Minutes of the Monetary Policy Meeting
on March 24, 2000
(English translation prepared by the Bank staff based on the Japanese original)
May 2, 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 Friday, March 24, 2000, from 9:00 a.m. to 1:13 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 Finance2
Mr. T. Haraguchi, Deputy Vice Minister for Policy Coordination, Ministry of Finance3
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. H. Tanaka, Chief Manager, Planning Division 2, Policy Planning Office4
Mr. S. Hida, Manager, Secretariat of the Policy Board
Mr. S. Uchida, 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 April 27, 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 10:45 a.m. to 1:13 p.m.
- Mr. Haraguchi was present from 9:00 a.m. to 10:45 a.m.
- Mr. Tanaka was present from 9:00 a.m. to 9:35 a.m.
I. Approval of the Minutes of the Monetary Policy Meeting Held on February 24, 2000
The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of February 24, 2000 for release on March 29, 2000.
II. Decisions concerning Commercial Paper (CP) Issued by Securities Companies and Securities Finance Companies That Maintain Current Accounts with the Bank of Japan
A. Staff Proposal
At the Monetary Policy Meeting on September 21, 1999, the Bank decided that CP issued by securities companies and securities finance companies that maintained current accounts with the Bank would no longer be eligible collateral for transactions with the Bank or be purchased by the Bank through market operations. However, as a temporary measure, the Bank also decided that such CP purchased by the Bank by the end of March 2000 would remain eligible in view of the volume of CP the Bank had been buying.
With the end of the temporary measure approaching, the Bank needed to take relevant measures as it would stop purchasing such CP through market operations from April 3.
B. Members' Discussion and Votes
Members unanimously approved the proposal and decided that the decision should be publicized immediately after the meeting.
III. Summary of Staff Reports on Economic and Financial Developments5
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 March 8, 2000, and the overnight call rate remained steady at around 0.02 percent.6
The intermeeting period was marked by the following two points.
First, the Bank stopped announcing the "morning projection for reserves" on March 16, 2000.7 For a while, many market participants calculated the "morning projection for reserves" themselves to see whether it amounted to the previous level of 1 trillion yen. However, recently, the market seemed to be gradually realizing that there was not much significance in the size of the "morning projection for reserves."
And second, interest rates on term instruments maturing beyond the fiscal year-end on March 31 rose, exerting upward pressure on the overnight call rate. In view of this, the Bank actively provided funds maturing beyond the fiscal year-end to stabilize the market.
- 5Reports were made based on information available at the time of the meeting.
- 6The 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."
- 7The "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 temporarily rose to the 104-105 yen range against the U.S. dollar toward the middle of March due partly to growing hopes for a recovery in Japan's economy. However, it weakened following the release of positive economic indicators in the United States and the resulting recovery in U.S. stock prices. Recently, it was moving in the 107-108 yen range, largely unchanged from the level at the time of the previous meeting.
2. Overseas economic and financial developments
The European Central Bank (ECB) raised interest rates on March 16, and on March 21 the U.S. Federal Open Market Committee (FOMC) raised the federal funds rate target. These moves had been widely expected by the market. Moreover, many market participants expected the target for the federal funds rate to be raised to around 6.5 percent by the end of 2000.
In the United States, long-term interest rates were weakening moderately due partly to relatively stable consumer prices and producer prices in February. Stock prices were generally firm: the Dow Jones Industrial Average rebounded; the Nasdaq composite index fluctuated somewhat but generally remained at a historically high level; and the Wilshire 5000 Total Market Index--the broadest measure of U.S. stocks--reached a record high. There were no signs in economic data that the expansion of the economy was slowing; production remained on an upward trend reflecting high growth in private consumption and business fixed investment.
In the euro area also, the economy was expanding; exports were firm and domestic demand such as private consumption was on an uptrend. The year-on-year rate of increase in the Harmonised Index of Consumer Prices (HICP) for the euro area rose to 2 percent. The ECB has defined price stability as year-on-year increases of below 2 percent in the HICP for the euro area.
In East Asia, economic recovery continued. The economic growth in most countries accelerated further in the October-December quarter of 1999 from the previous quarter. With the exception of Thailand and Indonesia, the level of economic activity had already exceeded or was likely to exceed in 2000 that before the Asian economic crisis in 1997. Against this background, domestic demand, in addition to exports, was improving in East Asian economies, excluding Hong Kong and Indonesia. This trend was especially notable in Korea. In China, domestic demand had recently started to recover and the economy seemed to have bottomed out.
C. Economic and Financial Developments in Japan
1. Economic developments
The contracted value of public works showed a relatively large rise in February, reflecting an increase in public works orders based on the second supplementary budget for fiscal 1999. Judging from this development, public investment was likely to resume its upward trend. On the other hand, the number of applications for loans provided by the Housing Loan Corporation declined, and this underlined the weak trend in housing demand.
Exports rose substantially in February according to trade statistics, confirming that the sluggishness in exports toward the end of 1999 was a temporary phenomenon arising from preparations for the Year 2000 problem. Exports remained on an upward trend amid the continuing expansion of the global economy.
With regard to private consumption, retail sales were generally firm in February led by sales of spring clothes, and according to anecdotal information, they seemed to have remained stable in early March. Outlays on travel also rose in January, and a fair volume of reservations for Golden Week (the period from late April to early May that includes several national holidays) had been made. Consumer confidence was also recovering, and thus the risk that private consumption would deteriorate due to weak consumer sentiment seemed to be decreasing.
The improvement in corporate profits and cash flow was clearer than before reflecting a rise in sales and progress in corporate restructuring. Meanwhile, the index of tertiary industries' activity had been rising gradually since the second half of 1999. Indicators related to business fixed investment were generally more favorable as evident in the improvement in data on business fixed investment in the Financial Statements Statistics of Corporations by Industry, Quarterly released by the Ministry of Finance and in the GDP data for the October-December quarter of 1999. Machinery orders had also increased in January after surging in December 1999. It could, therefore, be judged that business fixed investment had bottomed out and was starting to pick up moderately. However, it would take more time for private demand as a whole, including private consumption, to recover.
As described above, Japan's economy was shifting to the phase of a self-sustained recovery underpinned by private demand from a phase of improvement supported by exogenous demand. Judging from the continuing improvement in the environment for private demand, for example the upturn in corporate profits, it was more probable than before that the driving force of the economy would shift smoothly from exogenous demand to domestic private demand. It was necessary to examine forthcoming economic data, including the Tankan--Short-Term Economic Survey of Enterprises in Japan--and trends in household income.
2. Financial developments
Developments in short-term interest rates were as reported by staff in Money Market Operations in the Intermeeting Period.
Long-term interest rates rose somewhat reflecting the release of favorable economic indicators, and were recently back at around 1.85 percent. Stock prices declined to around 19,000 yen at one time before rebounding to the present level of around 19,500-20,000 yen. Attention should be paid to how long-term interest rates and stock prices reacted to various economic indicators to be released from the end of March to the beginning of April.
With regard to the monetary aggregates, money stock (M2+CDs) grew by 2.1 percent year on year in February, down from 2.6 percent in January. The decline in the growth rate was attributable to sluggish credit demand in the private sector reflecting the following. First, firms were keeping fixed investment at a level lower than their cash flow, which was growing. As a result, cash flow was used to finance any increases in fixed investment, and thus demand for external funds remained stagnant. And second, firms were making efforts to reduce debts. In addition to the above developments, a shift of funds from M2+CDs to investment trusts also depressed the growth rate of M2+CDs in February. This shift seemed to have accounted for about four-fifths of the total 0.5-percentage-point decline. Although this trend seemed to have lost momentum since the beginning of March, attention should still be paid to money stock because it was not clear how the massive amount of postal savings due to mature in and after April would affect it.
IV. Summary of Discussions by the Policy Board on Economic and Financial Developments
A. The Current Economic Situation and the Economic Outlook
Members' discussion was mainly focused on assessment of economic indicators released since the previous meeting on March 8.
Many members pointed out that some economic indicators such as those related to business fixed investment had been firm, and favorable signs were increasing in the corporate sector. However, members generally shared the view that they needed to wait for the release of the forthcoming economic data, including the March Tankan, before deciding whether 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 continues to improve, as seen in the increase in corporate profits. However, clear signs of a self-sustained recovery in private demand have not been observed yet."
With regard to public investment, some members noted that the contracted value of public works had surged in February. These members expressed the view that an increase in public works orders based on the second supplementary budget for fiscal 1999 was evident in economic indicators, and it was very probable that public investment would resume an upward trend in the near future.
One member, however, expressed a cautious view on public investment, noting that a decrease in local governments' expenditure had become evident. The member projected that local governments' budgets for public works financed independently by local governments for fiscal 2000 would fall by 12 to 13 percent--approximately 1.6 trillion yen below the level forecast by the Ministry of Home Affairs.
As for exports, many members pointed out that the economies of the United States, Europe, and Asia were generally recovering or expanding, and this continued to support the improvement in Japan's economy. Against this backdrop, statistics confirmed a clear increase in exports after the turn of the year. The members thus shared the view that exports remained on an upward trend.
Members next discussed developments in the corporate sector.
On corporate profits, many members noted that (1) an uptrend in profits had become more evident due to an increase in production and sales and the positive effects of corporate restructuring, and (2) an improvement in profits had been observed in a wider range of industries and in firms of various sizes. One of these members commented that the improvement in corporate profits was an important stage in the mechanism for a recovery, and recent developments indicated that this mechanism had gained momentum.
In response to this, one member remarked that the basis for profits was still fragile with the recovery in corporate profits in fiscal 1999 largely supported by such factors as (1) a rise in exports, (2) the positive effects of corporate restructuring, and (3) a reduction of firms' interest burden due to the zero interest rate policy. The member continued that it was still only a limited range of industries that were confident of a recovery in profits due to a rise in domestic demand, for example, those related to information technology (IT).
Meanwhile, a few other members cited the results of surveys on corporate profits conducted by private institutions as favorable factors. These members pointed out that most of the surveys showed that (1) corporate restructuring had contributed to an increase in profits despite a decrease in sales in fiscal 1999, and (2) a wide range of industries expected both sales and profits to increase in fiscal 2000. One of these members noted that firms' net income for fiscal 1999 might fall since they had recently been making up the shortfall in retirement reserves ahead of their original schedules. This member added that this was nevertheless a positive development as it meant firms had gained enough strength to take such action.
On business fixed investment, the majority of members pointed out that economic indicators released since the previous meeting had been generally showing favorable signs. First, Financial Statements Statistics of Corporations by Industry, Quarterly and GDP data suggested that fixed investment for the October-December quarter of 1999 had picked up. Second, with the increase in machinery orders in January, most leading indicators had improved, the examples being construction starts and construction orders. Third, various surveys on business fixed investment painted a brighter picture for fiscal 2000. For example, a survey by the Development Bank of Japan showed that both the manufacturing and nonmanufacturing sectors planned to increase fixed investment in fiscal 2000, while a survey by The Nihon Keizai Shimbun indicated that the year would see an increase in fixed investment in the manufacturing sector.
On these grounds, many members judged that business fixed investment had hit bottom and was starting to increase moderately. One of these members commented that improvements in the environment for investment, evident in the increase in production and the recovery in corporate profits, appeared to be stimulating firms' spending activities.
One member, however, noted that although business fixed investment had hit bottom, it lacked strong upward momentum. The member commented that business fixed investment had increased in a limited number of industries whose ratio of interest-bearing liabilities to sales was relatively low, such as manufacturers of precision machinery, transportation machinery, electric machinery, and processed food.
Members next exchanged views on the outlook for business fixed investment.
Looking ahead, some members cited several favorable factors for fixed investment. First, according to a survey by the Development Bank of Japan, firms that definitely planned to reduce fixed investment for fiscal 2000 were limited to a few sectors, such as iron and steel, construction, and real estate. Second, the Analysis of Industrial Production Activities released by the Ministry of International Trade and Industry showed that the proportion of IT-related investment in overall fixed investment had increased rapidly in Japan in recent years, and it was now nearing that in the United States. This meant that the impact of developments in information technology could spread more easily to a wide range of sectors than before. Third, there were signs that positive developments in the manufacturing sector and IT-related industries would spread to the nonmanufacturing sector as suggested by an increase in the volume of firms' advertising, a rise in the index of tertiary industries' activity, and an expansion in construction as seen in the rise in construction starts and construction orders. And, fourth, the Business Outlook Survey for February compiled by the Ministry of Finance showed that small firms in the manufacturing sector already planned to increase fixed investment for fiscal 2000 from the previous year's level; such an increase was unusual in a survey conducted in February. Thus, it could be said that encouraging movements had been observed even in small firms' fixed investment.
One member remarked that fixed investment was expected to continue increasing and spread to a wider range of sectors and thus, it could be said that the prospect of a self-sustained recovery in private demand was in sight.
This member stated that, during 1995 and 1996, an increase in business fixed investment in some sectors, such as mobile telecommunications, did not spread to a wide range of industries. However, there was a strong possibility that the current increase would be sustainable and affect a wider range of sectors. As reasons for this, this member raised the following: (1) compared with 1995 and 1996, the profitability of firms had improved as a result of corporate restructuring, as suggested by a decrease in firms' break-even-point ratio; (2) since late 1999, the index of capacity utilization had been at around 98, a level at which fixed investment had in the past become active; and (3) capital equipment had become old and capital stock adjustments had progressed as a result of restrained fixed investment in the past several years.
However, many members were of the opinion that it was still difficult at this point to foresee whether the recovery in business fixed investment was sustainable and whether it would spread to a wider range of industries in the future, and thus it was necessary to examine forthcoming economic indicators, such as the March Tankan.
One of these members stated that the leading indicators pointed to a strong probability that fixed investment would increase over the next two to three quarters. However, a few members including this member added that, although the results of surveys on fixed investment conducted at this time of the year were usually sluggish since many firms did not finalize their investment plans until later in the year and the figures were likely to be revised upwards, it could be judged for the time being that a clear turnaround had not been confirmed yet since only a slight upturn was observed in the Development Bank of Japan survey results.
A different member commented that the recent rise in machinery orders seemed to have been partly affected by an increase in overseas investment by Japanese firms. The member continued that it had become less likely than before that increases in machinery orders would be followed by a rise in domestic business fixed investment that would encourage production and increase employment.
Another member remarked that it was important to have an accurate understanding of the state of the entire economy for the implementation of monetary policy at a time when the contrast between sectors was becoming pronounced. Nevertheless, the member pointed out that there was a great deal of uncertainty regarding the sustainability of the recovery in business fixed investment and the extent to which it would spread because (1) investment activities had been observed mainly in IT-related areas, and (2) many firms still had excess capacity and were still restructuring their balance sheets.
With regard to private consumption, some members noted that retail sales statistics had generally improved after the turn of the year, and indexes related to consumer confidence were recovering. However, members generally agreed that the Bank's view on private consumption did not need to be changed because the amount of information obtained since the previous meeting was limited.
One of these members stated that it was natural that the corporate sector was improving before the household sector, in view of the fact that the relative share of labor in income distribution was declining amid an increase in production. This member added that it was not contradictory to say that the economy was steadily heading toward a recovery while developments in private consumption remained mixed.
Members moved on to the outlook of private consumption.
One member remarked that the employment and household income situation was the key to developments in private consumption as downside risks to private consumption stemming from weak consumer confidence had decreased. Further, against the background of progress in structural changes in the distribution system, it was difficult to get an accurate picture of private consumption solely from existing retail sales statistics. Thus, it was important to watch developments in income conditions to judge the basic trend of consumption.
Some members including this member expressed the view that, given firms' restructuring efforts, close monitoring would still be required to judge the extent to which the improvement in corporate profits would positively affect the employment and household income situation.
A different member commented that the current level of private consumption should be regarded as normal given the following factors. First, since income was unlikely to improve with GDP growth of around 1 percent, it was hard to expect an immediate and clear recovery of consumption. And second, although growth in income was still stagnant, the propensity to consume had recovered to a fair level due to reduced anxiety about the financial system.
Another member stated that, considering the fact that the employment and household income situation had stabilized while production continued to rise, moderate increases in households' income could be expected if this favorable situation continued.
Meanwhile, a different member remarked that the main issue at the spring wage negotiations appeared to be job security rather than wage increases. For example, efforts to improve the reemployment system for elderly people had been observed. Thus, even if the wage level was largely unchanged, improvements in the corporate sector could lead to a favorable employment situation and have a positive effect on private consumption by reducing uncertainty about the future.
One member referred to the indexes of business conditions compiled by the Economic Planning Agency.
This member was of the opinion that the diffusion index (DI) and the composite index (CI) suggested that Japan's economy had hit bottom during April-June 1999 and had subsequently turned around, and the momentum of the economic recovery had grown to levels comparable to past recovery phases. Furthermore, the economy was expected to continue improving until September-November 2000. However, this member whose view of the economy as a whole was more cautious than that of other members pointed out that (1) GDP data for October-December 1999 suggested the contrast between households and firms was becoming more pronounced and public investment had started to lose its momentum, (2) the return on assets (ROA) of Japanese firms was low and restructuring measures seemed insufficient, and (3) it seemed that many firms increased fixed investment without properly calculating their profitability based on, for example, the discount cash flow method, and thus ROA would fall further in the future. Moreover, this member said that sales at supermarkets and convenience stores had been generally stagnant since the turn of the year.
As future risk factors, this member raised the developments in crude oil prices and U.S. stocks. This member said that judging from developments in the oil futures market, where several oil companies with short positions in nearby contracts seemed to be rolling over their positions, oil prices could be volatile this year depending on the outcome of the OPEC meeting on March 27. The member also mentioned that in the United States, stock, bond, and mortgage prices continued to rise despite the Federal Reserve's tightening of monetary policy. For example, Standard & Poor's 500 Index recorded a historical high the day after the fifth consecutive increase in the target for the federal funds rate on March 21. The member stated that U.S. stock prices were in the last stage of a "bubble."
With regard to prices, many members shared the view that prices would continue to be flat for the time being, but continued close monitoring would be required of downward pressures on prices arising from weak demand.
Responding to this, one member pointed out that the rise in prices of international commodities, including crude oil, was due not only to a reduction in oil production by OPEC, but also to the expansion and recovery of economies overseas. This member commented that, since upward pressure on prices was strengthening worldwide, it was unlikely that Japan alone was immune to such pressure.
Members exchanged views on structural problems relating to prices.
One member raised the question of how one should consider the current situation where year-to-year falls in domestic wholesale prices were contracting reflecting the improvement of the economy while consumer prices were relatively weak. This member was of the opinion that, if consumer prices continued to be affected by such factors as structural changes of the economy and changes in the sample items used to compile the statistics, consumer prices might continue to be somewhat weak despite a sustained improvement of the economy.
Another member remarked that consumer prices had the potential to fall as a result of deregulation and increased efficiency in the distribution system, and that downward pressures on consumer prices stemming from structural changes would continue. The member added that (1) such downward pressures on prices were not deflationary, and (2) price falls due to deregulation enhanced economic welfare and in this sense they could be viewed as an economic stimulative measure that would not further expand the fiscal deficit.
Meanwhile, a few members pointed out that it was difficult in practice to distinguish price falls due to technological innovation and the rationalization of the distribution system or the changes in the sample items of the consumer price index (CPI) from deflationary price falls reflecting weak demand.
One of these members remarked that a guide to distinguishing between these two different types of price falls would be trends in corporate profits. The member explained that, if corporate profits as a whole continued to improve as a result of increased sales volume outweighing cuts in prices, price falls in this situation could not be described as deflationary. The member added that, although consumer prices were relatively weak toward late 1999, the improvement in corporate profits during the period was confirmed by various indicators such as the Financial Statements Statistics of Corporations by Industry, Quarterly, and this had important implications for judging price developments.
Meanwhile, another member pointed out that the issue of how one should perceive price falls due to technological innovation and the rationalization of the distribution system from the viewpoint of monetary policy was very complicated. This member mentioned that since members agreed in the previous meeting that the Bank would launch a comprehensive study on price stability, this issue should also be examined.
B. Financial Developments
On the financial front, the majority of members shared the view that the financial environment remained favorable and continued to underpin the economic recovery.
One member noted that long-term interest rates remained at a low level while economic indicators were relatively firm. This member stated that (1) participants in the bond market might pay closer attention to the Bank's stance on monetary policy in reaction to economic indicators than to the released economic indicators themselves, and (2) the market might have been distorted by the fact that market participants strongly believed that the zero interest rate policy would continue for some time regardless of the improvement in the economy.
In response to this, another member said that, as could be seen in yield curves and yields of interest rate futures, market interest rates seemed to reflect various factors, such as economic indicators and expectations that the Bank would change interest rates in reaction to the indicators. On these grounds, the member said that long-term interest rates were at a low level because market participants remained cautious about the outlook for the economy and prices.
With regard to the monetary aggregates, one member commented that banks were becoming more active in extending loans, and recently credit demand had gradually been emerging from some small firms with brisk sales. However, bank lending as a whole was likely to remain weak for the time being because (1) a rise in investment by firms engaged in business related to IT-hardware rarely increased demand for external funds because of their high level of cash flow and depreciation reserves, and (2) promising venture firms tended to depend on direct financing in the capital market.
Meanwhile, another member commented that the shift of funds to investment trusts from M2+CDs in February could be regarded as a sign that concerns over the financial system, which had grown sharply at one time, had subsided.
V. Summary of Discussions on Monetary Policy for the Immediate Future
Based on the above assessment of the economic and financial situation, members discussed the monetary policy stance for the immediate future.
As mentioned earlier, many members agreed that many economic indicators released in the intermeeting period had been relatively firm, and it was very probable that business fixed investment had bottomed out and was starting to increase moderately.
The members, however, judged that clear signs of a self-sustained recovery in private demand had not been observed yet. They therefore generally agreed that attention should continue to be paid to possible downward pressure on prices stemming from weak demand, and on this basis, deflationary concern had not been dispelled yet.
Thus, with regard to monetary policy for the immediate future, the majority of members considered it appropriate to continue the zero interest rate policy.
Before reaching the above decision, members discussed the basis for judging whether deflationary concern had been dispelled and whether a self-sustained recovery in private demand was in prospect.
One member expressed the following view. It had become generally accepted among members through discussions at Monetary Policy Meetings that the judgment as to whether deflationary concern had been dispelled was based on the momentum in private demand for a self-sustained recovery, with focus on the mechanism of an increase in business fixed investment having a positive effect on private consumption. Recently, developments in indicators of business fixed investment suggested that private demand was showing some signs of a self-sustained recovery. As for the future, the following points warranted attention: (1) the sustainability of the recovery in business fixed investment and the extent to which the recovery would spread to a wider range of sectors; and (2) the employment and income situation--whether it was certain that it would not deteriorate further.
A different member argued against the above view for the following reasons. First, it was unlikely that every component of demand, including business fixed investment and private consumption, would show clear improvements when Japan's economy as a whole was making a transition to a low-growth era. Second, given this situation, if a recovery in both business fixed investment and consumption was a prerequisite for terminating the zero interest rate policy, it would be difficult to terminate it since the results of surveys on business fixed investment plans conducted at this time of the year, including the March Tankan, were usually not strong. And third, if the zero interest rate policy had to be continued for the above reasons, structural reform indispensable for Japan's economy would be delayed and the economy would be damaged in the medium to long term.
In relation to this point, another member said views about how a judgment should be arrived at as to whether private demand had achieved a self-sustained recovery fell into three main categories. The first was based primarily on an assessment of business fixed investment. One could conclude that the basis for a self-sustained recovery in private demand was in place if a recovery in business fixed investment was confirmed from economic indicators. This was because in a normal business cycle, higher business fixed investment boosted private consumption through improvements in the employment and income situation. The second was based on the employment and income situation as well as developments in business fixed investment; it was also necessary to confirm an improvement in the former, which would provide the basis of a recovery in private consumption. And the third was based on developments in private consumption in addition to business fixed investment. A clear recovery in indicators for private consumption, as well as a recovery in business fixed investment, would confirm that a self-sustained recovery in private demand had been attained. This member's opinion, taking account of the current economic situation, was closest to the second.
A different member expressed the opinion that the current level of private consumption could be viewed as normal in a low-growth era, and thus a further rise in private consumption was not necessarily a prerequisite to terminate the zero interest rate policy. The member, however, agreed that it was appropriate to continue the zero interest rate policy because the sustainability of the recovery in the corporate sector and the extent to which it would spread had not been confirmed yet.
Meanwhile, one member pointed out that the Bank of England used simulations based on macro-econometric models. The member suggested that the Bank of Japan could consider using such simulations as a guide to judge whether deflationary concern had been dispelled.
Members next discussed the relationship between the Bank's monetary policy stance and the financial market.
One member supported the view expressed at previous Monetary Policy Meetings that, in order to terminate the zero interest rate policy without disturbing the financial market, it was important to create an environment where market participants could, to a certain degree, anticipate future monetary policy. The member continued that movements in long-term interest rates suggested that the probability market participants attached to the zero interest rate policy being terminated within a certain period was smaller than what the Bank had in mind.
The member added that the Bank should not be passive, waiting for the market's response, but should continue to do its utmost to convey its thinking on monetary policy to the market. The member stressed that such action would also be effective in alleviating the impact of various shocks that could occur to the financial market when the zero interest rate policy was terminated. The member further suggested that in this context it was important to use appropriate expressions in "The Bank's View" in the Monthly Report of Recent Economic and Financial Developments in order to convey the Board's view to the market.
In relation to this view, a few other members commented that market participants formed expectations of the economic outlook, prices, and future changes in monetary policy based on the same information, such as economic indicators, as the Bank. Therefore, it would be difficult to judge, a priori, whether the market's view diverged from the Bank's or whether the market's view was more optimistic or pessimistic than the Bank's. These members nevertheless agreed with the view that the Bank should correctly convey its thinking to the market, adding that it was vital that "The Bank's View" accurately stated the Board's judgment of the economic situation.
On the basis of the above discussion, a different member concluded as follows. With regard to the judgment on whether deflationary concern had been dispelled, an increasing number of positive signs were recently being observed in the economy. Therefore, at the next meeting, the Board should thoroughly discuss to what extent it saw an improvement of the economic situation in view of economic indicators, such as the results of the March Tankan, and also how the Bank should convey this change to the market.
Meanwhile, two members objected to the maintenance of the zero interest rate policy.
One member proposed changing the guideline for money market operations 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 economy had definitely improved from the critical state in February 1999, when the zero interest rate policy was introduced, and it was no longer in danger of falling into a deflationary spiral. A self-sustained recovery in private demand was in prospect, as seen in the recovery in business fixed investment, which was evident in recent economic indicators. Second, the continuation of the zero interest rate policy in such an environment would be detrimental to the economy in the medium to long term, hampering structural reform indispensable for Japan's economy. And third, it seemed that the longer the zero interest rate policy was continued, the greater the negative effects became. For example, market participants seemed to be becoming less sensitive to the risk of a rise in interest rates.
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 CPI, and increasing current account balances at the Bank to achieve these targets.
The member gave the following reasons for the proposal. First, the CPI remained below the previous year's level, private consumption was weak, and there was a risk that the CPI would decline even further. Second, GDP data for the October-December quarter of 1999 showed a quarter-to-quarter decline, and the rate of decline in the GDP deflator had expanded. Third, land prices continued to decline, and thus the amount of nonperforming assets could increase. Fourth, although production was increasing, selling prices were not improving. And fifth, it was important that the economy achieved a self-sustaining recovery that was accompanied by an increase in credit demand from the private sector and did not require the support of fiscal measures.
VI. Remarks by Government Representatives
The representatives from the Ministry of Finance made the following remarks.
(1) Japan's economy remained in a severe situation, as the recovery of aggregate demand as a whole remained weak. However, economic activities continued to improve moderately due to the effects of various policy measures and of the economic recovery in Asia. Signs of a self-sustained recovery of the economy were gradually appearing, as seen in the positive movements in corporate activities. The Government would continue to implement fiscal measures to realize a smooth shift in the driving force for an economic recovery from public to private demand and to achieve a full-scale economic recovery led by private demand.
(2) The fiscal 2000 budget had been passed by the Diet on March 17. The Government would smoothly carry out the necessary procedures for approving the projects for public works so that construction could begin immediately with the start of the new fiscal year.
The Government considered it important to deliberate various issues related to fiscal reform including the relationship between the central and local governments, and various services offered under the social security system, such as pension schemes, medical care, and welfare services. In the immediate future, however, the Government would continue to place top priority on steering the economy toward a recovery.
(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 remained in a severe situation, as the recovery of aggregate demand as a whole remained weak. However, economic activities continued to improve moderately due to the effects of various policy measures and of the economic recovery in Asia. Signs of a self-sustained recovery of the economy were gradually appearing, as seen in the positive movements in corporate activities. Preliminary GDP for the October-December quarter of 1999 declined by 1.4 percent from the previous quarter. This was due mainly to temporary factors, such as the decline in public investment ahead of the launch of projects based on the second supplementary budget for fiscal 1999. Since the turn of the year, positive signs had been observed in consumption, production, and corporate profits, and thus the economy was considered to be following the Government's projected recovery path. The Government would aim to realize a smooth shift in the driving force for the economy from public to private demand and achieve a full-scale economic recovery, and would strongly promote structural reform. The Government would implement measures to this end, especially those in the Policy Measures for Economic Rebirth.
(2) At a Cabinet meeting that reviewed the state of the economy for February, the Prime Minister ordered a study of measures aimed at enhancing consumption and investment data to facilitate a more prompt and accurate understanding of the situation. In response, it was decided that the Economic Planning Agency and the Management and Coordination Agency would jointly examine ways of improving private consumption data. The Government would seek the advice of academics and specialists and present the results of the study as soon as possible.
(3) 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 market.
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 continued to improve, as seen in the increase in corporate profits, and it was probable that business fixed investment had bottomed out and was starting to increase moderately. Third, the financial environment remained favorable. Fourth, however, clear signs of a self-sustained recovery in private demand had not yet been observed, and therefore, attention should be paid to (1) the sustainability of the recovery in business fixed investment and the extent to which it would spread to a wider range of sectors, and (2) the future employment and income situation. Fifth, prices were expected to remain generally unchanged for the time being, but attention should still be paid to the downward pressure on prices stemming from weak demand. And thus, deflationary concern had not been dispelled yet.
Based on this understanding, the majority of members considered it 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:
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 provide ample funds should there be a risk that financial markets might destabilize, for example, should demand for liquidity surge.
The proposal was defeated with one vote in favor, eight against.
To reflect the majority view, the chairman formulated the following proposal.
Chairman's Policy Proposal:
The guideline for money market operations in the intermeeting period ahead would be as follows, and publicized by the attached statement (see Attachment 1).
The Bank of Japan will flexibly provide ample funds and encourage the uncollateralized overnight call rate to move as low as possible.
Votes for the proposal: Mr. M. Hayami, Mr. S. Fujiwara, Mr. Y. Yamaguchi, Mr. S. Taketomi, Mr. T. Miki, 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, consumer prices were weak. Second, since there were no inflationary risks, the Bank should adopt a proactive policy to achieve annual GDP growth of 1.5-2.0 percent. Third, over a year had passed since the zero interest rate policy was introduced, and it had become less effective. And fourth, since the framework of the zero interest rate policy was expressed in ambiguous language, the Bank should release forecasts for prices and the GDP in order to enhance its accountability.
Ms. Shinotsuka dissented for the following reasons. First, the economy had clearly improved from the critical state when the zero interest rate policy was introduced and was no longer in danger of falling into a deflationary spiral. Second, in these circumstances, a self-sustained recovery in private demand was in prospect given the improvement in various indicators such as those on business fixed investment. Third, the negative effects of the policy were increasing as time went by. For example, it was delaying structural reform and encouraging market participants to take excessive risks. And fourth, the termination of the zero interest rate policy would not mean an end to the Bank's extremely easy monetary policy.
VIII. Approval of the Scheduled Dates of the Monetary Policy Meetings in April-September 2000
At the end of the meeting, members approved the dates of Monetary Policy Meetings to be held in the period April-September 2000, for immediate release (see Attachment 2).
For immediate release
March 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.
March 24, 2000
Bank of Japan
Scheduled Dates of Monetary Policy Meetings in April-September 2000
|Date of MPM||Publication of
|Apr. 2000||10 (Mon.)||12 (Wed.)||May 22 (Mon.)|
|27 (Thur.)||--||June 15 (Thur.)|
|May||17 (Wed.)||19 (Fri.)||July 3 (Mon.)|
|June||12 (Mon.)||14 (Wed.)||July 21 (Fri.)|
|28 (Wed.)||--||Aug. 16 (Wed.)|
|July||17 (Mon.)||19 (Wed.)||Sep. 20 (Wed.)|
|Aug.||11 (Fri.)||15 (Tue.)||To be announced|
|Sep.||14 (Thur.)||19 (Tue.)||To be announced|