Minutes of the Monetary Policy Meeting
on June 12, 2000
(English translation prepared by the Bank staff based on the Japanese original)
July 21, 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, June 12, 2000, from 9:00 a.m. to 12:30 p.m., and from 1:21 p.m. to 3:48 p.m.11
Policy Board Members Present
Mr. M. Hayami, Chairman, Governor of the Bank of Japan
Mr. S. Fujiwara, Deputy Governor of the Bank of Japan
Mr. Y. Yamaguchi, Deputy Governor of the Bank of Japan
Mr. S. Taketomi
Mr. T. Miki
Mr. N. Nakahara
Ms. E. Shinotsuka
Mr. K. Ueda
Mr. T. Taya
Government Representative Present
Mr. Y. Hayashi, State Secretary for Finance, Ministry of Finance
Mr. T. Komine, Director-General of the Research Bureau, Economic Planning Agency
Mr. M. Matsushima, Executive Director
Mr. M. Masubuchi, 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. M. Shirakawa, 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. I. Yokota, 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 July 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.
I. Approval of the Minutes of the Monetary Policy Meeting Held on April 27, 2000
The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of April 27, 2000 for release on June 15, 2000.
II. Summary of Staff Reports on Economic and Financial Developments2
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 May 17, 2000.3 As a result, the overnight call rate remained generally steady at around 0.02 percent, and current account balances at the Bank were stable at around 5 trillion yen.
In the intermeeting period, the amount of funds outstanding in the uncollateralized overnight call market declined to 7-8 trillion yen, the lowest level since 1988. This was attributable to the fact that (1) city banks' funds position had improved further due to sluggishness in lending, and (2) market participants increased direct dealing--transactions that do not go through tanshi companies (money market broker-cum-dealers) --in preparation for the start of real-time gross settlement (RTGS). However, the proper functioning of the market had not been significantly impaired so far.
- 2Reports were made based on information available at the time of the meeting.
- 3The guideline was as follows:
"The Bank of Japan will flexibly provide ample funds and encourage the uncollateralized overnight call rate to move as low as possible."
B. Recent Developments in Financial Markets
1. Developments in domestic financial markets
Financial markets as a whole tended to be influenced by U.S. stock prices. Until the second half of May, Japanese stock prices had been weak reflecting the plunge in U.S. stock prices, and short- and long-term interest rates had declined because expectations of an early termination of the zero interest rate policy had been somewhat reduced. Toward early June, stock prices in Japan and abroad recovered after the release of economic indicators, such as U.S. employment data, as concern about inflationary risks in the United States abated.
Japanese stocks taken as a whole became susceptible to fluctuations in Nasdaq stock prices, as information technology (IT)-related stocks, which accounted for a large share of the total market value, continued to move in line with Nasdaq stocks. In May, selling by foreign investors, who had been net buyers until this spring, greatly outweighed their buying. Market participants considered the improvement in Japan's economy and the uptrend in corporate profits as buying factors for stocks, and the instability in U.S. stock prices, political uncertainty in Japan ahead of the general election, and pressure from the unwinding of cross shareholdings as selling factors.
Yields on Japanese government bonds (JGBs) temporarily fell to around 1.65 percent reflecting weakness in domestic and overseas stock prices and the resulting market expectations that termination of the zero interest rate policy would be delayed. Subsequently, they fluctuated around 1.7 percent in response to comments by Bank officials and the release of various economic indicators, including GDP data for the January-March quarter of 2000. The yield spread between corporate bonds and JGBs moved within a narrow range.
In the money market, expectations that the zero interest rate policy would be terminated in the near term eased in late May, but recently they had strengthened again. Many market participants expected the policy to be terminated in September, while some expected termination in July.
2. Developments in foreign exchange markets
The yen generally hovered around 106-108 yen against the U.S. dollar.
It briefly rose to around 105 yen at the beginning of June reflecting the strength in the euro against the U.S. dollar as well as an improvement in a survey of firms' financial statements, the Financial Statements Statistics of Corporations by Industry, Quarterly for January-March 2000. However, it fell back to 106-107 yen following the release of GDP data for the same period. The impact on the exchange rate of net selling of Japanese stocks by foreign investors was offset by their bulk buying of bonds and notes.
C. Overseas Economic and Financial Developments
In the United States, the robust economic expansion led by domestic demand continued. However, growth in housing investment and spending on some consumer durables slowed somewhat. With regard to prices, the rise in consumer prices decelerated slightly in April. The unemployment rate increased somewhat, although it remained at a low level, and growth in average hourly earnings slowed slightly. The U.S. economy overall seemed to be starting to show signs of a slowdown.
In the euro area, exports remained buoyant, domestic demand expanded further, and the employment situation continued to improve. The year-on-year rate of increase in consumer prices was 1.9 percent in April, slightly below the upper limit of the price stability objective of 2.0 percent set by the European Central Bank (ECB), but the rate of core inflation rose somewhat. The annual rate of increase of the broad monetary aggregate M3 was 6-7 percent, much higher than the ECB's reference value of 4.5 percent. Taking account of the above, the ECB raised interest rates by 0.5 percentage point on June 8.
In NIEs and ASEAN countries, rapid economic growth was generally sustained. Exports were buoyant, and the effects of economic stimulus measures had permeated throughout these countries. The inflation rate remained low, but was gradually rising in many countries due partly to a tighter supply-demand balance, strong crude oil prices, and the depreciation of currencies in some countries.
In U.S. financial markets, yields on treasury securities and those of federal funds rate futures declined in response to abatement of concern about inflationary risks. Expectations of a further tightening at the next meeting of the Federal Open Market Committee (FOMC) in late June eased sharply. Stock prices were weak toward the end of May, but rebounded in early June in response to reduced concern about inflationary risks.
Long-term interest rates in Europe fell reflecting the decline in long-term U.S. interest rates and the rebound in the euro. Stock prices in Europe generally moved in line with those of the United States.
D. Economic and Financial Developments in Japan
1. Economic developments
With regard to exogenous demand, net exports continued to follow an upward trend, and public investment was picking up reflecting progress in the implementation of the supplementary budget for fiscal 1999. As regards private demand, housing investment was on a moderate declining trend, and the recovery in private consumption remained weak. Meanwhile, business fixed investment was increasing.
Against this background, the corporate sector was recovering at a faster pace than had been expected with production continuing to increase and corporate profits improving more clearly. In the household sector, although the decrease in the number of employees and in wages was slowing, efforts by firms to reduce personnel expenses were prolonging the severe income conditions.
There was no major change in prices.
As described above, the improvement in Japan's economy was becoming distinct, and business fixed investment was increasing reflecting improvement in corporate sentiment and profits. The mechanism of a self-sustained recovery in private demand was starting to work, prompted by the increase in business fixed investment. However, it was likely to take some more time to achieve a full-fledged recovery accompanied by an increase in private consumption.
With respect to the outlook for exogenous demand, net exports were expected to continue rising supported by robust demand for IT-related goods. Public investment was expected to increase moderately until the summer and decrease gradually thereafter.
In private demand, business fixed investment, especially by IT-related industries, was expected to continue increasing gradually. As for the household income situation, which provided the basis for private consumption, it was probable that scheduled cash earnings and overtime payments would increase moderately as production and corporate profits continued to recover. However, bonus payments were likely to be adversely affected by corporate restructuring and firms' response to deregulation. Therefore, improvement in the overall income situation, including bonus payments, was likely to be moderate at most, and it would be necessary to further examine various developments.
With regard to the outlook for prices, upward pressure was likely to arise from the gradual improvement in the domestic supply-demand balance and the past rise in crude oil prices. On the other hand, technological innovation, rationalization of the distribution system, and deregulation were likely to exert downward pressure. The effect of the past strength of the yen was expected to diminish gradually. Under these circumstances, overall prices were likely to remain unchanged. Attention should still be paid to the downward pressure on prices stemming from weak demand, although the pressure had weakened given some recovery in private demand.
2. The financial environment
With regard to the financial intermediation function of banks, private banks basically maintained a cautious lending stance. Major banks, however, were becoming more willing to increase lending according to anecdotal information and various diffusion indexes. The environment for direct corporate financing via such instruments as corporate bonds and commercial paper (CP) remained easy as evident in the narrow credit spread (the difference between yields on private bonds/CP and those on Japanese government securities).
The improvement in economic activity was not immediately stimulating corporate demand for external funds, since firms' cash flow was increasing. Moreover, firms were still making efforts to reduce debt, and as a result, credit demand in the private sector remained stagnant.
Against this background, the year-on-year rate of decline in private bank lending expanded in May after contracting in March and April. The steeper rate of decline in May could be attributed partly to the fact that lending by banks was depressed after they increased their lending at the end of March to meet the targets set in their plans for restoring sound management submitted to the Financial Reconstruction Commission. Issuance of corporate bonds and CP remained basically stable.
As a result, the year-on-year growth rate of money supply declined again in May. Corporate fund-raising costs remained at a low level.
As described above, corporate financing conditions were easing. However, there were still no signs of increased demand for funds.
III. Summary of Discussions by the Policy Board on Economic and Financial Developments
A. The Current Economic Situation
On the current economic situation, the majority of members agreed that the economy had continued to improve, and focused on the fact that the recovery of the corporate sector had become more pronounced at this point in time.
Most members remarked that the improvement in the corporate sector was becoming clear as shown in data such as the Financial Statements Statistics of Corporations by Industry, Quarterly for the January-March quarter.
Many members expressed the view that the uptrend in corporate profits, with a continued increase in sales, had become more evident than before. One of these members pointed out that the decrease in the breakeven-point ratio was becoming clear reflecting a reduction in personnel expenses. Another member noted that for the year ending March 2000, firms' sales had decreased but their profits had increased, mainly because of an increase in production led by exports, positive effects of corporate restructuring, and an improvement in net financial income. The member continued that, in contrast, for the year ending March 2001, firms forecasted improvements in both sales and profits. On this point, the member also expressed a cautious view, pointing out that their forecasts were based on the assumption that the economy would continue to improve in the second half of fiscal 2000, which was still uncertain.
Next, the view that a recovery in business fixed investment was becoming clear against the backdrop of the improvement in corporate profits was put forward. Many members pointed out that the Financial Statements Statistics of Corporations by Industry, Quarterly for the January-March quarter confirmed that business fixed investment had increased not only in large firms but also in small and medium-sized firms. On these grounds, the members agreed that the upturn in business fixed investment was starting to spread to a wide range of industries, although the degree varied depending on the industry and the size of firms. One of these members judged that business fixed investment was becoming strong enough to make up for a decrease in public investment and support production. However, some members added that one should bear in mind the fact that machinery orders, a leading indicator of business fixed investment, had decreased for four consecutive months.
In response to this, another member's evaluation was that one could not be optimistic about business fixed investment for the following reasons. First, the improvement in the Financial Statements Statistics of Corporations by Industry, Quarterly was mainly due to large-scale redevelopment projects in the Tokyo metropolitan area and a rush to construct buildings before the implementation of the revised Law concerning the Measures by Large Scale Retail Stores for Preservation of Living Environment. And second, although the ratio of nominal business fixed investment to nominal GDP had started to increase, its underlying trend was not necessarily strong.
The majority of members judged that the recovery in the household sector was weak on the whole, but indicators relating to the employment and income situation were starting to show some positive signs.
A few members said that indicators relating to private consumption showed mixed developments. One of them pointed out that, although various retail sales statistics, such as department store and convenience store sales and sales of household appliances, were weak, indexes used to gauge consumer confidence continued to improve, and the results of the Family Income and Expenditure Survey for April were fairly strong even when one took into account the fluctuations in the statistics.
With regard to the employment and income situation, a few members remarked that it was not certain whether the number of employees had completely stopped falling, and that downside risks remained as structural adjustment was still continuing. However, many members, including these members, said that the ratio of job offers to applicants and the number of new job offers were gradually improving. One of these members said that past experience had proved that the ratio of job offers to applicants was the most reliable statistic among those relating to employment, which tended to be volatile. This member continued that the improvement in this ratio indicated that the employment situation had started to head toward improvement. The member added that hopeful signs were evident in the Survey on Labor Economy Trend for May by the Ministry of Labor, which showed a decrease in the proportion of firms that were reducing their workforce and a significant increase in the number of new graduates firms planned to recruit in the next business year.
As for the income situation, some members pointed out that both scheduled cash earnings and overtime payments had been following an upward trend reflecting the improvement in Japan's economic activity. Many members were of the view that summer bonus payments were likely to be slightly below the previous year's level, judging from the agreements in negotiations on bonus payments so far. However, they were of the opinion that bonuses would not fall as sharply as in 1998 and 1999.
Based on the above discussions, the majority of members agreed that the deterioration in the employment and income situation had almost come to a halt.
In response to this, one member stressed that the environment for private consumption remained extremely severe as could be judged from surveys: one conducted by the Japanese Consumer's Co-operative Union showed that households continued to limit their consumption; and the Labor Force Survey showed that the number of people who had given up looking for a job had reached 4.45 million.
As for prices, some members mentioned that domestic wholesale prices had continued to increase slightly from the previous year, but consumer prices and corporate service prices had been somewhat weak. They also pointed out the following developments. First, an improvement in the supply-demand balance and a rise in crude oil prices had pushed up domestic wholesale prices. Second, in corporate service prices, communications costs continued to decline due to increased competition, but downward pressure on other items such as office rents was not particularly strengthening at the moment. Third, the weak trend in consumer prices was basically being caused by the past appreciation of the yen and price-cutting competition in the food service industry. In summary, these members generally agreed that downward pressures on prices stemming from weak demand had gradually subsided.
Some members commented on preliminary GDP data for the January-March quarter. These members said that, although the data were lower than market estimates, they provided a fairly well-balanced picture of the economy, with private demand acting as the engine of growth while public investment had decreased significantly for three consecutive quarters. They said this was evidence of momentum for a self-sustained recovery.
A few members referred to the sharp year-on-year decline in the GDP deflator. They said, while the deflator for government consumption was falling rapidly, the private demand deflator had almost leveled off, and thus recent movements in the GDP deflator did not necessarily indicate strong deflationary pressure.
On the basis of the above discussion, members shared the following view on the economic situation, which was slightly more positive than that at the previous meeting: "The improvement in Japan's economy is becoming distinct. Recovery has been observed in some areas of private demand, with business fixed investment continuing to increase."
However, one member suggested that the Bank's assessment of the economy could be more positive than the above since the recovery trend in the corporate sector was becoming pronounced and some positive indications were gradually appearing in statistics related to employment and income.
Meanwhile, a different member expressed a cautious view on the economy. First, the GDP data for the January-March quarter were inflated by the leap day. Second, the economy was approaching its peak and firms might start inventory adjustments in the autumn, given the fact that the leading index of business conditions for April had fallen below 50, and the balance between firms' shipments and the level of their inventories. Third, the Nikkei Business Index indicated that the economy had not yet recovered even to the mid-point between a peak reached in March 1997 and a trough of April 1999. Fourth, the average length of past economic expansion phases was slightly over two years, and more than a year had already passed since the current recovery phase started. Fifth, corporate earnings remained lackluster with firms still posting large amounts of special losses. And sixth, crude oil prices might rise reflecting the strength in demand, and thus developments in U.S. consumer prices would require close monitoring.
On the above points referring to business cycles, another member expressed the following view. Japan was currently in the process of structural adjustment as part of efforts to boost productivity and competitiveness to keep up with globalization, and this adjustment could not be explained by a short-term business-cycle theory. The member who had made the points argued against this remark as follows. First, such statistics as Indexes of Business Conditions were not designed specifically with the intention to examine short-term business cycles such as an inventory cycle; rather, they were effective in capturing broader movements of the economy, and they were suggesting that the current economic recovery had very nearly reached its peak. Second, examination of various business cycles showed that the next high peak of the economy was quite far ahead around 2010 when the peaks of the business fixed investment and construction investment cycles coincided, and thus, until then, one could not expect to observe strong momentum in the economy.
B. Financial Developments
On the financial front, members commented on the real economy's relationship with developments in stock prices and interest rates.
Many members were of the view that stock prices had been unstable recently mainly because of uncertainty about the outlook for the economy and stock prices in the United States. One member added that the instability might be a sign of uncertainty about the domestic economy and corporate profits in the second half of this year, and thus it was important to watch developments of stock prices together with foreign exchange rates.
A different member, however, pointed out that (1) the basic trend of stock prices remained unchanged, as they continued to reflect the improvement in the economy and progress in corporate restructuring, (2) a flight to quality was not occurring in financial markets as a whole, and (3) thus, Japanese stock markets might stabilize when U.S. stock markets settled down. Another member was of the view that the recent decline in stock prices was unlikely to have a serious impact on the economy.
A different member said that (1) stock prices might approach the low of October 1998 around the summer or autumn because market conditions were weak, and (2) foreign investors, who had hedged their positions by diversifying their investment, were selling Japanese stocks because they were moving in tandem with Nasdaq stocks and were thus probably not functioning as hedge instruments. This member expressed concern about a negative impact on the economy and financial markets when the overheated U.S. economy--evident in the high price-earnings ratio and the surge in bank lending--started to adjust, and the fact that Latin American countries had been affected by the increase in U.S. interest rates.
As for the market's outlook for interest rates, a few members pointed out that movements in Euro-yen futures seemed to suggest that market participants expected the zero interest rate policy to be terminated before the year-end, against the backdrop of the improvement in Japan's economy.
C. The Economic Outlook
On the economic outlook, members exchanged views on the prospects for a self-sustained recovery in private demand in the current situation where the recovery in the corporate sector was becoming more distinct while the household sector was still showing mixed developments.
Many members discussed how to interpret the situation where a recovery in the household sector, which they had expected to follow that in the corporate sector with some time lag, had not been observed yet while the recovery in the corporate sector was very clear.
Some members commented that firms, faced with strong pressures arising from ongoing globalization and from the financial markets, were extremely aware of the need to increase return on capital and thus continued to place top priority on improving their balance sheets. They considered this was why the improvement in corporate profits had not immediately spread to the household sector.
One of the above members commented on the strength of the recovery in business fixed investment. The member considered that the extent to which business fixed investment spread continued to require attention because (1) the bulk of capital expenditure on IT was still by manufacturers of IT products and that by IT users was limited, and (2) with regard to non-IT-related investment, it was steadily increasing led by blue-chip companies, but only a few small and medium-sized firms were engaging in such investment.
Members also exchanged views on how to assess developments in the household sector.
One member expressed the view that, when examining the slow recovery of the household sector, one should take into account the fact that the relative share of labor in income distribution, which had previously been too high, was presently in the process of adjustment.
Another member remarked that even though the number of people who had involuntarily left jobs had finally started to decline, long-term unemployment and frictional unemployment had started to increase. The member said this was a sign of a growing mismatch between supply and demand in the labor market. It was thus important for a recovery in the household sector that such structural problems were resolved. The member also added that, in this regard, the employment measures adopted by the Government in mid-May to resolve the mismatch were appropriate.
A different member stressed that the strength of the household sector was approaching a level that could be considered as normal given the following factors. First, a significant rise in income could not be expected with GDP growth of around 1 percent. Second, since firms were still undergoing restructuring, downside risks to employment would remain and it would thus take some time for it to recover. Third, it should therefore be considered more or less sufficient if employment and income as a whole stopped deteriorating and downside risks to both almost disappeared. Fourth, consumption expenditure would not immediately increase given the sluggishness in income, structural changes in consumption, and uncertainty about the future of the social security system. And fifth, although prices were falling as a result of technological innovation and the distribution revolution, the volume of goods purchased was increasing, and thus in real terms expenditure of households was rising somewhat.
Taking account of the situation of firms and households as described above, the majority of members agreed that a self-sustained recovery in private demand required that the recovery in the corporate sector--the engine for economic recovery--was strong enough to ensure a recovery in the household sector.
On this basis, these members agreed that the improvement in corporate profits was making firms capable of increasing, for example, capital expenditure and wage payments, and such improvement in the corporate sector was expected to eventually affect the household sector. One member described the situation as follows: the water level in the dam was rising, but the amount of water released from it had not yet increased.
One member considered that it could be said that the effect of the recovery in the corporate sector was spreading to the household sector provided that income was not declining and consumer sentiment was not deteriorating. The member thus considered that this process had already started. Another member also commented that the rise in job offers to applicants, scheduled cash earnings, and overtime payments was also evidence that this process had started.
Some members argued as follows. Even if positive developments could not be detected in the employment situation or wages due partly to structural changes, the effects of the recovery in the corporate sector would eventually spread to the household sector provided that the momentum of the virtuous circle operating in the former was becoming stronger. Therefore, when assessing prospects for a sustainable recovery in private demand, the focus should not be solely on developments in the household sector but also on overall private demand including business fixed investment.
A different member expressed the view that the environment for a self-sustained recovery in private demand was gradually being established. However, it was still necessary to examine the strength of the corporate sector, for example in the Tankan survey, and to confirm that indicators relating to employment and income had clearly stopped deteriorating.
In sum, members generally agreed that the prospects for a self-sustained recovery in private demand were growing, but further examination was required.
As for the outlook for prices, based on the above discussion, there were views that downward pressure on prices stemming from weak demand was receding.
One of the members who expressed the above views commented that the contribution of the decline in machinery prices to overall wholesale prices was shrinking, and this was a sign that the effects of the improvement in the supply-demand balance were spreading. A different member commented, taking into account the clearer recovery in corporate profits, that the weakness in consumer prices did not necessarily imply that deflationary pressures were growing as this weakness was caused partly by the past strength of the yen.
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 on the economic and financial situation was as follows. First, the improvement in Japan's economy was becoming distinct. Second, recovery had been observed in some areas of private demand, with business fixed investment continuing to increase. Third, developments in financial markets were generally consonant with the improvement in the economy, although stock prices were somewhat unstable. Fourth, the prospects for a self-sustained recovery in private demand were growing, but further examination was required. And fifth, attention should still be paid to downward pressure on prices stemming from weak demand, although the pressure had weakened somewhat.
On the basis of the above assessment, many members shared the view that the economy was approaching a situation where it could be said that deflationary concern had been dispelled.
Specifically, these members said "deflationary concern is disappearing," "the economy is approaching a situation where the zero interest rate policy can be terminated," and "the time to terminate the zero interest rate policy is approaching." A different member who had a more positive view of the economy than other members said that it was making a self-sustained recovery led by private demand, and the overnight call rate target should therefore be raised to 0.25 percent.
However, members generally shared the view that the momentum for a self-sustained recovery in private demand had to be examined further. As for monetary policy for the immediate future, the majority of members considered that it was appropriate to continue the zero interest rate policy.
Various views were put forward regarding termination of the zero interest rate policy.
One member who advocated terminating the zero interest rate policy expressed the following view. First, although it was necessary to examine various risk factors when judging the momentum for a self-sustained recovery in private demand, it was impossible to discern all of them with perfect clarity. Thus, a policy decision had to be made under some uncertainty. Second, if the economy slowed down again after a decision to terminate the policy, the Bank needed to be flexible and resume the zero interest rate policy if necessary.
Another member basically supported the first point and said that since the Bank had made clear that it would terminate the zero interest rate policy when deflationary concern had been dispelled, its judgment as to whether this criterion had been met was one which should be made with a certain degree of confidence. A few other members said that an examination of every risk factor was not necessary to judge whether the criterion for terminating the zero interest rate policy had been satisfied. The criterion for termination was, for example, a continued contraction in the output gap over a certain period of time and the emergence of clear prospects for a self-sustained recovery in private demand.
A few members commented on the second point. Although they agreed that monetary policy should be conducted in a flexible manner, they would like to wait until it was quite certain that the risk that the economy would fall back into the extremely severe condition experienced over the past two years had decreased substantially.
In response to these remarks, a different member pointed out that, in view of the need to ensure the credibility of the Bank's monetary policy, the Bank should be more specific: for example, it should make clear (1) the rate of economic growth that would allow termination of the zero interest rate policy, and (2) the minimum length of time over which the new rate would be maintained thereafter.
Members next discussed the significance of developments in the household sector for the Bank's judgment on the economy.
The member who advocated terminating the zero interest rate policy raised the question of whether members considered the final condition that had yet to be satisfied for termination of the zero interest rate policy was an improvement in the household sector or in domestic demand as a whole.
In response to this, one member expressed the view that it was important to watch the household sector for signs of improvement, but the Bank could judge that the economy as a whole had improved further if positive developments in other areas became more evident than before. Members including this member expressed the view that it was necessary to monitor not only private consumption and the employment and income situation, but also private demand as a whole, including business fixed investment.
Some members also discussed the issue of raising the overnight call rate target when there were no inflationary risks.
A few members commented that the zero interest rate policy was an extreme monetary easing measure adopted in February 1999 when the economy was on the verge of falling into a deflationary spiral, and thus the effects of the policy would become stronger as the recovery of the economy became more pronounced. Furthermore, if this extreme policy was maintained for a long period of time, the possibility that it might undermine a sustainable economic expansion would increase as the risks of, for example, large fluctuations in the economy or a surge in interest rates would grow.
On this basis, one member expressed the view that deflationary concern was disappearing, and thus the time was approaching to make fine adjustments to the extremely easy monetary policy, giving due consideration to the strength of the recovery of the economy. Some members also commented that, from a medium- to long-term perspective, the degree of monetary easing should be adjusted in line with the improvement of the economy to achieve stability in the economy and in prices. One member added that such thinking was reflected in the criterion for terminating the zero interest rate policy, "until deflationary concern has been dispelled."
Following the above discussion, many members agreed that termination of the zero interest rate policy was not a shift to monetary tightening.
Members next discussed the relationship between fiscal policy and termination of the zero interest rate policy.
Some members commented that fiscal consolidation was essential in the medium to long term, and thus a decrease in fiscal support to the economy was inevitable. One of them added that the short-term outlook for fiscal management for the second half of fiscal 2000 and early fiscal 2001 was extremely uncertain. This member, however, considered that, if private demand was likely to recover even without substantial support from additional fiscal measures in the second half of fiscal 2000, this could be one strong argument for terminating the zero interest rate policy.
A different member said that, when conducting monetary policy, the Bank should not be overly influenced by the uncertainty in the outlook for fiscal policy, for the following reasons. First, although public investment's contribution to economic growth had been negative for the past three quarters, a self-sustained recovery in private demand was coming into view. And second, economic growth would not be hampered significantly as long as the budget for fiscal 2000 was implemented by the central and local governments as planned. Other members added that interest rates would remain extremely low even after termination of the zero interest rate policy, and this very accommodative monetary policy would be compatible with fiscal consolidation, on which the Government placed emphasis.
Members exchanged views on the extent to which the market and the general public were expecting termination of the zero interest rate policy. Members generally agreed that there remained a gap between the Bank's thinking and the market's, but this was steadily shrinking.
One member commented that the market had not fully factored in termination of the zero interest rate policy. A different member pointed out that industries that were continuing to reduce excess debt and capacity felt strongly against termination.
A different member, however, commented that the discrepancy between the Bank's thinking and the market's was steadily being reduced as a result of improvement in economic indicators and information released by the Bank through various channels. Other members expressed the following view. First, major market participants were preparing for a rise in interest rates by increasing use of various hedging instruments and shifting investment in JGBs to those with relatively short maturities. Such movements were gradually being reflected in JGB prices. Second, the distribution of expectation derived from interest rate futures showed that the market increasingly saw termination of the zero interest rate policy as probable in or before September 2000. And third, discussion both inside and outside Japan on the issue of termination was increasing, indicating that speculation about termination was intensifying in the market. The member thus considered that termination would no longer be a complete surprise to the market, and it should thus be considered that the Bank's thinking had been sufficiently conveyed to the market.
A different member added that the judgment on whether deflationary concern had been dispelled should be based on a comprehensive assessment of prices and economic activity, but the timing of the decision, which should take account of the economic situation and developments in the financial markets, would also be crucial.
Meanwhile, one member advocated adopting monetary base targeting accompanied by setting a target for the rate of increase in the CPI (consumer price index), and increasing current account balances at the Bank to achieve these targets.
The reason for the proposal was as follows. First, warning signs suggesting future weakness in the economy had been observed, and price indicators such as the GDP deflator and consumer prices were on a downward trend. Second, surveys conducted by the Japan Finance Corporation for Small Business, the Regional Banks Association of Japan, and chambers of commerce revealed that the business sentiment of small firms had not shown clear signs of an improvement. Third, quantitative easing should be adopted to produce a faster rise in prices while the effects of fiscal measures remained. Fourth, some sort of explicit policy rule should be employed to enhance communication with the market. And fifth, having the responsibility to pursue price stability, the Bank should set a numerical target for inflation to enhance its accountability and clarify its responsibility.
The above member added that terminating the zero interest rate policy before the new Government had thoroughly discussed whether to draw up a supplementary budget for fiscal 2000 would not be in line with Article 4 of the Bank of Japan Law of 1997, which stipulated that the Bank's currency and monetary control and the basic stance of the Government's economic policy should be mutually harmonious. And furthermore, should the policy be terminated based on an incorrect judgment of the economic outlook, the Bank's independence would be seriously undermined.
V. Remarks by Government Representatives
The representative from the Ministry of Finance made the following remarks.
(1) Japan's economy 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, particularly in the corporate sector. However, the employment situation remained severe, and private consumption was generally flat. In addition, there was some uncertainty in the outlook for the U.S. economy.
The Government had been implementing fiscal measures in order to realize a full-scale recovery of the economy. It would smoothly and steadily implement the budget for fiscal 2000, 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) 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 essential to implement necessary measures for fiscal reform when the economy was back on a full-fledged recovery path. However, as the economy was still at a stage that required attentive monitoring, the Government would continue to place top priority on steering the economy toward a recovery. Although the economy had shown positive growth in January-March 2000 after contracting for two consecutive quarters, the Government considered it appropriate to decide additional fiscal policy after studying GDP data for the April-June quarter due to be released in September.
(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 market.
The representative from the Economic Planning Agency made the following remarks.
(1) Japan's GDP for January-March 2000 grew by a seasonally-adjusted 2.4 percent from the previous quarter, according to preliminary data released on June 9. This meant that the economy had grown by 0.5 percent in fiscal 1999 in real terms--the first increase in three years--and that the Government's target of achieving distinct positive growth had been achieved.
Japan's economy was improving moderately. However, the employment situation remained severe, and corporate restructuring continued. Therefore, developments in income, including summer bonus payments, and prices would continue to require close monitoring. Although business fixed investment was improving, the output gap remained quite large. Therefore, it was still unclear whether the improvement in the economy would continue and to what extent it would spread. In addition, there was some uncertainty in the outlook for the U.S. economy.
(2) A study group of the Economic Planning Agency would hold its second meeting later in June to determine provisionally when the economy had reached its trough. The group's finding would be based on past statistical data, and would not affect the current assessment of the economy nor would it be the basis for an announcement of an economic recovery.
(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 on the economic and financial situation were summarized as follows. First, the improvement in Japan's economy was becoming distinct. Second, recovery had been observed in some areas of private demand, with business fixed investment continuing to increase. Third, developments in the financial markets were generally consonant with the improvement in the economy, although stock prices were somewhat unstable. Fourth, the prospects for a self-sustained recovery in private demand were growing, but further examination was required. And fifth, attention should still be paid to 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.
Until the previous meeting, Ms. Shinotsuka's proposal had included the following sentence: "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." She gave the following reasons for its deletion. First, this sentence reflected the strong concerns about the financial system that had existed in and before February 1999. And, second, it could be judged that deflationary concern had already been dispelled, and thus the sentence was no longer necessary. The deletion did not, of course, mean that necessary measures should not be employed in cases of emergency.
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 2002 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 15 percent annual growth of the monetary base (change from the average for the January-March quarter of 2000 to the average for the same quarter of 2001) 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.
Ms. Shinotsuka dissented for the following reasons. First, the economy had entered a self-sustained recovery phase led by private demand, and thus there was very little risk that the economy would fall into a deflationary spiral. Second, if the zero interest rate policy was continued for a long period of time when the economy was recovering, its impact would be too strong and as a result, its negative side effects would be likely to intensify. And third, even if the zero interest rate policy was terminated, interest rates would remain extremely low and would be able to support the economic recovery.
Mr. Nakahara voted against the chairman's proposal on the following grounds. First, it was necessary to further stimulate the economy by means of monetary policy, as it was becoming likely that it would slow down in the second half of fiscal 2000. Second, given the continued fall in land prices, business conditions for small and medium-sized firms might deteriorate further through an increase in their nonperforming assets and a cautious lending attitude on the part of financial institutions. And third, some sort of explicit policy rule, such as the Taylor Rule or the McCallum Rule, should be employed to help enhance communication with 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. The Board unanimously determined "The Bank's View," for publication on June 14, 2000 in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background").4
- 4The original full text, written in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on June 14, 2000 together with the English version of "The Bank's View." The English version of "The Background" was published on June 26, 2000.
For immediate release
June 12, 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.