Minutes of the Monetary Policy Meeting
on February 24, 2000
(English translation prepared by the Bank staff based on the Japanese original)
March 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 Thursday, February 24, 2000, from 9:03 a.m. to 1:06 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 2
Mr. T. Haraguchi, Deputy Vice Minister for Policy Coordination, Ministry of Finance 3
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. S. Uchida, Manager, Policy Planning Office
- The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on March 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.
- Mr. Hayashi was present from 10:00 a.m. to 1:06 p.m.
- Mr. Haraguchi was present from 9:03 a.m. to 9:57 a.m.
I. Approval of the Minutes of the Monetary Policy Meeting Held on January 17, 2000
The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of January 17, 2000 for release on February 29, 2000.
II. Summary of Staff Reports on Economic and Financial Developments 4
A. Money Market Operations in the Intermeeting Period
Market operations in the intermeeting period were conducted in accordance with the guideline determined at the previous meeting on February 10, 2000. 5As a result of the continued provision of ample funds, financial market conditions were stable. Throughout the period, the overnight call rate was stable at 0.02 percent, virtually zero percent. Interest rates on term instruments fell somewhat partly due to reduced anticipation of an early termination of the zero interest rate policy.
In conducting market operations in the immediate future, attention would be paid to the market's concerns over possible disruptions to computer systems on February 29. Market participants had already started taking precautionary steps. For example, city banks significantly delayed the accumulation of required reserves for the current reserve maintenance period from February 16 to March 15, planning to accelerate the pace from February 28. Some foreign banks were procuring funds maturing beyond the end of February at relatively high interest rates. As a result, interest rates on three-day contracts maturing beyond the end of February had recently risen to around 0.10 percent.
The following points would be of concern in the period leading up to February 29. First, it was uncertain how much reserves regional banks would accumulate. Second, institutional investors such as life insurance companies might shift funds to the call market from ordinary deposits at banks if the overnight call rate increased to around 0.10 percent, and thus city banks' funds position might deteriorate. And third, the nationalized Long-Term Credit Bank of Japan (LTCB) was due to receive a large amount of funds as special financial assistance from the Deposit Insurance Corporation on February 28 in relation to New LTCB Partner's acquisition of LTCB, and it was not clear how much of these funds would be invested in the market. In view of these circumstances, the Bank would continue to flexibly provide ample funds.
- 4Reports were made based on information available at the time of the meeting.
- 5The 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."
B. Recent Developments in Foreign Exchange Markets and Overseas Economic and Financial Conditions
1. Developments in foreign exchange markets
The yen had been falling against the U.S. dollar since the middle of February and recently moved around 111 yen, the lowest level since September 1999. The euro was firm against the U.S. dollar, recovering to above US$1, and consequently the yen fell against the euro as well.
The depreciation of the yen was attributable to growing uncertainty regarding the prospects for Japan's economy while the U.S. economy was robust. Also, foreign investors had been paying more attention to the deterioration in Japan's fiscal condition since a rating agency announced in mid-February that it had placed Japanese government bonds (JGBs) on review for possible downgrade. Volatility spreads suggested that, since the middle of February, market expectations of a further rise in the U.S. dollar had increased.
2. Overseas economic and financial developments
There were no substantial changes in overseas economies, except for the Bank of Korea's raising of the overnight call rate target to around 5.00 percent from about 4.75 percent on February 10.
In the U.S. financial market, yields on 30-year Treasury bonds dropped to around 6.1 percent reflecting the Treasury's buyback program and a stable consumer price index. In the meantime, yields on two-year Treasury notes fell only marginally, causing further yield inversion. Developments in U.S. stocks were mixed; the Dow Jones Industrial Average and S&P 500 fell, while the Nasdaq composite index marked a historical high. There was a view among some market participants that funds were being shifted from stocks to bonds reflecting concern about high stock prices. Stocks in Europe remained at a high level, although they had declined somewhat recently. Stock prices in Asia were weak.
C. Economic and Financial Developments in Japan
1. Economic developments
Economic indicators released in the intermeeting period offered no grounds to change the Bank's view of the economy at the previous meeting.
The contracted value of public works rose slightly in January reflecting orders placed using the reserve fund appropriated for public works in the fiscal 1999 budget. Public works orders based on the second supplementary budget for fiscal 1999 appeared to have grown since the beginning of February.
Toward the end of 1999, exports fell and imports rose mainly in the area of equipment related to information technology (IT) and capital goods. In January 2000, exports of these goods rebounded while imports fell back, and net exports seemed to have returned to a moderate upward trend. Imports as a whole, however, continued to rise reflecting strong domestic demand for IT-related goods and an influx of low-priced consumer goods given the appreciation of the yen.
Economic indicators related to private consumption continued to show mixed developments. Sales at department stores in Tokyo increased in January, and sales of passenger cars rose in January and appeared to have remained firm in February. On the other hand, outlays on travel declined sharply in December, and sales at convenience stores decreased in January.
For the October-December quarter of 1999, the index of tertiary industries' activity, which shows the level of activity in non-manufacturing industries, and the index of all industries' activities were flat from the previous quarter.
The corporate service price index (CSPI) continued to fall marginally from the previous year.
2. Financial developments
The fall in U.S. stock prices seemed to be regarded in the financial market as a positive factor that would put the U.S. economy back on a sustainable growth path. This perception and estimates that Japan's GDP for the October-December quarter of 1999 would turn out to have declined for the second consecutive quarter fueled a depreciation of the yen.
Stock prices were firm at around 19,500 yen, and long-term interest rates were stable despite reports that JGBs could be downgraded. It could be said that, at present, stocks and long-term interest rates were reacting to different factors--stock prices reflected the earnings of individual firms, while long-term interest rates reflected macroeconomic trends and markets' anticipation of future monetary policy.
Attention would be required as to whether this combination--a weak yen, low and stable long-term interest rates, and high stock prices--would continue.
Year-to-year growth of money stock (M2+CDs) remained weak at 2.6 percent in January, unchanged from December 1999.
The number of corporate bankruptcies in January increased by 40 percent from a year earlier. Recent features were as follows: (1) small-scale bankruptcies were growing; (2) bankruptcies were conspicuous in the construction and retail industries; and (3) an increasing number of bankruptcies were due to poor sales. In sum, it could be said that progress in the"distribution revolution"--innovative changes in the distribution system--and the decline in public works had led to corporate bankruptcies.
III. Summary of Discussions by the Policy Board on Economic and Financial Developments
A. The Current Economic Situation and the Economic Outlook
Discussion was focused mainly on the assessment of economic indicators released since the previous meeting on February 10. Members generally agreed that there were no significant factors to cause them to change their basic judgment of the economic situation at the previous meeting:"Japan's economy has recently started to improve. 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."
However, some members expressed the view that some bright spots had been observed in the private sector, and the downside risk to the economy was gradually decreasing. One of these members judged that, although it was expected that GDP for the October-December quarter would prove to have declined for the second consecutive quarter, the momentum for an economic recovery had nevertheless been maintained throughout the second half of 1999 and into 2000.
As for public investment, one member commented that public works had declined toward the end of 1999, but orders seemed to have been increasing since the beginning of February 2000. The member judged that the upward trend of net exports had been reconfirmed by the increase in the volume of net exports in January 2000, which proved that the fall in the October-December quarter of 1999 was due to a temporary rise in domestic demand for some goods reflecting concerns about the Year 2000 problem. On these grounds, the member was of the opinion that public investment and exports would continue to underpin the economy for a while.
Another member expressed the view that developments in exports and imports would require close attention, because the volume of net exports was increasing while the nominal value of net exports was decreasing. This indicated that income had been flowing overseas.
On corporate activities, such as business fixed investment, some members expressed the view that encouraging signs were gradually increasing, particularly in the IT-related sector. One of these members pointed out that the following developments corroborated this view: (1) an increasing number of firms in a wider variety of industries were seeing their profits increase; (2) machinery orders and construction starts (floor area), both leading indicators of business fixed investment, seemed to be bottoming out; and (3) capacity utilization in the manufacturing industry was improving. Another member cited the following positive signs. First, with regard to the volume of firms' advertisements, demand for television commercials, which typically increased in economic recovery phases, started growing from the middle of 1999, and would exceed the supply limits in March 2000. Second, some industries had overcome the problem of excess liabilities, as suggested by the significant progress in the repayment of funds borrowed for plant and equipment in the manufacturing, transportation, telecommunications, and electric power industries.
Meanwhile, a few members took a cautious view of the developments in business fixed investment. One member remarked that the current halt in the deterioration of business fixed investment was attributable to strength in a limited number of industries, such as electronics and telecommunications. Thus, careful attention should be paid to whether such improvement would spread to other industries. One concern was that electronics manufacturers, which already produced more than 70 percent of their output of electrical appliances overseas, were transferring their manufacturing bases for electronic office equipment to East Asia because of the appreciation of the yen last year, in order to sustain their international competitiveness. Such developments would lead to a hollowing-out of Japanese industry, reducing domestic production and constraining domestic business fixed investment.
Another member noted that capacity utilization in the manufacturing industry had not increased to a level that would bring about full-scale business fixed investment, and that the increase in construction starts (floor area) was due to a rush to construct buildings before the implementation of the Law concerning the Measures by Large Scale Retail Stores for Preservation of Living Environment. The member also commented that, unlike in the U.S. economy, growth in Japan's IT-related sector did not have a very large positive effect on the entire economy. Further, the member referred to the relationship between the rise in crude oil prices and corporate profits. According to empirical regularity, when the terms of trade deteriorated significantly, stock prices would peak out about eight months later, and after about another six months, the ratio of current profits to sales would start declining. The member concluded that, given this pattern, there was the risk that the deterioration in the terms of trade due to the rise in crude oil prices since 1999 might start to squeeze corporate profits from mid-2000. The member added that the deterioration in the terms of trade would continue for another two months or so considering the time it took for the rise in crude oil prices to be reflected in import prices.
On these grounds, one member commented that the key to future developments in business fixed investment was whether the recent recovery in corporate profits would lead to greater spending in not only IT-related sectors but in a wide range of industries. This point would be examined in surveys on business fixed investment plans for fiscal 2000 due to be released from the end of March through April 2000.
On recent movements in private consumption, one member commented that there was a sign of recovery in private consumption as sales of high-priced items had started to increase at department stores given the rise in stock prices and reduction of personal income tax. The member also said that hopes were pinned on sales of items related to the start of the new school year and sales to new graduates due to start working this spring. And this would serve as a test of whether private consumption would recover. Another member noted the recovery in sales of passenger cars as another bright sign. A few other members shared the view that the positive developments in the corporate sector had gradually led to an improvement in employment and income conditions as well as in household sentiment, alleviating anxiety about future household expenditure. One of these members added that, if summer bonus payments this year exceeded the previous year's level, private consumption might see a moderate recovery.
In contrast, a different member expressed the view that employment indicators generally gave a dismal picture, and the household sector continued to restrain consumption. The member remarked that the recovery in sales at department stores was due to bargain sales, a temporary factor, and the increase in sales of high-priced items was attributable to spending by people who had made capital gains from Internet-related stocks. Further, this member and another member doubted the sustainability of the current upward trend in car sales, because car manufacturers' production plans for the April-June quarter remained subdued in spite of the recent recovery in passenger-car sales.
Members also exchanged views on corporate bankruptcies. One member remarked that the recent increase in the number of bankruptcies and the failure of a major supermarket despite the support from its main bank indicated that the business environment still warranted attention. Moreover, with the implementation in April of a law facilitating business reorganization, there was a possibility that the number would increase further and this would have an adverse impact on financial institutions. In response to this, another member stated that, although attention should be paid to the negative effect of bankruptcies on the economy, the recent increase in small-scale bankruptcies mainly in the construction and distribution sectors due to slack sales could be signaling gradual progress in the structural adjustment of the economy.
Members' views of price developments were unchanged. They agreed that prices were generally flat, but the downward pressure would continue to require close monitoring. However, a few members pointed out that the downward pressure was being contained by price gains in international commodities, such as crude oil, reflecting the global economic recovery, and by the depreciation of the yen. Some members added that the risk of prices falling due to weak demand was gradually lessening, given that positive signs had started to emerge in the domestic private sector and the economy was gradually becoming firmer.
Another member stressed that developments in crude oil prices required vigilance. The member stated that the meeting of OPEC scheduled for late March 2000 would be crucial for the outlook for crude oil prices. There was a possibility that OPEC would decide to increase production at the meeting, but if this increase was not large enough, any fall in prices would be short-lived and West Texas Intermediate (WTI) crude oil was likely to rise above US$30 per barrel again in the second half of 2000. If OPEC decided to maintain its restrictive stance on output, crude oil prices would increase further.
B. Financial Developments
On the financial front, most members shared the view that (1) financial markets had been generally stable, and (2) the financial environment remained favorable.
One of these members judged that financial markets continued to underpin corporate profits and the overall economy. As reasons for this, this member pointed out that stock prices and long-term interest rates had remained stable since the previous meeting and the yen had depreciated more than firms had projected--large manufacturers' projected exchange rate for the second half of fiscal 1999 averaged 107.93 yen to the U.S. dollar in the December Tankan.
One member remarked that stock prices were generally firm on the grounds that (1) they were moving stably at around 19,500 yen despite unwinding of cross-shareholdings and profit-taking, and (2) the value of transactions on the Tokyo Stock Exchange exceeded 1 trillion yen every day. Another member commented that the supply-demand balance of stocks was favorable under the zero interest rate policy since funds of individual investors, who were seeking better returns, had flowed into the stock market through investment trusts. The member added that a large part of these funds were being invested in IT-related stocks ("e-business" stocks), and stocks of traditional heavy industries ("t-business" stocks) were unlikely to rise. The member concluded that the contrast between sectors was becoming more distinct.
One member expressed a cautious view that, after reaching a peak at the beginning of February, stock prices were currently in an adjustment phase, reflecting the weakness in the Dow Jones Industrial Average, and they would probably start increasing only after the middle of this year.
One member remarked that the weak trend of the yen reflected the market's contrasting view of the Japanese and U.S. economies. Market participants considered that the growth of the U.S economy had become more sustainable, while they took a cautious view of Japan's economy partly because of the anticipation that GDP would turn out to have fallen for the second consecutive quarter in October-December 1999.
Another member pointed out that the stock and foreign exchange markets were giving different signals: movements in the stock market pointed to a further improvement in the economy and corporate profits, while the foreign exchange market indicated a cautious view of the economic outlook. Thus, attention should be paid to whether the combination of high stock prices and a weak yen would continue.
In relation to the above opinion, another member stated that the yen, which had appreciated from the 124 yen to the 101 yen level since mid-1999, was currently on a downward trend. The member was of the opinion that this trend was unlikely to continue since the yen had approached a technical point.
As for long-term interest rates, some members noted that they were moving within a narrow range despite the announcement by a rating agency that it had placed JGBs under review for a possible downgrading. These members gave the following reasons for this phenomenon: (1) market participants strongly believed that the zero interest rate policy would continue for some time; and (2) with weak credit demand and a lack of alternative investment opportunities, domestic investors, especially banks, had little choice but to increase investment in JGBs. On the grounds that the stability of long-term interest rates had been brought about by the permeation of the effects of the zero interest rate policy, one of these members remarked that the policy was contributing to the stability of overall asset prices.
Another member stated that the sustainability of Japan's budget deficit was becoming a focus of attention. The member expressed the opinion that, in such a situation, even if the Bank were to increase the amount of JGBs it bought outright through operations, long-term interest rates would not fall--indeed there would be a strong possibility that they would even rise due to an expansion of the risk premium.
With regard to the monetary aggregates, a few members pointed out that (1) firms' credit demand remained weak, (2) private banks' lending was sluggish, and (3) the growth of money stock was still slowing. However, one of these members noted that such developments were a result of firms giving priority to repaying debts to restructure their balance sheets, and it could therefore be said that steady progress was being made in structural adjustment.
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.
As mentioned earlier, most members agreed that it was not necessary to change their judgment on the economic and financial situation from the previous meeting.
Some of them expressed the view that the downside risk to prices due to a deterioration in the supply-demand balance was gradually decreasing, given that bright signs had started to emerge in domestic private-sector activity and the economy was gradually becoming firmer. However, a different member noted that private-sector activity was not strong enough to change the assessment of the economic situation. This view was supported by many members including the above members who pointed out that the downside risk to prices was gradually decreasing.
In conclusion, members generally agreed that careful attention should continue to be paid to economic developments in judging whether deflationary concern had been dispelled. On this basis, with regard to monetary policy for the immediate future, the majority of members considered it appropriate to continue the zero interest rate policy.
At the meeting, members discussed some issues on the relationship between price developments and monetary policy.
First, a member remarked that it was difficult to judge the basic trend in prices because there were two conflicting pressures from the supply side--i.e., upward pressure from the increase in international commodity prices and the depreciation of the yen, and downward pressure from technological innovation and a distribution revolution. However, the member stressed that, under the zero interest rate policy, attention should be paid to the downward pressure on prices stemming from a deterioration in the supply-demand balance in judging whether deflationary concern had been dispelled. Another member agreed with this view and remarked that, in order to assess price developments accurately, it was important to further examine (1) how much of the decline in price indexes was attributable to technological innovation in production and distribution systems, and (2) how much upward bias there was in price indexes caused by the limited price samples used in surveys.
Second, a few opinions were expressed regarding the Bank's commitment to maintain the zero interest rate policy until deflationary concern had been dispelled. One member remarked that monetary policy decisions, which were aimed at achieving price stability, should be based on a comprehensive assessment of the economic situation that took account of all available indicators and information. The member raised the question of whether the Bank could make the decision-making criteria clearer to enhance the Bank's accountability. The member continued that the adoption of a more concrete phrase could lessen the shocks to the financial markets when the zero interest rate policy was terminated, because market participants would then be able to anticipate the change in policy. Specifically, the member cited the following as important qualitative criteria that would clarify the basis of decision-making: (1) whether the downside risk to prices was sufficiently small; and (2) whether a virtuous circle--that is, positive interaction between production, profits, employment, business fixed investment, and private consumption--was operating firmly in the private sector.
Another member basically supported the above view, but was of the opinion that the above two qualitative criteria were already fully incorporated into the current phrase --that is,"until deflationary concern had been dispelled"--and it was difficult to arrive at any criteria, numerical or qualitative, that could adequately replace this.
Third, one member commented that it was necessary to consider what was meant by price stability, and presented the following view. It was important not only to stabilize price indexes at a certain level, but also to ensure that the economic conditions reflected in prices were contributing to maximizing the economic welfare of the nation. In this respect, it was cause for great concern that recent discussions on inflation targeting inside and outside Japan were focused solely on technical matters, such as how the Bank should achieve a certain level in price indexes. Improving the economic welfare of the nation meant raising the standard of living as well as enabling firms to secure optimum profits, and in this context, it was important to consider the following points: (1) whether the income distribution function of prices was as important as the role prices played in adjusting the supply-demand balance; (2) which aspect of prices--i.e., the level, the direction, or the relative structure--should be examined; (3) which of the following should be paid greater attention to in judging price developments, the domestic supply-demand balance or the international supply-demand balance; and (4) what was the relationship of prices to technological innovation and productivity.
Members discussed the above member's view of price stability. One member strongly supported the points regarding raising the standard of living and the income distribution function of prices.
A few other members expressed the opinion that the objective of monetary policy was to achieve the stability of general prices--not the stability of the relative price structure. They commented that such price stability meant a situation that was neither deflationary nor inflationary. This condition, using the words of Mr. Alan Greenspan, the Chairman of the Board of Governors of the Federal Reserve System, could be described as follows:"Price stability obtains when economic agents no longer take account of the prospective change in the general price in their economic decision-making." The members emphasized that both definitions of price stability indicated that stability in general prices was the most important precondition for the economy to achieve its potential.
One of them expressed the view that both inflation targeting and other frameworks of monetary policy aimed for stability in general prices. The member stressed that, however, the Bank should be careful in deciding whether to adopt inflation targeting in the current situation where there were hardly any effective monetary easing measures left. The member added that, although stability in general prices was important, it was impossible to define the general price level. Thus, all the Bank could do was to select the most representative price index.
Meanwhile, two members objected to the maintenance of the zero interest rate policy.
One member stated that the guideline for money market operations should be changed back to that employed before the zero interest rate policy was adopted on February 12, 1999--i.e., the overnight call rate target should be raised to 0.25 percent.
The reasons for this were as follows. First, the risk of the economy falling into a deflationary spiral had declined, given that the economy had started to improve and a self-sustained recovery in private demand was in prospect. For example, the positive momentum in the corporate sector was leading to improvements in employment and income conditions. Also, private consumption, especially that of single-person households, was improving. And second, the interest-bearing liabilities of many firms were still at a high level because the zero interest rate policy was allowing firms and financial institutions to defer the disposal of nonperforming assets. Such delays in structural adjustment could make market participants abroad uncertain about the outlook for Japan's economy.
The other member who objected 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 the current account balances at the Bank to achieve these targets.
The member gave the following reasons for the proposal. First, although the economy seemed to be in a recovery phase, the momentum was weak, and the outlook was uncertain. For example, GDP for the October-December quarter of 1999 could turn out to have fallen for the second consecutive quarter, possibly to the level of the same quarter of 1998. Second, as for prices, the GDP deflator had fallen below the previous year's level, and the CPI continued to be weak. Third, an increase in the monetary base would contribute to a depreciation of the yen. Fourth, inflation targeting should be introduced, considering the fact that it had been adopted by some other central banks and was supported by academics around the world. The adoption of such a policy would enable people to foresee developments in the economy and assess the effects of monetary policy. And fifth, the zero interest rate policy should be terminated and the monetary policy regime should be changed to quantitative targeting so that the Bank could prepare an environment where interest rate movements reflected the developments in the economy.
In response to the above member's proposal to adopt quantitative easing, one member expressed the opinion that, while it was practicable to implement quantitative easing and it could be effective to a certain extent, there were some difficulties. The member explained that, since there was a limit to the amount of funds that institutions not subject to reserve requirements such as tanshi companies could hold in their current accounts at the Bank, it was expected that the Bank could increase excess reserves by providing funds beyond this limit. However, it was suspected that the likely outcome would be under-subscription in market operations because financial institutions, especially city banks, were reluctant to hold excess reserves, and it was therefore difficult to implement quantitative easing with conventional monetary policy tools. The member suggested that the Bank could increase excess reserves by, for example, expanding the amount of outright purchases of JGBs, and through this influence financial institutions' activities. However, the member concluded that such a drastic measure should not be taken at a time when Japanese and overseas economies were improving.
Another member stated that there was no direct relationship between the monetary aggregates, such as the monetary base, and the yen's exchange rate judging from the fact that the yen continued to depreciate despite the slowing of growth in the monetary aggregates after the turn of the year. In response to this opinion, the member who advocated quantitative easing argued that the yen's depreciation was consistent with the difference in the year-on-year growth rate of the monetary base in January (average amount outstanding) between Japan and the United States.
V. Remarks by Government Representatives
The representatives from the Ministry of Finance made the following remarks.
- (1) Japan's economy continued to improve moderately due to the influence of various policy measures and of the economic recovery in Asia. However, private demand was still weak. Therefore, the Government would strongly promote the implementation of fiscal measures and would aim to achieve a full-scale recovery by realizing a smooth shift in the driving force for the economy from public to private demand.
- (2) The Government had to rely on debt for a considerable amount of its revenue and realized that fiscal reform was important. As the Medium-Term Fiscal Projection showed, the amount of government debt outstanding with annual nominal GDP growth of 3.5 percent would be about the same as with growth of 1.75 percent. This was because a significant increase in tax revenue was unlikely even if nominal GDP grew annually by 3.5 percent, and a rise in long-term interest rates was expected. Government debt outstanding as a percentage of GDP, however, would decline somewhat.
- (3) The Government would like to ask the Bank to continue implementing monetary policy appropriately and in a timely manner, harmonizing its actions with the Government's measures, to ensure a recovery of the economy--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 not yet out of a severe situation, as the momentum for recovery in private demand remained weak. Demand declined somewhat at the end of 1999. However, as could be seen in positive movements in corporate activities, the economy continued to improve moderately due to the influence of various policy measures and of the economic recovery in Asia.
- (2) The Government would aim to realize a smooth shift in the driving force for the economy from public to private demand with a view to achieving a full-scale recovery and to establish a new solid foundation for economic development in the 21st century. The Government would strongly promote the implementation of measures to this end, especially those in the Policy Measures for Economic Rebirth. 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--for example, by flexibly providing ample funds in the market giving due consideration to developments in 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 had started to improve. Second, the economic environment surrounding private demand was gradually improving, as seen in the continuing increase in corporate profits. Third, the financial environment remained 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. And sixth, thus, 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.
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 targeting accompanied by a target for the rate of increase in the CPI.
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, and explained that he had changed the operational target to current account balances at the Bank from excess reserves because the former was easier to control:
The Bank of Japan will aim at realizing a 0.5 to 2.0 percent annual increase in the CPI (excluding perishables) in the October-December quarter of 2001 as a medium-term target of price stability. In achieving this target, the Bank will raise the average balance of current accounts at the Bank in the intermeeting period ahead to about 7 trillion yen, 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, eight against.
After the vote, one member remarked that the final paragraph of the proposal, which indicated that the Bank would contain surges in interest rates caused by tight market conditions, was inconsistent with Mr. Nakahara's claim that quantitative easing should be adopted and the zero interest rate terminated to allow interest rates to reflect economic developments.
Mr. Nakahara explained that the paragraph was designed to cope with cases of emergency. He continued that the surge in interest rates was a mere example, and that the paragraph was consistent with his claim that interest rates should reflect economic developments.
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, it was not appropriate to be overly concerned about inflationary risks and maintain the current policy when there was no prospect of a recovery in private demand and the positive effects of policy measures could wane. Second, if no steps were taken, the monetary aggregates such as money stock would decline further, causing various undesirable effects. Third, under the zero interest rate policy, the only policy options were to continue it or discontinue it. Thus, the Bank should adopt quantitative easing and, at the same time, terminate the zero interest rate policy and thereby prepare an environment where interest rates reflected developments in the economy. And fourth, the Bank needed to rewrite the current directive so that the public could easily understand the target of monetary policy.
Ms. Shinotsuka dissented for the following reasons. First, the aim of the zero interest rate policy--which was to alleviate the market's concerns about the availability of liquidity--had been achieved, and therefore, the overnight call rate should be changed back to the level before the adoption of the zero interest rate policy. Second, it was impossible to solve the balance-sheet problem with the zero interest rate policy. Third, an increase of 0.25 percentage point did not signify a shift in policy to monetary tightening, and its negative impact on the economy would be limited. And fourth, it would be too late to raise interest rates after confirming a full-scale recovery in business fixed investment.
For immediate release
February 24, 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.