Minutes of the Monetary Policy Meeting
on January 17, 2000
(English translation prepared by the Bank staff based on the Japanese original)
February 29, 2000
Bank of Japan
A Monetary Policy Meeting of the Bank of Japan Policy Board was held in the Head Office of the Bank of Japan in Tokyo on Monday, January 17, 2000, from 9:00 a.m. to 12:23 p.m., and from 1:16 p.m. to 3:39 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
Mr. T. Taya
Government Representative Present
Mr. Y. Hayashi, State Secretary for Finance, Ministry of Finance
Mr. T. Komine, Director-General of the Research Bureau, Economic Planning Agency
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 Office
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. T. Murayama, Advisor to the Governor, Secretariat of the Policy Board
Mr. S. Hida, Manager, Secretariat of the Policy Board
Mr. T. Kurihara, Manager, Policy Planning Office
Mr. H. Yamaoka, Manager, Policy Planning Office
- The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on February 24, 2000, as"a document which contains an outline of the discussion at the meeting" stipulated in Article 20, Paragraph 1 of the Bank of Japan Law of 1997. Those present are referred to by their titles at the time of the meeting.
I. Approval of the Minutes of the Monetary Policy Meeting Held on November 26, 1999
The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of November 26, 1999 for release on January 20, 2000.
II. Summary of Staff Reports on Economic and Financial Developments 2
A. Money Market Operations in the Intermeeting Period
Market operations in the intermeeting period were conducted in accordance with the guideline determined at the meeting on December 17, 1999. 3Throughout the period, despite the turn of the year and concerns over the Year 2000 problem, the overnight call rate moved stably at virtually zero percent due to the Bank's provision of ample funds. During this time, market transactions proceeded without disruption, and concerns about the Year 2000 problem seemed to a large extent to have abated.
The Bank provided funds to deal with the Year 2000 problem as follows. From December 22, 1999, the Bank increased the amount of its"morning projection for reserves." 4Consequently, as of December 28, 1999, after 51 consecutive business days of provision of funds maturing beyond the year-end, such funds amounted to 46.5 trillion yen. From the afternoon of January 4, 2000, after confirming the smooth flow of market transactions, the Bank started absorbing an average of about 2.5 trillion yen of excess funds per day. The Bank had mostly completed the absorption of excess funds by the end of the previous week, although it had taken longer than in the United States and Europe. The slower pace of the absorption was because (1) the accumulated amount of excess funds was much larger than in the United States and Europe, and (2) upward pressure on the overnight rate had to be avoided under the zero interest rate policy.
The massive funds provision compared to that in the United States and Europe was because Japanese financial institutions held larger excess reserves to cope with the Year 2000 problem under the following circumstances. First, the cost of holding excess reserves was very low under the zero interest rate policy. Second, financial institutions tended to secure ample precautionary liquidity in case of emergency since the collapse of large financial institutions in fall 1997. And third, the Bank had encouraged self-help among financial institutions in preparing for the Year 2000 problem. As a result, excess reserves accumulated in the reserve maintenance period from December 16 to January 15 marked a record high. Current account balances held by institutions not subject to reserve requirements, such as tanshi companies (money market broker-cum-dealers), also amounted to a record high.
Yields on short-term Japanese government securities (JGSs), after falling at one time after the turn of the year reflecting abatement of concerns about the Year 2000 problem, rose somewhat recently. This reflected (1) concerns among market participants that the supply-demand balance of short-term JGSs would deteriorate due to increased issuance of financing bills (FBs), and (2) the anticipation that the zero interest rate policy would be terminated in the near future.
- 2Reports were made based on information available at the time of the meeting.
- 3The 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."
- 4The"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 had surged to the 101 yen level against the U.S. dollar at the beginning of 2000, then started to fall triggered by reports of intervention, and was recently moving around 106 yen. In the meantime, the euro, which had rebounded against the U.S. dollar after the turn of the year, had declined again since the end of the previous week. Thus, the recent foreign exchange market was characterized by the firmness of the U.S. dollar.
The strong U.S. dollar reflected the robust expansion of the U.S. economy and rising U.S. stocks. U.S. economic indicators for December showed that producer and consumer prices were generally stable while retail sales and industrial production were stronger than the market's forecasts. With the release of these indicators, market participants widely shared the view that the U.S. economy continued to grow with inflationary pressures contained, and this boosted stock prices and the U.S. dollar.
Some market participants abroad considered that the fact that the Bank took considerably longer to absorb funds provided for the Year 2000 problem than the U.S. and European central banks might have had some influence on foreign exchange developments. They claimed that the longer period of absorption kindled speculation about future monetary policy. This, however, did not seem to be the dominant factor.
2. Overseas economic and financial developments
In the United States, long-term interest rates were at 6.6-6.7 percent, the highest level in two and a half years. Federal funds rate futures suggested that the market already anticipated that the Federal Open Market Committee would raise the target for the federal funds rate in the near future. U.S. stock prices dropped significantly after the turn of the year, but they rebounded afterward despite the rise in long-term interest rates.
In Europe, stock prices and long-term interest rates were on an upward trend reflecting expectations for economic recovery. Stock prices posted a new record high in Germany, the United Kingdom, and France. Stock prices in emerging economies were also generally rising.
The U.S. economy continued to show firm private consumption and business fixed investment. Consumer confidence remained robust, and retail sales were brisk. Although slow at first, sales during the holiday season were good on the whole with brisk sales toward the end.
In Europe, exports and private consumption were firm, and given the resulting increase in production, employment conditions were recovering as seen in the fall in the unemployment rate. Against the background of the tightening labor market, the Bank of England raised its repo rate to 5.75 percent from 5.5 percent.
Asian economies continued to be on a recovery path. In Thailand and Malaysia, the engine of recovery seemed to be gradually shifting from external to domestic demand with business fixed investment starting to recover.
C. Economic and Financial Developments in Japan
1. Economic developments
Economic indicators released in the intermeeting period generally supported the Bank's view of the economy at the previous meeting, although small fluctuations stemming from concern about the Year 2000 problem were observed in exports, imports, and production.
Public investment had stopped rising, and housing investment had peaked out. Private consumption exhibited mixed developments, and business fixed investment showed signs of leveling off. Net exports were generally on an upward trend, although with small fluctuations.
Reflecting these developments in final demand and progress in inventory adjustment, production continued to rise. Corporate profits were also improving due partly to corporate restructuring. However, the upturn in corporate profits had not yet stimulated fixed investment. Although the deterioration in employment conditions was coming to a halt, firms' stance of reducing personnel expenses remained basically unchanged, and employment and income conditions continued to be severe.
As described above, Japan's economy, which had already stopped deteriorating, had started to improve, with exports and production increasing. The economic environment surrounding private demand was gradually improving, as seen in the continuing increase in corporate profits. However, clear signs of a self-sustained recovery in private demand had not been observed yet.
During the intermeeting period, the following phenomena were reported as consequences of concern about the Year 2000 problem.
First, domestic electronics companies increased inventory of parts such as DRAMs. As a result, exports fell at one time because production parts makers placed priority on domestic shipments over exports, and imports of production parts also increased. Second, with regard to business fixed investment, firms postponed purchasing mainframe computers until after the turn of the year. And third, concerning private consumption, consumers secured food and heating equipment in December in view of the Year 2000 problem, but the size of such purchases seemed to have been limited.
Domestic wholesale prices continued to be flat on the whole. Consumer prices remained generally unchanged, although prices of agricultural and marine products decreased slightly affected by weather conditions.
As for the outlook, exports were highly likely to remain on a moderate upward trend reflecting the recovery of overseas economies. Public investment was expected to increase again by the end of fiscal 1999 given the effects of the second supplementary budget, although the volume of public works would fall temporarily. In sum, exogenous demand on the whole was expected to underpin the economy, although it could level off temporarily at some time in the January-March quarter.
Conditions for business fixed investment were gradually improving given the rise in corporate profits. However, it was difficult to predict when business fixed investment would start to show a clear improvement, since firms still took a cautious view of their future sales and remained focused on restructuring their balance sheets.
Domestic wholesale prices were expected to be generally flat in the near future. While factors exerting downward pressure, such as the fall in prices of electric machinery and the appreciation of the yen, were observed, there were also factors exerting upward pressure, such as the rise in crude oil prices and improvement in the domestic supply-demand balance. Consumer prices as well were expected to remain at the same level as the previous year.
However, it was still not certain whether the driving force of economic recovery would shift smoothly from exogenous demand to private demand and whether the output gap would thus continue to narrow. Attention should therefore still be paid to the risk that prices would fall again in or after the second half of fiscal 2000 due to a possible decrease in exogenous demand.
2. Financial developments
The money market was generally stable, despite the surge in demand for liquidity comprising the seasonal demand for the year-end and precautionary demand in view of the Year 2000 problem. Meanwhile, the market's interest rate projections seemed to have changed slightly. Yields on Euro-yen interest rate futures suggested that some market participants had started to anticipate termination of the zero interest rate policy in a few months' to one year's time.
Long-term interest rates rebounded somewhat after following a downward trend through the end of 1999, and they were recently moving in the 1.75-1.80 percent range. It was, however, difficult to form a clear picture of the market conditions for JGBs because the market was very thin.
The Nikkei 225 Stock Average climbed beyond 19,000 yen at the beginning of 2000, but fluctuated thereafter reflecting developments in U.S. high-tech stocks. However, it was now moving above 19,000 yen again.
With regard to corporate financing, the cautious lending stance of private banks remained basically unchanged. However, major banks were gradually becoming more willing than before to increase lending, carefully evaluating the creditworthiness of borrowers. This was due to (1) the easing of the constraint on bank lending previously caused by the severe fund-raising conditions for banks and their insufficient capital bases, and (2) banks' efforts to increase loans in accordance with their plans for restoring sound management submitted to the Financial Reconstruction Commission (FRC).
Credit demand for economic activities, however, remained weak, since firms continued to reduce debts as a part of their balance-sheet restructuring. As a result, private bank lending basically remained sluggish, and the growth of money stock (M2+CDs) slowed slightly.
III. Summary of Discussions by the Policy Board on Economic and Financial Developments
A. The Current Economic Situation
As for the current economic situation, most members agreed that the latest economic indicators and other information basically supported the members' view of the economic situation at the previous meeting on December 17, 1999. Therefore, many members expressed views in line with the conclusion of the previous meeting,"Japan's economy, which has stopped deteriorating, has recently started to improve, with exports and production increasing. The economic environment surrounding private demand is gradually improving, as seen in the continuing increase in corporate profits. However, clear signs of a self-sustained recovery in private demand have not been observed yet."
Many members shared the opinion that public investment had stopped increasing and housing investment had peaked out.
As for exports, most members judged that they continued to be on an upward trend on the following grounds. First, although exports in October and November declined slightly, this seemed to be partly due to concern about the Year 2000 problem. And second, since the worldwide economic recovery had become more evident than before, its upside impact on the volume of exports was stronger than the downside impact of the strong yen.
Many members also shared the view that production continued to increase, underpinned by the progress in inventory adjustment, and this was positively influencing corporate profits and the employment and income conditions of the household sector.
Meanwhile, one member emphasized that improvement in corporate profits was important for an economic recovery, explaining that improvement in corporate profits would lead to an increase in household income, consumption, and business fixed investment. The member remarked that developments in corporate profits would require close monitoring because their foundation was still fragile for the following reasons. First, although corporate profits were definitely improving, this improvement was supported mainly by corporate restructuring and low interest rates. Second, the effects on profits of the increase in the volume of exports might be partly offset by the effects of the yen's appreciation to date. And third, there seemed to be firms recognizing unrealized losses on stocks due to the fall in some stocks and therefore recording smaller net income.
Many members expressed the view that the improvement in the income conditions of firms and households had not yet encouraged spending activity, such as business fixed investment and private consumption. One of these members commented that, although the economy was improving, it was still in a severe situation and continued to be underpinned by exogenous demand.
With regard to business fixed investment, many members pointed out that (1) the environment surrounding business fixed investment such as firms' profits and sentiment was improving, and (2) some leading indicators suggested that business fixed investment had stopped decreasing. However, members generally shared the view that there were no clear signs that it had started to increase.
As for private consumption, a few members commented that retail sales in November were relatively weak. At the same time, these members pointed out that (1) the warmer-than-usual weather during the month seemed to have affected sales of winter clothing; (2) according to anecdotal evidence, sales had recovered somewhat in December and January; and (3) moderate improvement in employment and income conditions continued. On the basis of these discussions, most members judged that private consumption on the whole continued to show mixed developments.
Meanwhile, one member assessed the economic situation based on the indexes of business conditions of the Economic Planning Agency. This member remarked that the diffusion index and the composite index both suggested that the economy had bottomed out in April or May 1999, and the recovery since then would continue into the July-September quarter of 2000, but its momentum was not strong.
Members generally agreed that prices were flat and stable.
One member analyzed price developments focusing on firms' behavior. The member pointed out that, firms' cost-cutting stance on materials and parts continued to exert downward pressure on prices. However, it had become easier for materials and intermediate goods manufacturers to raise sales prices because commodity prices had strengthened due to the recovery in Asian economies and because the domestic supply-demand balance had improved due to the progress in inventory adjustment. On these grounds, this member stated that the risk of undesirable price falls caused by a slackening of the supply-demand balance had almost disappeared.
B. Financial Developments
On the financial front, many members remarked that markets had been stable despite factors such as concerns about the Year 2000 problem and liquidity demand for the year-end, and acknowledged that concerns about the Year 2000 problem seemed to have abated.
Some members mentioned that the fact that the Bank had successfully maintained market stability by providing ample funds flexibly showed the effectiveness and flexibility of the zero interest rate policy--a policy ensuring that the Bank would flexibly provide sufficient liquidity to encourage the uncollateralized overnight call rate to move as low as possible.
A few members pointed out that the"morning projection for reserves," excess reserves, and the monetary base had all shown a significant increase, but, in contrast, private banks' lending had remained weak. One of these members remarked that this fact supported the view that banks' lending stance could not be changed solely by increasing excess reserves and the monetary base.
In response to this remark, one member commented that the banks had held excess reserves for dealing with the Year 2000 problem, and it was perfectly natural that the funds were not used for lending. Another member commented that it seemed inappropriate to conclude from the special case of the Year 2000 problem that increasing excess reserves was meaningless.
A few other members pointed out that it was due to concerns about the Year 2000 problem that excess reserves and the monetary base expanded with the Bank's provision of massive funds in the December reserve maintenance period. It was certainly not the case that the Bank could have brought about that expansion intentionally regardless of the strength of demand for liquidity. One of these members commented that, once the special factor of concerns about the Year 2000 problem disappeared, banks would not have any rational reason to hold excess reserves and pay extra costs, and therefore would go back to minimizing excess reserves.
Further, a few members remarked that the framework of the zero interest rate policy ensured that, if credit demand for economic activity emerged and banks' liquidity demand grew in line with this, the Bank would respond fully to such demand. Market participants were aware of this. Therefore, the effects expected from increasing excess reserves were already ensured by the framework, there being no liquidity constraint whatsoever on lending activity.
Another member pointed out that banks' lending was still sluggish despite the Bank's injection of ample liquidity into the market, and this strongly suggested that the weakness in lending was not due to a shortage of liquidity but other factors, such as stagnant demand for funds and impaired financial intermediary functions. Therefore, in order for lending to recover, improvement in the economy and financial intermediary functions was essential.
One member asked the staff what kind of structural problems were revealed in the financial market by the Year 2000 problem. The staff replied that the following phenomena were observed. First, amid the Bank's unprecedentedly large provision and absorption of funds, arbitrage between financial instruments did not always work well in the money market. And second, liquidity of Japanese government bonds (JGBs) declined temporarily against the backdrop that JGB market practices did not permit failure of delivery.
Members also discussed the fact that long-term interest rates were at an extremely low level.
A few members asked why long-term interest rates in Japan were so low when (1) business sentiment had improved, (2) stock prices had generally been firm, (3) some predicted an end to the zero interest rate policy, (4) long-term interest rates overseas were generally rising, and (5) the fiscal deficit was expanding.
One member cited the interpretation that there was a strong expectation in the stock market that corporate profits would recover due to restructuring, while the bond market expected only a moderate improvement in the economy. However, the member added that it was necessary to examine whether these two views could be consistent over the long term.
Another member remarked that the strong anticipation in the market of a further appreciation of the yen might have been contributing to the low long-term interest rates in Japan. The member noted that, if the yen started to depreciate, there was a possibility that the rates would rise.
A different member stated that financial institutions were increasing investment in JGBs mainly because they had been unable to find credit demand or profitable investment opportunities. Although financial institutions were increasing the share of short- and medium-term government securities in their portfolios in view of interest rate risks, close attention would be required to the risk that long-term interest rates might shoot up when those institutions started selling JGBs in order to avoid losses.
Many members, including the above members, also acknowledged that the bond market was currently very thin, and therefore in order to judge the trend in interest rates it was necessary to observe market developments for a while.
With regard to corporate financing, one member commented that the effects of monetary easing had permeated the corporate sector, and firms, having overcome the Year 2000 problem, had started to cut back their on-hand liquidity again and reduce excess debts. Further, the member explained that banks' lending attitude was changing from securing lending spreads to expanding the quantity of loans with a view to fully implementing their plans for restoring sound management submitted to the FRC. However, since credit demand was weak, lending had not increased.
C. The Economic Outlook
On the economic outlook, many members agreed that deflationary concern had not been dispelled yet.
With regard to exports, many members shared the view that they were expected to maintain an upward trend, pointing out that the positive effect on export volume of the recovery in the global economy was likely to outweigh the negative effect of the appreciation of the yen.
Meanwhile, one member was more cautious on the outlook for exports on the grounds that (1) the impact of the strong yen, already detected in imports, was likely to emerge with a time lag, and (2) countries such as Thailand and Indonesia had not finished disposing of their bad loans, although many Asian economies were indeed robust.
On the outlook for business fixed investment, many members cited as positive factors the fact that (1) the investment environment was improving as evident in the growth of production and improvement in corporate profits, and (2) leading indicators had, in general, stopped deteriorating. Furthermore, a few members added that firms, which had been restraining investment, had already made considerable progress in capital stock adjustment.
Many members, however, at the same time pointed out that firms were still in the process of restructuring, which involved eliminating excess capacity and paying back debts, and were still cautious about the outlook for demand. Thus, it remained difficult to foresee at this stage a clear increase in business fixed investment. A few of these members commented that attention should be paid to the results of various surveys on business fixed investment plans for fiscal 2000 in order to obtain clues to future developments in business fixed investment.
One member expressed the view that a recovery in business fixed investment was already in prospect given (1) the improvement in corporate profits and sentiment, (2) the halt in the deterioration in leading indicators, and (3) the distinct emergence of growth industries and the productivity-boosting effects of information technology (IT).
As evidence to support the above view, the member raised the following three points. First, a survey by the Development Bank of Japan showed that about 20 percent of firms planned to enter new business fields such as IT, and this suggested that there was now a clearer picture of which areas of business were promising. Second, as the contrast sharpened between firms, those with high growth were expected to invest more actively as their debt burden was likely to be relatively light compared with that of some other firms. And third, firms were aware of the expected decline in the workforce and were likely to be forced to increase IT-related investment to replace labor with capital.
A different member gave another interpretation of the distinct contrast between firms, and was more cautious about the outlook for business fixed investment. The member pointed out that (1) the only sectors likely to increase investment were the machinery industry, where large firms were dominant, and telecommunications, and (2) sectors such as food, ceramics, and textiles, where small firms were dominant and which accounted for a relatively large share of investment, were unlikely to increase investment.
On the contrast observed between sectors and firms, some members also expressed their views on its implications for the economy.
One member pointed out that, previously, it had not been clear which industries had growth potential in Japan, but it was now gradually becoming clear that areas related to IT were promising. In this respect, a key to the economic outlook was whether existing firms could make the most of this new technology.
A different member added that the contrast was likely to become more distinct between what the member called"old Japan"--traditional industries--and"new Japan"--growth industries such as IT-related ones--and even between"old Japan" firms, some of them succeeding in raising profitability through restructuring whereas others would languish while concentrating on cutting costs.
Furthermore, a few members commented that, in the process of Japan's structural adjustment, the contrast between firms was becoming clear in various areas such as stock prices and corporate profits. It was therefore necessary to carefully monitor developments in each industry as well as macroeconomic statistics to fully understand the state of the economy.
On the outlook for private consumption, many members expressed the view that the downside risk was diminishing because the employment and income conditions had improved, as was evident from an increase in the number of employed, a decrease in the unemployment rate, and a rise in overtime payments. Members generally agreed, however, that the current improvement in the income conditions was modest because firms continued to restrain personnel expenses, as was seen in the year-on-year fall in winter bonuses, and thus, it was difficult to forecast a clear recovery in private consumption. A few members added that, against the background of the nation's deteriorating fiscal condition, households were worried about future taxation and the cost of maintaining the public pension system, and that this was likely to have a negative effect on private consumption.
One member held a more cautious view on private consumption, pointing out that the current improvement in the labor market was largely due to an increase in part-time workers, and therefore the average wage level was considered to be actually declining. In contrast, a different member took a mildly optimistic view of the situation on the grounds that (1) while the income conditions remained harsh for main wage earners, the income of households as a whole was being supported by an increase in part-time work by other household members, and (2) the rise in stock prices since last year would stimulate spending of people holding a relatively large amount of financial assets.
Meanwhile, another member stated that consumer spending would not expand for the time being for the following reasons. First, prospects for income conditions were still uncertain. Second, consumers had become more prudent; they were carefully choosing products that matched their needs, were equipped with new digital functions, or were low priced. Third, consumers generally did not seem to be in immediate need of any particular product. The member further put forward the argument that, in an economic situation where only 1 percent real GDP growth was expected, one could not hope for a clear increase in private consumption, and that it was in no way surprising that consumption was showing mixed developments.
One member raised the following as risks to the economy: (1) the developments in U.S. stocks; (2) the financing of the U.S. current account deficit; and (3) a further sharp appreciation of the yen. The member continued that the current environment where a further surge of the yen could hamper an economic recovery was similar to that of September 1999, when the previous G-7 meeting was held. Therefore, the Bank should express its concern about a sharp rise in the yen again at the next G-7 meeting to be held in a few days' time. In addition, the member remarked that yen-selling intervention under the zero interest rate policy was effective in countering surges in the yen that deviated from economic fundamentals.
A different member added that a further surge in the yen would have an adverse effect on business fixed investment by hurting firms' profits and the profitability of exports.
Another member noted the development in crude oil prices as another risk to the economy. This member said that, if OPEC continued output cuts until June 2000, the price of West Texas Intermediate (WTI) crude could rise to US$39 per barrel in the January-March quarter of 2001, and it would not be surprising if the price surged to US$50 when the market was disrupted by some unexpected factor. The member remarked that the ratio of oil consumption to GDP in the United States was 4.0 percent in 1974 just after the first oil crisis, but it had declined to 1.4 percent in 1999. The member expressed concern that the ratio would increase to 1.9 percent this year if the price stayed around US$25, and this would have a large negative impact on the U.S. economy.
Members next discussed the outlook for prices and how to determine whether deflationary concern had been dispelled.
One member said that price declines stemming from technological innovation and increased efficiency in the distribution system could cause falls in price statistics but would improve economic welfare. The member considered that it was inappropriate, if positive momentum existed in the economy, to describe such a phenomenon as deflationary just because prices were declining. In this respect, it could be said that deflationary concern had been dispelled when a self-sustained economic recovery driven by private demand could be forecasted with a certain degree of probability. On this basis and judging that a recovery in business fixed investment was in sight, the member concluded that it was likely that deflationary concern had already been dispelled.
Regarding this opinion, some members agreed that it was important to make a comprehensive judgment but disagreed with the view that a recovery in investment was already in sight.
One of these members stated that deflationary concern could not be gauged solely by recent developments in a single price index, and that price developments as a whole, as well as developments in the economy affecting prices, should be assessed. This member went on to say that the economy continued to head toward a recovery, and in this respect, deflationary concern continued to lessen gradually. However, to determine whether deflationary concern had been dispelled, more evidence was required to confirm the likelihood of a recovery in private demand such as business fixed investment. A few members expressed agreement with this view.
Meanwhile, one member noted that, over the past ten to 15 years, a disinflationary trend had been observed globally. However, the downward pressures on prices worldwide were likely to weaken temporarily in 2000 and 2001 for the following reasons. First, reflecting firm global demand against the background of the economic recovery in Asia and Europe, and the continued strong expansion in the United States, the prices of primary commodities such as crude oil were expected to increase. And second, the economic recovery in emerging markets would exert upward pressure on their labor costs and currencies, and such a development would alleviate the pressure to equalize factor prices between countries.
Another member raised three factors contributing to recent price movements: (1) technological advances; (2) the domestic supply-demand balance; and (3) the price of commodities such as crude oil. The member considered that the first factor would continue to place downward pressure on prices, while the third would continue to exert upward pressure. With regard to the second factor, the member remarked that it was unlikely to create significant upward pressure on prices in the near future.
A different member pointed out that the output gap was still large and, while acknowledging that the Bank's staff were studying it, remarked that it was necessary to estimate the output gap and potential growth rate as accurately as possible.
After this discussion, many members shared the view that, although prices would continue to be flat for the time being, abatement of deflationary concern was not yet in prospect.
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 as follows. First, Japan's economy, which had stopped deteriorating, had recently started to improve, with exports and production increasing. Second, the economic environment surrounding private demand was gradually improving, as seen in the continuing increase in corporate profits. Third, the favorable financial environment continued. Fourth, however, clear signs of a self-sustained recovery in private demand had not been observed yet. And fifth, prices were expected to remain generally unchanged for the time being, but downside risks to prices should still be monitored carefully.
Based on the above assessment, many members judged that deflationary concern had not been dispelled yet. Therefore, with regard to monetary policy for the immediate future, the majority of members considered it appropriate to continue the zero interest rate policy.
One of the members said that the zero interest rate policy was an extraordinary policy. Based on this view, the member considered that the Bank's policy goal for the year 2000 was to realize an economic environment that allowed for the termination of this policy. The member agreed with the continuation of the policy, while emphasizing that the following would be very important when terminating the zero interest rate policy: (1) the timing of the decision; (2) transparency of the process leading to the decision; (3) a forward-looking decision; and (4) consideration of developments in individual industries.
Members discussed the fact that some market participants took the"morning projection for reserves" as indicating the Bank's stance on monetary policy.
One member, referring to the fact that the yen had appreciated while the"morning projection for reserves" as well as the monetary base expanded in December 1999 and had depreciated alongside the decline in the"projection" in January 2000, concluded that the amount of projection itself, or the quantity of liquidity itself, did not seem to affect the yen's exchange rate.
Regarding this view, a few other members remarked that some market participants overseas seemed to be paying attention not to the amount of the projection itself but to the pace of its change, believing that it signaled the Bank's stance on future monetary policy.
Responding to this, some members commented that the Bank's stance on monetary policy could not be changed without the Board's decision at Monetary Policy Meetings. Therefore, it was wrong to think that changes in the"morning projection for reserves" signaled changes in the Bank's monetary policy stance, and such views should be corrected.
One member commented that the Bank should pay attention to how much liquidity was needed in order to maintain the zero interest rate, by taking account of developments in the market.
Meanwhile, two members expressed opinions objecting to the maintenance of the zero interest rate policy.
The first member claimed that the guideline for money market operations should be changed back to that employed before the monetary easing on February 12, 1999--i.e., the overnight call rate target should be raised to 0.25 percent.
The member explained as follows. The zero interest rate policy--an extraordinary policy--had been introduced under the circumstances where Japan's economy was on the verge of a deflationary spiral--in other words, in an emergency state. However, the economy had improved since then, and was no longer in such a state. Further, it was natural from a theoretical viewpoint that the momentum of economic recovery placed upward pressure on long-term interest rates and the yen. Therefore, it was inappropriate to employ monetary policy measures just to contain such rises in the rates and the yen since rises consistent with the improvement of the economy would not hamper a self-sustained recovery in private demand.
In relation to this view, one member remarked that the zero interest rate was extraordinary and could not be justified when the economy was growing steadily. Further, some investors seemed to have become too heedless of interest rate risks. Another member commented that the Bank's maintenance of the zero interest rate policy had invited a misunderstanding of Japan's economic situation, leading many, especially abroad, to mistakenly believe that it was experiencing serious deflation.
Many members including the above members, however, still believed that it was appropriate to continue the zero interest rate policy based on the judgment that deflationary concern had not been dispelled yet.
The member who proposed the termination of the zero interest rate policy claimed that, even if the Board decided to continue the policy by majority vote at the meeting, the Bank should prepare measures to alleviate the various shocks that could occur to the financial market at the termination of the policy in the future. With regard to this view, a few members noted that, generally speaking, it was important that an environment was formed where market participants shared the central bank's view of the economy and could properly anticipate future monetary policy action. For that purpose, these members maintained that the Bank should convey adequately its view of the economy and its thinking on monetary policy to the market. One of them added that it was therefore inappropriate for a central bank to artificially hold down natural rises in long-term interest rates consistent with economic conditions.
Meanwhile, one member commented there was an argument that the Bank should not take advantage of misunderstanding by the market. This member continued that such misunderstanding was brought about because it was difficult for the Bank to share its view with the market. One of the members who advocated the importance of sharing the Bank's view with the market replied that it was indeed not easy to adequately convey the Bank's intention to the market.
The second member objecting to the zero interest rate policy advocated adopting monetary base targeting accompanied by a target for the rate of increase in the consumer price index (CPI), and increasing excess reserves to achieve these targets.
The member gave the following reasons. First, further monetary easing was required because (1) the GDP deflator still indicated a possibility of deflation, (2) firms' expectations for the future growth rate were declining, (3) crude oil prices were increasing, and (4) consumers were restricting their spending due to anxiety about tax burdens and social security costs in the future. Second, the large funds provision by the Bank to prepare for the Year 2000 problem seemed to have positively influenced the stock market and checked the appreciation of the yen. This experience provided a counter-argument to criticisms that the content of quantitative easing was ambiguous, quantitative easing was not operationally feasible, and an increase in the monetary aggregates would not boost the economy. Third, there was a risk of the yen appreciating after the G-7 meeting, and therefore the Bank should employ an additional monetary easing measure beforehand. Fourth, it was meaningful to adopt inflation targeting in that it would clarify the Bank's responsibility of pursuing price stability, and many countries abroad were adopting the policy. Fifth, setting a target for the CPI would encourage more forward-looking and preemptive decisions on monetary policy because it would require the release of projections for underlying factors such as GDP growth. And sixth, the zero interest rate policy was a passive, wait-and-see policy. This member also considered that the potential growth rate of the economy was 1.5 to 2 percent and the economy should achieve that level of growth as soon as possible through a coordination of fiscal and monetary policies.
One member asked the above member why that member was proposing a further monetary easing while being alert to the rise in crude oil prices, which was regarded as an inflationary risk.
The member who proposed monetary base targeting answered as follows. First, the world economy was showing stronger signs of disinflation due to structural changes in the post cold war era. And second, the rise in crude oil prices would have a relatively small impact on overall prices in Japan, where energy consumption was the most efficient in the world and the growth in demand for oil was relatively low.
V. Remarks by Government Representatives
The representative from the Ministry of Finance made the following remarks.
(1) Japan's economy was still in a severe condition. In view of the situation, the Government formulated the Policy Measures for Economic Rebirth in November 1999, and in December, the Diet passed the second supplementary budget for fiscal 1999. In fiscal 2000, the Government would continue to take appropriate and flexible action in order to realize a smooth shift from public to private sector led growth, steering the economy toward a full-fledged recovery, and in order to promote structural reform.
(2) In the fiscal 2000 draft budget, 9.4 trillion yen, the same amount as in the initial fiscal 1999 budget, was appropriated for public works and another 500 billion yen was set aside as a reserve fund for public works. With regard to the tax policy for fiscal 2000, national and local tax cuts for individuals and corporations amounting to over 6 trillion yen would continue. Further, the following tax measures would also be implemented: tax benefits on housing loans would be continued; special treatment would be given to capital gains on stocks of specified small and medium-sized enterprises (expansion of the Angel Taxation Scheme); and tax measures relating to the defined contribution pension scheme would be adopted. As a result of the above measures, JGS issuance in fiscal 2000 would amount to 32.61 trillion yen, which meant the budget would rely on debt for 38.4 percent of its revenues, and the amount outstanding of central and local governments' debt was forecast to reach 645 trillion yen as of the end of fiscal 2000. Fiscal conditions were extremely severe, and the Government realized it would have to undertake measures for fiscal reform when the economy was back on a recovery path, with a view to achieving an ideal economy and society in the 21st century. However, as the economy remained in a severe situation, the Government would continue to place top priority on steering the economy to a recovery.
(3) The above basic thinking behind the Government's economic policy would be explained at the G-7 meeting to be held in Tokyo over the coming weekend.
(4) The Government would like to ask the Bank to continue implementing monetary policy appropriately and in a timely manner to ensure a recovery of the economy, synchronizing its action with the Government's measures, for example by flexibly providing ample funds in the market giving due consideration to developments in financial markets, including the foreign exchange markets.
The representative from the Economic Planning Agency made the following remarks.
(1) Japan's economy was improving moderately due to the effects of various policy measures and the recovery in Asian economies. However, the economy had not yet achieved a self-sustained recovery driven by private demand. Against this background, the Government had projected a GDP growth rate of about 0.6 percent for fiscal 1999.
The Government had set three goals with regard to the economy in fiscal 2000: (1) achieving a full-fledged recovery led by private demand; (2) pursuing structural reform aimed at developing a socioeconomic framework suited to the needs of the knowledge-based age; and (3) maintaining and bolstering the multilateral trade system, and promoting economic cooperation with the Asian region. The Government would place priority on steering the economy to a full-fledged recovery led by private demand in the second half of fiscal 2000 through implementation of necessary measures such as the Policy Measures for Economic Rebirth.
(2) The Government would like to ask the Bank to continue to implement monetary policy appropriately and in a timely manner to ensure a recovery of the economy, for example by flexibly providing ample funds in the market giving due consideration to developments in the financial markets, including the foreign exchange markets.
The views of many members of the economic and financial situation were summarized as follows. First, Japan's economy, which had stopped deteriorating, had started to improve, with exports and production increasing. Second, the economic environment surrounding private demand was gradually improving, as seen in the continued increase in corporate profits. Third, the financial environment continued to be favorable. Fourth, however, clear signs of a self-sustained recovery in private demand had not yet been observed. Fifth, prices were expected to remain generally unchanged for the time being, but attention should still be paid to the downward pressure on prices.
Based on this understanding, the majority of members considered that it was appropriate to maintain the zero interest rate policy.
However, one member proposed changing the guideline for money market operations back to that employed before the adoption of the zero interest rate policy on February 12, 1999. Another member proposed adopting quantitative easing by setting a target for the rate of increase in the CPI and the growth rate of the monetary base.
As a result, three policy proposals were put to the vote.
Ms. Shinotsuka proposed the following as the guideline for money market operations for the intermeeting period ahead:
The Bank of Japan will encourage the uncollateralized overnight call rate to move on average around 0.25 percent.
Regardless of the above target for the call rate, the Bank of Japan will provide more ample funds, if judged necessary, to maintain the stability of the financial markets.
The proposal was defeated with one vote in favor, eight against.
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 create excess reserves of about 1.5 trillion yen on average in the current reserve maintenance period from January 16 through February 15, and by continuing to increase the amount thereafter, induce approximately 10 percent annual growth of the monetary base (change from the average for the July-September quarter of 1999 to the average for the same quarter of 2000) to realize quantitative easing (expansion of the monetary base). Regardless of the above target for the monetary base, the Bank will expand money further should the financial markets destabilize, for example, should the uncollateralized overnight call rate rise substantially.
The proposal was defeated with one vote in favor, seven against. One member abstained from voting.
To reflect the majority view, the chairman formulated the following proposal.
Chairman's Policy Proposal:
The guideline for money market operations in the intermeeting period ahead would be as follows, and publicized by the attached statement(see attachment).
The Bank of Japan will 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, Mr. K. Ueda, and Mr. T. Taya.
Votes against the proposal: Mr. N. Nakahara and Ms. E. Shinotsuka.
Mr. Nakahara voted against the chairman's proposal on the following grounds. First, since the Bank's policy intention was not reflected in the movement of the overnight call rate under the zero interest rate policy, the Bank should seek other ways to convey its message to the market. Second, under the zero interest rate policy, the Bank was taking a wait-and-see stance, claiming that credit demand was low and recovery in private demand was awaited. However, the Bank should actively take measures to improve the economic situation considering the large output gap. And third, growth in the monetary base could fall sharply following the abatement of concerns about the Year 2000 problem.
Ms. Shinotsuka dissented for the following reasons. First, economic conditions had definitely improved from the time of the implementation of the zero interest rate policy, and abatement of deflationary concern was in prospect. Second, the negative effects of the zero interest rate policy were increasing as time went by. For example, moves of market participants taking advantage of a further prolongation of the policy were becoming conspicuous. Third, by terminating the zero interest rate policy, the Bank could make its policy stance consistent with the current economic situation, and monetary policy would still be extremely accommodative. And fourth, the prolongation of the zero interest rate policy would defer structural reform by impairing the incentive for scrap-and-build, which would otherwise give rise to profitable investment projects.
VII. Discussion on the Bank's View of Recent Economic and Financial Developments
The Policy Board discussed"The Bank's View" of recent economic and financial developments, and put it to the vote. The Board unanimously determined"The Bank's View," for publication on January 19, 2000 in the Monthly Report of Recent Economic and Financial Developments (consisting of"The Bank's View" and"The Background"). 5
- 5The original full text, written in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on January 19, 2000 together with the English version of"The Bank's View." The English version of"The Background" was published on January 31, 2000.
For immediate release
January 17, 2000
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.