Minutes of the Monetary Policy Meeting

on November 30, 2000
(English translation prepared by the Bank's staff based on the Japanese original)

January 24, 2001
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, November 30, 2000, from 9:00 a.m. to 12:27 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. T. Haraguchi, Deputy Vice Minister for Policy Coordination, 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. T. Kurihara, 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 January 19, 2001 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 October 30, 2000

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of October 30, 2000 for release on December 5, 2000.

II. Summary of Staff Reports on Economic and Financial Developments²

A. Money Market Operations in the Intermeeting Period

Market operations in the intermeeting period were conducted in accordance with the guideline determined at the previous meeting on November 17, 2000.³ Financial institutions maintained their daily balances at the Bank so that these were more or less equal to their period-average reserve requirements, and the overnight call rate was steady around 0.25 percent.

2Reports were made based on information available at the time of the meeting.
3The 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

Stock prices remained unstable, with the Nikkei 225 Stock Average and TOPIX (Tokyo Stock Price Index) tumbling to record lows for 2000 on November 22 and 24 respectively reflecting a fall in U.S. Nasdaq stocks and more cautious views about the Japanese economy. In September and October, stocks related to information and telecommunications were dragged lower by the fall in Nasdaq stocks, and in November, falls in stocks of financial institutions accelerated partly due to speculation that unrealized capital gains on stocks held by banks were diminishing. Market participants were loath to buy stocks as they were becoming uncertain about the economic outlook. For the time being, market participants would focus on (1) developments in U.S. stocks, (2) actions of foreign investors, and (3) unwinding of cross-shareholdings.

Yields on ten-year Japanese government bonds (JGBs) declined to 1.6-1.7 percent, the level at which they were just before the zero interest rate policy was terminated in August. In the medium-term zone, yields on JGBs with remaining maturities of four to eight years were significantly below the levels marked just before the termination of the zero interest rate policy. These developments were signs that more market participants were becoming cautious about the outlook for the economy and prices.

Interest rates on three-month instruments had stopped rising recently, suggesting that concerns about procuring funds over the year-end were receding gradually with the Bank's ample provision of funds.

2. Developments in foreign exchange markets

The yen declined somewhat against the U.S. dollar and was in the range of 110-111 yen. The yen was sold for the U.S. dollar due to (1) the market's increasingly cautious view of the outlook for Japan's economy, (2) heightening concern about the Japanese financial system prompted by the failures of a few life insurance companies, (3) political uncertainty in Japan, and (4) developments in the U.S. presidential election. The yen also fell against the euro as comments by officials of European monetary authorities triggered speculation over possible market intervention to support the euro.

C. Overseas Economic and Financial Developments

U.S. economic indicators released recently suggested that the economy was slowing. The consumer confidence index for November declined somewhat, and nondefense capital goods orders weakened slightly. The U.S. trade deficit in September hit a record high for a single month. Consequently, real GDP growth for the July-September quarter was revised downward to an annualized quarter-on-quarter rate of 2.4 percent from the advance estimate of 2.7 percent growth.

In the euro area, both Germany's Ifo business climate index and France's INSEE business confidence index declined slightly, suggesting that economic expansion in these countries was slowing. In East Asian economies, real GDP for the July-September quarter generally grew as fast as in the previous quarter. Recently, however, indicators showed that the economies of Korea, Singapore, and Hong Kong were slowing.

U.S. stock prices remained unstable. The yield spread between AAA-rated corporate bonds and noninvestment-grade bonds ("junk" bonds) had been widening quite noticeably, but recently the spread between AAA- and BBB-rated investment-grade corporate bonds had also started widening. U.S. banks' lending standards on commercial and industrial loans became tighter.

D. Economic and Financial Developments in Japan

1. Economic developments

Indicators released after the previous Monetary Policy Meeting on November 17, 2000 such as those on exports and imports, private consumption, and production did not necessitate any change to the judgment on the economy.

Real exports in October remained broadly unchanged. They did not grow chiefly due to the continued small decline in exports of information-related goods, and the downturn in exports of steel to East Asia and of automobiles to Europe and the United States. On the other hand, real imports continued to increase led mainly by imports of information-related goods and capital goods. As a result, there had been a pause in the improvement in the trade balance in real terms.

The recovery in private consumption remained weak as a whole according to the relevant indicators. Recent statistics showed that sales of electrical appliances and sales at convenience stores remained at high levels, while sales at department stores and chain stores remained stagnant.

The corporate service price index continued to decline somewhat from the previous year, mainly due to lower lease prices for IT-related equipment reflecting the fall in prices, and lower telephone charges for long distance calls within the same prefecture.

The seasonally adjusted industrial production index for October rose 1.5 percent from the previous month, which was lower than the 3.4 percent increase in the forecast index, the projection of producers. Production growth in the October-December quarter, estimated using forecasts for November and December, was expected to be a slight 0.7 percent. Production growth had been expected to slow down somewhat, but developments in October seemed to be slightly weaker than had been expected.

2. The financial environment

The year-on-year growth rate of the monetary base for November was expected to exceed slightly that in the previous month, because post offices were continuing to increase cash on hand in preparation for possible massive withdrawals of cash from maturing postal savings. The monetary base was likely to remain at a high level for the time being, because a large amount of postal savings was still due to mature in January-March 2001. However, its year-on-year rate of increase was expected to be unstable owing to its large fluctuations of a year earlier caused by concerns about the Year 2000 Problem.

In September, the average contracted interest rate on new long-term loans rose slightly. Despite a rise in market interest rates, the average contracted rate on short-term loans declined because financial institutions had increased extension of loans with relatively low lending rates toward the end of September taking into consideration their plans for restoring sound management submitted to the Financial Reconstruction Commission.

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

A. The Current Economic Situation and the Outlook

The discussion of members centered on the assessment of economic indicators released since the previous meeting on November 17.

Many members remarked that there were signs that the pace of the increase in production was slowing, and that this had been partly caused by a pause in the increase in exports due to a slowdown in the economies of the United States and Asian countries.

A few of these members expressed the view that the economy, which had been recovering gradually, might be approaching a temporary lull.

Another member said that, against the background of the leveling-off of the industrial production index and the fall in stock prices, uncertainty about Japan's economic outlook had mounted and thus the economy was in an important and delicate phase.

However, the majority of members shared the following view. First, there was no need to change the previous meetings' assessment that the economy was recovering gradually. And second, current economic and financial developments were within the range of the standard scenario in "Outlook and Risk Assessment of the Economy and Prices" (hereafter, Outlook and Risk Assessment).

Given that production in the October-December quarter was forecasted to grow only 0.7 percent from the previous quarter, members discussed whether any signs of change could be detected in the recovery trend in the corporate sector.

One member said that the actual results of the industrial production index had been lower than the forecast index for four consecutive months from July, and that production in the electrical machinery industry was slowing. The member commented that, in view of these developments, the corporate sector should be monitored vigilantly.

A different member said that industrial production might have reached its peak in August 2000, and might have lost upward momentum since then, citing the following reasons. First, production in the electrical machinery industry had been unable to reach levels initially forecasted by producers. Second, inventories of materials for production had built up. And third, business fixed investment was no longer vigorous due to a decline in exports and a fall in construction projects following the surge related to the coming into force of the revised Law concerning the Measures by Large Scale Retail Stores for Preservation of Living Environment. The member remarked that a loss in momentum in production would eventually have an adverse effect on corporate profits.

Another member expressed the view that the profit base in the corporate sector as a whole remained fragile at this point because (1) profits in the first half of fiscal 2000 were still largely supported by exports and restructuring, with the exception of IT-related firms and some growing firms, and (2) profits in the second half of the year were likely to decrease from the first half due to the fall in exports, the lull in the recovery of domestic demand, and the possibility of a further fall in prices. The member continued that close attention should be paid to the fact that corporate earnings results for fiscal 2000 were likely to be affected by the introduction of mark-to-market accounting, which would influence firms' capital accounts, and adjustments for retirement benefits. The member also expressed the view that although inventory adjustment was limited at this point to some steel and petrochemical products, inventories of some IT-related goods such as multi-purpose parts were starting to build up, and thus it was necessary to keep in mind the risk that such developments could lead to production adjustments.

In response to the above concerns, one member said that it was not necessary for members, at this point, to change their judgment on the sustainability of business fixed investment because anecdotal information suggested that orders for machine tools, logic ICs, and software development were firm.

A different member made the following remarks. First, the trend of the corporate sector basically remained unchanged judging from the firm global demand for IT-related goods and the continued increase in business fixed investment in Japan. Second, although the pace had slowed, production remained on an increasing trend. And third, the rising trend in corporate profits and the moderate improvement in the employment and income situation, both of which supported the scenario for a gradual economic recovery, had therefore not changed. This member commented that the crucial issue of whether the economic growth rate would fall below the potential growth rate, which would lead to another expansion of the output gap, depended on the pace of slowdown in overseas economies.

Many views were put forward regarding exports and overseas economies.

Regarding the U.S. economy, one member said that the financial environment including the lending attitude of financial institutions had tightened to levels similar to those in the early 1990s and that the debt of the corporate and household sectors had increased further. This recent deterioration in the financial environment might eventually have a negative impact on the economy. With regard to U.S. stock prices, this member expressed concern that they might continue to fall despite monetary easing given that they had continued to rise despite monetary tightening, as Nasdaq stocks were in the classic process of the bursting of a speculative bubble and money was flowing out of mutual funds.

In response to this, a few members said that a slowdown in the U.S. economy had been hoped for, and a deceleration from the high growth rate of 5 percent to 3 percent was likely to contribute to a sustained global economic expansion. These members emphasized, however, that it was necessary to monitor developments in Japan's exports carefully because it was not clear whether the U.S. economy could avoid a further slowdown and even if it did not decelerate more severely, there might be a larger-than-expected negative effect on Japan's fragile economic recovery via a slowdown in Asian economies.

Members also exchanged views on developments in East Asian economies. One member raised the following points. First, running stock had been sufficiently restored in these economies. Second, exports of semi-processed materials to the United States, which had fallen due to the slowdown in the U.S. economy, had been redirected to countries within the region. And third, firms had accumulated inventories, anticipating the economies in the region to expand. Against this background, exports by Japanese firms to East Asia had decreased, leading to a slowdown in the rising trend of production in Japan.

A different member said that the deterioration in Korea's economy required close attention and cited the following two concerns. First, the restructuring of chaebols (business conglomerates) was insufficient. And second, the parliament had not yet approved a bill that would enable the government to inject additional public funds into the financial sector in order to stabilize the financial system.

However, the member who commented on the developments in East Asian economies added that, even though economies in Asia were being affected by the U.S. economic slowdown, East Asian economies as a whole were unlikely to stall because some of them were displaying firm strength, mainly in IT-related areas, although there was a sharp contrast in the economic performance of different countries in the region.

With regard to private consumption, a few members said that the following measures would be necessary to stimulate household spending. First, an early introduction of defined-contribution pension schemes (401k-style pension schemes), through which households would be able to benefit more from financial markets when building up assets. And second, measures to tackle the problems of the pension system, the social security system, and balance-sheets at financial institutions, all of which were making households anxious about their future. Another member expressed the view that the actual state of private consumption might not be accurately reflected by indicators relating to private consumption, which were weak despite the fact that income had stopped falling and propensity to consume had been stable.

On prices, one member remarked that the recent downtrend in the prices of perishable foods was similar to that in clothes in that they had both been caused by the widespread use of imports. The member continued that from the viewpoint of gaining a comprehensive understanding of the changes in the supply side, it was necessary to examine the consumer price index (CPI) taking into account prices of perishables.

Concerning crude oil prices, hovering around the range of $34-35 per barrel for West Texas Intermediate, another member noted that attention should be paid to the increased volatility in crude oil prices resulting from the fact that the strategy of major U.S. oil refiners to minimize their inventories since the 1980s had been expedited by mergers in recent years.

B. Financial Developments

On the financial front, members expressed their views on the continued instability of stock prices, its background, and its effects on the economy.

Many members said that the weakness in stock prices implied that the market was becoming cautious about the economic outlook, and they pointed out that the weakness was partly attributable to the fall in U.S. stock prices.

A few of these members remarked that the combination of the recent developments in the financial markets--a weakness in stock prices, a decrease in long-term interest rates, and a depreciation of the yen--was a typical phenomenon when the market was cautious about the economic outlook.

Another member remarked that the adjustment in global stocks, mainly IT-related stocks, had had a more negative impact on stocks than domestic factors. To support this view, the member gave the following explanation. Among stock indexes in major countries, the rate of decline from highs for 2000, adjusted for exchange rates, was large for Japanese and German indexes, both of which were heavily weighted with high-tech stocks such as electronics and telecommunications stocks. With nearly half of stock transactions in Japan being made by foreign investors, the influence of overseas factors on domestic stock prices had been increasing significantly.

On long-term interest rates, a different member commented as follows. Long-term interest rates had recently become sensitive to any deterioration in the economic outlook, but not to news related to the supply-demand balance of JGBs, such as news that the fiscal 2000 supplementary budget had been passed by the Diet and that the amount of JGB issuance in fiscal 2001 might reach 100 trillion yen. Therefore, it was possible that the rates might decline further depending on the outcome of the December Tankan (Short-Term Economic Survey of Enterprises in Japan).

Next, members exchanged views on how these developments in financial markets would affect the economy.

One member remarked that one of the direct effects of the weak stock prices on the economy might be a deterioration in corporate and consumer sentiment. This member, however, added that no significant effect had yet been seen at this point because economic activity was firm as a whole. Another member expressed the view that the weakness in stock prices might hinder the start up of new firms in the so-called new economy and job creation, but only to a very limited extent.

Some members remarked that the weakness in stock prices might make financial institutions even more cautious about extending loans. One member voiced concern over the significant decrease in unrealized capital gains on stocks, with which banks would be able to dispose of nonperforming loans. Another member said that a further decline in Japanese stock prices could negatively affect the financial condition of banks and life insurance companies.

Some other members also expressed similar concerns, but at the same time, they pointed out the following. First, when extending loans, financial institutions were already adequately taking into account the credit risks of borrowers, and thus it was unlikely that the decrease in unrealized capital gains would make financial institutions tighten their lending stance further. Second, demand for credit in the private sector remained stagnant, and thus even if the lending attitude of financial institutions did change, it would not immediately act as a strong restraint on corporate activity. And third, unlike yield spreads in the United States, those between Japanese corporate bonds and JGBs had been stable, and thus it could be judged that firms were not encountering difficulties in their borrowing. One of these members said, however, that developments in stock prices would require careful monitoring because the situation might change if stock prices remained weak until the end of fiscal 2000.

A few members, taking a different viewpoint, said that declines in long-term interest rates and the yen in response to a weaker view of the economic outlook were a natural reaction of the market and, by supporting corporate profits and maintaining a favorable environment for investment, provided the economy with a buffer to some extent.

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.

Many members' view of the economic and financial situation was as follows. First, it was not necessary to change the Bank's judgment at previous meetings that the economy was recovering gradually. Second, the economy and the market's view of the economic outlook both seemed to have weakened slightly, but developments of the economy were within the range of the standard scenario in the Outlook and Risk Assessment.

Based on the above view, the majority of members generally concurred that the Bank should (1) maintain the current accommodative monetary conditions to support the economic recovery, and (2) examine the strength and sustainability of the recovery of private demand and developments in financial markets at home and abroad, giving due consideration to various risks mentioned in the Outlook and Risk Assessment. They thus agreed that it was appropriate to maintain the current guideline for market operations.

A different member asserted that a further monetary easing was necessary. The member advocated adopting, as a feasible means to achieve it, monetary base targeting accompanied by a target for the rate of increase in the CPI and increasing current account balances at the Bank to achieve these targets, for the following reasons. First, developments in the Indexes of Business Conditions, the industrial production index, and stock prices clearly showed a deterioration in the outlook for the economy. Second, a deflationary situation was continuing as evident in the decrease in the CPI, the wholesale price index, and the GDP deflator, in addition to the accelerating rate of decline in land prices. Third, it was therefore becoming more likely that the Bank's standard scenario in the Outlook and Risk Assessment released in late October, that the economy would continue to recover gradually, might fail to materialize. Fourth, the Bank should adopt a target for the CPI and publish it. Finally, this member added that the Bank should take note of the European Central Bank's decision to release its staff's economic forecasts covering the next two years, including figures for each demand component.

V. Remarks by Government Representatives

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

(1) Japan's economy as a whole continued to improve moderately, with the momentum for a self-sustained recovery continuing, mainly in the corporate sector. However, the employment situation remained severe and private consumption was generally unchanged, indicating a delay in an improvement in the household sector. Thus, it was not yet clear whether the substantial improvement in corporate profits would lead to an increase in private consumption. Regarding prices, the CPI and the GDP deflator continued to decrease year on year despite the sharp rise in crude oil prices. The impact on the economy of the surge in crude oil prices and of market developments at home and abroad, including the recent weakness in stock prices, required close monitoring.

(2) Against this background, the Government drew up a policy package, and the fiscal 2000 supplementary budget compiled to carry out the package was passed by the Diet on November 22. By steadily implementing this budget, the Government would make efforts to ensure that the movements of a self-sustained recovery of the economy led to a full-fledged recovery and would aim to establish a new foundation for development of Japan's economy in the 21st century. Furthermore, the Government considered it essential that sufficient credit be provided to firms over the year-end, and it would therefore exchange views with private and government financial institutions shortly.

(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 Economic Planning Agency representative, after giving an assessment of the economy that was similar to that of the Ministry of Finance representative, made the following remarks.

(1) Downside risks to the economy, such as an increase in corporate bankruptcies, developments in the U.S. and Asian economies, movements in oil prices, and any negative effects on consumer and business sentiment caused by a decline in stock prices, should be monitored vigilantly.

(2) The Government recently released GDP data (benchmark year 1995) based on the System of National Accounts 1993. Real GDP growth for fiscal 1999 was revised upward by 0.9 percentage point to 1.4 percent while the GDP deflator was revised downward by 0.4 percentage point to -1.5 percent. In this environment, steady structural reform was indispensable for a full-fledged recovery of the economy, and from this viewpoint, a policy package had recently been compiled. The Government considered it necessary to continue to advance various measures including those in the package.

(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.

VI. Votes

Based on the above discussion, the majority of members considered it appropriate to maintain the current guideline for market operations.

However, one member proposed adopting quantitative easing accompanied by targets for the rate of increase in the CPI and for 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 July-September quarter of 2000 to the average for the same quarter of 2001) to realize quantitative easing (expansion of the monetary base).

Regardless of the above target for the monetary base, the Bank will provide ample funds should there be a risk that financial markets might destabilize, for example, should demand for liquidity surge.

The proposal was defeated with one vote in favor, eight against.

To reflect the majority view, the chairman formulated the following proposal.

Chairman's Policy Proposal:

The guideline for money market operations in the intermeeting period ahead would be as follows, and publicized by the attached statement (see Attachment).

The Bank of Japan will 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, arguing that the current guideline for market operations was not sufficiently accommodative. He raised the following points. First, the fall in stock prices could stall an economic recovery through deterioration in business sentiment and a negative wealth effect, given that it was already damaging banks' capital bases and having a large negative effect on the financial condition of life insurance companies. Second, Japan was still experiencing serious deflation as could be seen in the year-on-year decreases in various price indexes. Third, a self-sustained recovery of private demand had yet to be realized, and the deflationary gap remained large. And fourth, since the objective of the current guideline to maintain the overnight call rate at 0.25 percent was unclear, the Bank was deficient in its accountability to the public, and thus it was necessary to adopt a quantitative guideline for a price target.

Attachment

For immediate release

November 30, 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: