and production, but a self-sustained recovery in private demand had not been observed yet. Second, the financial environment was improving. Third, the environment for prices was improving gradually and prices were expected to remain level in the immediate future, but downward pressure on prices persisted. And fourth, given the above three points, deflationary concern had not yet been dispelled.

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, claimed that it was appropriate to implement further monetary easing by setting a target for the growth rate of the consumer price index and adopting an apparent quantitative targeting.

On the basis of these arguments, two 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 a 0.5 to 2.0 percent annual increase in the consumer price index (excluding perishables) in the October-December quarter of 2001 as a medium-term target. 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 September 16 through October 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 January-March quarter of 1999 to the average for the same quarter of 2000) to realize quantitative easing (expansion of the monetary base).^(note) 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.

Note:To realize approximately 10 percent annual growth of the monetary base (change from the average for the January-March quarter of 1999 to the average for the same quarter of 2000), the Bank will need to increase reserves by about 3 trillion yen by the end of March 2000 through market operations if it is assumed that the current annual growth in banknotes, which was about 6 percent, will continue.

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

To reflect the majority view, the chairman formulated the following proposal.

Chairman's Policy Proposal:

The guideline for money market operations in the intermeeting period ahead would be as follows, and publicized by the attached statement (see attachment).

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

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

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

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

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

Mr. Nakahara voted against the chairman's proposal for the following three reasons. First, the Bank, under the zero interest rate policy, would not be able to take sufficient measures to counter the downside risk to the economy. Second, the Bank, which now has the right to set policy targets as well as to select policy tools, would be able to secure independence in the implementation of monetary policy even in the process of discussions about the second supplementary budget for fiscal 1999 and an increase in the Bank's outright purchase of JGBs by employing monetary base targeting accompanied by an inflation target. Under this policy framework, the Bank would also be able to respond flexibly to changes in the economic and financial situation. And third, the growth in the monetary base had recently become sluggish and could gradually decline in the future. Such a decline should be prevented considering its negative effects on long-term interest rates, stock prices, and the yen's exchange rate.

Ms. Shinotsuka dissented commenting as follows. Although she acknowledged that the Bank's decision to employ the current zero interest rate policy was based on careful consideration of its positive and negative aspects, the negative outcomes of this policy had become more prominent. They were (1) distortion in income distribution, (2) reduced awareness of credit risks, (3) delay in structural adjustment, and (4) heightened risk of confusion accompanying the termination of the prolonged policy. She also remarked that the economy was gradually becoming more stable. On the basis of this understanding, she considered that it had become even less justifiable to continue the zero interest rate policy.

VII. Discussion on the Bank's View of Recent Economic and Financial Developments

The Policy Board discussed "The Bank's View" of recent economic and financial developments, and put it to the vote. The Board unanimously determined "The Bank's View," for publication on September 13, 1999 in the Monthly Report of Recent Economic and Financial Developments (the "Ivory Paper," consisting of "The Bank's View" and "The Background").⁹

9The original full text, written in Japanese, of the "Ivory Paper" was published on September 13, 1999 together with the English version of "The Bank's View." The English version of "The Background" was published on September 27, 1999.

Attachment

For immediate release

September 9, 1999
Bank of Japan

The Bank today held a Monetary Policy Meeting, a regular meeting of the Policy Board on monetary policy.

By majority vote, the Policy Board decided to leave monetary policy unchanged.

The guideline for money market operations in the inter-meeting period ahead is as follows: