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Minutes of the Monetary Policy Meeting

on October 13, 1999
(English translation prepared by the Bank staff based on the Japanese original)

November 17, 1999
Bank of Japan

A Monetary Policy Meeting of the Bank of Japan Policy Board was held in the Head Office of the Bank of Japan in Tokyo on Wednesday, October 13, 1999, from 9:01 a.m. to 12:35 p.m., and from 1:34 p.m. to 5:22 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. S. Taketomi
Mr. T. Miki
Mr. N. Nakahara
Ms. E. Shinotsuka
Mr. K. Ueda

Government Representative Present
Mr. Y. Ohno, Senior State Secretary for Finance, Ministry of Finance
Ms. Y. Koike, Senior State Secretary for Economic Planning, Economic Planning Agency2
Mr. T. Komine, Director-General of the Research Bureau, Economic Planning Agency3

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. N. Inaba, Advisor, Policy Planning Office4
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 Office
Mr. A. Miyanoya, Chief Manager, Open Market Operations Division, Financial Markets Department5
Mr. S. Uchida, Manager, Policy Planning Office
Mr. H. Yamaoka, Manager, Policy Planning Office

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on November 12, 1999, as "a document which contains an outline of the discussion at the meeting" stipulated in Article 20, Paragraph 1 of the Bank of Japan Law of 1997. Those present are referred to by their titles at the time of the meeting.
  2. Ms. Koike was present from 9:01 a.m. to 12:35 p.m.
  3. Mr. Komine was present from 1:34 p.m. to 5:22 p.m.
  4. Mr. Inaba was present from 1:34 p.m. to 5:22 p.m.
  5. Mr. Miyanoya was present from 3:15 p.m. to 5:07 p.m.

I. Approval of the Minutes of the Monetary Policy Meeting Held on September 9, 1999

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting, the "Green Paper," of September 9, 1999 for release on October 18, 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 September 21 were conducted in accordance with the guideline determined at that meeting.7

Upward pressure on interest rates intensified from late September through early October, before and after the end of the semiannual accounting period on September 30. To contain this pressure, the Bank flexibly provided ample funds, announcing a larger "morning projection for reserves" of an excess of more than 2 trillion yen compared with the usual excess of 1 trillion yen.8 As a result, the overnight call rate was relatively stable, staying at 0.05 percent even on September 30. Thereafter, money market conditions became extremely easy again. The Bank therefore went back to announcing a "morning projection for reserves" of an excess of 1 trillion yen, and the overnight call rate had been stable at 0.02-0.03 percent.

Three conspicuous developments were observed during the intermeeting period.

First, interest rates on three-month contracts increased due to the "Year 2000 premium" given that contracts made after September 29 would mature beyond the year-end. Interest rates on term instruments maturing before the year-end declined, however, reflecting a further abatement of concern that the Bank might terminate the zero interest rate policy.

Second, the "Japan premium," although small, was observed in interest rates on three-month contracts maturing beyond the year-end.

Third, financial institutions held a somewhat larger amount of reserves than before in September, before the end of the semiannual accounting period on the 30th. Accordingly, the amount of funds in the accounts at the Bank of Japan held by tanshi companies (money market broker-cum-dealers) decreased to some extent. However, in October, after the end of the semiannual accounting period, excess reserves decreased, and the market's attention became concentrated on the Year 2000 problem.

  1. 6Reports were made based on information available at the time of the meeting.
  2. 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."
  3. 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 at one time surged to the 103 yen level against the U.S. dollar, but fell back afterward reflecting (1) market speculation concerning the G-7 joint statement, and (2) purchases of foreign-currency assets by Japanese institutional investors. The yen had recently been at the 106-107 yen level.

Meanwhile, the euro rose against the U.S. dollar and the yen, reflecting the economic recovery in the euro area that had become more conspicuous than before.

Under these circumstances, the market sentiment that had fueled the appreciation of the yen seemed to have changed as follows, and the upward pressure on the yen had weakened recently. First, the surge in the yen against the U.S. dollar in September stopped at the 103 yen level, and this was regarded as the ceiling of the current yen-appreciation phase. Second, the market's attention was shifting toward developments in the euro. And third, the market's excessively strong and premature expectation of a recovery in Japan's economy stemming mainly from the release of the GDP figures for the April-June quarter had been gradually modified.

2. Overseas economic and financial developments

In the U.S. financial markets, long-term interest rates were rising. This was attributable to (1) strong economic indicators such as durable goods orders in August, (2) the decision by the Federal Open Market Committee (FOMC) on October 5 to adopt a directive that was biased toward a possible firming of policy going forward, and (3) a rise in long-term interest rates in Europe. Stock prices declined in September, but they had been increasing since the beginning of October reflecting the market's expectations of improvements in corporate profits.

The U.S. economy, led by domestic demand, continued to expand. In the meantime, the external imbalance was expanding conspicuously, as observed in the three consecutive months of increase in the trade deficit through July. The current account deficit had been increasing since the latter half of 1998, and recent figures suggested that it would reach approximately US$300 billion per annum. In this situation, the market had begun to pay attention to whether the external deficit could continue to be financed smoothly in the future.

In the euro area, the pace of economic recovery was accelerating moderately due to firm private consumption and an upward trend in exports. Prices were stable, but inflationary expectations were gradually becoming pronounced. Under these circumstances, market expectations were growing that the European Central Bank (ECB) would raise interest rates in the near future. Against this background, long-term interest rates were increasing.

C. Economic and Financial Developments in Japan

1. Economic developments

Business fixed investment was declining moderately, and housing investment had peaked out. Private consumption generally showed mixed developments. Meanwhile, public works increased given the large amount of orders placed in early spring. Exports continued to expand. Reflecting these developments in final demand and progress in inventory adjustment, production was increasing.

Business sentiment had continued to improve despite the appreciation of the yen, as observed in the substantial improvement in the business conditions diffusion index (DI), mainly for large manufacturers, in the September Tankan--Short-Term Economic Survey of Enterprises in Japan.

As described above, Japan's economy had stopped deteriorating, and exports and production had been improving.

With regard to prices, domestic wholesale prices had leveled off reflecting a rise in import prices, such as that of crude oil, and progress in inventory adjustment. Consumer prices generally remained close to the level of the previous year.

As for the outlook for final demand in the October-December quarter, housing investment was expected to decrease moderately. However, exports were likely to continue expanding underpinned by the economic recovery overseas mainly in Asia, and public investment was likely to avoid a large drop due to the continuation of public works that had been delayed. Under these circumstances, production was highly likely to remain level in the October-December quarter after increasing in the July-September quarter. However, a smooth, self-sustained recovery in private demand was not yet foreseeable in the near future, considering that (1) as observed in the September Tankan, there was no clear sign of an upturn in business fixed investment, and (2) with regard to the environment for private consumption, severe income conditions were expected to continue for some time.

Regarding the impact of the recent appreciation of the yen on corporate profits, it could cause some downward revision of the profit projection for the second half of fiscal 1999, since the projection in the September Tankan presumed that the yen-U.S. dollar rate would be 113.58 yen on average, which was somewhat lower than the current level. However, it was probable that the adverse effect on corporate profits would be alleviated to some extent for the following reasons. First, the volume of exports was expected to increase reflecting the sustained economic recovery overseas. Second, it had become easier to raise export prices given, for example, the economic recovery overseas. Third, a global production system had gradually been developed by Japanese manufactures. And fourth, Japanese importers could gain benefits from the appreciation of the yen. The business conditions D.I. had improved conspicuously despite the considerable rise in the yen from the time of the June Tankan to the September Tankan. This suggested that firms considered that the recovery trend in corporate profits would not be hampered by the yen's exchange rate at the time they answered the September Tankan survey. However, the results could partly reflect the fact that some firms, having made forward exchange contracts, anticipated that the impact would be limited for the time being. The effect of the appreciation of the yen on corporate profits and sentiment should continue to be closely watched.

With regard to the outlook for prices, the rise in crude oil prices to date was expected to influence domestic prices until next spring. In addition, firms' strategy seemed to have become more focused than before on avoiding a reduction in output prices. Therefore, the effect of the yen's rise on consumer prices was likely to appear more slowly than previously anticipated. Under these circumstances, it was expected that domestic wholesale prices and consumer prices would remain generally flat in the immediate future. However, in the medium term, the risk of a further decline in prices could not be ruled out given the persistent output gap, and this risk continued to require attention.

2. Financial developments

The money market was stable on the whole. Long-term interest rates had declined since late August to around 1.6 percent. This reflected a further waning of market expectations of an early termination of the zero interest rate policy given the appreciation of the yen. Thereafter, they had recovered somewhat, and were at the 1.7-1.8 percent level.

Stock prices fell to the 16,000 yen level in late September due to a decline in U.S. stock prices and the appreciation of the yen. However, they rebounded subsequently reflecting a recovery in U.S. stock prices and the stabilization of the yen's exchange rate, and were around 18,000 yen.

Three conspicuous developments were recently observed in the financial markets.

First, a stabilization mechanism inherent in the market seemed to be at work whereby a surge in the yen dampened stock prices, and this in turn brought the rise in the yen to a halt.

Second, the Japanese financial markets had become more sensitive to overseas factors, as observed in the recent tendency of Japan's stock prices to move in line with U.S. stock prices. Developments in the U.S. economy and stock prices therefore required attentive monitoring.

Third, long-term interest rates and stock prices were increasing concurrently. Such movements could usually be interpreted as a sign of a recovery in economic activity. On this point, however, further observation of market developments was needed.

With regard to corporate financing, the cautious lending stance of private banks remained basically unchanged. However, major banks were gradually increasing their lending, carefully evaluating the credit risks involved. 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 lending plans for restoring sound management submitted to the Financial Reconstruction Commission (FRC).

However, credit demand for economic activities remained weak. In addition, reflecting the alleviation of concern about the availability of funds, firms had been trying to reduce debts using their accumulated on-hand liquidity. As a result, credit demand in the private sector continued to be weak. Under these circumstances, private bank lending remained sluggish, and the year-to-year growth rate of money stock (M2+CDs) had declined to around 3.5 percent.

In the meantime, corporate bonds and commercial paper (CP) had been issued at a steady pace.

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 from economic indicators released in the intermeeting period that it had become more conspicuous than before that Japan's economy had stopped deteriorating, and signs of improvement were increasing mainly in exports and production. At the same time, however, they pointed out that clear indications of recovery were not yet observed in domestic private demand such as private consumption and business fixed investment. Therefore, the members' general judgment was that the economy had stopped deteriorating and exports and production were improving, but clear signs of a self-sustained recovery in private demand had not been observed yet. One member summarized the situation as follows: "The economy remains flat with positive and negative factors intertwined, but all the factors are improving gradually." A few other members also expressed the view that the economic situation, leaving aside the prospects for the future, had improved.

Some members pointed out that the recovery in Asian economies was stronger than previously expected, and it was contributing significantly to the amelioration in Japan's economic situation.

As regards public investment, many members were of the opinion that it remained at a high level and was likely to underpin demand until the turn of the year.

Many members expressed the view that exports had increased conspicuously reflecting the recovery of Asian economies and were underpinning production. One member specifically pointed out the briskness in exports of materials and knockdown exports to Asian countries. In view of these developments, some members commented that exogenous demand--that is, public investment and exports--was slightly firmer than they had previously projected.

With respect to housing investment, some members remarked that it seemed to have peaked out. However, one of these members commented that the risk of a rapid decrease in housing investment had lessened somewhat, considering the significant rebound in housing starts in August.

Furthermore, many members pointed out that production was increasing reflecting the growth in exogenous demand and progress in inventory adjustment.

A few members noted that the inventory-to-shipment ratio had decreased to a level suggesting that inventory adjustment had almost been completed, and that such marked progress in inventory adjustment had paved the way for an economic recovery. One member expressed the view that, due to the removal of the inventory burden, the increase in external demand was directly leading to growth in production.

Many members pointed out that corporate profits and sentiment were improving given the recovery in production and the positive effects of corporate restructuring.

As regards corporate profits, many members cited the results of the September Tankan survey, which showed that profits were projected to increase in fiscal 1999 at both manufacturers and nonmanufacturers. On this basis, they expressed the view that corporate profits were generally on an uptrend reflecting the recovery in production and the effects of corporate restructuring.

Many members also remarked that corporate sentiment had continued to improve reflecting the favorable developments in corporate profits.

A few members referred to the significant improvement in the business conditions D.I. in the September Tankan. One member remarked that it was good news that corporate sentiment had improved markedly despite the notable appreciation of the yen at the time of collection of the September survey data, although the exchange rate predicted by firms in the survey suggested that the most recent surge in the yen might not have been fully taken into account. Furthermore, this member commented that the improvement also reflected firms' continued efforts since the 1980s to become resistant to exchange rate fluctuations by constructing global production systems and carrying out restructuring.

Nevertheless, members generally agreed that clear signs of a self-sustained recovery had not been observed yet in domestic private demand such as business fixed investment and private consumption.

In relation to business fixed investment, many members pointed out that, according to the September Tankan, firms still planned to reduce investment in fiscal 1999. A few members remarked that, taking into account other related indicators, it was possible that the declining trend was gradually coming to a halt, but the prospect of a firm recovery remained remote because companies still felt that they had excess capacity and debt. One member stated that business fixed investment in 1998 and 1999 did not include much information-related investment, such as that in computers and telecommunications devices.

A few members remarked that it was impressive that private consumption was not falling despite the severe employment and income conditions. One pointed out that, compared with about six months earlier, household confidence had improved noticeably due to the stabilization of the financial system and the firmness in stock prices. Further, the member added that strong demand for personal computers, telecommunications-related goods, and other digital devices had boosted business activities in growth sectors.

Meanwhile, one member pointed out that the trend of improvement in private consumption appeared to have stalled in the third quarter. Statistics, which had been generally firm in the first and second quarters, became unstable, showing weakness in new passenger-car registrations, sales of department stores, and sales of household electric appliances.

In conclusion, many members shared the view that no clear sign of a recovery had been observed in private consumption as a whole, with related indicators showing mixed developments. One member commented that the improvement in private consumption was currently at a pause. To illustrate this, the member cited the following developments: (1) new passenger-car registrations (including light cars) had increased year to year in September and exports were firm, but automobile manufacturers still lacked confidence in the prospect of a recovery in consumption and remained cautious about increasing production; and (2) sales of household electric appliances had continued to increase from a year earlier, but looking at the breakdown, the contrast was becoming conspicuous between goods that were selling well, such as those related to personal computers, and those that were not.

One member commented that the diffusion index and the composite index of business conditions both suggested a strong possibility that the economy had bottomed out in April or May. However, the member also stated that, although there were signs of an upturn in economic activity, the momentum of the recovery was still very weak. The same member commented that, according to business surveys such as Tankan, the contrast was becoming sharp between the conditions surrounding large and small firms. Small firms, particularly nonmanufacturers, were facing an even severer situation than before, and were significantly reducing the number of employees and projecting a substantial deterioration in their fund positions and in banks' lending attitude in the near future.

As for prices, it was the view of many members that prices would remain generally flat for the time being although the output gap was still large and downward pressure on prices persisted.

B. Financial Developments

On the financial front, members generally shared the views expressed in the staff's report.

One member commented that, recently, the financial markets seemed to have generally stabilized. After the surge in the yen and the fall in stock prices had been contained, no further abrupt developments had been observed in the markets. Even with the release of some favorable economic indicators such as production indices and the September Tankan between late September and early October, neither stock prices nor long-term interest rates soared, nor did the yen appreciate further. The same member remarked that, several months earlier, the financial markets had seemed to be driven mainly by expectations of economic recovery that heightened prior to actual improvements in indicators for economic activity. Recently, however, the member had the impression that market developments appropriately reflected both expectations and the actual indicators.

Some members elaborated on the current situation of the yen, which appeared to have stabilized somewhat.

One member remarked that the market's excessively optimistic view of the prospects for Japan's economy had receded to some degree, while expectations of robust economic growth in the United States and Europe appeared to have strengthened, and these developments seemed to be reflected in the foreign exchange rates. Having said this, the member commented that the markets' view changed frequently, and therefore, developments in the exchange rates, and in the markets' view behind them, continued to require close monitoring.

Another member stated that, recently, a stabilization mechanism might be operating --that is, when the yen appreciated, kindling concerns about negative effects on Japan's economy, stock prices fell, which in turn led to a weakening of the yen.

One member remarked that, judging from the developments as a whole in the financial markets since summer, the appreciation of the yen during this period could be better described as a depreciation of the U.S. dollar. As grounds for this view, the member noted that the yen tended to appreciate when U.S. stock prices were declining, and that the U.S. dollar had fallen significantly against the euro as well. In relation to this point, some members, including this member, commented that one factor behind the recent depreciation of the U.S. dollar might be the market's perception of risks to the U.S. economy, including the risk to the continued economic expansion without inflation and that to the smooth financing of the growing external deficit. Accordingly, many members stated that close attention should be paid to the influence of the market's view of the economy and stock prices of the United States on the yen-U.S. dollar rate.

One member commented on the effects of the zero interest rate policy amid the yen's appreciation. This member pointed out that declines in interest rates on term instruments with longer maturities as well as in long-term interest rates had partly cancelled out the negative effects of the yen's appreciation in September. The member expressed the view that the Bank's commitment to the continuation of the zero interest rate policy had reinforced the market's stabilization mechanism. Specifically, when deflationary pressures strengthened, the market's expectation of a prolongation of the zero interest rate policy led to a decline in longer-term interest rates, enhancing the effects of the monetary easing.

Another member focused on the recent halt in the rise in long-tem interest rates. The member described the background as follows: (1) the tendency of hedge funds to restrain short sales; (2) the diversification of the maturities of JGBs; (3) the stance of the Trust Fund Bureau to continue purchasing JGBs in the markets; and (4) expectations of quantitative easing.

Regarding the environment for corporate financing, one member stated that more banks appeared to be narrowing their lending spreads as they gradually became more willing to lend. On this point, the member expressed the view that banks were trying to achieve their business plans by expanding the quantity of loans rather than securing lending spreads. Also, the member commented that the fund-raising conditions in the capital markets were favorable.

On this basis, the member pointed out that the supply of funds was improving steadily and the financial intermediary channels were functioning smoothly enough to support economic activity, although demand for funds in the private sector remained weak. Furthermore, the member commented that the effects of the zero interest rate policy had clearly permeated the economy on the following grounds: (1) the funds necessary for economic activity had been provided, and firms' concerns about fund-raising had diminished; and (2) as the financial statements for the semiannual settlement in September showed, the monetary easing had had positive effects on corporate profits through the reduction of interest burdens.

C. The Economic Outlook

Many members' view of the economic outlook was as follows. Although the improvements in economic activities, especially those in exports and production, were expected to exert a positive influence on the economy, clear signs of a self-sustained recovery in private demand were not yet observed, and effects of the recent appreciation of the yen were anticipated. Therefore, the members concluded that the downside risk to the economy remained almost unchanged. On this basis, members generally agreed that deflationary concern had not been dispelled yet.

Many members commented that exogenous demand--that is, exports and public investment--was expected to underpin aggregate demand in the immediate future, and production would remain firm as a result.

At the same time, however, the majority of members expressed concern that it was still uncertain whether the economy would continue to show positive developments after the turn of the year in the absence of signs of a recovery in private demand.

One member commented that one of the critical points in judging the economic outlook was whether the ongoing recovery in production would lead to an upturn in domestic private demand such as business fixed investment and private consumption through, for example, an increase in corporate profits and overtime payments. Many members then commented on the effects of production growth.

Some members pointed out that figures for production in the latter half of fiscal 1999 would show a definite rise and this increased the possibility of an economic recovery in the near future. One of them also expressed the view that this clear rise in production could be expected to prevent a decline in nominal wages by increasing overtime payments, and such a development seemed to have already been observed to some degree.

A different member commented that there was an increasing possibility that the recent growth in production would have a positive influence on the economy in the future through multiplier effects. However, this member added that there was also a risk that the multiplier would be smaller than in the past due to the structural problems encumbering the economy.

As for business fixed investment, some members expressed the view that the prospect of a smooth recovery was still remote although its decline was moderating judging from the business fixed investment plans revealed in the September Tankan.

However, one of them commented that the environment surrounding business fixed investment was improving on the following grounds. First, various surveys suggested that business fixed investment in some sectors had already been reduced to a very low level--for example, manufacturers had decreased investment to below depreciation expenses. Second, to survive intense competition, firms would have to increase investment in such areas as information technology and environmental protection. Third, production was increasing and corporate profits were improving as a result. And fourth, corporate sentiment was improving and the expected growth rate of the economy seemed to have stopped falling. The member concluded that these changes suggested the possibility of business fixed investment increasing in fiscal 2000.

In contrast to this opinion, a few other members expressed the view that, in the current situation where firms were encumbered with excess capacity and debt, improvements in their cash flow would first be used to reduce liabilities, making it difficult for real investment to increase. One of them added that it was difficult to anticipate an immediate recovery in business fixed investment given that (1) the prospects for final demand were still unclear, (2) the introduction of international accounting standards, which take account of such items as pension liabilities, would become a financial burden on firms, and (3) firms were focusing on increasing capital efficiency. Another member commented that the average return on capital of Japanese firms was on a downward trend, and was low compared to firms in other countries. In this situation, a smooth recovery in business fixed investment was deemed rather difficult. Based on this view, the member expressed the opinion that the development of new growth industries was essential for an upturn in business fixed investment.

With regard to private consumption, a few members remarked that a steady recovery in consumer sentiment was unlikely to continue. On this point, one member commented that, given the possibility that the recovery in production could stop the fall in nominal wages, an increase in private consumption might no longer have to rely solely on a rise in the propensity to consume.

Meanwhile, a few members commented that firms' restructuring efforts could restrain household expenditure in the short term, and in order to give positive drive to the economy, it was important to mobilize the labor market and thereby increase employment. One of them remarked that, if such structural reform could be implemented smoothly, an economic recovery like the "jobless recovery" in the United States could be achieved. Another member pointed out that, in Europe, where economies had matured ahead of Japan, possible employment structure in a low-growth era had been explored through discussions between employees and employers. The member considered that such explorations would also become necessary in Japan.

One member made the following observation on recent developments in private consumption. First, consumption was becoming increasingly dependent on capital and income gains on asset holdings. Second, anxiety about a possible decline in one's lifetime income was impairing consumer sentiment. And third, the weight of optional consumption was increasing in private consumption. The member therefore considered that a recovery in private consumption required not only efforts by firms to develop new technology and products, but also establishment of a foundation that would contribute to an improvement in consumer sentiment, for example by relieving anxiety about the future through tax cuts and a solution of the pension problem.

Next, as in the previous meeting, members discussed the impact on the economy of the yen's appreciation to above 110 yen against the U.S. dollar.

One member commented that the recent appreciation of the yen would undoubtedly have a negative impact on the economy on the following grounds. First, the pace of the yen's appreciation from July through September 1999 had been extremely rapid with the monthly increase in the yen's effective exchange rate more than 4 percent on average. This was one of the fastest appreciations since 1971, when the United States abandoned gold convertibility. And second, the yen's appreciation from 1993 through 1995 had later placed downward pressure on the economy. This member also remarked that developments in the economy required careful attention when the yen was appreciating, because judgments on the economic situation during such phases had had to be corrected several times in the past. For example, when the yen appreciated from 1993, the Economic Planning Agency announced in early summer 1993 that the economy had bottomed out, but later corrected its judgment in November that year. Again, after announcing in September 1994 that the economy had started to recover, the agency corrected its judgment in September 1995.

Some other members noted that, unlike past phases where appreciation of the yen hindered economic growth, export volume was increasing reflecting strong overseas economies. The members continued that the recent appreciation of the yen would not immediately hamper the recovery of the economy given that (1) corporate sentiment was improving reflecting the uptrend in export volume and production, and (2) to some extent, prices of export goods were being raised to reflect the rise in the yen.

One of them added that the overall strength in stock prices suggested that market participants shared this view. Another member remarked that, according to anecdotal evidence, firms seemed to be reacting calmly to the yen's appreciation compared to past phases.

Nevertheless, many members, including the above members, shared the view that a rapid appreciation of the yen that diverged from the economic fundamentals was undeniably a problem, and therefore, a further surge in the yen would pose a risk to the possibility of economic recovery. One of them added that a further rapid appreciation of the yen would be detrimental to the economy since its steady improvement was underpinned by exports. Based on the above discussions, many members agreed that the yen's exchange rate as well as its effects on the economy and prices continued to warrant attentive monitoring.

One member further expressed the view that, in the short term, intervention was necessary to counter an excessive appreciation of the yen that diverged from the economic fundamentals. As one of the important factors to be considered in the implementation of monetary policy, the problem also needed to be dealt with flexibly by promoting the permeation of the effects of the zero interest rate policy.

Some members expressed the view that the recent development of the exchange rate might be better described as a depreciation of the U.S. dollar, considering that the U.S. dollar was also falling against the euro. The members commented that it was therefore necessary to pay careful attention to developments in the economy and stock prices of the United States, which were behind the depreciation of the U.S. dollar, because they could become risks to Japan's economy. In relation to this argument, one member referred to Japan's fiscal deficit and the United States' current account deficit as factors affecting the foreign exchange markets. The member commented that market participants seemed to be gradually becoming sensitive to these two deficits, and especially their perception of the U.S. current account deficit warranted due attention.

As for prices, members shared the view that prices were expected to remain flat in the immediate future, but downside risks still needed attention in the absence of any prospect of a self-sustained recovery in private demand.

One member pointed out two aspects of the ongoing decline in nominal wages. On the one hand, given the increasing stability in overall prices, lower nominal wages seemed to be supporting firms' profits. On the other, the downtrend in nominal wages was a downside risk to future prices. Since subtle changes seemed to be appearing in the downtrend in nominal wages reflecting the recent recovery in production, the member intended to continue to closely monitor developments in wages and their effects on the economy.

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 monetary policy stance for the immediate future.

Many members' view of the economic and financial situation was that (1) improvements in economic activities were observed but there had been no significant change to the economic outlook from the previous meeting, and (2) downward pressure on prices persisted.

Based on the above assessment, many members considered that, as to the guideline for money market operations for the immediate future, it was appropriate to continue the zero interest rate policy while ensuring further permeation of its effects by providing ample funds flexibly in the market, in line with the Bank's stance to maintain the current policy until deflationary concern was dispelled.

At the same time, members discussed whether the Bank should state more explicitly the meaning of and the intention behind the zero interest rate policy.

One member elaborated on the two important factors of the zero interest rate policy by citing specific examples.

First, under the zero interest rate policy, the Bank had flexibly provided more funds than was required in the market in view of the market conditions--otherwise the overnight call rate could not have been maintained at close to zero. Around September 9 and toward the end of September, when demand for reserves strengthened, the Bank provided funds in line with a "morning projection for reserves" of an excess of over 2 trillion yen to stabilize the overnight call rate. Second, the zero interest rate policy was a flexible policy whose effects endured and permeated automatically according to the situation in the economy and the market. In September, for example, longer-term interest rates declined as the yen appreciated.

On this basis, the member claimed that the above two important elements of the zero interest rate policy should be stated more explicitly in the guideline for money market operations.

Another member remarked that the zero interest rate policy had reduced interest rates on short-term financial assets, other than narrowly defined money, to the lowest possible level and had also increased their liquidity as much as possible. The member explained that, in this sense, the policy had made these financial assets, such as treasury bills (TBs) and financing bills (FBs), extremely similar to money. In other words, the policy had been creating an enormous amount of assets almost equivalent to money, thereby encouraging quantitative easing more drastically than was implied by figures for the monetary aggregates such as money stock (M2+CDs).

Following the discussions, the majority of the members who had supported the maintenance of the zero interest rate policy expressed the view that the meaning of the current policy should be stated more explicitly in the guideline for money market operations.

Further, many members suggested the enhancement of money market operations to ensure the effectiveness of the zero interest rate policy.

Some members commented that improvement of the infrastructure, such as the strengthening of the Bank's capacity to implement money market operations, would contribute to increasing the market's confidence in the Bank's capability to provide ample funds flexibly in the market and promoting the permeation of the effects of monetary easing. They further added that such measures were becoming increasingly important in view of the Year 2000 problem, and it was an appropriate time to enhance the Bank's fund-providing means.

A different member cited the following risks that lay ahead in the financial markets: (1) a surge in the yen diverged from the economic fundamentals; and (2) a rise in long-term interest rates diverged from the economic fundamentals due to speculations on the second supplementary budget. The member remarked that enhancement of money market operations and the reinforcement of their functions would contribute to the further permeation of the effects of the zero interest rate policy, and also increase the Bank's capability to deal with these risks. Specifically, the member suggested the introduction of outright operations using short-term government securities.

Based on these discussions, members decided to exchange views on the enhancement of money market operations after the discussions on and decision of the basic policy on money market operations to address Year 2000 liquidity problems, scheduled to take place later in the meeting.

Besides the above issues, members also exchanged views on the environment for monetary policy in the immediate future and on policy measures.

One member pointed out that some extreme arguments were put forward outside the Bank that monetary policy should be implemented in order to create a certain level of inflation on the grounds that Japan's economy was experiencing severe deflation. However, the member considered that the economy was not at all in a condition that required such an extreme policy. The member explained that firms' recent pricing strategy featured a trend of "price revolution," and it was inappropriate to regard such movements as deflation. For example: (1) it was becoming popular among industries expecting positive outcomes from the economies of scale to adopt a strategy of setting prices at relatively low levels to increase market shares; (2) distribution costs were being reduced through the utilization of more advanced information technology; and (3) various costs were being reduced through the construction of global production systems.

Further, the member referred to the Accord reached between the Federal Reserve System and the U.S. Treasury in 1951, which stipulated that the Federal Reserve System would no longer purchase U.S. Treasury securities to support their prices. The member stated that the principle of this accord--that a central bank should not purchase its country's government bonds to support their prices--was a common understanding among the central banks of major industrialized countries, and disregarding this principle would involve tremendous risks.

Another member referred to the argument outside the Bank that it should directly extend loans to the private sector to increase money stock. The member commented that this argument failed to take account of the impact on the credibility of a country's economy and currency if a central bank were to subject itself to credit risks involved in corporate financing as large as or even greater than those taken by private banks.

Further, one member elaborated on the relationship between the foreign exchange rate and monetary policy.

The member commented that there were many factors affecting the foreign exchange rate. In respect of the interest rate differential, the Bank had reduced interest rates to the lowest possible level under the zero interest rate policy, and there was in fact no conceivable monetary policy measure that could contribute more to a depreciation of the yen than the current policy. The member further referred to a recent view outside the Bank that the growth differential in the monetary aggregates, such as money stock, between the United States and Japan could affect the exchange rate between the two currencies. Any attempt to realize a certain exchange rate level by increasing the monetary aggregates in Japan on the basis of this view would necessitate increasing money stock by tens of trillions of yen or more according to simple calculation, and this was by no means feasible.

Meanwhile, two members argued against the maintenance of the zero interest rate policy.

One member expressed the view that the Bank should continue to seek a way of terminating the zero interest rate policy on the following grounds. First, the economy had become more stable than before, and the possibility had increased that private demand was headed toward a self-sustained recovery. Second, the negative effects were amplifying due to the prolongation of the zero interest rate policy. Third, if the zero interest rate policy was continued any longer, the repercussions of the termination of the policy would become greater, making it harder to end the policy. And fourth, this could as a result delay the Bank's policy action against changes in the economic situation. The member, however, decided not to submit a policy proposal, saying that a counterproposal was not particularly necessary in expressing disapproval of the current zero interest rate policy.

Another member claimed that the Bank should adopt monetary base targeting accompanied by an inflation target. The member gave the following reasons. First, the Bank should set a numerical policy target on the consumer price index (CPI) and clarify its responsibility. Second, the expression "until deflationary concern was dispelled" was ambiguous, and therefore, a policy shift to a numerical target was necessary to increase the Bank's accountability. Third, the growth in the monetary aggregates was slowing. Fourth, a quantitative easing was required at this time because the momentum for a recovery of the economy, which seemed to have bottomed out in April or May, was still weak. Fifth, an additional monetary easing measure should be taken concurrently with the second supplementary budget. And sixth, CPI targeting would be effective in stabilizing the public's expectations and containing political pressures on monetary policy, such as that for the underwriting of JGBs and increasing of JGB outright purchasing operations.

V. Remarks by Government Representatives

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

(1) Japan's economy was showing signs of improvement due to the effects of various policy measures. However, the momentum for a recovery in private demand remained weak, and the economy was still in a severe situation. Under these circumstances, a Cabinet decision was made on September 28 to utilize the reserve budget of 500 billion yen for additional public works to strengthen the foundation for an economic recovery. Specifically, the government allotted about 740 billion yen to public works to ensure stimulatory effects on the economy and decided that most of the orders should be placed under the central government. The usage of the budget was concentrated on national projects and on the development of infrastructure indispensable for enhancing people's living conditions in the 21st century. In addition, the Prime Minister had stated after the formation of the new Cabinet that the government would draw up a comprehensive economic policy package worth more than 10 trillion yen by the beginning or the middle of November. The Prime Minister had also directed that necessary steps should be taken promptly to compile a second supplementary budget for fiscal 1999 in order to achieve a full-scale recovery and to establish a solid new foundation for economic development.

(2) In relation to recent developments in the financial markets, the G-7 Finance Ministers and Central Bank Governors issued a statement on September 25 that they "shared Japan's concern about the potential impact of the yen's appreciation for the Japanese economy and the world economy." A surge in the yen could have a serious impact on Japan's economy, which had at last escaped from the worst and had started to show signs of improvement, by increasing the uncertainty regarding the economic outlook. Also, developments in the bond markets associated with the additional supplementary budget required close attention. The government acknowledged that the Bank, as the Governor had stated at the G-7 meeting, was exploring how it could enhance money market operations so as to assure further permeation of the effects of the zero interest rate policy, and would like to request the Bank to take appropriate monetary policy measures giving due consideration to developments in the financial markets.

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

(1) Japan's economy was improving moderately as the effects of various policy measures spread, although it was still in a severe situation with the momentum for a recovery in private demand weak. The government wished to realize a smooth shift in the driving force for an economic recovery from public to private demand to prevent a double dip in the economy and achieve a full-scale recovery. To this end, the government would promptly decide on a comprehensive economic policy package--which would be a guideline for future economic management--including measures to support small ventures and "millennium projects" by the beginning or the middle of November, and would also decide on the second supplementary budget for fiscal 1999.

(2) The government heard that the Bank was deliberating the enhancement of money market operations from the viewpoint of diversifying operations means. The government would like to request the Bank to provide ample funds in the market until a self-sustained economic recovery became apparent, by implementing appropriate money market operations in response to the economic and financial conditions including the impact of foreign exchange fluctuations. The government would also like to suggest that the Bank pursue a more effective way of providing funds--for example, through the enhancement of money market operations.

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 exports and production were improving. Second, the financial environment was also improving. Third, prices were expected to remain level in the immediate future. Fourth, clear signs of a self-sustained recovery in private demand had not yet been observed. Fifth, the impact of the appreciation of the yen on the economy and prices warranted close attention. And sixth, given the above points, downward pressure on prices persisted, and therefore, deflationary concern had not been dispelled yet.

Based on this understanding, the majority of members considered that it was appropriate to maintain the zero interest rate policy and to state the Bank's policy intention more explicitly in the guideline for money market operations.

One member, however, presented the opinion that it was appropriate to set a numerical target for the growth rate of the CPI as well as the monetary base.

As a result, 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 October 16 through November 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).1 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 is about 6 percent, will continue.

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

To reflect the majority view, the chairman formulated the following proposal. He explained that the proposal stated explicitly, as some members had suggested during the discussions, that the Bank would provide ample funds flexibly, and excluded expressions that had reflected the Bank's concern at the initial stage of the zero interest rate policy--such as "to avoid excessive volatility in the short-term financial markets," "by paying due consideration to maintaining market function," and "initially aim to guide the above call rate to move around 0.15%."

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 flexibly provide ample funds and encourage the uncollateralized overnight call rate to move as low as possible.

Votes for the proposal: Mr. M. Hayami, Mr. S. Fujiwara, Mr. Y. Yamaguchi, 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 on the following grounds. First, the longer the zero interest rate policy was maintained, the more the economy was likely to suffer low interest rates, prolonged deflation, and the yen's appreciation. It should especially be noted that, as long as the Bank tried to keep nominal interest rates down at zero percent, the deflationary trend would continue. Second, the effects of the zero interest rate policy had permeated the economy, and had already come out to the maximum. Third, as long as the Bank's "morning projection for reserves" was kept unchanged, any enhancement of fund-providing means would be useless. Fourth, the Bank should set an inflation target to ensure its independence and to counter political pressure for its underwriting of JGBs and increasing of outright JGB purchasing operations. And fifth, in view of the interaction between the Bank and the markets, quantitative easing, whereby the Bank could flexibly change quantitative targets, was better than the current zero interest rate policy, where the Bank's "morning projection for reserves" was fixed at a certain amount.

Ms. Shinotsuka dissented for the following reasons. First, the economy had become more stable than before, and the probability that domestic private demand was headed toward a self-sustained recovery had increased. The conditions thus allowed for the termination of the zero interest rate policy, which would open the way to raising interest rates to a normal level. Second, the longer the zero interest rate policy was maintained, the more economic entities tended to take risks presuming the continuation of the policy. Further prolongation of the policy would therefore amplify its negative outcomes and make its termination increasingly difficult. And third, there was the risk that, as a result, the Bank's policy response to changes in the economic situation would be delayed.

VII. The Basic Policy for Money Market Operations to Address Year 2000 Liquidity Problems

A. Staff Proposal

The financial markets had remained stable on the whole under the zero interest rate policy.

However, the "Year 2000 premium" had been pushing up three-month interest rates since September 29, and some premium had been imposed on repo transactions maturing beyond the year-end for certain JGB issues. Further, concerns had been intensifying that liquidity would decrease in both the funds and JGB markets toward the year-end, and there was the risk that interest rates would become somewhat volatile when financial institutions started to procure funds maturing beyond the year-end. Market participants had pointed out the possibility that financial institutions would become conservative and defensive in their financing and their securing of collateral toward the year-end if the Bank did not declare its basic stance on the provision of liquidity to address Year 2000 liquidity problems.

While it was usually the case that a large shortage of funds occurred in the money market toward the end of the year due to increased demand for banknotes and payment of corporate taxes, the shortage was projected to be substantially larger this year. This was because a considerable increase was anticipated in the issuance of JGBs and in the amount of FBs issued in the market, as well as in demand for funds associated with the Year 2000 problem. Judging from the current capacity of the Bank's fund-providing operations, it was expected to take almost two months to provide the funds necessary to cover the shortage. Considering that the Bank would also have to address the shortage of funds maturing before the year-end, and in view of the technical aspects of the Bank's fund-supplying operations, it was time to start providing funds maturing after the year-end.

B. Members' Discussion and Votes

Following the staff's explanation, members concluded that, in view of the market developments and the technical aspects of market operations, it was appropriate at this time to set out a basic policy for money market operations to address Year 2000 liquidity problems. Based on this understanding, the chairman formulated the following policy proposal.

Chairman's Policy Proposal:

The basic policy for money market operations to address the Year 2000 problem would be as follows:

In conducting money market operations, the Bank will respond flexibly such as by providing ample funds over the year-end, paying due consideration to fund demand related to Year 2000 problems.

The chairman should formulate the public statement on this issue.

The chairman's proposal was approved by unanimous vote.

Following the vote, the chairman explained that this basic policy should be publicized together with the Bank's lending policies to address the Year 2000 problem (for the public statement, see attachment 2).

VIII. Enhancement of Money Market Operation Tools

The chairman had ordered the Bank's staff at the previous meeting on September 21 to deliberate promptly the enhancement of money market operation tools with a view to assuring further permeation of the effects of the zero interest rate policy. Further, at this meeting, many members had expressed the view that the Bank should diversify its operation tools. On this basis, the chairman requested the Bank's staff to report on its deliberations.

In response to this request, the staff explained as follows.

The staff had been deliberating two issues: (1) the enhancement of money market operation tools; and (2) the implementation of money market operations for providing year-end funds.

To expand money market operation tools, the Bank could introduce outright purchasing/selling operations (operations without repurchase agreements) using short-term government securities--that is, FBs and TBs. The amount outstanding of such securities in the market was over 36 trillion yen at the end of September, and was expected to continue growing in the future. If outright operations were introduced in addition to the current sales and purchases under repurchase agreements, the Bank could respond more easily to temporary hikes in demand for liquidity, such as that arising from the Year 2000 problem.

One measure that could be employed immediately under the current framework would be to expand the range of government securities used in repo operations. Specifically, the Bank could use two-year securities in addition to the currently used maturities of four, six, ten, and 20 years.

With regard to money market operations for providing funds maturing beyond the year-end, there were two possibilities.

The first was to make full use of operations utilizing private corporations' debt obligations in addition to those utilizing government securities so that the Bank could provide funds flexibly to accommodate fluctuations in demand for funds due to the Year 2000 problem. To this end, the Bank should advise counterparties to make early and active preparation. For example, they might submit in advance eligible collateral for the Bank's bill purchasing operations, add to the pooled collateral for the Bank's operations utilizing corporate bonds and loans on deeds, or go through eligibility screening procedures for the Bank's CP operations.

The second was to make offerings of every repo and CP operation to all eligible counterparties, including those subject to the rotation system, as a temporary measure until the year-end in order to increase the number of bidders and thereby smoothly provide necessary year-end funds.

Introduction of outright operations using short-term government securities needed to be determined by the Board at a Monetary Policy Meeting. The other measures were possible under the current framework, and would be implemented as necessary.

B. Members' Discussion and Votes

Given the staff's explanation, members shared the understanding that it would be useful to introduce the reported measures. The chairman formulated the following policy proposal, giving due consideration to the fact that the introduction of outright operations using short-term government securities needed to be determined at a Monetary Policy Meeting.

Chairman's Policy Proposal:

The Bank will, in maintaining its zero interest rate policy, flexibly use a wider range of money market operation tools so as to assure further permeation of the effects of monetary easing, paying due consideration to developments in financial markets including the foreign exchange market.

With respect to operations using short-term government securities (FBs, TBs), in addition to current sales and purchases with repurchase/resale agreements (conditional trading), the Bank will introduce outright sales and purchases (unconditional trading) and decide principal terms and conditions at the next Monetary Policy Meeting.

The Governor of the Bank will determine the public statement on this policy and related issues.

The majority of members approved of the proposal.

One member, while agreeing that it was appropriate to enhance money market operation tools, expressed the view that improvement of the infrastructure should be discussed separately from the guideline for money market operations for the immediate future. The member stated that the chairman's proposal, which stated that the Bank would flexibly use a wider range of money market operation tools "in maintaining its zero interest rate policy," was not appropriate in this sense. The member, however, emphasized that expanding market operation tools was a permanent measure that was necessary in dealing with the financial markets, and for this reason, approved of the chairman's proposal.

Another member objected to the chairman's proposal, expressing similar views as the above member. This member considered that it was appropriate to improve market operation tools, but could not approve of the proposal because the member was against maintaining the zero interest rate policy.

In response to these comments, a few members remarked that, although the enhancement of money market operation tools was a permanent measure, the expressions used in the chairman's proposal were appropriate because the market's interest was currently focused on the permeation of monetary easing effects and on the availability of year-end funds, including the impact of the Year 2000 problem.

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

Votes against the proposal: Mr. N. Nakahara.

Mr. Nakahara stated that he agreed with the introduction of outright operations using short-term government securities. However, because he was against continuing the zero interest rate policy, he could not approve of the chairman's proposal, which suggested the measure in the context of the zero interest rate policy.

Mr. Nakahara stated that he agreed with the introduction of outright operations using short-term government securities. However, because he was against continuing the zero interest rate policy, he could not approve of the chairman's proposal, which suggested the measure in the context of the zero interest rate policy.

The chairman explained that the Bank's staff would prepare a public statement outlining the introduction of outright operations using short-term government securities together with the other measures, and that it should be released immediately after the meeting (for the public statement, see attachment 3). He further stated that, since as many as three public statements were to be released--the guideline for money market operations that laid down the continuation of the zero interest rate policy, the basic policy for dealing with the Year 2000 problem, and the enhancement of money market operation tools--he would hold a press conference after the meeting to explain the policy decisions and the thinking behind them. The other members gave consent to this plan.

IX. 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 October 15, 1999 in the Monthly Report of Recent Economic and Financial Developments (the "Ivory Paper," consisting of "The Bank's View" and "The Background"). 9

  1. 9The original full text, written in Japanese, of the "Ivory Paper" was published on October 15, 1999 together with the English version of "The Bank's View." The English version of "The Background" was published on October 27, 1999.

Attachment 1

For immediate release

October 13, 1999
Bank of Japan

At the Monetary Policy Meeting held today, the Bank of Japan decided, by majority vote, to maintain its "zero interest rate policy" to assure permeation of the effects of monetary easing.

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

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


Attachment 2

For immediate release

October 13, 1999
Bank of Japan

Money Market Operations and Lending Policies to Address
Year 2000 Liquidity Problems

(Money Market Operations)

1. At the Monetary Policy Meeting held today, the Bank of Japan decided a basic policy for money market operations to address Year 2000 problems as follows:

In conducting money market operations, the Bank will respond flexibly such as by providing ample funds over the year-end, paying due consideration to fund demand related to Year 2000 problems.

(Lending Policies)

2. As for Year 2000-related liquidity problems at individual financial institutions, the Bank of Japan intends to respond in a timely and appropriate manner through its lending in case an institution experiences a temporary liquidity shortage, taking into account such factors as the institution's soundness and availability of eligible collateral, although self-efforts on the part of individual institutions are a prerequisite in overcoming possible problems.

In connection with the above, the Bank will accept requests from lending counterparties to submit eligible collateral to the Bank in advance. Taking into account such factors as funding prospects during the days covering the year change period and the amount of collateral necessary for market transactions, lending counterparties are advised to examine the necessity of submitting eligible collateral as well as the amount to submit, and to contact the Bank promptly if necessary.

As the Bank has reiterated, the Japanese financial industry has been making solid progress in its preparations for Year 2000. The Bank believes that the aforementioned measure, in fully utilizing the existing lending facilities, will further enhance preparedness for Year 2000-related liquidity problems at individual financial institutions.


Attachment 3

For immediate release

October 13, 1999
Bank of Japan

Enhancement of Money Market Operations

At the Monetary Policy Meeting held today, the Bank of Japan decided, in maintaining its "zero interest rate policy", to flexibly use a wider range of money market operations so as to assure further permeation of the effects of monetary easing, paying due consideration to developments in financial markets including the foreign exchange market. The Bank of Japan will continue exploring how it can improve its money market operations.

1. Use of a wider range of money market operations

(1) Introduction of outright operations using short-term government securities

With respect to operations using short-term government securities (TBs, FBs), in addition to current sales and purchases with repurchase/resale agreements (conditional trading), the Bank will introduce outright sales and purchases (unconditional trading) and decide principal terms and conditions at the next Monetary Policy Meeting.

(2) Expansion of the range of government securities for repo operations

To strengthen the capacity of fund provision, the Bank will add 2-year government securities for repo operations effective today.

2. Accommodation of year-end fund demand through flexible operations

(1) Year-end fund provision utilizing a full range of measures

In order to provide year-end funds with sufficient flexibility to accommodate fund demand related to Year 2000 problems, the Bank will fully effect operations not only utilizing government securities but also private corporate debt obligations.

Therefore, counterparties are advised to effect early and active preparations, if necessary, such as by submitting in advance eligible collateral for the Bank's bill purchase operations, submitting collateral to pooled collateral for the Bank's operations utilizing corporate bonds and loans on deeds, and obtaining eligibility evaluation for the Bank's CP operations.

(2) Increase in the number of counterparties being offered

With a view to smoothly providing year-end funds, the Bank will make offerings to all eligible counterparties for repo and CP operations, instead of using the current rotation system.