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Minutes of the Monetary Policy Meeting

on October 27, 1999
(English translation prepared by the Bank staff based on the Japanese original)

December 1, 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 27, 1999, from 9:00 a.m. to 12:42 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. T. Haraguchi, Deputy Vice Minister for Policy Coordination, Ministry of Finance
Mr. T. Komine, Director-General of the Research Bureau, Economic Planning Agency

Reporting Staff
Mr. I. Kuroda, Executive Director2
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 Office
Mr. M. Amamiya, Chief Manager, Planning Division 1, Policy Planning Office
Mr. T. Yoshida, Research and Statistics Department3

Secretariat of the Monetary Policy Meeting
Mr. K. Koike, Director, Secretariat of the Policy Board
Mr. S. Hida, Manager, Secretariat of the Policy Board
Mr. K. Hiraiwa, Advisor, Financial Markets Department4
Mr. H. Tanaka, Chief Manager, Planning Division 2, Policy Planning Office5
Mr. T. Kurihara, Manager, Policy Planning Office
Mr. S. Uchida, Manager, Policy Planning Office

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on November 26, 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. Mr. Kuroda was present from 11:00 a.m. to 12:42 p.m.
  3. Mr. Yoshida was present from 9:45 a.m. to 12:42 p.m.
  4. Mr. Hiraiwa was present from 9:00 a.m. to 9:38 a.m.
  5. Mr. Tanaka was present from 9:00 a.m. to 9:45 a.m.

I. Approval of the Minutes of the Monetary Policy Meeting Held on September 21, 1999

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting, the "Green Paper," of September 21, 1999 for release on November 1, 1999.

II. Discussions and Decisions on the Establishment of the Principal Terms and Conditions for the Outright Purchase/Sale of Short-Term Japanese Government Securities, the Eligibility Standards for Asset-Backed Securities, and the Acceptance of U.S. Treasury Securities as Collateral

A. Establishment of the Principal Terms and Conditions for the Outright Purchase/Sale of Short-Term Japanese Government Securities

1. Staff proposal

The Bank's staff explained and proposed a scheme for the outright purchase/sale of short-term Japanese government securities (JGSs) as below. Introduction of this operation had been decided at the previous monetary policy meeting on October 13.

The Bank currently conducted sales and purchases of short-term JGSs under repurchase agreements and also repo operations that utilized long-term Japanese government bonds (JGBs) to adjust short-term liquidity, while it conducted outright purchases of JGBs in accordance with the long-term trend in demand for banknotes. Like the first two market operation tools, it would be appropriate to establish the newly introduced outright purchase/sale of short-term JGSs as a means of adjusting short-term liquidity. Accordingly, the operation should be based on the following principles: (1) the amount to be purchased/sold should not be predetermined and the operation should be carried out whenever judged necessary in view of the financial market situation, and the JGS issues to be purchased should be determined for each operation according to the term of liquidity the Bank intended to provide; (2) the short-term JGSs purchased should, in principle, be redeemed in cash; and (3) outright sales would be made when there was a surplus of funds in the market.

In light of the above, the staff proposed establishing the principal terms and conditions for the outright purchase/sale of short-term JGSs, the outline of which was as below, and making necessary amendments to the Bank's rules and regulations including the written statement of manners of conducting business.

  1. (1) The location of these operations shall be the Bank's Head Office (Operations Department).
  2. (2) Eligible counterparties shall be the same as those for short-term JGS operations with repurchase agreements.
  3. (3) JGSs to be purchased/sold shall be treasury bills (TBs) and financing bills (FBs).
  4. (4) Purchase/sale dates and amounts shall be determined for each operation taking into account the situation in the financial markets.
  5. (5) Purchase/sale shall be made under a competitive yield auction.

2. Discussion and vote on the staff's proposal

Given the staff proposal, one member raised the issue of whether a ceiling should be set on the total amount of this type of operation. On this point, members shared the understanding that this was not necessary as long as this type of operation was clearly established as a means of adjusting short-term liquidity. Following the discussion, the proposal was put to the vote. The Board unanimously approved the proposal and decided to announce the decision publicly immediately after the meeting.

B. Eligibility as Collateral of Asset-Backed Securities

1. Staff proposal

The Bank's staff made the following two proposals: (1) in line with the basic thinking on the eligibility as collateral of asset-backed securities (ABSs; securities whose principal and interest are mainly paid out of receivables from specific assets) determined at the monetary policy meeting on September 21, 1999, the eligibility standards for ABSs should be determined as below; (2) ABSs should be eligible for the time being only as collateral for the Bank's bill purchasing operations utilizing corporate bonds and loans on deeds, and necessary amendments should be made to the principal terms and conditions for bill purchasing operations utilizing corporate debt obligations as eligible collateral and to the written statement of manners of conducting business. The types of ABSs to be accepted for eligibility screening would be the following for the time being: (1) securities backed by lease receivables; (2) those backed by credit receivables; (3) collateralized bond obligations (CBOs); and (4) collateralized loan obligations (CLOs).

The eligibility standards for ABSs as collateral for extension of credit by the Bank would be as follows.

  1. (1) The certainty of payment of principal and interest: cash flow from specific assets should be deemed sufficient to pay the principal and interest of ABSs in light of the creditworthiness of the specific assets, and the structure of ABSs should be deemed to satisfy requirements such as true sales, bankruptcy-remoteness, and existence of alternative measures for the collection of cash from specific assets.
  2. (2) Marketability: ABSs should be publicly issued in Japan.
  3. (3) Without credit enhancement by financial institutions: the creditworthiness of ABSs should not be enhanced by financial institutions maintaining current accounts with the Bank.
  4. (4) Others: ABSs should be denominated in yen, they should be governed by Japanese law, and there should be no obstacle to the Bank exercising various rights on them.

2. Discussion and vote on the staff's proposal

The proposal was put to the vote and was approved by a majority. The Board decided to announce the decision publicly immediately after the meeting. One member remarked that the proposed eligibility standards took into consideration the possible future diversification of assets that backed ABSs. This member added that the Board should be notified in advance should ABSs other than the aforementioned four types become eligible as collateral.

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 voted against the proposal, saying that (1) the Bank should not, without careful consideration, step into the area of corporate financing, (2) there was a great variety of ABS issues but each issue was small in value, and (3) the Bank should, from a long-term perspective, seek reduction or even abolishment of commercial paper (CP) operations.

C. Acceptance of U.S. Treasury Securities as Collateral

1. Staff proposal

The Bank's staff proposed accepting U.S. Treasury securities as eligible collateral for the Bank's loans on bills under the terms and conditions outlined below to cope with the Year 2000 problem. This would be a temporary measure to expand the type of eligible collateral necessary for providing funds to financial institutions and to secure the stability of the financial markets. The staff also requested that this measure be publicized by attachment 1.

  1. (1) The measure shall be effective from December 1, 1999 to January 31, 2000.
  2. (2) Treasury bills, Treasury notes, and Treasury bonds shall be eligible.
  3. (3) The value of collateral shall be, at maximum, 85 percent of the market value on a current yen basis.
  4. (4) The basic loan rate shall be that applied to "bonds specified by the Bank" (currently 0.5 percent per annum).

2. Discussion and vote on the staff's proposal

The Board unanimously approved the proposal.

III. 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 October 13 were conducted in accordance with the guideline determined at that meeting.7 During the intermeeting period, the Bank constantly announced a "morning projection for reserves" of an excess of 1 trillion yen, and as a result, the overnight call rate moved stably at 0.02-0.03 percent.8 The daily weighted average of the overnight call rate had been 0.03 percent since October 21, but the market accepted the rate as being within the range of virtually zero interest rate. This was because (1) the rate was only affected by the rounding up of decimals and no substantial changes were seen in the actual rates; and (2) it was due in part to an increase in the share of fund-raising by financial institutions with relatively low credit ratings amid major banks' weaker demand for funds.

During the intermeeting period, interest rates on term instruments moved within a narrow range. Meanwhile, two conspicuous developments were observed.

First, yields on short-term JGSs, after rising briefly due to an increase in issuance through public auctions, declined again. This reflected (1) the gradual absorption in the market of the effect of the increased issuance through auctions, and (2) the Bank's implementation of short-term JGS purchasing operations under repurchase agreements for providing year-end funds. The decline in yields on short-term JGSs maturing at the beginning of 2000 was partly due to the market's expectations for the Bank's outright purchasing operations using short-term JGSs, details of which had been decided at this meeting.

Second, interest rates on three-month contracts increased slightly reflecting lenders' cautious investment attitude and borrowers' rather active procurement stance in view of the Year 2000 problem.

Under these circumstances, the Bank followed the money market operations policy to address the Year 2000 problem that had been decided at the previous meeting, and started operations to supply year-end funds on October 14.9 The Bank conducted such operations for nine consecutive business days through October 26, the day before the meeting, providing a total of 6.3 trillion yen in the market. The year-end funds had been provided at a faster pace than the previous year, fully utilizing various types of operations including those using private corporations' debt obligations. Bids for the operations had been sufficiently active in general. This reflected (1) the strengthened bidding capability of counterparties given the rapid expansion of the short-term JGS market, and (2) the effects of the measures decided at the previous meeting, such as the addition of two-year JGBs to instruments used in repo operations and the increase in the number of counterparties being offered.

  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 flexibly provide ample funds and encourage the uncollateralized overnight call rate to move as low as possible.
  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.
  4. 9The money market operations policy was 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.

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

1. Developments in foreign exchange markets

The yen had shown mixed movements against the U.S. dollar affected by both upward and downward pressure in the period from the previous meeting to late October. The market's focus for the immediate future seemed to be shifting from the Bank's monetary policy to the anticipated additional supplementary budget and its effects on Japan's economy, as well as to developments in the financial markets in the United States and Europe.

Meanwhile, the currencies of most East Asian countries had been relatively stable. However, the Indonesian rupiah surged reflecting expectations that the selection of Mr. Wahid as president and Ms. Megawati as vice-president by the People's Consultative Assembly would promote smooth progress in political and economic reform.

2. Overseas economic and financial developments

In the United States, long-term interest rates had risen since the beginning of October following the release of stronger-than-expected economic indicators. The market's attention was on the labor market, and the balance between the rise in productivity and that in wages seemed to be the key to future developments. Stock prices fell at one time reflecting the rise in long-term interest rates and a speech by Mr. Greenspan, Chairman of the Board of Governors of the Federal Reserve System, on October 14 that was received as a warning to the market about high stock prices. However, they rebounded afterward to almost the same level as in late September following reports of strong business performance.

Long-term interest rates in Europe were on an upward trend due to expectations for economic recovery and concerns about inflation, as well as anticipation of a raising of interest rates by the monetary authorities in the near future. In the United Kingdom, the pace of economic expansion was accelerating to close to the potential growth rate, and the labor market was tightening. As a result, concern about inflation was intensifying. In the euro area, the pace of economic recovery was accelerating moderately due to firm private consumption and an upward trend in exports. Therefore, the European Central Bank (ECB) had become more alert to a rise in prices since the summer although inflation rates were still low and stable. Meanwhile, stock prices in Europe had been declining reflecting anticipation of an increase in long-term interest rates.

C. Economic and Financial Developments in Japan

1. Economic developments

There were no economic indicators released in the intermeeting period that would change the Bank's previous view that Japan's 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.

The industrial production index in September declined 0.8 percent from the previous month (seasonally adjusted), a smaller fall than the predicted 1.3 percent. As a result, the index for the July-September quarter marked a significant increase of 3.8 percent from the previous quarter (seasonally adjusted). As for the October-December quarter, a substantial rise was expected in such sectors as electricity and general machinery, and the possibility had grown that the overall index would also increase.

Real exports in September also showed a higher-than-predicted growth of 3.7 percent from the previous month (seasonally adjusted), and as a result, the July-September quarter marked a notable rise of 7.9 percent from the previous quarter (seasonally adjusted). By region, real exports to the United States had increased, those to East Asia had continued to expand conspicuously, and those to the European Union, which had decreased for two consecutive quarters, had started to recover. In the meantime, real imports had also been showing high growth, rising 3.9 percent in the July-September quarter from the previous quarter (seasonally adjusted). A breakdown by goods revealed a conspicuous increase in imports of intermediate goods, reflecting the increase in production in Japan, and of information-related goods.

Indicators for private consumption generally showed mixed developments. Sales of household electric appliances recovered in September mainly due to strong sales of air conditioners. Sales at chain stores nationwide also increased in September after two consecutive months of decline, but there had been no significant improvement in the basic trend. Meanwhile, sales at department stores were weak both in Tokyo and elsewhere. Although sales of autumn clothing were increasing as the weather became colder in October, the overall trend seemed basically unchanged. In the meantime, the consumer sentiment index improved slightly in September from the previous survey in June. This, together with other indicators, suggested that consumer confidence continued to recover.

2. Financial developments

In the intermeeting period, the latest private bank lending and money supply statistics were released.

Private bank lending in September (the total for city banks, long-term credit banks, trust banks, regional banks, and regional banks II; adjusted for special factors, such as loan write-offs) decreased 1.6 percent year to year, a smaller fall than the 1.8 percent in the previous month. However, this was merely due to the large drop in September 1998, and the basic trend of year-to-year decline remained unchanged. Accordingly, the year-to-year growth rate in money stock (M2+CDs) declined for the third consecutive month to 3.3 percent. Looking back on the growth trend in money stock over the relatively long term, the peaks were seen in the period from late 1997 to early 1998, when Hokkaido Takushoku Bank and Yamaichi Securities failed, and from the autumn to the end of 1998, when a liquidity crisis occurred reflecting disruption in international financial markets. Since the middle of 1999, the growth of money stock had slowed in accordance with the abatement of concern about the stability of Japan's financial system.

Long-term interest rates had increased slightly since the beginning of October reflecting the market's expectations of a supplementary budget and concerns about the supply and demand conditions for JGBs. Stock prices had declined from the beginning of the month, and then increased in late October, reflecting movements in U.S. stock prices and concern about inflation there that underlay these movements.

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

A. The Current Economic Situation and the Economic Outlook

Members' discussion was focused on the assessment of economic indicators released since the previous meeting on October 13. Members generally agreed that there were no factors that would change their basic judgment of the economic situation.

Many members noted that exports were showing higher-than-expected growth, and this was contributing greatly to a recovery in production. One member remarked that the increasing traffic suggested that trade of goods was becoming active. A few members also pointed out that such favorable trends, if they became more conspicuous, could be expected to spread to business fixed investment and private consumption through a recovery in corporate profits and an upturn in wages.

Members generally agreed that private consumption still showed mixed developments judging from newly released indicators. One member expressed the view that the improvement in private consumption was currently at a pause, citing the fact that domestic sales of automobiles were sluggish despite manufacturers' efforts to stimulate demand. With regard to consumer confidence, one member noted that households were still inclined to cut spending, and another pointed out that developments in the propensity to consume, which was on the rise, should be monitored closely.

Taking account of these factors, members shared the view that clear signs of a self-sustained recovery in private demand were not yet observed. In relation to this view, one member remarked that the following was necessary for the economy to achieve a self-sustained recovery led by private demand: (1) uninterrupted public investment and a continuation of tax measures, for example those for boosting housing investment, and (2) continued support from exports. From this standpoint, the member remarked that attention should be paid to economic developments in China and other East Asian countries.

During the discussion, many members elaborated on the effects of the recent appreciation of the yen. One member expressed the view that firms were responding relatively calmly to the yen's appreciation because they were able to raise export prices given the strong demand overseas and their comparative advantages in their products. Another member pointed out that firms did not seem to be making any substantial downward revisions to their profit projections or spending plans. The member also noted that exports continued to be on the rise reflecting the recovery in Asian economies, and corporate profits were improving overall due to firms' restructuring efforts and the recovery in production.

Many members, however, expressed concern about a further surge in the yen. One of them commented that a further appreciation of the yen would be a problem since exporting firms might not be able to secure profits. Another member pointed out that it should be recognized that an economic recovery driven by exports would naturally place upward pressure on the yen. The member considered that a rise in the yen might be acceptable if it was commensurate with the economic recovery. However, the member was of the opinion that, because an appreciation of the yen might also be kindled by uncertainty regarding the U.S. economy, the risk that the rise would destabilize the market or negatively affect the economy should be monitored closely. One member stated that intervention might be effective in the short run in curbing an excessive rise of the yen diverging from the economic fundamentals.

One member was slightly more cautious about the economic outlook than the others.

The member pointed out that the ongoing employment adjustment was different from previous phases. Not only had the number of regularly employed workers and the length of working hours been cut, but also hourly wages. In addition, small firms, which had previously accepted workers from large firms, were reducing the number of employees. The member therefore judged that the employment situation was extremely severe and that the unemployment rate could exceed 5 percent in the latter half of fiscal 1999. The member also remarked that, given this severe employment situation, the prospects for private consumption could not be viewed with optimism. The member also pointed out that prices of crude oil could rise further due to a seasonal increase in demand in the winter, and this could pose a risk to the world economy. The member further pointed out that some firms, such as airline companies, had long positions in call options on crude oil futures accounting for 20 percent of the total position in crude oil futures. The member concluded that the massive amount of call options indicated the possibility of large fluctuations in crude oil prices through early next year, when most of these options expire.

In contrast to the above view, one member expressed the opinion that the economy was showing clearer signs of a bottoming-out every month. For example, in addition to the improvement in indicators for exports and production as reported by the staff, both coincident and leading indicators of business conditions for August had been revised upward, and according to a survey conducted by a newspaper in early October, most firms judged that the economy had bottomed out. The member also pointed out that a majority of small and medium-sized firms still considered that their financial positions were tight and banks' lending stance was severe, and this implied that there was potential demand for funds. In these circumstances, it was favorable that banks seemed to be gradually becoming more willing to lend. The member also commented that, although the employment situation was severe, the moderate fall in the labor share triggered by corporate restructuring could pave the way for an economic recovery.

B. Financial Developments

On the financial front, members mainly discussed developments in long-term interest rates and the yen's exchange rate.

Many members commented that developments in long-term interest rates and their effects on economic activity should be monitored carefully. One member pointed out that it should be examined carefully whether the rise in the rates was simply due to concern about a deterioration in the supply and demand balance of JGBs, or whether it was due to an improvement in the economic outlook for Japan. In relation to this point, one member remarked that the rates would naturally rise to a certain extent when the economy started to improve and the bottoming-out of prices became more evident. Another member also stated that, so far, the rise in the rates had not been detrimental on the grounds that stock prices were firm. However, some members including this member called attention to the fact that slightly unstable developments had been observed, such as a rise in long-term interest rates triggered by political debate about the nursing care system.

Many members expressed the view that, in following exchange rate developments, due attention should be paid not only to the outlook for Japan's economy but also to the risks to the economy and stock prices in the United States. One member commented that market participants were becoming more sensitive about whether the U.S. economy could continue to enjoy noninflationary expansion, and whether it could smoothly finance its expanding current account deficit. On this point, a different member stated that debt obligations of the private sector were increasing rapidly in the United States, and the shortage of savings could barely be financed by the inflow of foreign funds. The member was of the opinion that, taking account of such an unstable situation, economic and financial developments in the United States including stock prices required further attention.

A few members also noted the increasing sensitivity of Japanese stocks to developments in the U.S. economy.

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

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

As mentioned earlier, members generally agreed that it was not necessary to change their judgment on the economic and financial situation made at the previous meeting.

On this basis, the majority of members considered that, in the implementation of monetary policy in the immediate future, it was appropriate to continue the zero interest rate policy in line with the Bank's stance to maintain the current extremely easy policy until deflationary concern was dispelled.

Some members commented that the Bank's stance to maintain the zero interest rate policy and to ensure further permeation of its effects contributed to restraining an increase in long-term interest rates and containing upward pressure on the yen. These members were of the opinion that such a stance should therefore be maintained. In relation to this point, one member emphasized the significance of ensuring effectiveness and flexibility in the Bank's money market operations, and noted that the Bank should further review money market instruments and operation tools if necessary.

Before reaching the above conclusion, members also discussed inflation targeting.

Some members noted that inflation targeting had the merit that it enabled the Bank to indicate a medium- to long-term commitment. They also commented that the Bank's announcement of its intention to maintain the zero interest rate policy until deflationary concern was dispelled fully incorporated the above-mentioned merit of inflation targeting.

One member commented that inflation targeting required consideration of the following points: (1) the appropriateness of making a commitment to a specific target for the rate of increase in the consumer price index; (2) the extent to which setting such a target could increase accountability for monetary policy; and (3) the significance of setting an inflation rate target in a stable price environment as seen in Japan. Another member pointed out that countries employing inflation targeting did not implement monetary policy only in view of movements in the targeted inflation rate, but based on a comprehensive judgment of various risks to future price developments. The member therefore concluded that it was too simple to think that setting a numerical target would increase the transparency of monetary policy, and it was necessary to discuss the pros and cons as well as the feasibility of inflation targeting giving due consideration to its basic nature.

Meanwhile, one member commented that there were two types of inflation targeting. One was a commonly employed scheme that aimed to stabilize expectations by setting a medium-term inflation rate target while allowing flexible policy responses in the short term. The other was a policy where every possible measure was employed to create a certain level of inflation, which was the sole policy target. Based on this understanding, the member remarked that the former, although it involved technical difficulties, was worth considering, but the latter had serious problems such as the following. First, it was very difficult to realize a certain level of inflation within a certain time frame. Second, there was danger of the inflation rate overshooting. And third, such a policy would cause excessive volatility in the economy and have an adverse effect on the nation's welfare. This member commented that households heavily dependent on pension income had been seriously hit by the continued low interest rate policy, and that for these people a further deterioration in asset values due to inflation was not tolerable. The member therefore concluded that the Bank could never employ such a policy.

One member presented the content of discussions the member had at an international conference with policy makers and economists abroad on possible monetary policy measures after interest rates had declined to zero percent.

According to this member, conference participants generally shared the following views.

  1. (1) When interest rates of up to one year declined to zero percent, short-term financial assets became almost perfect substitutes for base money. In such circumstances, supplying of base money through purchases of short-term assets, the usual quantitative easing method, would become almost meaningless because it would just be an exchange of equivalent assets.
  2. (2) It was not realistic to consider that a mere announcement of an inflation target could influence people's inflation expectations and thereby stimulate demand for goods and services.
  3. (3) It was effective to combine a policy with an expressed commitment, as the Bank combined its current zero interest rate policy with the commitment to continuing it.

This member also mentioned that, in the discussion over an additional monetary easing measure, conference participants also exchanged ideas on the effects of operations that would not normally be conducted by a central bank--for example, aggressive outright purchases of long-term government bonds and purchases of foreign currencies and stocks. According to this member, there was the opinion that, although effects of some kind could be expected from such operations as long as the assets purchased were not perfect substitutes for base money, it was highly uncertain whether the intended effects could be achieved. There was also the opinion that due consideration should be given to the cost of such operations.

This member further mentioned that there was a misunderstanding overseas that Japan was experiencing serious deflation, and this misunderstanding was leading to calls for an extreme policy. In relation to this point, another member pointed out that some of those advocating increasing JGB outright purchasing operations might not be aware of the fact that the Bank was conducting such operations according to a certain set of rules and that it already held a substantial amount of JGBs.

Two members opposed to the continuation of the zero interest rate policy.

First, one member, based on the recognition that the economy had passed the worst stage and was becoming firmer each month, claimed that the Bank should seek an early termination of the zero interest rate policy because prolongation of the policy would amplify the negative impact of its termination. The member, however, did not submit a policy proposal, saying that, considering the Year 2000 problem, the time was not right to propose a raising of the interest rate.

Another member claimed that the Bank should adopt monetary base targeting accompanied by an inflation target. This member gave the following reasons. First, it was highly likely that the economy had bottomed out in April or May 1999, but the momentum for a recovery was extremely weak. Second, the impact of the yen's exchange rate on industries would be completely different at a level of around 105 yen against the U.S. dollar from that at around 120 yen. Third, the effects of the zero interest rate policy had played themselves out. Fourth, the Bank should adopt a monetary policy measure that would be in harmony with the government's comprehensive economic policy package. Fifth, employment of an effective monetary policy measure that would boost economic growth was expected even from other countries. Sixth, it was necessary to maintain a highly flexible monetary policy framework to avoid the pressure from some politicians for quantitative monetary easing and for an increase in outright purchases of JGBs. And seventh, given the active debate over consumer price index (CPI) targeting, the Bank should set a numerical target for the CPI as early as possible.

VI. Remarks by Government Representatives

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

(1) Japan's economy was improving moderately due to the permeation of 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, at a Cabinet meeting on October 8, the Prime Minister directed that necessary steps should be taken promptly to formulate 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. The ministry would receive budget requests from government offices by the end of October, and would start formulating the second supplementary budget immediately thereafter. The Prime Minister had also ordered the compilation of a comprehensive economic policy package including the second supplementary budget by the middle of November. The Ministry of Finance was working on the specific contents of the package together with the Economic Planning Agency, the main compiler of the package.

(2) At the previous meeting, in maintaining the zero interest rate policy, the Bank had decided to enhance money market operation tools, for example by introducing outright operations using short-term JGSs. Further, at this meeting, the principal terms and conditions for the operations were determined. The government would like to request that the Bank take appropriate monetary policy measures giving due consideration to developments in the economy and the financial markets.

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

(1) The Monthly Economic Report for October 1999 stated that 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. Based on this assessment, 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 decide a comprehensive economic policy package--which would be a guideline for future economic management--including measures to support small ventures and "millennium projects," and also decide a second supplementary budget for fiscal 1999. The package would emphasize three principles in view of the current economic situation: (1) measures should be novel; (2) measures should fulfill people's expectations; and (3) measures should be appealing to the public. In drawing up the package, the government would attach utmost importance to setting out new schemes that were free from conventional ideas, and independent from previous projects and the restrictive framework of government offices. In addition, the goal of the policy, the overall picture, and the target years should be presented as clearly as possible so that what had been achieved by the package was apparent to the public.

(2) Along with the Bank's enhancement of money market operation tools, the government would like to request that the Bank provide ample funds in the market as effectively as possible in view of the economic and financial conditions, including the impact of foreign exchange fluctuations, until a self-sustained economic recovery became apparent.

VII. 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 effects of monetary easing were permeating the economy. Third, clear signs of a self-sustained recovery in private demand had not yet been observed. And fourth, the situation had not changed much from the previous meeting, and 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 in the immediate future and ensure the permeation of its effects.

One member, however, presented the opinion that it was appropriate to adopt quantitative targeting accompanied by a target for the rate of increase in the CPI.

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:1.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.

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 2).

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.

Ms. Shinotsuka dissented for the following reasons. First, the economy had passed the worst stage, and therefore interest rates should be put back as soon as possible to a level where there was room for both monetary easing and tightening. And second, the longer the zero interest rate policy was maintained, the larger the repercussions of the termination of the policy would become.

Mr. Nakahara voted against the chairman's proposal on the following grounds. First, an additional monetary easing was necessary to contain the instability in the foreign exchange markets and in the stock markets of Japan and the United States. Second, the growth of money stock and the monetary base was slowing. Third, the enhancement of money market operation tools, such as the introduction of outright operations using short-term JGSs, was insufficient to create additional monetary easing effects, unless the Bank increased the amount of its "morning projection for reserves" by 3-4 trillion yen. Fourth, although the Bank was free to decide policy targets and measures, such a situation would not be allowed to continue for long in a democratic society. Fifth, the Bank should not only be accountable for its policies, but also responsible for the consequences. Without a specific numerical target, however, the Bank could not fulfill this responsibility. And sixth, the Bank could not interact well with the market under the zero interest rate policy, and therefore, it was appropriate to shift to a quantitative easing policy and achieve greater flexibility in monetary policy.


Attachment 1

For immediate release

October 27, 1999
Bank of Japan

Acceptance of U.S. Treasury Securities as Collateral

The Monetary Policy Meeting of the Policy Board has today decided to accept U.S. Treasury securities (Treasury bills, Treasury notes, and Treasury bonds) as eligible collateral for the Bank's loans on bills, from December 1, 1999 to January 31, 2000, as a temporary measure to cope with the Year 2000 problem.

The Bank will later notify details to related financial institutions.


Attachment 2

For immediate release

October 27, 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.