Minutes of the Monetary Policy Meeting
on April 10, 2000
(English translation prepared by the Bank staff based on the Japanese original)
May 22, 2000
Bank of Japan
A Monetary Policy Meeting of the Bank of Japan Policy Board was held in the Head Office of the Bank of Japan in Tokyo on Monday, April 10, 2000, from 9:00 a.m. to 12:54 p.m., and from 1:46 p.m. to 3:33 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. E. Kawade, Director-General of the Coordination 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. T. Oyama, Associate Director, International Department
Mr. N. Inaba, Advisor to the Governor, Policy Planning Office
Mr. M. Amamiya, Chief Manager, Planning Division 1, Policy Planning Office
Mr. T. Yoshida, Senior Manager, 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, Senior Economist, Policy Planning Office
Mr. S. Uchida, Senior Economist, Policy Planning Office
- The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on May 17, 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 9:45 a.m. to 12:54 p.m., and from 1:46 p.m. to 3:33 p.m.
- Mr. Haraguchi was present from 9:00 a.m. to 9:45 a.m.
I. Approval of the Minutes of the Monetary Policy Meeting Held on March 8, 2000
The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of March 8, 2000 for release on April 13, 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 March 24, 2000. 5
From March 28, the Bank increased the balance of current accounts at the Bank through money market operations to ease upward pressure on interest rates toward the fiscal year-end. As a result, the overnight call rate was generally stable at around 0.02 percent. The tight market conditions eased from March 30 when private banks became confident they could procure funds maturing beyond the end of fiscal year on March 31. Therefore, from the afternoon of March 30, the Bank started to absorb funds giving due consideration to market conditions.
The following three points deserved attention. First, city banks did not restrain accumulation of reserves during the first few days of the current reserve maintenance period, unlike the reserve maintenance periods starting in mid-December 1999 and mid-February 2000 when they did so planning to increase reserves at the end of the month. This was because city banks maintained the"standard" pace of progress in satisfying reserve requirements in the reserve maintenance period--i.e., they held the average balance of required reserves for the period every day--in preparation for the rise in demand in the second half of March from their customers for liquidity for settlement. Second, interest rates on term instruments maturing beyond the fiscal year-end peaked out on March 23, which was earlier in the month than in December 1999 and February 2000. This was because of the early start in the procurement of funds maturing beyond the fiscal year-end by foreign banks and in the lending of funds in the money market by regional banks and the central organizations of small financial institutions. And third, in market operations aimed at providing funds maturing beyond the fiscal year-end, the Bank increased reliance on purchasing of treasury bills (TBs) and financing bills (FBs) under repurchase agreements.
Judging from trends in interest rates in the money market since the turn of the fiscal year, many market participants expected the zero interest rate policy to be terminated in or after the autumn of this year at the earliest, and consequently the interest rate on three-month instruments was somewhat weak. The market would look for clues to the timing of the termination of the zero interest rate policy in economic indicators and the Bank's response to those indicators. The Bank would provide ample funds to ensure stability in the money market since there was a possibility that the market would be destabilized by the issuance of TBs and FBs, the amount of which was increasing.
- 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 surged to the 102-103 yen range against the U.S. dollar from the end of March to early April. It subsequently fell in reaction to media reports of intervention by Japan's monetary authorities and wariness ahead of the mid-April G-7 meeting and was recently moving in the 104-105 yen range.
The surge in the yen could be attributed to the following factors. First, expectations for a recovery in Japan's economy were growing. And second, Japanese stock prices were firm while U.S. stock prices were somewhat unstable. The foreign exchange market tended to react to factors that supported a stronger yen, although there were factors weakening the upward momentum of the yen, including the purchasing of foreign assets by Japanese investors and concern about possible market intervention. Volatility spreads indicated that, even after the reports of market intervention on April 3, many market participants remained bullish about the outlook for the yen.
The euro was weak in the intermeeting period. Sales of the euro were prompted by reduced expectations that the European Central Bank (ECB) would raise interest rates and acquisitions by firms in the euro area of others based outside the area. The market was focusing on whether concern over weakness in the euro would be mentioned in the G-7 communiqué.
2. Overseas economic and financial developments
In U.S. stock markets, the Dow Jones Industrial Average and the Standard & Poor's 500 Index, which both covered the stocks of many firms in traditional industries, were generally stable, while the stock prices of firms engaged in business related to information technology (IT) were volatile. Stock prices in Europe and Asia were somewhat weak.
Yields on 30-year U.S. Treasury bonds declined further, although marginally, reflecting expectations that demand for government bonds would increase due partly to a proposal to repeal government credit lines to government sponsored enterprises. As a result, further inversion of the yield curve occurred. In Europe, long-term interest rates declined after wage settlements were reached in some German industries.
With regard to the real economy in the United States, the robust economic expansion continued led by strong domestic demand, particularly private consumption and business fixed investment mainly in IT-related areas. Wages and prices were stable reflecting the continuing improvements in labor productivity. However, judging from developments in federal funds futures, the market seemed to expect a rise in interest rates.
In the euro area, production was rising and employment was improving led by a rise in exports and firmer private consumption. The year-on-year rate of increase in consumer prices reached two percent, the upper limit of the ECB's definition of price stability.
In East Asian countries, exports of IT-related goods to the United States and Japan were firm. Private consumption and business fixed investment were recovering due partly to the permeation of the effects of previous economic stimulus measures. There were no signs at present that prices would surge.
C. Economic and Financial Developments in Japan
1. Economic developments
Net exports continued to follow an upward trend, and public investment had started to pick up reflecting the progress in the implementation of the supplementary budget for fiscal 1999. On the other hand, housing investment was decreasing moderately, and recovery in private consumption continued to be weak. Business fixed investment had bottomed out and was starting to increase moderately.
Reflecting these developments in final demand, production continued to rise, and a positive mechanism for income generation was functioning steadily in the corporate sector, as improvement in corporate profits and sentiment had become more distinct. Regarding the employment situation, the decrease in the number of employees and in wages was slowing. However, households' income conditions remained severe.
As described above, the improvement in Japan's economy was becoming more distinct. Firms' sentiment and profits continued to improve, and business fixed investment was starting to pick up. The mechanism of a self-sustained recovery in private demand was starting to work, prompted by the moderate increase in business fixed investment. However, it was likely to take some more time to achieve a full-fledged recovery accompanied by a rise in private consumption.
The Bank staff judged that the economy was becoming firmer for the following reasons. First, various surveys showed that firms expected profits to continue recovering in fiscal 2000. And second, manufacturers of electronic devices and related sectors were increasing fixed investment to expand production capacity. Moreover, small companies were becoming more eager to increase capital spending, reflecting improvements in their profits and the financial environment.
As for the outlook, business fixed investment was expected to remain on a moderate uptrend. However, as firms still took a cautious view of their future sales, it was necessary to examine the sustainability of business fixed investment and the extent to which its momentum was spreading among industries. As consumer sentiment had been improving, private consumption could pick up if an upward trend in income became evident. The realization of this scenario depended on the size of summer bonus payments given that base wage growth was expected to be limited.
Reflecting improvement in the domestic supply-demand balance and a rise in crude oil prices, wholesale prices were expected to be firm until the summer, and consumer prices were likely to level off after trending lower. Corporate service prices were expected to remain on a moderate downtrend. The downward pressure on prices stemming from weak demand had decreased as a result of a recovery in some areas of private demand, but it still required attention.
2. Financial developments
The overnight call rate was stable at virtually zero percent. Interest rates on term instruments rose somewhat toward the end of the fiscal year on March 31, and declined thereafter. Yields of Euro-yen interest rate futures suggested that the market seemed to expect the zero interest rate policy to be terminated in the autumn at the earliest.
Yields on Japanese government bonds (JGBs) were generally at around 1.8 percent. In the bond market, bearish factors were countered by bullish ones; comments by an official forecasting a rise in interest rates triggered selling, while an improvement in the supply-demand balance encouraged buying.
Stock prices were firm, rising to over 20,000 yen. Despite the weak tone of IT-related stocks, which had entered an adjustment phase, stock prices overall gained strength due to the recovery in stock prices in traditional sectors, which had been somewhat weak.
With regard to corporate financing, the cautious lending stance of private banks remained basically unchanged. However, major banks, while paying attention to borrowers' creditworthiness, were becoming more willing to increase lending reflecting the easing of fund-raising conditions for banks and the abatement of constraints caused by insufficient capital bases.
Credit demand for economic activities, however, remained weak, and firms continued to make efforts to reduce debts. In sum, credit demand in the private sector remained sluggish, and growth in private bank lending and money stock continued to be weak.
III. Summary of Discussions by the Policy Board on Economic and Financial Developments
A. The Current Economic Situation
On the current economic situation, members agreed that the improvement in the economy was becoming distinct. Many members pointed out that recent economic indicators suggested that (1) corporate profits and sentiment had clearly improved, (2) business fixed investment had started to pick up, and (3) the decrease in the number of employees and wages was slowing. Based on the above, these members judged that the corporate sector had started to recover. Further, some members pointed out that in the household sector some faint but positive signs had been observed.
Members made the following comments on recent developments in the corporate sector taking account of the business surveys that had been released since mid-March, such as the Tankan (Short-Term Economic Survey of Enterprises in Japan), and economic indexes related to business fixed investment, for example, machinery orders and construction starts (floor area).
First, corporate profits and sentiment had clearly improved reflecting the increase in production since mid-1999. Corporate profits for fiscal 2000 were expected to rise for the second consecutive year. Furthermore, although sales had decreased in fiscal 1999 despite an improvement in profits, both sales and profits were forecasted to rise in fiscal 2000, suggesting a further improvement in the corporate sector. Second, the financial environment for firms had continued to improve. Third, plans for fixed investment for fiscal 2000 were fairly encouraging considering the fact that the results of surveys conducted at this time of the year were usually weak. And thus it could be judged that fixed investment had started to increase, albeit moderately.
One of these members raised the matter of how business fixed investment should be assessed when the contrast between economic sectors became more pronounced. This member said that differences between various industries' attitudes toward fixed investment were inevitable. For fiscal 2000, some industries, such as iron and steel, intended to cut fixed investment while such industries as pulp and paper and nonferrous metals, in addition to electrical machinery, intended to increase it. This member concluded that the contrast between sectors was not very substantial and thus it could be said that fixed investment as a whole had started to recover.
Another member said that the main indicators of production and orders, such as domestic passenger-car sales and production indexes for industrial and electronic machinery, had been rising steadily on a year-on-year basis. This member remarked that some manufacturers in"t-business"--business run mainly by traditional heavy industries--were operating at full capacity due to the effects of an increase in public investment and exports. Also, the performance of firms in"e-business"--business related to IT--had been robust, underpinned by private demand. A different member added that there were signs that the recent rise in fixed investment in some industries would spread to a wider range of sectors.
Some other members pointed out the following as evidence of a steady improvement in corporate activity: (1) an increase in the volume of firms' advertising; and (2) increasingly brisk business in the distribution sector, as seen in an increase in transportation by trucks and in delivery services.
One member, however, cautioned that the developments in the corporate sector should not be viewed as grounds for optimism for the following reasons. First, in the March Tankan, large manufacturers' estimates for their actual fixed investment for fiscal 1999 were revised downward. Second, Financial Statements Statistics of Corporations by Industry, Quarterly, and some business surveys showed that small firms' plans for fixed investment were lackluster. Third, there was an imbalance between the volume of inventory and shipments.
Another member expressed the view that the recovery in corporate profits to date--underpinned by an increase in exogenous demand, the effects of restructuring, and the zero interest rate policy--was fragile. This member continued that firms would have to make provision for shortfalls in their pension reserves following changes in the accounting system and said that the current recovery in corporate profits should not be viewed too optimistically.
As for developments in the household sector, many members shared the view that private consumption remained stagnant. These members, however, pointed out the following favorable developments: (1) the number of new passenger-car registrations and sales of electronic appliances had been firm; (2) sales at department stores, chain stores, and convenience stores were not decreasing; and (3) consumer confidence was improving.
It was also noted that recently the rationalization of the distribution system and structural changes in consumption were becoming conspicuous, examples of the latter being the introduction of new products employing new technology, a contraction of the product life cycle of consumption goods, and an increase in the share of services in consumption. Accordingly, it was difficult to gain an accurate grasp of the state of private consumption solely from existing retail sales statistics, and it was better to make judgments from a macroeconomic viewpoint based on both the employment and household income situation and consumer confidence.
Responding to this, some members judged that the deterioration in the employment and household income situation was coming to a halt and consumer confidence was improving, although various retail sales statistics were showing mixed signs.
Some members cited the following as evidence that the employment and household income situation had stopped deteriorating: (1) the number of regularly employed workers and nominal wages had both increased moderately since the turn of the year; and (2) firms felt that the surplus in labor was gradually diminishing. These members expressed the view that the record-high unemployment rate in February did not necessarily indicate weakness in the economy. Given that the number of job offers was increasing sharply, the high rate of unemployment might suggest that there was a structural mismatch between demand and supply in the labor market against a background of increased mobility of labor.
One member expressed a cautious view on private consumption. This member pointed out the following. First, although firms perceived that the surplus in labor was narrowing, they considered that it was still at a fairly high level. Second, since the marginal propensity to consume was high in households whose main wage earner was employed by industries undergoing structural adjustments, a decrease in their income would prompt a cut in their spending. Also, there were a large number of such households. Third, households' income seemed to have decreased due to a rise in the proportion of part-time workers among total employees.
One member assessed the overall economic situation as follows. First, production had increased due to fiscal and monetary policy measures underpinning the economy, an expansion of exports to East Asia, and an increase in IT-related investment. Second, the increase in production had boosted corporate profits and led to a recovery in fixed investment. Third, signs of a self-sustained recovery in domestic private demand were becoming clearer. Fourth, however, an across-the-board recovery of the economy had not been observed, and the momentum of the recovery was weak because of structural changes in consumption and the excess of employees, capacity, and debt in many firms.
Another member remarked that, in view of the downside risks to business fixed investment and private consumption, the economy would continue to require close monitoring. However, the indexes of business conditions compiled by the Economic Planning Agency suggested that cyclical upward pressure was being countered by long-term downward pressure stemming from structural problems but that the former was winning over the latter.
On these grounds, members' view on the current economic situation was summarized as follows:"The improvement in Japan's economy is becoming distinct. Recovery has started in some areas of private demand, as seen in a gradual upturn in business fixed investment."
Members remarked that prices were generally flat, and, in view of the signs of recovery in some areas of private demand, it could be judged that downward pressure on prices stemming from weak demand had subsided. Some members ascribed the slight decline in the consumer price index (CPI) on a year-on-year basis to the following: (1) technological innovation and the rationalization of the distribution system; (2) reductions in the prices of domestic products competing with imported goods whose prices were falling due to the past appreciation of the yen; and (3) the effect of various efforts to make the CPI accurately reflect actual price trends.
Another member referred to developments in crude oil prices. This member remarked that WTI crude was likely to move within a range of US$20-30 per barrel--most likely around US$25--after OPEC's decision in late March to increase oil production. This member, however, was of the opinion that crude oil prices would be volatile despite OPEC's efforts to stabilize the OPEC basket of seven crudes around US$22-28, and there was a strong probability that the direction of oil prices toward the year-end would depend on Iraq's actions.
With regard to land prices, one member stated that prices of highly marketable land were rising while land prices as a whole had not yet stopped falling. This member continued that developments in land prices should be watched carefully.
B. Financial Developments
Members' discussion on financial developments was focused on the following two points. First, whether the self-sustained recovery in some areas of the real economy was reflected in the developments in the financial market. And second, to what extent the market expected a termination of the zero interest rate policy.
With regard to stock prices, one member noted that the stock market as a whole was firming as blue-chip stocks of companies unrelated to IT started to be purchased while IT-related stocks were in a correction phase. The member added that this development was consistent with the real economy. In response to this, another member expressed a cautious view that the Nikkei 225 Stock Average was merely on an upward trend in a medium-term cycle in view of the fact that (1) the aggressive buying of Japanese stocks by foreign investors had ended last year, and (2) a contrast was observed between the Nikkei 225, which had reached a record high for 2000 in April, and the TOPIX (Tokyo Stock Price Index), which had yet to renew its record for the year.
As for the money market, a few members commented that developments in Euro-yen futures suggested that market participants were beginning to expect the zero interest rate policy to be terminated as early as the autumn.
Members exchanged views on the recent trend of long-term interest rates, which were still stable at a low level despite an improvement in some areas of the economy.
One member gave four different explanations that could be put forward for long-term interest rates being low and stable. The first was based on the theory that long-term rates were determined by the rate of economic growth. According to this theory, if Japan's potential economic growth rate was 1.5-2.0 percent and the expected rate of inflation was zero percent, nominal long-term rates would be 1.5-2.0 percent. Thus the current level of long-term rates was not unreasonably low. The second was that the market's expectation was the dominant factor behind the low and stable long-term rates. Market participants expected the zero interest rate policy to continue for some time, assuming that there were a number of hurdles that needed to be cleared before the policy could be terminated. The third saw the supply-demand balance of JGBs as the main factor; demand for JGBs from banks was strong as credit demand in the private sector remained weak. The fourth attributed the low and stable long-term rates to the existence of a"bubble" in the bond market.
Another member commented that the first explanation seemed the most likely, judging from the fact that the market believed the nominal long-term growth rate of the economy had declined. This member further stated that a continuing fall in long-term interest rates in the United States and Europe, which reflected disinflationary trends and declines in their fiscal deficits, had affected long-term interest rates in Japan. The member also commented that it was difficult to analyze the market's outlook for interest rates merely from developments in long-term interest rates. Therefore, developments in short- and medium-term interest rates should also be monitored.
A third member expressed the view that long-term interest rates could rise if market participants started to prepare for a termination of the zero interest rate policy in response to the release of economic data suggesting an economic recovery or if market concerns about the massive government debt were rekindled.
C. The Economic Outlook
On the economic outlook, members' discussion was focused on whether it could be said that deflationary concern had been dispelled given the recent improvement in the economy.
One member judged that deflationary concern had been dispelled. In response to this, many members expressed the view that, although such concern had been subsiding steadily, there were some points that needed to be examined before reaching a judgment as to whether it had been dispelled.
Many members expressed the view that the economy was steadily approaching a situation where abatement of deflationary concern was in prospect, as the economy was improving in line with the following scenario, which had been discussed at previous meetings: (1) a recovery in corporate profits would increase firms' spending, such as fixed investment; (2) the increase in firms' spending would have a positive effect on the entire economy, for example, it would boost production; and (3) this would lead to an increase in household income and private consumption.
These members, however, also agreed that, with regard to private demand, there were some points that required further monitoring to confirm a self-sustained recovery.
One member remarked that, since an uptrend in business fixed investment had been confirmed, attention would be focused on the following in the future: (1) to what extent fixed investment plans for fiscal 2000 would be revised upward; and (2) to what extent private consumption would improve toward the summer.
Another member was of a similar opinion, and had no objection to judging that the economy had improved further. This member, however, noted that, since business fixed investment plans for fiscal 2000 were almost the same level as the estimated amount for fiscal 1999, it was premature to judge solely from information available to date that a self-sustained recovery in private demand--a situation where a virtuous cycle could continue to operate smoothly except when exogenous factors caused massive shocks--had started in earnest.
A different member said that the judgment depended on whether fixed investment and private consumption could underpin the economy when public investment and exports started to decline.
With regard to each component of aggregate demand, the following views were exchanged.
On business fixed investment, several members were of the opinion that both its sustainability and the extent to which it would spread would need to be watched.
One member remarked that business fixed investment could be expected to increase gradually given that the correlation between firms' current profits and their fixed investment had been growing stronger since the bursting of the economic"bubble," and current profits were expected to grow in fiscal 2000. Another member pointed out that in view of the fact that fixed investment by large manufacturers had hit bottom, the following points would require close monitoring: (1) whether small firms' fixed investment, which was about to stop decreasing, would start rising; and (2) whether IT-related investment would spread to a wider range of industries, and contribute to sustainability and strength in overall business fixed investment. However, a different member expressed the view that taking into account structural adjustment pressures and balance-sheet problems, there was a possibility that business fixed investment might not buoy the entire economy unlike in past recovery phases.
Various opinions were put forward on private consumption.
One member remarked that private consumption was expected to become relatively firm as favorable factors had been appearing gradually. For example, the consumer sentiment index had recovered to the level marked in the second half of 1996, and overtime payments and income of part-time workers had increased. Another member suggested that the environment for private consumption was not too dismal considering the easing of concern about a surplus in labor and growing hopes that some portion of postal savings that had matured would be used for consumption.
Some members said that it was becoming less likely that fixed wages would rise in tandem with improvements in corporate profits as firms continued to restrain personnel expenses. However, bonus payments were expected to increase, and thus summer bonus payments this year would provide clues to the direction of private consumption.
Responding to this, a few other members added that one should not be too optimistic about summer bonus payments. One of them commented that the basis for corporate profits remained fragile, and, in the spring wage negotiations, firms were determined to restrain basic wages and bonus payments. Thus, a substantial increase in the summer bonus payments was unlikely.
Another member was of the opinion that it would be rash to judge the employment and income situation solely from summer bonus payments, and at least the outcome of winter bonus payments should be awaited.
The view was put forward that, when judging private consumption as a whole, its medium-term trend should be examined, in addition to the current environment for private consumption.
Some members considered that a surge in private consumption could not be expected in view of the fact that (1) the potential growth rate of the economy was substantially lower than in the past period of rapid economic growth, and (2) structural changes had occurred in private consumption. For example, sales of goods that were low-priced or fully satisfied the needs of consumers were recently increasing, while sales of other goods were relatively stagnant. In this situation, one member said that the current mixed developments in consumption should be considered normal, not weak, given the halt in the deterioration in the employment and household income situation and the improvement in consumer sentiment.
A few members stated that firms' recent efforts to restrain personnel expenses were driven by the need to improve their return on equity, which had been extremely low in the 1990s due to the very high share of labor in income distribution. One member said that the restraint on personnel expenses had resulted in a decline in real wages to a level that was in line with labor productivity, and this process of adjustment was vital for the creation of a flexible labor market and for an improvement in the employment environment. Another member agreed with this view and commented on the effect of the adjustment process on the real economy. This member said that by themselves wage cuts as part of corporate restructuring would exert considerable downward pressure on aggregate demand. However, wage cuts combined with the introduction of technological innovation could ease such pressure and could even increase aggregate demand. Recent developments in IT-related areas might be a case in point.
The majority of members were of the opinion that private consumption would gradually improve, and over the course of this process the employment and income situation would require close monitoring.
Members commented on public investment and exports, both of which had been underpinning the economy to date.
In relation to public investment, some members said that if fiscal spending, which had been expansionary, was restrained, the economy would be affected negatively toward fiscal 2001. Thus attentive monitoring would be required as to whether the momentum of a self-sustained recovery in private demand would compensate for this downward impact.
Turing to exports, some members raised as risks a faltering of the economy in the United States and falls in U.S. stock prices. One of these members also expressed the view that the prices of stocks on Nasdaq had peaked out and were likely to enter an adjustment phase.
Another member remarked that there was a possibility that exports to Asian countries, which had been robust, would level off in the near future because (1) inventories of imported goods from Japan held by companies in Asia had increased, (2) the Korean economy seemed to be slightly overheated, and (3) the recovery in the Thai economy was under way but hampered by a delay in the disposal of non-performing assets in the financial sector. This member continued that, if exports did level off, the recovery in domestic private demand might come to a temporary halt. In response to this, another member expressed the view that the effects of excess stocks would be limited as exports to Asian countries from Japan were mainly semiconductors and other products related to IT.
With regard to the outlook for prices, the majority of members shared the view that downward pressure on prices stemming from weak demand was weakening due to bright movements in some areas of private demand. However, attention should still be paid to the downward pressure as it had not been confirmed yet whether there was enough momentum for a full-scale recovery.
One of these members said that price indexes were expected to decline although downward pressure on prices arising from weak demand would abate. This member pointed out that there was downward pressure on wholesale price indexes due to a long-term downtrend in machinery prices, and also on the CPI due to the effects of technological innovation, the rationalization of the distribution system, and changes in data compilation for the CPI. Further, if the influence of rising crude oil prices subsided, such downward pressure would cause price indexes to fall. This member expressed the view that, in order to explain the fact that, at the same time, downward pressure on prices stemming from weak demand was receding, the following points should be made clear to the public: (1) corporate profits had not deteriorated despite a decline in price indexes; and (2) consequently, weakness in price indexes was compatible with a recovery in private demand.
IV. Summary of Discussions on Monetary Policy for the Immediate Future
Based on the above assessment of the economic and financial situation, members discussed the monetary policy stance for the immediate future.
Many members' view of the economic and financial situation was as follows. First, the improvement in Japan's economy was becoming distinct. Second, recovery had started in some areas of private demand, as seen in a gradual upturn in business fixed investment. Third, financial market conditions remained easy, but some participants were taking action based on the assumption that the zero interest rate policy would be terminated. Fourth, the momentum for a self-sustained recovery in private demand required further monitoring. And fifth, attention should still be paid to the downward pressure on prices stemming from weak demand, although it had weakened somewhat.
Based on the above assessment, many members judged that the economy was steadily approaching but had not yet reached a situation where it could be said that deflationary concern had been dispelled.
Thus, with regard to monetary policy for the immediate future, the majority of members considered it appropriate to continue the zero interest rate policy.
One member considered that deflationary concern had been dispelled, and stated that the overnight call rate target should therefore 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 decreased to a sufficiently small level. Second, as the economy started to improve, the demerits of the zero interest rate policy had increased while the merits had decreased. Third, private consumption was showing mixed developments, but the level should be considered sufficient as it was being influenced by the downward adjustment of the share of labor in income distribution, which had been high in the 1990s. In this respect, it would be too late to raise the overnight call rate after a distinct recovery in private consumption had been confirmed. And fourth, the market was expected to interpret termination of the zero interest rate policy as the end of the Bank's emergency measure, and therefore it was unlikely that long-term interest rates would surge.
Another member supported the maintenance of the zero interest rate policy at this point, but said that in future the member would assess the economic and financial situation with a stance leaning toward terminating the policy. The reasons for this were as follows. First, the zero interest rate policy could be regarded as an emergency measure that had been introduced when the economy was at risk of falling into a deflationary spiral amid concern about the stability of the financial system. It was natural that the Bank fine-tuned monetary policy in accordance with the recent cyclical improvement of the economy. Second, monetary policy would remain extremely easy even if the Bank terminated the zero interest rate policy. And third, at present firms fell into two main categories: one consisted of growth firms, especially those related to IT, and the other of firms that were behind in structural reform. If monetary policy, which should take account of the entire economy, was focused solely on the latter for a long period of time, inflationary risks would emerge as a consequence.
A different member also put forward the view that the time was ripening for termination of the zero interest rate policy.
On the basis of these opinions, members exchanged views on the issues related to the appropriateness of terminating the zero interest rate policy.
Members discussed how to evaluate the current situation where there were signs of a recovery in some areas of private demand while at the same time deflationary concern had not yet been dispelled.
Some members stressed that, in order to achieve a firm, self-sustaining recovery in private demand, it was important that (1) the increase in business fixed investment should be sustainable and be observed in a wider range of sectors, and (2) a recovery in the corporate sector should have a positive effect on households, and create prospects for an improvement in the employment and income situation.
On this point, the member who proposed terminating the zero interest rate policy said that, given that business fixed investment had already turned around, it was not clear what kind of developments in fixed investment and the employment and income situation should be checked.
One member answered as follows. First, firms' profits and leading indicators related to business fixed investment should be examined to judge to what extent plans for fixed investment for fiscal 2000, which at this point were already at the level for fiscal 1999, would be revised upward. Second, attention should be paid to the effects of the improvement in the corporate sector, as they would be evident in not only increases in business fixed investment but also, for example, in raises of bonuses and increases in expenses for sales and general administration. The member continued that a further improvement in the corporate sector could contribute greatly to the household sector although it was difficult to judge when the household sector had actually started to improve.
Another member agreed that it was indeed difficult to judge when the household sector had actually started to improve. This member put forward the view that one basis for the judgment was confirmation that the employment and income situation had stopped deteriorating.
Some members shared the view that it would be a while before it could be judged that private demand had achieved a self-sustained recovery.
These members accepted the fact that the downside risk to the economy had definitely subsided and that the zero interest rate policy had some negative effects. However, they considered that there were no signs of upward pressure on prices emerging although downward pressure on prices stemming from weak demand had abated.
One of them, while calling for a certain amount of latitude, presented an analysis based on the Taylor rule; the overnight call rate estimated using this rule had been below zero percent, but it had recently recovered to around zero. On this basis, the member and some other members said that they were not confident about whether the momentum of a self-sustained recovery in private demand could absorb the shocks from the expected reduction in stimulative measures from the fiscal side, and that there were almost no risks of inflation. On these grounds, the members considered that attention should still be paid to the risk that, after termination of the zero interest rate policy, the economy would stall and the zero interest rate policy would be reintroduced.
Members also discussed the meaning of termination of the zero interest rate policy.
Some members, including the member who proposed terminating the zero interest rate policy, commented that the policy was an emergency measure introduced in early 1999 when the economy was on the verge of falling into a deflationary spiral amid increased anxiety about the financial system. It would thus be natural to terminate the policy when the economy started to improve.
One member argued against this opinion for the following reasons. First, the extremely easy monetary policy, which had been adopted in the above economic situation, had been considered vital for the economy until very recently, and therefore a decision to terminate the policy should be made only after thorough consideration. Second, the Bank had explained that the basis for terminating the zero interest rate policy was whether deflationary concern had been dispelled. However, if the Bank stressed that termination of the policy meant the end of an emergency measure, the criteria for terminating the policy would become unclear. In response to this, a member who supported the view that the zero interest rate policy was an emergency measure commented that industries undergoing restructuring would find it easier to accept the termination of the policy if it was explained that the policy was an emergency measure.
Each member commented on how the Bank should convey its thinking to the market.
Members shared the view that, in order to avoid any unnecessary shocks to the market--including a surge in long-term interest rates and the yen--when the zero interest rate was terminated, it was important to create an environment where the termination would not be a surprise to the market. On this basis, some members remarked that there was a slight discrepancy between the Bank's view of the economy, which saw an improvement in the economic situation, and the market's. The members continued that, in order to eliminate the discrepancy, the Bank should convey its thinking to the public effectively, through such methods as incorporating this meeting's discussion concerning the assessment of the economic situation in the Monthly Report of Recent Economic and Financial Developments.
In relation to this, the member who called for an increase in interest rates reemphasized that, by making clear that the termination of the zero interest rate policy meant the end of an emergency measure, a sharp rise in the market's expected inflation rate and the resultant surge in long-term interest rates would be avoided. Regarding this view, a different member was of the opinion that, even if termination of the zero interest rate policy was characterized as termination of an emergency measure, the move could be interpreted as the first step of monetary tightening and trigger a surge in long-term interest rates. This was because the market might find it difficult to understand how the end of an emergency measure was connected with the situation where deflationary concern had been dispelled. A few members pointed out that, regardless of the meaning of the move, long-term interest rates could gather upward momentum depending on the market's view on the economy and prices.
The chairman summarized the above discussion as follows. The time was approaching for the Bank to reexamine the compatibility of the zero interest rate policy, an unprecedented policy, with developments in the real economy. Nevertheless, for the time being, the zero interest rate policy should be maintained while trends in the real economy and the financial market were checked to see whether a self-sustained recovery in private demand was in prospect--a prerequisite for deflationary concern to be dispelled. The chairman also suggested, from the viewpoint of promoting dialogue with the market, that the outline of this meeting's discussion be introduced at a regular press conference. A few members cautioned that it would not be appropriate to expand on the details of various opinions.
Separately, one member 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 reasons for the proposal were as follows. First, judging from the indexes of business conditions, the economy was fairly strong from the viewpoint of business cycles, but structural adjustment pressures had not weakened at all. Therefore, the future of the economy was still at risk. Second, firms felt that the surplus in capacity and employment remained large, and thus the outlook for business fixed investment and private consumption remained unclear. Third, the CPI remained lower than a year earlier, and the rate of decline in the GDP deflator had expanded. Fourth, since there were no inflationary risks, monetary policy should be eased further in order to stimulate the economy and halt the appreciation of the yen, which the market expected to continue. Fifth, since the objective of monetary policy was to achieve price stability, the Bank should present a concrete target to the public and make clear that it was responsible for attaining the target. And sixth, the Bank should announce its projections for GDP or the path of the economy, which affected prices, and make the implementation of monetary policy more transparent.
V. Remarks by Government Representatives
The representatives from the Ministry of Finance and the Economic Planning Agency made the following remarks.
- (1) Japan's economy was gradually showing signs of a self-sustained recovery due to the effects of various policy measures and of the economic recovery in Asia. For example, positive movements were observed in corporate activities. However, weakness remained in private demand, which was the key to a self-sustained recovery of the economy. The Government would therefore 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 above view was confirmed by the new Cabinet formed on April 5. The new Cabinet would continue the policies of the previous Cabinet, and take appropriate measures to deal with immediate issues. Given Japan's critical fiscal condition, as seen in the fact that the fiscal 2000 budget relied on debt for 38.4 percent of revenues, the Government considered it necessary to undertake measures for fiscal reform when the economy was back on a full-fledged recovery path. However, as the economy remained in a severe situation, the Government would continue to place top priority on steering the economy toward a recovery. The Government would explain its thinking on economic policy at the G-7 meeting to be held over the coming weekend.
- (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 views of many members of the economic and financial situation were summarized as follows. First, the improvement in Japan's economy was becoming distinct. Second, recovery had started in some areas of private demand, as seen in a gradual upturn in business fixed investment. Third, the financial environment remained favorable, but some market participants were taking action based on the assumption that the zero interest rate policy would be terminated. Fourth, the momentum for a self-sustained recovery in private demand had to be examined further. And fifth, attention should still be paid to the downward pressure on prices stemming from weak demand, although the pressure had weakened somewhat.
Based on this understanding, the majority of members considered it appropriate to continue the zero interest rate policy.
However, one member proposed changing the guideline for money market operations back to that employed before the adoption of the zero interest rate policy on February 12, 1999. Another member proposed adopting quantitative easing accompanied by a target for the rate of increase in the CPI and the growth rate of the monetary base.
As a result, three policy proposals were put to the vote.
Ms. Shinotsuka proposed the following as the guideline for money market operations for the intermeeting period ahead:
The Bank of Japan will encourage the uncollateralized overnight call rate to move on average around 0.25 percent.
Regardless of the above target for the call rate, the Bank of Japan will provide more ample funds, if judged necessary, to maintain the stability of the financial markets.
The proposal was defeated with one vote in favor, eight against.
Mr. Nakahara proposed the following as the guideline for money market operations for the intermeeting period ahead:
The Bank of Japan will aim at realizing a 0.5 to 2.0 percent annual increase in the 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).
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, the Bank should terminate the current policy, which was passive and static, and adopt a proactive policy given that there were hardly any inflationary risks to the economy although there were various downside risks. Second, under the zero interest rate policy, the only options were to continue or discontinue it. The longer it was continued, the larger the negative impact would be when it was terminated, causing a hard landing of the economy. Third, since the expressions used to describe the circumstances in which the zero interest rate policy would be terminated were ambiguous, the Bank should increase its accountability by releasing statistical projections for prices for about one to two years ahead. Even after the zero interest rate policy was terminated, the Bank should continue to release statistical projections for prices.
Ms. Shinotsuka dissented for the following reasons. First, the zero interest rate policy was an emergency measure that had been introduced to counter the risk of the economy falling into a deflationary spiral. Because this risk had subsided, the Bank should end the zero interest rate policy. Second, the improvement in the economy was being accompanied by an increase in the negative effects of the zero interest rate policy. Third, monetary policy would continue to be extremely easy even if the Bank terminated the zero interest rate policy. And fourth, if the Bank terminated the zero interest rate policy after the growth rate of the economy expected by firms and credit demand had started to increase, the market could interpret the termination as efforts to counter inflationary risks, not as the end of an emergency measure, leading to confusion in the market.
VII. Discussion on the Bank's View of Recent Economic and Financial Developments
The Policy Board discussed"The Bank's View" of recent economic and financial developments, and put it to the vote. One member confirmed the reason for judging that business fixed investment and prices had improved. The member also added that the economy required continued monitoring. The member agreed with the"The Bank's View" since the member considered that the phrase in its first paragraph ("recovery has started in some areas of private demand, as seen in a gradual upturn in business fixed investment") expressed a judgment that private consumption had not recovered yet.
The Board unanimously determined"The Bank's View," for publication on April 12, 2000 in the Monthly Report of Recent Economic and Financial Developments (consisting of"The Bank's View" and"The Background"). 6
- 6The original full text, written in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on April 12, 2000 together with the English version of"The Bank's View." The English version of"The Background" was published on April 24, 2000.
For immediate release
April 10, 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.