Minutes of the Monetary Policy Meeting
on September 14, 2000
(English translation prepared by the Bank staff based on the Japanese original)
October 18, 2000
Bank of Japan
A Monetary Policy Meeting of the Bank of Japan Policy Board was held in the Head Office of the Bank of Japan in Tokyo on Thursday, September 14, 2000, from 9:01 a.m. to 12:21 p.m., and from 1:13 p.m. to 2:38 p.m.1
Policy Board Members Present
Mr. M. Hayami, Chairman, Governor of the Bank of Japan2
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. Murata, Senior State Secretary for Finance, Ministry of Finance
Mr. S. Ono, Senior State Secretary for Economic Planning, Economic Planning Agency3
Mr. T. Komine, Director-General of the Research Bureau, Economic Planning Agency4
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. M. Shirakawa, Advisor to the Governor, Policy Planning Office
Mr. T. Nunami, Associate Director, International Department
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. C. Sakuraba, Chief Manager, Global Economic Research Division, International Department5
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 October 13, 2000 as "a document which contains an outline of the discussion at the meeting" stipulated in Article 20, Paragraph 1 of the Bank of Japan Law of 1997. Those present are referred to by their titles at the time of the meeting.
- Mr. Hayami was absent from 9:01 a.m. to 10:20 a.m. to attend a meeting of the Ministerial Council which discussed issues including the Economic Planning Agency's Monthly Economic Report. During his absence, Mr. Fujiwara performed the duties of chairman pursuant to Article 16, Paragraph 5 of the Bank of Japan Law of 1997.
- Mr. Ono was present from 9:01 a.m. to 12:21 p.m.
- Mr. Komine was present from 1:17 p.m. to 2:38 p.m.
- Mr. Sakuraba was present from 9:01 a.m. to 9:44 a.m.
I. Summary of Staff Reports on Economic and Financial Developments6
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 August 11, 2000.7 As a result, the overnight call rate was generally steady at 0.25 percent.
The overnight call rate was below the target rate of 0.25 percent on August 14 and 15, the first two business days after the guideline for market operations was changed. On both days, financial institutions' demand for funds was weak as they had already satisfied most of their reserve requirements in anticipation of an increase in the overnight call rate target on August 11. The Bank had been providing a massive amount of funds to the market until August 11 under the zero interest rate policy, and as a result the market was left with a huge amount of funds that could not be drained from the market in one day. Thus, there was a large surplus of funds on August 14 and 15, the last day of the reserve maintenance period that started in mid-July. In the United States too, it has tended to take a few days for the market rate to reach the target level after the target rate has been raised.
From August 16, the start of a new reserve maintenance period, financial institutions procured funds aggressively to secure liquidity, briefly pushing the overnight call rate above 0.25 percent. The market, however, gradually regained stability due to the Bank's provision of ample funds, and the overnight call rate was stable around 0.25 percent from August 18 onwards.
As for current account balances at the Bank, both the amounts in the accounts of institutions not subject to reserve requirements and the amount of excess reserves decreased sharply compared to those under the zero interest rate policy. The amount of funds outstanding in the call market recovered to around 25 trillion yen from 18 trillion yen mainly due to a shift in funds to the market from ordinary deposits at banks.
- 6Reports were made based on information available at the time of the meeting.
- 7The guideline was as follows:
The Bank of Japan will encourage the uncollateralized overnight call rate to move on average around 0.25 percent.
B. Recent Developments in Financial Markets
1. Developments in domestic financial markets
Financial markets were very stable immediately after the termination of the zero interest rate policy, and it was thus confirmed that market participants had received the policy change calmly. In the second half of August, the Nikkei 225 Stock Average rose to 17,000-18,000 yen, long-term interest rates increased to almost 2 percent in early September, and the yen appreciated slightly. However, all declined somewhat thereafter.
In the stock market, the Nikkei 225 recovered to 17,000-18,000 yen in late August, but subsequently weakened due to a decline in the Nasdaq composite index and downward pressure from Japanese firms' unwinding of cross-shareholdings ahead of their interim book closings. Recently, the Nikkei 225 was around 16,000-16,500 yen, the level at the time of the previous Monetary Policy Meeting. Market sentiment, however, had not weakened significantly, due to forecasts of firm growth in corporate profits and increased expectations of a soft landing of the U.S. economy.
Long-term interest rates increased gradually from the middle of August, reaching just below 2 percent in early September. The continued rise in the rates after stock prices weakened in late August was due partly to concerns over fiscal policy management. Subsequently, the rates declined reflecting somewhat weak economic indicators and were recently around 1.85-1.90 percent.
In the money market, interest rates on four-month instruments rose slightly due to growing demand for funds maturing beyond the year-end in preparation for the introduction of real-time gross settlement (RTGS) scheduled for January 4, 2001.
2. Developments in foreign exchange markets
The yen had risen somewhat against the U.S. dollar since the last Monetary Policy Meeting. The yen briefly touched 104-105 yen on September 7 reflecting an improved outlook for Japan's economy, the release of economic indicators suggesting a slowdown in the U.S. economy, and the sharp fall of the euro. Thereafter, the yen declined somewhat due to the release of weak economic indicators in Japan and the downgrading of Japanese government bonds by a credit-rating agency. Market sentiment, however, seemed to be in favor of the yen.
Against the euro, the yen surged to a level beyond its historical peak. Sales of the euro were triggered by comments by officials of European authorities and speculation that Japanese institutional investors would sell euro-denominated bonds ahead of their interim book closings.
C. Overseas Economic and Financial Developments
Expectations that the U.S. economy would make a soft landing had increased, and the world economy as a whole continued to expand. The rise in crude oil prices was starting to influence prices in some countries, and each of these countries was paying close attention to how this development would affect its economy.
In the United States, the economy continued to expand led by domestic demand. However, an increasing number of indicators, such as consumption of durable goods, housing starts, and employment data, showed that the economy was slowing, and prices remained stable. At the Federal Open Market Committee (FOMC) meeting on August 22, the target for the federal funds rate was kept unchanged. The statement released after the FOMC meeting said that the expansion of aggregate demand was moderating toward a pace closer to the rate of growth of the economy's potential to produce. As this statement weakened expectations of a further increase in interest rates, long-term interest rates declined slightly. The statement also said that the FOMC remained concerned about the risk of a continuing gap between the growth of demand and potential supply and believed the risks continued to be weighted mainly toward conditions that might generate heightened inflation pressures in the foreseeable future, showing that the Federal Reserve maintained a cautious stance.
In the euro area, both domestic and external demand continued to expand. The economic sentiment index remained at a high level, and the unemployment rate was 9.1 percent, the lowest level since 1992. Prices continued to trend moderately upward reflecting the rise in crude oil prices and the depreciation of the euro. In July, consumer prices rose by 2.4 percent from a year earlier, above the limit of the European Central Bank's (ECB's) price stability objective. Under these circumstances, the ECB decided on August 31 to raise interest rates by 0.25 percentage point.
In East Asian countries, private consumption and business fixed investment continued to recover, helped by buoyant exports and the permeation of the effect of past economic stimulus measures. In many of these countries, growth of real GDP for the second quarter of 2000 slowed slightly, but the recovery trend was still sustained. The rates of increase in consumer prices were rising moderately in accordance with the tighter supply-demand balance and the rise in crude oil prices.
D. Economic and Financial Developments in Japan
1. Economic developments
Several indicators released in the past month showed large fluctuations, but it was considered that there was no need to change the judgment that Japan's economy was recovering gradually, with corporate profits and business fixed investment continuing to increase.
With regard to final demand, public investment was about to decrease since the implementation of the supplementary budget for fiscal 1999 had peaked out. Net exports continued to follow a moderate upward trend. As for domestic private demand, business fixed investment was increasing, but the recovery in private consumption continued to be weak as a whole. Against this background, production was rising.
Reflecting these developments, the virtuous circle of income and spending starting from the corporate sector continued to operate. Corporate profits continued to improve as seen in the Financial Statements Statistics of Corporations by Industry, Quarterly for April-June 2000. Business fixed investment was in a temporary lull, but judging from movements of leading indicators, it seemed to remain on a rising trend. The results of the Monthly Labor Survey for June and July combined showed that firms' cutting of bonus payments had almost come to a halt. Therefore, although the household income situation remained severe, it seemed poised for a gradual improvement.
As for prices, there had been no significant change. Domestic wholesale prices were mostly unchanged, while consumer prices continued to be somewhat weak. Corporate service prices were still falling slowly.
The economy was likely to recover moderately based on the following three factors. First, the positive interaction between exports, corporate profits, and business fixed investment would continue in the foreseeable future, reflecting the global expansion in demand for information technology (IT)-related goods and services. Second, although a significant change had not been observed in firms' efforts to restrain personnel expenses, household income was poised to make a modest recovery as production increased. And third, the impact of the fiscal drag expected in or after the second half of the fiscal year would lessen if a supplementary budget for fiscal 2000 was formulated.
As for the outlook on prices, downward pressure on prices stemming from weak demand was declining significantly. Technological innovation, the streamlining of distribution channels, and deregulation were likely to exert downward pressure, while the recent increase in crude oil prices was likely to create upward pressure. Under these circumstances, price indexes as a whole were expected to be stable or somewhat weak.
2. The financial environment
Only a limited amount of economic and financial data had been released since the termination of the zero interest rate policy. Based on the information available, there seemed to be no substantial change in the lending attitude of financial institutions and in the easing of corporate financing conditions.
The underlying tone of private banks' lending remained sluggish, but recently the year-on-year decline seemed to have stopped widening. New demand for funds in IT-related areas was emerging according to anecdotal information. This demand, however, was not yet strong enough to boost the total amount of lending. In the money and capital markets, the amount outstanding of commercial paper (CP) had decreased compared with the previous month. Issuance of corporate bonds remained around 500-600 billion yen per month on average with monthly fluctuations.
The year-on-year growth rate of money stock (M2+CDs) for August was 1.7 percent, lower by 0.3 percentage point than the previous month and the lowest since the 1.5 percent of June 1994. The year-on-year growth rate of the monetary base was 4.6 percent in August, down sharply by 1.2 percentage point from the previous month, due to the steep decline in both excess reserves and current account balances at the Bank held by institutions not subject to reserve requirements following the termination of the zero interest rate policy.
Firms' fund-raising costs, such as long- and short-term prime lending rates, corporate bond rates, and CP rates, were rising slightly, due to the rise in market rates.
The number of corporate bankruptcies increased in July. The number of failures of wholesalers, retailers, and construction firms was conspicuous.
II. Summary of Discussions by the Policy Board on Economic and Financial Developments
A. The Current Economic Situation
Regarding the current economic situation, the majority of members shared the view that some indicators released in the past month seemed weak at first glance, and therefore, they should be examined carefully. It was unnecessary, however, to change the judgment from the previous meeting that the economy was recovering gradually, with corporate profits and business fixed investment continuing to increase.
Members first discussed recent trends in private demand.
Some members expressed the view that the quarter-on-quarter decline in business fixed investment for April-June, as shown in the preliminary GDP data, was a temporary phenomenon. These members considered that the corporate sector as a whole was continuing to improve on the following grounds. First, corporate profits were improving as evident in Financial Statements Statistics of Corporations by Industry, Quarterly for April-June. Second, firms such as electrical machinery manufacturers had successively revised their business fixed investment plans for fiscal 2000 upward. Third, leading indicators were on an upward trend. And fourth, production and the index of tertiary industries' activity were rising.
One of these members, however, said that corporate profits might be constrained by potential negative factors including firms' write-offs of excessive debts, the changes in accounting rules including the introduction of accounting for retirement benefits and mark-to-market accounting, and downward pressure on prices stemming from global competition. Thus in some respects, corporate profits actually remained somewhat vulnerable.
A different member expressed a cautious view on business fixed investment on the following grounds. First, of the 13 industries covered in Financial Statements Statistics of Corporations by Industry, Quarterly, the increase in business fixed investment was concentrated in four--real estate, electrical machinery, services, and food--and thus was not widespread. Second, the achievement ratio for the quarterly forecast of machinery orders was declining. And third, growth in fixed investment by small firms and family owned firms was falling.
As for household income and private consumption, some members were of the view that employees' income might have started to improve gradually, judging from the increase in the average of June and July bonus payments from the same period a year earlier.
One of these members pointed out the following as noteworthy evidence of a recovery in the employment and income situation. An increase in the number of employees was making up for the decline in the number of the self-employed and family workers, which was showing the sharpest fall since that during the oil crisis in 1973. Another member raised the following points. First, according to the Business Outlook Survey compiled by the Ministry of Finance, small and medium-sized firms were starting to experience labor shortages. Second, the ratio of applicants to the number of job advertisements in a job-hunting magazine had surged recently. And third, the proportion of small firms that had made bonus payments seemed to be rising.
Following the above discussion, one member expressed the view that private consumption appeared to have started to improve gradually. Some members said that April-June preliminary figures for private consumption in the GDP data, which increased for the second consecutive quarter, seemed too strong considering the movements of other consumption indicators. They continued, however, that attention should be paid to this data given that it might reflect trends in private consumption that could not be captured by various sales data. Another member said that even manufacturers facing price competition and lacking a sense of recovery were recognizing that private consumption had been recovering in terms of quantity, and thus, it could be said that private consumption had reached a level that could be considered as normal. The member, however, added that developments in private consumption continued to require close monitoring as it would take time for employment and income to recover.
A different member held a very cautious view of the household sector for the following reasons. First, private consumption in the April-June preliminary GDP data seemed stronger than it was in reality, as it had been boosted by the introduction of the nursing care insurance system for the elderly, a rise in the number of households, and an increase in rents. Second, according to Financial Statements Statistics of Corporations by Industry, Quarterly, firms' personnel expenses had fallen by 5 percent year on year. Therefore, it could be said that the employment and income situation had not improved yet. And third, the reduction in civil servants' salaries might have an adverse impact on the employment and income situation.
Some members commented on the preliminary estimates of GDP for the April-June quarter. The majority of these members agreed that, judging from the data for the April-June quarter and the January-March quarter taken together, it could be confirmed that the driving force of the economy had shifted from public to private demand, although in the April-June quarter individual demand components had fluctuated widely on a quarter-on-quarter basis and the contribution of public demand was greater than that of private demand. A few of these members expressed the view that it had become highly probable that the economic growth rate for fiscal 2000 would be around 2 percent in view of the GDP data.
Another member expressed the view that it was not necessary to change the judgment that downward pressure on prices stemming from weak demand was declining significantly because of the sharp fall in the GDP deflator alone. The member pointed out that (1) the sharp fall in the GDP deflator was caused partly by the plunge in the deflator for exports and the decline in the deflator for government consumption reflecting the reduction in bonuses for civil servants, and (2) the fall in the deflators for private demand and private consumption, both of which closely reflected the domestic supply-demand situation, was becoming somewhat smaller compared to that around the end of 1999.
Some members raised the following point related to GDP data on income. The GDP data showed that growth in employees' income outpaced that of real GDP, and thus the unit labor cost was increasing. And it was likely that unit profit was also rising judging from recent developments in corporate profits. Given the above analysis, the sharp fall in the GDP deflator was difficult to explain. One of these members added that the rise in employees' income in the April-June GDP data was fairly large but was likely to be revised to a more moderate increase, judging from other indicators released recently.
A different member held a cautious view of business fixed investment and private consumption, and expressed concern with regard to the following points. First, the momentum of the economic recovery might have peaked out judging from the Indexes of Business Conditions. Second, although production had increased in industries such as electrical machinery, chemicals (excluding pharmaceuticals), and pulp and paper, production in other industries and production as a whole had not yet exceeded the historical peak. Third, public investment was expected to continue following a downtrend. And fourth, the OECD's composite leading indicator for the world economy had moderated.
B. Financial Developments
On the financial front, members generally agreed that financial markets had responded calmly overall to the termination of the zero interest rate policy.
Many members noted that there had been no significant change in developments in financial markets after the termination of the policy, and thus it could be said that they had responded very calmly. As for the financial environment, there had been no significant change in financial institutions' lending stance and in the easing of corporate financing conditions.
Some members remarked that, although it was too early to judge at this stage the impact of the termination of the policy on the economy, there seemed to have been few significant effects to date, judging from the calm response of financial markets.
Members commented on developments in financial markets since the middle of August when the initial effects of the termination of the zero interest rate policy seemed to have subsided.
Some members paid attention to the following. Until late August, a rise in stock prices, a slight increase in long-term interest rates, and a strengthening of the yen, all of which reflected the brighter outlook for the Japanese economy, were observed. However, from the end of August to early September, there was movement in opposite directions: stock prices weakened, but long-term interest rates and the yen rose.
There was an opinion that the fall in stock prices from the end of August was prompted by growing downward pressure from the unwinding of cross-shareholdings and weakness in U.S. stock prices. One member said that stock prices needed to be analyzed from the perspective of the globalization of the market, and that stock prices would continue to be under downward pressure until price-earnings ratios had been adjusted to lower, international levels and the amount of cross-shareholdings had been reduced. This member added that technical analysis of U.S. stock markets suggested that there was a risk that U.S. stock prices would plummet between September and the end of October. A few other members, however, said that if the fall in stock prices was mainly attributable to the unwinding of cross-shareholdings, stock prices would stabilize when it subsided.
It was pointed out that the continued rise in long-term interest rates and the yen was attributable to a perception that there might be an increase in the issuance of government bonds and to the weakening of the euro, respectively, as well as the continued optimism about the economic outlook.
One member considered that the recent fall in the euro warranted attention as it could dent the competitiveness of Japanese exports to the euro area and also could reduce the consolidated profits of Japanese firms operating in the area.
A few other members commented on the monetary and credit aggregates, such as money stock and private banks' lending, which remained weak. These members added that this weakness was partly due to firms' continued efforts to repay debt reflecting the improvement in corporate profits and to the easing of concerns about the financial system. It was therefore compatible with an economic recovery. One of these members pointed out that the growth of money stock had slowed partly because of a shift of a part of firms' financial assets from ordinary deposits to CP issued by banks, and the growth rate of broadly-defined liquidity had been stable. This member continued that various monetary and credit aggregates should be monitored carefully and examined comprehensively together with an analysis of (1) the level of concern over the financial system, (2) the relationship between business fixed investment and firms' cash flow, (3) the lending attitude of financial institutions, and (4) trends in debt repayment by individuals and firms. A different member added that the Bank should explain developments in monetary aggregates thoroughly so that the public would not mistakenly consider that monetary conditions were tightening, on the basis solely of superficial developments in the monetary aggregates figures.
C. The Economic Outlook
On the economic outlook, members agreed to maintain the view at the previous meeting that the economy was likely to recover gradually led mainly by business fixed investment unless there were major adverse external shocks.
Members mainly discussed the momentum and sustainability of a recovery in private demand, but they first exchanged views on exogenous demand, which supports private demand.
Regarding public investment, a few members said that they would focus on the content and size of a possible supplementary budget for fiscal 2000, since the positive effects of the supplementary budget for fiscal 1999 were subsiding.
As for housing investment, one member said that it was currently being supported by construction of condominiums and, to ensure that the support continued, the tax reduction on housing loans should be extended for a longer period of time. A different member expressed the view that housing investment depended on what would happen to the tax reduction on housing loans. The member, however, noted that even if housing investment declined, its impact on the whole economy would be limited.
One member expressed the view that it was highly likely that the year-on-year decline in exports in July was a temporary phenomenon caused by the smaller number of business days than the same month the previous year, and given that overseas economies continued to expand, it could be said that exports were still on an uptrend. A few members, however, remarked that exports might temporarily stop increasing because (1) inventories of some Japanese exports were increasing mainly in Asian countries, and (2) Japanese car manufacturers were planning to cut production in anticipation of slower car sales in the United States.
Members exchanged views on the outlook for private demand, focusing on the extent to which business fixed investment was spreading and its sustainability.
Some members expressed the view that business fixed investment, which had been driven mainly by IT-related industries, recently seemed to be gaining momentum in a wider range of industries and a variety of sizes of firms.
One of these members, however, said that it was necessary to bear in mind the risk that supply of IT-related goods might exceed demand on a global basis, since business fixed investment in IT-related areas had accelerated not only in Japan but also in other Asian countries, the United States, and Europe. Another member commented that it would also be necessary to monitor U.S. Nasdaq stocks since they were sensitive to such risks. A different member, however, was of the view that it was not necessary to be overly concerned about the risk of excess supply since IT-related business fixed investment was not concentrated in facilities for producing a limited range of products--there was a wide variety of products and buyers--unlike the situation in 1995 and 1996 when business fixed investment was concentrated in facilities for producing DRAMs (dynamic random access memories), which are all-purpose microchips.
In relation to the sustainability of business fixed investment, members discussed the progress in firms' structural adjustment. Members shared the view that pressure from structural adjustment continued to be an impediment to economic growth. One member expressed the view that corporate restructuring had progressed considerably judging from (1) the decline in labor's share in income distribution due to firms' efforts to reduce personnel expenses, and (2) the reduction in expenses for sales and general administration. A different member said that the progress in structural adjustment in the corporate sector could be confirmed in the ratio of operating profit to sales, labor's share in income distribution, and the break-even-point ratio, which were all currently improving to the levels of the previous economic peak of January-March 1997. This member added that these figures were expected to improve further if the corporate sector remained buoyant.
A different member commented that although structural adjustment should not be delayed, it was vital that manufacturers at the same time reinforced the basics--production technology and quality control--in view of the series of accidents over the last year in industries such as aerospace, nuclear power, food, and automobiles.
Based on the above outlook for the corporate sector and its fixed investment, some members expressed the view that the current economic recovery was likely to remain moderate, with the household sector lagging behind the corporate sector.
One member said that although the employment and income situation might have started to improve gradually, it was unlikely that employees' income, which was rising by around 1 percent year on year, would be boosted by winter bonuses in 2000 or basic-wage increases in fiscal 2001. On this basis, the member judged that the economy would recover moderately. This member, however, noted that unless there were major adverse external shocks, it was likely that business fixed investment, supported by corporate profits, would continue to increase and that the output gap would narrow, even if fiscal support declined.
Members also discussed the recent rise in crude oil prices and its impact.
One member expressed the view that the rise in crude oil prices occurred against the background of an improvement in global economic fundamentals, and the rise might have been amplified by market speculation. This member also referred to the fact that the rise in crude oil prices was being taken seriously in Europe, since prices as a whole were rising there. This member and a few other members, however, were of the view that the impact of movements in crude oil prices would be smaller than in the past because of a diversification of energy sources and the development of energy-saving technology. A few other members were of the view that, in Japan in particular, the rise in crude oil prices, which might increase import prices, was unlikely to push up the general price level, because the supply-demand balance of the economy was not tight.
With regard to the outlook for crude oil prices, one member expressed the view that the supply-demand balance of crude oil might turn into a supply surplus after the turn of the year, as oil exporters had already increased production considerably, and therefore the inventories of oil importing countries were likely to be replenished in the not-so-distant future. Furthermore, the U.S. government might release supplies from its strategic petroleum reserve. The member continued that depending on Iraq and trends in the futures market, crude oil prices might become volatile toward the end of the year when demand for heating oil increased in countries in the northern hemisphere.
As a result of the above discussion, members agreed that developments in crude oil prices and their effects on the economy required close monitoring.
III. 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.
Many members' view of the economic and financial situation was as follows. First, Japan's economy was recovering gradually, with corporate profits and business fixed investment continuing to increase. Second, financial markets had responded calmly to the termination of the zero interest rate policy. Third, the economy was likely to recover gradually led mainly by business fixed investment, unless there were major adverse external shocks. And fourth, downward pressure on prices stemming from weak demand was declining significantly.
One member said that the termination of the zero interest rate policy signified a small adjustment to the degree of monetary easing in line with the improvement of the economy. For the time being, it was necessary to conduct monetary policy with a view to achieving a steady and sustained narrowing of the output gap, keeping in mind the following: (1) the rate of contraction of the output gap was likely to remain moderate; (2) a rise in wages and salaries was unlikely to push up prices; and (3) the economic outlook for the second half of 2001 remained uncertain, and it was essential to examine the sustainability of business fixed investment.
A different member said, although the member still thought the termination of the policy had been slightly premature, the member did not intend to propose readopting the zero interest rate policy at this meeting. The reason was that (1) readopting the policy immediately after terminating it would undermine the credibility of the Bank's policy, and (2) thus a decline in interest rates on term instruments could hardly be expected, which meant that policy effects of the readoption would be very limited.
The majority of members, including these members, agreed that the Bank should maintain the current accommodative stance to support the economic recovery consistent with price stability.
Members commented on monetary policy for the foreseeable future.
One member noted that markets were now focusing on the possibility of a further increase in interest rates, and there were many calls for the Bank to come up with a new framework for the conduct of monetary policy, given that the condition "until deflationary concern is dispelled" was no longer applicable. This member continued that it would be difficult to respond to such a request and the Bank should give priority to carefully examining the economic growth path and price developments. This member said that although the economy was recovering, it was still burdened with structural adjustment prompted by the bursting of the economic bubble, and under these circumstances, it was inappropriate to conduct monetary policy based on a predetermined condition.
Another member was also cautious about setting a specific condition as a basis for the conduct of monetary policy. This member said that it was understandable that the market participants wanted the Bank to provide a condition with a numerical basis, but the transparency of a central bank's monetary policy would not necessarily be enhanced by doing so. On the contrary, setting a specific condition without thorough consideration might distort the self-adjustment mechanism of the economy. This member said that the conduct of monetary policy should be based simply on the thinking that small adjustments should be made to interest rates in line with the recovery of the economy.
Based on the above discussion, another member summarized actions that should be taken in the foreseeable future as follows. First, the Bank should carefully monitor the momentum for and sustainability of a self-sustained recovery of private demand and price developments, maintaining an accommodative stance supporting the economic recovery. And second, it was essential that the Bank explain thoroughly its view of the economy and thinking on monetary policy to the public and markets.
Another member raised the following points for consideration. First, it was important to revitalize the market so that interest rates would function fully, and to this end it was necessary to increase the liquidity of bond and stock markets. Second, it was hoped that this would make capital markets more accessible for households and enable them to choose from a variety of financial instruments. Third, it was necessary to improve the infrastructure of various markets in order to facilitate the flow of funds from overseas and promote the internationalization of the yen. And fourth, a restructuring of the financial sector, including the system of postal savings, and the rationalization of settlement systems through, for example, the introduction of RTGS were important.
With regard to the comprehensive examination of issues regarding price stability, which had started in the spring of 2000, the chairman said that the Bank's staff were currently in the final stages of compiling a report and he would like the Policy Board to approve the report at a meeting in October, in view of the widespread hopes for its early release. Members agreed to this and an announcement to that effect was made at a regular press conference.
With regards to the termination of the zero interest rate policy, another member made the following remarks. First, the move showed that greater importance was attached to the cyclical momentum for recovery rather than structural deflationary pressures and the focus of monetary policy had shifted from traditional industries to new industries as represented by the IT sector. Second, the policy was terminated based solely on the moderate improvement in business fixed investment, before it had been clearly confirmed that employees' income had recovered. And third, the decision was made without making a clear judgment on market sentiment.
On this basis the member advocated adopting monetary base targeting accompanied by setting a target for the rate of increase in the consumer price index (CPI), and increasing current account balances at the Bank to achieve these targets.
This member expressed the view that it was necessary to adopt quantitative easing and accelerate economic growth to the potential growth rate of 1.5-2.0 percent for a certain length of time on the following grounds. First, economic indicators had been weak since the termination of the zero interest rate policy, and the situation had not really improved since August. Second, GDP growth in April-June was solely due to support from public demand. Third, each demand component of GDP was likely to gradually weaken contrary to the market expectations. Fourth, the year-on-year decrease in the GDP deflator and consumer prices was large, and thus price developments had not improved at all. Fifth, the growth rate of the monetary base was contracting rapidly, and thus it might have a negative effect on exchange rates, long-term interest rates, and stock prices. And sixth, the Bank's policy target was unclear, and it went against the global trend of increasing transparency.
IV. Remarks by Government Representatives
The representative from the Ministry of Finance made the following remarks.
(1) Japan's economy continued to improve moderately, as seen in the preliminary GDP data for the April-June quarter, which showed the economy had grown for two consecutive quarters. However, the employment situation remained severe, and private consumption was generally unchanged. Business fixed investment continued to improve although the extent varied depending on the industry and size of firms. It was not yet clear whether the substantial improvement in corporate profits would lead to an improvement in the employment and income situation and an increase in private consumption. Regarding prices, the GDP deflator and the CPI continued to decrease year on year. As described above, private demand still seemed to lack strength.
(2) The Government would continue to place top priority on realizing a full-scale recovery of the economy led by private demand, closely monitoring developments in the economy. Meanwhile, in view of the deterioration in fiscal conditions, the Government would need to enhance the efficiency of the budget to minimize the issuance of government bonds, bearing in mind the achievement of a smooth shift in the driving force for an economic recovery from public to private demand. Based on this thinking, the Government would reconsider its heavy reliance on government bond issuance to finance the supplementary budget, which had been discussed among fiscal policy makers.
(3) The Government would like to ask the Bank to conduct monetary policy appropriately and in a timely manner--for example, by flexibly providing ample funds in the market giving due consideration to developments in the economy--harmonizing its actions with the Government's measures to achieve a full-scale economic recovery led by private demand.
The representative from the Economic Planning Agency made the following remarks.
(1) Japan's economy remained in a severe situation but was continuing to improve moderately. Various policy measures and the economic recovery in Asia were having a positive effect on the economy, and the momentum for a self-sustained recovery of the economy continued mainly in the corporate sector. Preliminary GDP data for the April-June quarter showed that the economy had grown for two consecutive quarters, but there were some worrying factors. Specifically, (a) the employment situation remained severe, (b) although the effect of the unusually hot summer was observed, overall consumption was sluggish, (c) the higher crude oil prices might adversely affect the economies of the United States and Asian countries, (d) prices were weak, and land prices continued to fall, (e) stock prices were declining, (f) the number of corporate bankruptcies and the amount of liabilities owed by failed firms were increasing, and (g) interest rates and the yen were on an upward trend.
(2) As for the outlook, the economy should continue to recover moderately led mainly by the corporate sector at least until the end of this year. However, as it would take some time for the improvement to affect the household sector, policy management would require extreme care, taking into account the fact that there were a number of downside risks.
(3) The Government would like to ask the Bank to continue conducting monetary policy that would contribute to economic recovery--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, Japan's economy was recovering gradually, with corporate profits and business fixed investment continuing to increase. Second, financial markets had responded calmly to the termination of the zero interest rate policy. Third, the economy was likely to recover gradually led mainly by business fixed investment, unless there were major adverse external shocks. And fourth, downward pressure on prices stemming from weak demand was declining significantly.
Based on the above, the majority of members considered it appropriate to maintain the current accommodative stance to support the economic recovery consistent with price stability.
However, one member proposed adopting quantitative easing accompanied by targets for the rate of increase in the CPI and the growth rate of the monetary base.
As a result, two policy proposals were submitted.
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 encourage the uncollateralized overnight call rate to move on average around 0.25 percent.
Votes for the proposal: Mr. M. Hayami, Mr. S. Fujiwara, Mr. Y. Yamaguchi, Mr. S. Taketomi, Mr. T. Miki, Ms. E. Shinotsuka, Mr. K. Ueda, and Mr. T. Taya.
Vote against the proposal: Mr. N. Nakahara.
Mr. Nakahara dissented for the following reasons. First, growth in money stock, monetary base, and other quantitative indicators was slowing noticeably, and this might have a negative impact on financial markets. Second, the policy should be changed as soon as possible to one aiming at a faster rate of economic growth since (1) there was still an output gap, (2) there was little prospect for an improvement in price developments, and (3) uncertainties with regard to the world economy remained. And third, the policy aim of encouraging the uncollateralized overnight call rate to move on average around 0.25 percent was unclear, and the Bank needed to enhance its accountability.
VI. 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. By majority vote, the Board determined "The Bank's View," for publication on September 18, 2000 in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background").8
Votes for the proposal: Mr. M. Hayami, Mr. S. Fujiwara, Mr. Y. Yamaguchi, Mr. S. Taketomi, Mr. T. Miki, Ms. E. Shinotsuka, Mr. K. Ueda, and Mr. T. Taya.
Vote against the proposal: Mr. N. Nakahara.
Mr. Nakahara dissented for the following reason: when consumer prices continued decreasing year on year and the decline in the GDP deflator was accelerating year on year, the view that the downward pressure on prices stemming from weak demand was declining significantly was unacceptable.
- 8The original full text, written in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on September 18, 2000 together with the English version of "The Bank's View." The English version of "The Background" was published on September 26, 2000.
VII. Approval of the Minutes of the Monetary Policy Meetings
The Policy Board approved unanimously the minutes of the Monetary Policy Meetings of July 17, 2000 and August 11, 2000 for release on September 20, 2000.
VIII. Approval of the Scheduled Dates of the Monetary Policy Meetings in October 2000-March 2001
At the end of the meeting, members approved the dates of Monetary Policy Meetings to be held in the period October 2000-March 2001, for immediate release (see Attachment 2).
For immediate release
September 14, 2000
Bank of Japan
At the Monetary Policy Meeting held today, the Bank of Japan decided, by majority vote, to maintain the following guideline for money market operations for the inter-meeting period:
The Bank of Japan will encourage the uncollateralized overnight call rate to move on average around 0.25 percent.
September 14, 2000
Bank of Japan
Scheduled Dates of Monetary Policy Meetings in October 2000-March 2001
|Date of MPM||Publication of
|Oct. 2000||13 (Fri.)||16 (Mon.)||Nov. 22 (Wed.)|
|30 (Mon.)||--||Dec. 5 (Tue.)|
|Nov.||17 (Fri.)||20 (Mon.)||Dec. 20 (Wed.)|
|30 (Thur.)||--||Jan. 24 (Wed.)|
|Dec.||15 (Fri.)||18 (Mon.)||Jan. 24 (Wed.)|
|Jan. 2001||19 (Fri.)||22 (Mon.)||Mar. 5 (Mon.)|
|Feb.||9 (Fri.)||13 (Tue.)||Mar. 23 (Fri.)|
|28 (Wed.)||--||To be announced|
|Mar.||19 (Mon.)||21 (Wed.)||To be announced|