Minutes of the Monetary Policy Meeting

on June 28, 2000
(English translation prepared by the Bank staff based on the Japanese original)

August 16, 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 Wednesday, June 28, 2000, from 9:00 a.m. to 12:56 p.m.¹

Policy Board Members Present
Mr. M. Hayami, Chairman, Governor of the Bank of Japan
Mr. S. Fujiwara, Deputy Governor of the Bank of Japan
Mr. Y. Yamaguchi, Deputy Governor of the Bank of Japan
Mr. S. Taketomi
Mr. T. Miki
Mr. N. Nakahara
Ms. E. Shinotsuka
Mr. K. Ueda
Mr. T. Taya

Government Representative Present
Mr. Y. Hayashi, State Secretary for Finance, Ministry of Finance
Mr. E. Kawade, Director-General of the Coordination Bureau, Economic Planning Agency

Reporting Staff
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. H. Yamaoka, Senior Economist, Policy Planning Office
Mr. S. Shimizu, Senior Economist, Policy Planning Office

The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on August 11, 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 May 17, 2000

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of May 17, 2000 for release on July 3, 2000.

II. Summary of Staff Reports on Economic and Financial Developments ²

A. Money Market Operations in the Intermeeting Period

Market operations in the intermeeting period were conducted in accordance with the guideline determined at the previous meeting on June 12, 2000, and the overnight call rate remained steady at 0.02 percent.³

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

Interest rates on short-term instruments, such as one- to three-month instruments, rose reflecting growing expectations of an early termination of the zero interest rate policy. The accepted bid rate in recent bill selling operations showed that the market had already factored in a possible increase in the overnight call rate target to 0.25 percent at the monetary policy meeting on July 17.

Meanwhile, the bond and stock markets were jittery and lacked a sense of direction.

2. Developments in foreign exchange markets

The yen had generally appreciated moderately against the U.S. dollar since the previous meeting. The rise was due partly to the following factors. First, following the release of economic indicators suggesting a slowdown in the U.S. economy, the market expected the contrast between the economic performance of Japan and the United States to become less pronounced. And second, market expectations of an early termination of the zero interest rate policy grew.

C. Overseas Economic and Financial Developments

Overseas economies remained more or less buoyant. In the euro area, the economy continued to expand as evident in the steady increase in industrial production. In NIEs and ASEAN countries also, private consumption and business fixed investment continued to improve against a background of firm exports.

In the United States, household expenditure as a whole remained at a high level, but housing investment and spending on some types of durable consumer goods such as automobiles were showing signs of slowing down. Demand taken as a whole, however, remained strong, chiefly due to spending on services. The labor market remained tight. These factors were exerting upward pressure on the core consumer price index (CPI).

In U.S. financial markets, expectations of an increase in the federal funds rate target eased somewhat due to weaker-than-expected economic indicators released lately, such as May retail sales. Stock prices were steady. Financial markets as a whole were factoring in a future slowdown in the economy. However, it was still difficult to judge whether the U.S. economy could make a soft landing.

With regard to corporate financing in the United States, the spreads between the issue rates of corporate bonds with different credit ratings expanded. The amount of corporate bond issuance decreased somewhat in April and May, although it remained at a high level. Bank lending continued to increase strongly, but surveys revealed that the lending attitude of banks had become slightly more severe. As evident in the above developments, the effects of the successive monetary tightening by the Federal Reserve seemed to be gradually affecting the corporate financing environment in the United States.

D. Economic and Financial Developments in Japan

1. Economic developments

The limited number of economic indicators released in the intermeeting period did not offer enough grounds for changing the Bank's view on the economy decided at the previous meeting.

Although real exports in May decreased by 6.6 percent from the previous month, it was highly probable that they were temporarily depressed after the significant increase in the January-March quarter. Exports seemed to basically continue to follow an upward trend. Real imports in May rose by 8.8 percent from the previous month due to an increase in imports of apparel from China and information technology (IT)-related goods.

According to the Survey of Capital Investment by Small Sized Manufacturers (as of April) conducted by the Japan Finance Corporation for Small Business, small manufacturers planned to increase fiscal 2000 business fixed investment by 1.6 percent from the previous year. The results, which marked the first increase in 27 years for the survey conducted at this time of the year, were fairly strong, and, judging from past experience, were very likely to be revised upward later in the year. The figures for the electrical machinery, chemical, plastic, nonferrous metal, and precision machinery industries were strong, and a significant portion of the investment was to increase capacity in IT-related areas. Judging from the above, it seemed that the increase in IT-related investment by large firms was starting to spread to small manufacturers.

Indicators relating to private consumption remained lackluster. As regards households' income conditions, summer bonus payments had risen by 1.2 percent year on year, according to the interim results of a survey conducted by Nihon Keizai Shimbun Inc. Although the weight on the buoyant electrical machinery industry in this survey was greater than those conducted by other institutes, other surveys such as those conducted by the Japan Federation of Employers' Associations (Nikkeiren) and by the Japanese Trade Union Confederation (Rengo) were showing smaller year-on-year declines as time went by.

Industrial production (seasonally adjusted) in May increased by 0.2 percent from the previous month. Production in the April-June quarter (seasonally adjusted), calculated using the forecast for June, was forecast to continue increasing and mark a 1.4 percent rise from the previous quarter.

2. The financial environment

The year-on-year growth rate of the monetary base in April exceeded 10 percent as post offices held a large amount of banknotes to prepare for a possible massive withdrawal of postal savings. Thereafter, the growth rate of the average amount outstanding declined in May and June as post offices reduced their holdings of banknotes to usual levels in May.

The year-on-year growth rate of money stock (M2+CDs) declined to 2.2 percent in May from 2.9 percent the previous month. This decline could be attributed to the following factors. First, the year-on-year growth rate of bank lending declined after March, a month in which banks boosted lending to meet targets laid down in their plans for restoring sound management submitted to the Financial Reconstruction Commission. Second, the amount of banknotes held by post offices decreased.

in stock and bond investment trusts rose significantly. The increase did not have a significant effect on money stock as it was more or less equivalent to the outflow of funds from postal savings.

Bankruptcies in May decreased slightly from the previous month for the second consecutive month. Although this downtrend should not be seen as a reason for undue optimism, at least no signs of a sharp increase had been observed. Looking at the breakdown, small construction firms accounted for an increasing proportion of the total, and this trend was expected to continue.

III. Summary of Discussions by the Policy Board on Economic and Financial Developments

A. The Current Economic Situation and the Economic Outlook

Members mainly focused on the assessment of economic indicators released since the previous meeting on June 12.

Some members pointed out that some encouraging signs had been observed in business fixed investment and the income situation. However, the majority of members, including these members, generally agreed that these factors could not immediately justify upgrading their view of the economic situation from the previous meeting.

One member, who had been of the view at the previous meeting that the economy had almost reached a situation where it could be said that deflationary concern had been dispelled, remarked that not enough evidence to remove "almost" from the judgment had emerged in the intermeeting period. Another member commented that although the economy was on a recovery track, it continued to lack momentum compared with previous recovery phases due to the ongoing structural adjustment and corporate restructuring.

Members exchanged views on developments in the corporate sector.

With regard to private research institutes' outlook for corporate profits, one member remarked that (1) although the growth rate of sales was slightly negative in fiscal 1999, it was expected to be positive in fiscal 2000 and fiscal 2001, (2) current profits were expected to increase significantly in fiscal 2000 and fiscal 2001 as in fiscal 1999, (3) the outlook for corporate profits had been revised significantly upward from that of three months ago, and (4) an increasing number of firms were expected to see profits grow in fiscal 2000.

With regard to business fixed investment, many members noted the encouraging results of the survey by the Japan Finance Corporation for Small Business, which showed an increase in the fiscal 2000 business fixed investment plans of small manufacturers--the first increase in 27 years for the survey conducted at this time of the year. One of these members said that, according to the survey, small manufacturers planned to step up business fixed investment by a substantial 14.4 percent in the first half of fiscal 2000 compared with a year earlier, and thus one could expect a significant increase in their business fixed investment at least for that period.

With regard to the survey, one member pointed out that (1) 10 out of 18 industries planned to increase business fixed investment in fiscal 2000, and (2) firms' attitude toward investment was becoming positive.

In addition, a few members pointed out that the above survey results were consistent with other statistics; they expressed the view that the uptrend in business fixed investment of small manufacturers was backed by evidence. For example, the survey results above were in line with (1) an increase in business fixed investment of small manufacturers in the Business Outlook Survey compiled by the Ministry of Finance released on June 7, 2000, and (2) a significant 6.6 percent increase in the business fixed investment plans of medium-sized and large manufacturers in the Survey of Capital Investment conducted by the Ministry of International Trade and Industry released on June 17, 2000.

On these grounds, some members, including these members, said that the improvement in the corporate sector was becoming clearer with the uptrend in business fixed investment spreading to a wider range of firms, as growth in IT-related investment gradually influenced small IT-related firms. One of these members expressed the view that the uptrend of business fixed investment was observed mainly in IT-related manufacturers, and the spread to users of IT was limited.

Many members, however, were of the view that they would like to wait for the June Tankan (Short-Term Economic Survey of Enterprises in Japan), due to be released on July 4, to determine whether the upturn in business fixed investment had spread to various other sectors including small nonmanufacturers.

Some members commented on the developments in the corporate sector referring to anecdotal information and industry statistics.

One member remarked that although firms' production seemed to have briefly stopped increasing in April to the beginning of May, it started to increase again after Golden Week (the period from late April to early May that includes several national holidays) reflecting firm exports to Asia and encouraging developments in private demand, such as the rise in business fixed investment and domestic car sales. The member continued that production at some firms was surpassing their original plans.

A different member said that positive developments in the corporate sector had continued in the January-March and April-June quarters as evident in (1) the brisk flow of goods--in May the amount of traffic on highways had shown a year-on-year increase, mainly in large vehicles, for the tenth consecutive month, and (2) the service sector had been vibrant, seeing a double digit year-on-year increase in the volume of advertising in May.

Members next exchanged views on developments in the household sector.

Some members said that although the employment and income situation appeared to have stopped deteriorating, it was taking longer for the improvement in the corporate sector to spread to the household sector than in past recovery phases given firms' continued restructuring and reduction in personnel expenses.

Many members noted that the interim survey results on summer bonus payments conducted by Nihon Keizai Shimbun Inc. showed a slight year-on-year increase.

One member commented that the results were in line with the member's expectation that summer bonus payments would be lackluster. A few other members said that, although one should bear in mind the fact that, with regard to bonus payments, the results of surveys conducted at this time of the year tended to be less reliable than normal due to sampling factors, it was encouraging that at least summer bonus payments this year were unlikely to fall as sharply as in 1999 or 1998. In response to this, another member said that total summer bonus payments might decline from the previous year reflecting a decrease in the number of workers, although various survey results showed that the year-on-year change in summer bonus payment per person would be in the range of around -2 percent to slightly more than zero. This member added that it was increasingly likely that total winter bonus payments would increase year on year, given the macroeconomic situation, notably (1) the increase in corporate profits, and (2) the improvement in the supply-demand balance of the labor market as evident in the increase in the ratio of job offers to applicants, reflecting the increase in production.

On these grounds, one member stated that the prospects of the improvement in the corporate sector spreading to the household sector were gradually improving. Another member said that considering the fact that labor's share in income distribution had already declined substantially, it was highly likely that the improvement in the corporate sector would be reflected in household income if the uptrend in corporate profits continued.

With regard to private consumption, one member pointed out the following facts as encouraging signs: the consumer sentiment indexes compiled by a private research institute indicated that consumer sentiment had recovered and reached the level of around the end of 1996 just before the consumption tax rate was raised, and real consumption expenditure was also reaching the level of that period.

A different member pointed out the possibility that consumer sentiment had been dampened by uncertainty about (1) a possible tax increase given the expansion in the fiscal deficit, (2) the future of the social security system, and (3) the negative wealth effect as seen in the continued fall in land prices. The member also expressed the view that the propensity to consume remained at a reasonably high level and the spending behavior of households remained broadly in line with their disposable income.

Some members commented on the economic outlook taking into account the above mentioned developments in private demand.

One member noted the following two points regarding the economic forecasts of private research institutes. First, their forecasts had been revised upward as compared with three months ago. For economic growth in fiscal 2000, their forecasts ranged from below 1 percent to above 2 percent and averaged about 1.7 percent. As for fiscal 2001, their forecasts ranged from around 1 percent to above 3 percent and averaged about 1.8 percent. And second, most of the institutes did not expect large-scale supplementary budgets to be implemented in fiscal 2000 or in 2001, and had forecast that public investment's contribution to growth would be negative.

Another member said that one could expect economic growth of around 2 percent this fiscal year if business fixed investment increased as suggested by various surveys and private consumption rose. This member said that this possibility of economic growth should be examined in the June Tankan due to be released in early July, and in summer bonus payments.

One member who took a more cautious view of the economic outlook than other members mentioned the following points. First, the Indexes of Business Conditions showed that the leading indicators of the composite index (CI) had been decreasing since January 2000. Also, the ratio of the coincident index to the lagging index for business conditions--empirically known to be an indicator of the condition of the economy some months ahead--had been following a downtrend after peaking out in December 1999. Second, unlike the large-scale economic expansions led by business fixed investment, i.e., the Iwato expansion (1958-61), the Izanagi expansion (1965-70), and the bubble period, phases of economic expansion between December 1971 and June 1985 lasted only for an average of 25 months. Third, nominal GDP and industrial production remained low, and the former in particular had recently been decreasing on a year-on-year basis. Fourth, the effect of public works projects had diminished judging from the decrease of more than 10 percent in shipments of goods related to public investment compared with shipments around 1990. Fifth, firms had not made sufficient progress in restructuring.

Further, with regard to oil prices, this member said that (1) incidents such as the strike of workers in Norway's offshore oilfields suggested oil prices could become volatile, (2) prices of gasoline in the United States were surging, (3) it would take two months for the effects of the recently decided increase in OPEC oil production to affect end-user prices, and by then the summer seasonal demand for oil would have diminished, and (4) there was a possibility that Iraq might stop crude oil production. The member concluded that on balance the supply-demand balance of crude oil could tighten from the end of 2000 to the beginning of 2001.

Next, members discussed developments in prices.

One member raised the question of how one should interpret the situation where domestic wholesale prices were rising somewhat while consumer prices and the GDP deflator were slightly negative year on year.

This member said that a situation where wholesale prices became firmer while consumer prices and the GDP deflator eased was not particularly strange in the early stages of an economic recovery especially when a recovery in the corporate sector was preceding that of the household sector. This was because, while wholesale prices tended to reflect changes in corporate activity, consumer prices and the GDP deflator were under downward pressure from (1) relative weakness in private consumption (demand factor), and (2) a decrease in the production cost per unit due to a rise in capacity utilization (supply factor). This member added that as the economy recovered further, prices would eventually stop falling due to a tightening of the supply-demand balance of various goods and services. Further, this member pointed out that there had been cases in the past where the level of economic activity rose while the slack in the economy remained as evident in the economy in 1996, when the GDP deflator had continued to fall despite relatively high economic growth of 4.4 percent.

Another member analyzed price developments from the perspective of firms.

This member said that (1) the risk of product prices falling due to weak demand had almost been dispelled, (2) it was very difficult for firms to raise product prices unilaterally amid heightened price competition, and (3) products whose prices were higher than in the global market faced enormous international competition and their prices remained under pressure to fall in line with international prices. Such downward pressure was having a strong impact in particular on consumer prices, which had been pushed up partly by inefficiency in the distribution system, and was affecting some long-term contract prices agreed between companies.

The member commented that this pressure was prompting adjustment in the cost structure that was necessary to enhance international competitiveness and that price falls stemming from this factor could not be described as deflationary. Further, an increasing number of firms were recently reviewing their cost structure based on the assumption that such structural changes would continue.

A different member said that firms had to develop business strategies taking account of the difficulty of raising prices of products. Furthermore, this member stated that many firms were aware of this and had already succeeded in increasing profits by improving productivity.

B. Financial Developments

Some members expressed the view that judging from the developments in short-term interest rates, financial markets seemed to have factored in termination of the zero interest rate policy in the not-so-far future.

Against this background, members exchanged views on the overall stability of long-term interest rates at a low level.

One member raised the question of how consistent this situation in long-term interest rates was with: (1) the rise in short-term interest rates as a result of their pricing in termination of the zero interest rate policy; and (2) the upward revisions in private research institutes' economic forecasts, with some forecasting economic growth of 2 percent for fiscal 2000. This member added that it was very important to examine these points when considering the effects of termination of the zero interest rate policy on financial markets.

Another member remarked that long-term interest rates were low probably because (1) the supply-demand balance of bonds was favorable in the short term, and also (2) the financial markets had more cautious views on the future course of the Japanese economy than private research institutes.

Another member said that the possibility that long-term interest rates would surge sharply due to termination of the zero interest rate policy was slim considering that (1) the financial markets had fairly fully factored it in, and (2) for the time being it was very unlikely that demand for funds would increase substantially.

One member who had a cautious view on the economic situation mentioned that there was a risk that U.S. stock prices might fall sharply in July 2000. The member pointed out that, according to data covering the past 80 years, U.S. stock prices had tended to plunge not long after the Federal Reserve had raised its official discount rate to 6 percent or more. With regard to Japanese stock prices, the member pointed out that stock prices in the banking sector were weighing down the overall market as could be seen in their decline to about 9 percent of the total market value of the first section of the Tokyo Stock Exchange, the smallest share since 1983. This member however said that, given that the market had already factored in the positive effects of firms' restructuring on their profits, if a positive factor that might surprise the market was to emerge, that factor could be a surge in corporate sales.

IV. Summary of Discussions on Monetary Policy for the Immediate Future

Based on the above assessments of the economic and financial situation, members discussed the monetary policy stance for the immediate future.

One member assessed the economic situation as follows. In the corporate sector, a positive mechanism for income generation was functioning, and this was expected to contribute to a self-sustained recovery of private demand by improving the employment and income situation. Thus, the member judged that the risk that the economy would fall into a deflationary spiral had decreased to a sufficiently small level. On these grounds, the member considered that the criterion for terminating the zero interest rate policy, "until deflationary concern has been dispelled," had been satisfied, and therefore the overnight call rate target should now be raised to around 0.25 percent--the level before the zero interest rate policy was adopted.

The majority of members expressed the view that, as judged at the previous meeting, the economy was steadily approaching a situation where it could be said that deflationary concern had been dispelled. However, they also shared the view that only a limited number of economic indicators had been released in the intermeeting period, and there had been no significant factors that would prompt the Bank to upgrade its assessment of the economy. Therefore, with regard to monetary policy for the immediate future, the majority of members considered that it was appropriate to continue the zero interest rate policy.

Members discussed from various perspectives whether it was appropriate to terminate the zero interest rate policy.

Many members commented on how one should evaluate the zero interest rate policy and the implications of terminating it.

One member was cautious about terminating the zero interest rate policy on the grounds that it was the first shift to monetary tightening in about ten years. This member remarked that monetary policy had to focus not only on money market operations but also on macroeconomic management such as demand control. The member also compared the current situation in Japan to that of the United States during 1992-94 when the effectively zero percent real interest rate policy was in force. The member considered that Japan could learn from U.S. monetary policy during that period. The member pointed out that in contrast to the situation in the United States at that time, real interest rates had been positive in Japan. Furthermore, the Federal Reserve had waited until it was certain that U.S. economic entities had completed their balance-sheet adjustment.

In response to this, another member expressed the view that the level of interest rates should be evaluated in the context of the overall economic situation. The member continued that the economy had clearly improved since the zero interest rate policy had been introduced. If the increase in interest rates was small relative to the extent of the improvement in the economy, it could be said that an extremely stimulative monetary environment was being maintained. Therefore, it was not necessary to consider that termination of the zero interest rate policy itself constituted "monetary tightening."

A different member commented that termination of the zero interest rate policy should be considered as a slight adjustment within the Bank's extremely easy monetary policy stance to normalize the interest rate structure, and thus termination of the policy need not be seen as a shift to monetary tightening. The member, however, added that financial markets and firms could focus solely on the rise in interest rates and perceive termination of the policy as monetary tightening. Therefore, it was necessary for the Bank to give a convincing explanation to the public at home and abroad that termination was a slight adjustment within the Bank's extremely easy monetary policy stance.

Next, some members commented on the relationship between termination of the zero interest rate policy and fiscal policy.

The member who regarded termination of the zero interest rate policy as monetary tightening expressed concern that termination of the policy at a time when the Government was shifting to a neutral fiscal stance would have a negative impact on the economy.

A member who considered that termination of the zero interest rate policy was a slight adjustment within the Bank's extremely easy monetary policy stance expressed the following view. It was natural to adjust the degree of monetary easing when fiscal expenditure was gradually reduced as the economy improved. In this regard, termination of the zero interest rate policy would be in tune with fiscal policy and efforts to respond to the strong expectations of countries such as the United States that Japan further expand domestic demand. However, there was a danger of a misunderstanding arising that the Bank was raising interest rates at a time when the Government was implementing fiscal measures, and in overseas economies, including that of the United States, much attention was being paid to whether Japan could achieve a recovery led by domestic demand. Against this background, it was important from the standpoint of accountability that the Bank explain the meaning of termination of the policy and the state of the economy that would allow termination, in order to gain the understanding of the public and global financial markets.

A different member commented that fine adjustments to the extremely easy monetary policy when the economy was improving did not conflict with the Government's economic policies. The member pointed out that fiscal policy and monetary policy differed in nature; the former was decided based on the budget system and directly created demand while the latter should be employed in a flexible manner, taking account of the effects of the former. The member commented that the meaning of compatibility of monetary policy with fiscal policy should be examined carefully, as there seemed to have been cases where an inappropriate interpretation of the idea had hindered the Bank from taking appropriate monetary policy action at the right time.

In addition, some members commented on the points that needed to be checked when deciding whether to terminate the zero interest rate policy.

Many members expressed the view that it was crucial that a self-sustained recovery of private demand--that included both business fixed investment and private consumption--was sufficiently strong. Some members further commented that they would like to confirm the strength of the recovery of the corporate sector from, for example, the June Tankan, and judge whether the employment and income situation had clearly stopped deteriorating by examining the Tankan and other various economic indicators.

Some members further listed the following as important points to check: (1) the state of financial markets, such as the bond, stock, and foreign exchange markets; and (2) developments in the economy and financial markets of the United States and their influence on Japan's economy.

One member remarked that the member had voted consistently against maintenance of the zero interest rate policy, pointing out its negative side effects as one of the reasons. The member continued that, when evaluating the zero interest rate policy, its side effects should be considered carefully. In order to ensure that the reasons for termination of the policy were fully understood at home and abroad, it was most important for the Bank to assess the economic and financial situation by examining various indicators, so that it could provide objective proof that the economy had improved and deflationary concern had been dispelled. A different member commented that, when terminating the zero interest rate policy, the Bank should make clear its view of the economic outlook, checking it against the criteria for terminating the policy--the disappearance of deflationary concern. This view was supported by the majority of members.

A different member commented on whether the economy had reached a situation where the zero interest rate policy could be terminated.

The member remarked that even in circumstances where high economic growth was expected, it might be desirable to keep interest rates negative, which might in the present situation mean a continuation of the zero interest rate policy, depending on the size of the GDP gap and the difference between the inflation rate aimed for and the actual inflation rate. Further, the optimal interest rate derived from the Taylor Rule might have risen to close to zero percent depending on the assumption used for the calculation. However, the results of the calculation would differ depending on the assumption. Some might think it necessary to wait until the optimal interest rate had risen clearly above zero percent before it could be said that deflationary concern had been dispelled. It should be noted, however, that the optimal interest rate derived from the Taylor Rule was merely one factor, among many, that helped in decision-making.

Meanwhile, one member advocated adopting monetary base targeting accompanied by setting 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, the economy was in a recovery phase but a large deflationary gap remained, and there were no empirical studies to prove that inflationary concern had emerged or the deflationary gap had disappeared and thus further easing of monetary policy was necessary. Second, based on the assumption that the potential economic growth rate was 2 percent, the target inflation rate was 1 percent, and the target for nominal GDP growth was 3 percent, calculations using the McCallum Rule showed a 15 percent target for year-on-year growth in the monetary base could be considered suitable. Third, the CPI and the GDP deflator were declining year on year. Fourth, quantitative easing should be adopted while effects of economic policy measures remained because the economy was most likely to stall if fiscal support diminished in the autumn. And fifth, setting a target for the CPI and releasing projections for factors underlying developments in the CPI, such as GDP growth, would make monetary policy more forward-looking and preemptive.

V. Remarks by Government Representatives

The representative from the Ministry of Finance made the following remarks.

(1) Japan's economy continued to improve moderately, but the employment situation remained severe. Private consumption had been more or less unchanged. Therefore, the economy as a whole still remained in a severe situation. The improvement in business fixed investment had become clearer, but its sustainability and the extent to which it would spread would continue to require close monitoring. With regard to the substantial improvement in corporate profits, it was not clear whether it would lead to an improvement in the employment and income situation or an increase in private consumption. The GDP deflator and the CPI had continued to decrease year on year. In addition, there was some uncertainty about the U.S. economy, and its developments would require close monitoring.

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 achieve a full-scale economic recovery led by private demand.

(2) Given Japan's critical fiscal condition, the Government considered it essential to implement necessary measures for fiscal reform when the economy was back on the path to a full-fledged recovery. However, as the economy was still at a stage that required attentive monitoring, the Government would continue to place top priority on ensuring an economic recovery. While Japan's economy had grown in the January-March quarter this year after two consecutive quarters of contraction, it was considered necessary to closely monitor developments. In order to avoid a premature change in policy that would prompt an economic slowdown and reduce credibility inside and outside Japan in the management of the economy, the Government considered it appropriate to decide future fiscal policy after studying preliminary GDP data for the April-June quarter of 2000.

(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 economy continued to improve moderately due to the effects of various policy measures and of the economic expansion in Asia. Movements toward a self-sustained recovery of the economy were gradually strengthening, mainly in the corporate sector. However, corporations were undergoing full-scale restructuring, the employment situation remained severe, and considering the level of bonus payments agreed on, growth in personal income was expected to remain low for a while. A recovery in consumption could be expected if the employment and income situation showed solid improvement, but there was no certainty yet that it would do so. Although the improvement in business fixed investment had become clear, whether its recovery would be sustained and the extent to which it would spread to various industries remained uncertain, given the substantial supply-demand gap in the real economy.

There were various factors that made it hard to predict the course of the economy, such as developments in the world economy, including the U.S. economy, and their effects on foreign exchange and stock markets, possible rises in long-term interest rates and the yen, the sustainability of business fixed investment and the extent to which it would spread to various industries, an acceleration in the pace of corporate restructuring, the effects of mergers and acquisitions in the financial sector and the disposal of nonperforming assets on corporate activity, and a reduction in social infrastructure investment by local governments.

The Government considered it vital that the economy returned as soon as possible to a self-sustained recovery track that was in line with the potential economic growth rate. To this end, the Government's policy measures attached importance to accelerating and reinforcing structural reform to achieve a revitalized economy in the 21st century and ensuring a self-sustained recovery.

(2) To ensure a solid economic recovery, it was necessary to monitor the extent to which improvements in the economy spread and also their sustainability to determine whether the economy could return to a full-scale recovery track, led by private demand. The Government would like to ask the Bank to continue implementing monetary policy appropriately and in a timely manner--for example, by flexibly providing ample funds in the market giving due consideration to developments in financial markets, including the foreign exchange market.

VI. Votes

Based on the above discussion, 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 targeting accompanied by a target for the rate of increase in the CPI.

As a result, three policy proposals were put to the vote.

Ms. Shinotsuka proposed the following as the guideline for money market operations for the intermeeting period ahead:

The Bank of Japan will encourage the uncollateralized overnight call rate to move on average around 0.25 percent.

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 1).

The Bank of Japan will flexibly provide ample funds and encourage the uncollateralized overnight call rate to move as low as possible.

Votes for the proposal: Mr. M. Hayami, Mr. S. Fujiwara, Mr. Y. Yamaguchi, Mr. S. Taketomi, Mr. T. Miki, Mr. K. Ueda, and Mr. T. Taya.

Votes against the proposal: Mr. N. Nakahara and Ms. E. Shinotsuka.

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. It could therefore be judged that the criterion for terminating the zero interest rate policy--"until deflationary concern has been dispelled"--was satisfied. And second, even if the zero interest rate policy was terminated, monetary policy would continue to be extremely accommodative.

Mr. Nakahara voted against the chairman's proposal on the following grounds. First, the zero interest rate policy was expressed in ambiguous language, without concrete figures or standards, and this made it difficult for the Bank to convey its thinking to the market. Second, under the current situation where there were no inflationary risks, growth in both the monetary base and money supply would slow without measures in addition to the zero interest rate policy, and this could have a negative effect on stock prices and the yen. The Bank should therefore change its passive policy stance to a more proactive one.

VII. Approval of the Scheduled Dates of the Monetary Policy Meetings in July-December 2000

At the end of the meeting, members approved the dates of Monetary Policy Meetings to be held in the period July-December 2000, for immediate release (see Attachment 2).

Attachment 1

For immediate release

June 28, 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: