Minutes of the Monetary Policy Meeting
on February 9, 2001
(English translation prepared by the Bank's staff based on the Japanese original)
March 23, 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 Friday, February 9, 2001, from 9:00 a.m. to 12:18 p.m., and from 1:02 p.m. to 5:13 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. M. Wakabayashi, Senior Vice Minister, Ministry of Finance2
Mr. Y. Tamura, Deputy Vice Minister for Policy Planning and Coordination, Ministry of Finance3
Mr. Y. Kobayashi, Director General for Economic and Fiscal Management, Cabinet Office4
Mr. T. Sakai, Senior Vice Minister, Cabinet Office5
Mr. M. Matsushima, Executive Director
Mr. M. Masubuchi, Executive Director
Mr. S. Nagata, Executive Director
Mr. M. Shirakawa, Advisor to the Governor, Policy Planning Office
Mr. M. Samejima, Associate Director, Policy Planning Office6
Mr. M. Amamiya, Chief Manager, Planning Division 1, Policy Planning Office
Mr. H. Tanaka, Chief Manager, Planning Division 2, Policy Planning Office7
Mr. I. Yamashita, Director, Financial Markets Department
Mr. S. Murayama, Director, Research and Statistics Department
Mr. T. Yoshida, Senior Manager, Research and Statistics Department
Mr. E. Hirano, Director, International 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. S. Uchida, 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 March 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.
- Mr. Wakabayashi was present from 9:00 a.m. to 1:31 p.m.
- Mr. Tamura was present from 1:31 p.m. to 5:13 p.m.
- Mr. Kobayashi was present from 9:00 a.m. to 12:18 p.m.
- Mr. Sakai was present from 1:02 p.m. to 5:13 p.m.
- Mr. Samejima was present from 9:00 a.m. to 11:23 a.m., and from 1:02 p.m. to 5:13 p.m.
- Mr. Tanaka was present from 9:00 a.m. to 11:23 a.m., and from 1:02 p.m. to 5:13 p.m.
I. Summary of Staff Reports on Economic and Financial Developments8
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 January 19, 2001.9 As a result, the overnight call rate was generally around 0.25 percent. Funds demand, which had increased with the introduction of the real-time gross settlement (RTGS) system, had stabilized as financial institutions gradually became accustomed to cash management under the system and carried out settlements of government securities smoothly on the issuance days. Market interest had shifted to procurement of funds maturing over the fiscal year-end.
- 8Reports were made based on information available at the time of the meeting.
- 9The 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
Stock prices had been relatively firm toward the end of January but fell in early February reflecting a fall in Nasdaq stocks and the market's increasingly cautious view of the outlook for Japan's economy. On February 8, they declined to their lowest levels since early 2000 in reaction to a downward revision of GDP growth in the second preliminary estimates for the July-September quarter of 2000. As for the outlook, many market participants did not expect stock prices to fall significantly as stocks were considered to be at reasonable value at present levels. However, they expected stock prices to stay around their recent lows for a while because of concern that (1) the adjustment in the U.S. economy and stock prices might continue longer than expected, (2) Japanese corporate earnings might be revised downward, and (3) there might be a deterioration in the supply-demand balance of stocks due to unwinding of cross-shareholdings.
Long-term interest rates, particularly yields on bonds with long or super-long maturity, declined as market participants became more inclined to buy such bonds following the release of "Chairman's Instructions to the Bank's Staff" immediately after the previous meeting.
The yen had stopped depreciating against the U.S. dollar and rebounded slightly reflecting factors such as the slowdown in the U.S. economy. As for the outlook, market participants were focusing on the economic fundamentals of both Japan and the United States, measures to improve the way in which liquidity was provided that would be announced after the present meeting, and discussions at the upcoming G-7 meeting.
C. Overseas Economic and Financial Developments
The slowdown in the U.S. economy had become clearer, and private research institutes had revised their growth forecasts successively downward. According to the advance estimate, real GDP growth for the October-December quarter of 2000 declined to an annualized rate of 1.4 percent from the previous quarter, due to a slowdown in private consumption coupled with a downturn in business fixed investment. The weaker growth in final demand noted above and a continued rise in inventories resulted in a fall in production. Moreover, the unemployment rate had risen slightly, showing that the labor market was easing. Consumer and business confidence continued to deteriorate.
Following these developments, the Federal Open Market Committee (FOMC) decided at its meeting at the end of January to lower its target for the federal funds rate by 0.5 percentage point to 5.5 percent.
Anxiety in U.S. financial markets had abated slightly because markets expected the effects of the two consecutive interest rate cuts in January to permeate through the economy. In fact, investors' concern about credit risk was easing somewhat as seen in the contraction in the yield spreads between corporate bonds with low credit ratings and high ratings, and the increase in issuance of corporate bonds. Furthermore, U.S. stock prices were becoming less volatile. However, U.S. banks' lending standards continued to tighten and borrowing conditions for firms with lower creditworthiness remained severe.
In the euro area, the economy had been showing signs of slowing as evident in the decline in production growth since mid-2000 and the deceleration in export growth. Yet, economic developments remained firm led mainly by growth in private consumption, which was due to the improvement in the employment situation and the successive tax cuts in major countries in the area.
In East Asian countries, the momentum of export growth had weakened rapidly since autumn 2000, reflecting the slowdown in the U.S. economy and slower growth in demand for semiconductors. Some countries were starting to show signs of deceleration in domestic demand. Consequently, Korea, Taiwan, and Hong Kong had cut their policy rates.
D. Economic and Financial Developments in Japan
1. Economic developments
Japan's economy continued to recover gradually, but the pace was slowing due to decelerating export growth.
With regard to final demand, business fixed investment was on an increasing trend. The recovery in private consumption continued to be weak as a whole, but there were somewhat positive signs in some indicators. Housing investment was virtually unchanged. As for public investment, the pace of decline was slowing. Meanwhile, net exports were starting to decrease due to a slowdown in exports and an increase in imports.
Against this background, the pace of increase in production had slowed considerably mainly due to the deceleration in exports. Corporate profits continued to improve. Income conditions of households still remained severe but were not deteriorating, as the employment situation was on an improving trend. According to preliminary data for special cash earnings in the Monthly Labor Survey, winter bonuses both for December and for November and December taken together had declined by 1.5 percent from the previous year, a fairly large fall compared with the results of other surveys of winter bonuses in 2000 already released. This decline might be due to a decrease in the winter bonuses of employees of governments and public corporations, whose bonus payments significantly lag behind economic developments. In any case, no final assessment could be made until the revised figures of the Monthly Labor Survey and other data were available.
The likelihood of the current economic recovery continuing depended on whether the mechanism of income generation starting from the corporate sector would continue to operate amid the changes in overseas economies. The key would be developments in production and corporate profits. Production was likely to be broadly unchanged for a while, and, with the depreciation of the yen providing support to exporters, there was not enough evidence to judge that the increasing trend in profits of manufacturers had faltered. However, if production failed to recover, Japanese corporate profits would, sooner or later, stop improving and business fixed investment in turn would enter an adjustment phase. As the pace of the slowdown in the U.S. and East Asian economies seemed to be accelerating, the extent and duration of the resulting economic adjustments required further careful monitoring. If corporate and household sentiment deteriorated due to the continued weakness in stock prices, this would exert negative pressure on the economy, and thus the downside risks arising from a deterioration in corporate and household sentiment continued to require close monitoring.
As for the outlook for prices, the following factors needed to be considered. First, the extent of inventory adjustments was quite limited and the labor market was generally improving. Therefore, there was no need to change the judgment that, led by domestic private demand, the domestic supply-demand balance was on an improving trend. This improvement was, however, not expected to be steady given that the decline in exports of some goods had triggered adjustments in their inventories. Second, prices were likely to be affected by continued downward pressure from the sharp fall in crude oil prices in late 2000, technological innovation, and the reduction in communications charges due to deregulation. Third, the streamlining of distribution channels was also likely to continue to affect prices for some time, although its influence was gradually weakening. Fourth, in contrast, the recent rapid weakening of the yen was expected to raise import prices, which would reduce downward pressure on domestic prices. Considering the overall situation, various price indexes were expected to be somewhat weak for the time being.
2. The financial environment
With regard to effects of stock prices on the financial environment, the fall in stock prices had caused no significant change in the lending attitude of financial institutions. However, small firms' perception of their financial position had deteriorated somewhat according to surveys conducted in January by Japan Finance Corporation for Small Businesses and Shoko Chukin Bank. This deterioration did not seem to indicate a change in financial institutions' lending attitude since (1) sectors that reported a deterioration in their financial positions also reported a fall in their sales and (2) the survey by Japan Finance Corporation for Small Businesses showed no change in small firms' perception of financial institutions' lending attitude. Developments, however, required monitoring.
With regard to firms' borrowing from the market, there had been several isolated cases where firms had postponed public offering of stocks or had reduced funds procurement, but overall fund-raising conditions showed no significant change, as seen in the steady issuance of corporate bonds and increased issuance of CP.
Based on the above, it seemed that the lending attitude of financial institutions and corporate financing conditions remained easy. However, the effects on fund-raising conditions for firms of developments in stock prices needed careful monitoring.
The monetary base in January declined by 5.6 percent from the previous year, due to the significantly high level a year earlier, when the Bank increased funds provision to deal with possible Year 2000 problems. However, the monetary base in January exceeded the average for the whole of 2000. The growth rate of money stock (M2+CDs) was somewhat higher than in summer 2000 due to an inflow of cash from postal savings that had matured.
The number of corporate bankruptcies remained at a high level, but recently it was decreasing slightly. The financial conditions of small firms and the effects of termination at the end of March 2001 of special guarantee systems for the financial stabilization of small and medium-sized enterprises required further monitoring.
II. Summary of Discussions by the Policy Board on Economic and Financial Developments
Based on the results of economic and financial indicators and other information released since the previous meeting, members discussed (1) whether recent developments in Japan's economy were within the range of the standard scenario, that is, a gradual recovery, and (2) the extent to which downside risks to the economy, such as the slowdown of the world economy and the fall in domestic and overseas stock prices, had increased.
With regard to the current economic situation, members generally agreed that the pace of economic recovery was slowing at present due to decelerating growth in exports and production. One member was less optimistic about the state of the economy, that is, the member considered that it was currently in a lull, given that production was showing almost zero growth from the previous quarter as the increase in domestic private demand was being offset by decelerating growth in exports.
One member said that a decline in exports to Asia was becoming evident and that those to the United States were starting to slow down. Many members agreed that in view of these developments, production was expected to remain at around the current level for a while.
One member remarked that it was becoming less likely that corporate profits--the starting point of the economic recovery--would increase in fiscal 2001 to the same extent as in fiscal 2000, due to the sluggishness in production and weakness in prices. In relation to this, this member and a different member commented that the depreciation of the yen would be a supportive factor for corporate profits and thus it should be accepted as long as it reflected economic fundamentals.
With regard to business fixed investment, many members expressed the view that it was likely to continue increasing for a while, judging from developments in various leading indicators. At the same time, however, some concerns were raised about the outlook. One member mentioned (1) the weaker-than-expected machinery orders, (2) the decrease in construction starts (floor area), and (3) the downward revisions to business fixed investment plans by nonmanufacturers in the Business and Investment Survey of Incorporated Enterprises. A few members pointed out that the survey showed that relatively large firms felt their business conditions had worsened, and various surveys revealed that small firms felt the same way.
In relation to this, one member commented that the recovery in the volume of sales, although it was currently in a lull, had made firms feel they were doing normal business in volume terms. This member continued, however, that the persistent weakness in prices was undermining business confidence. A different member pointed out that firms might be cautious in their business fixed investment planning for fiscal 2001 due to the deterioration in firms' sentiment with respect to business and the recent weakness in stock prices.
Another member expressed the view that, while capital spending to develop products using new technology or to produce high value-added goods was, to a certain extent, insulated from economic fluctuations, the slowdown in the world economy and the unclear economic outlook were likely to depress the prospects for business fixed investment as a whole. A different member referred to the acceleration of IT-related investment in the United States as a result of the amendment of telecommunications regulations in 1996. This member was of the opinion that the proposed IT legislation on formation of an advanced network society, which was currently being deliberated in the Diet, might have positive effects on new investment. This member thus expressed the view that one should not be too pessimistic about the prospects for business fixed investment. Based on these discussions, many members said that it was important to examine various surveys that would be released in March and April to assess firms' business plans for fiscal 2001.
As for the employment and income situation, some members commented on the year-on-year decrease in special cash earnings in December. One member commented that, although the decline in special cash earnings gave cause for concern, it could be judged that the employment and income situation as a whole was firm given the continued improvement in the labor market. On the other hand, a different member commented that improvement in the employment and income situation had been much smaller than expected in October 2000 when the "Outlook and Risk Assessment of the Economy and Prices" (hereafter, Outlook Report) was released.
Next, some members commented on the downward revision to the secondary preliminary estimates of GDP growth for July-September 2000. These members said that, even if industrial production had remained almost unchanged during the second half of fiscal 2000, GDP was expected to increase slightly on the following grounds. First, business fixed investment was likely to increase in the second half of fiscal 2000, as long as a certain amount of the business fixed investment plans in the Tankan (Short-Term Economic Survey of Enterprises in Japan) and other surveys were carried out. Second, public investment was also expected to continue increasing until the middle of 2001. And third, consumption was unlikely to fall significantly given the continued improvement in the labor market.
Following the above discussion, many members expressed the view that the gradual recovery was continuing, although its pace was slowing. One member mentioned that, although the economy was in a lull and there were no signs of deterioration, there was a need to monitor it for emerging signs of economic deterioration. A different member held the view that the economy was struggling to stay within the range of the standard scenario. Another member commented that although the member's view differed only slightly from the majority's, the member considered that the economic recovery was unlikely to gather as much momentum as had been expected.
A different member expressed the view that the standard scenario was already failing to materialize and the economy was approaching a recession. This member said that, when assessing the state of the economy, it was necessary to take various business cycles of different durations together. This member continued that, according to an analysis based on the Indexes of Business Conditions, (1) the ratio of the coincident indicator to the lagging indicator for the composite indexes of business conditions, which moved to a certain extent in line with the output gap and firms' rate of profit, was declining significantly, and (2) more than half of the components comprising the coincident indicator had reached their peak before or in August 2000. Therefore, this member was of the opinion that the economy had started to shift from stagnation to recession in the second half of fiscal 2000 and there was a large risk that the economy would deteriorate further in fiscal 2001.
As for the economic outlook, members agreed that downside risks were increasing. One member said that risks to the basis of the mechanism for recovery were increasing.
Many members commented on the fact that it was becoming clear that the U.S. economy was slowing rapidly. One member said that many economists at international organizations and private institutes expected it to recover in the second half of 2001. This member said, however, that views were divided as to whether (1) the rapid economic adjustments the U.S. economy was undergoing would lead to a "V-shaped" recovery, or (2) the economic adjustments would be substantial and protracted given the long period of expansion. The member continued that developments in the U.S. economy required closer monitoring considering the fact that their direction was unclear. A different member said that Japan's experience since the bursting of the economic bubble suggested it was difficult to forecast how long economic adjustments in the U.S. economy would last. This member expressed the opinion that the outlook for the U.S. economy should be viewed cautiously given the recent, rapid deterioration in economic indicators. Another concern expressed in relation to the U.S. economy was a likely full-scale adjustment in fixed investment in IT-related sectors. A different member expressed the view that the U.S. economy had clearly entered a recession, based on (1) the significant decrease in the number of job advertisements, (2) the decrease in employees' income (nonagricultural, changes from three months earlier), and (3) the deterioration in consumer confidence. This member added that (1) IT-related investment in the United States had peaked out, (2) balance-sheet adjustments in the household sector might impair economic growth, and (3) the California electric power crisis might have a substantial effect on the United States as a whole. Further, this member said that the supply of crude oil might exceed demand due to a further slowdown in the world economy, and if crude oil prices dipped below US$25 per barrel, they were likely to fall fairly steeply.
With regard to the effects of the fall in stock prices, members discussed whether firms' creditworthiness and financial institutions' risk-taking ability had declined due to a decrease in unrealized gains on stock holdings. One member noted that, so far, there had been neither substantial change in the lending attitude of financial institutions nor signs that firms' procurement of funds would become difficult. This member added, however, that the results of surveys, such as those conducted by the Japan Finance Corporation for Small Business and Shoko Chukin Bank, revealed that small firms' perception of their financial position had deteriorated slightly, and thus it was necessary to monitor whether this deterioration was temporary.
As for consumer and corporate confidence, one member said that consumer confidence had been improving while stock prices were falling, and that, in Japan, it was likely that the employment and income situation was having a larger effect on household sentiment than stock prices.
Based on these discussions, many members agreed that the fall in stock prices had not seriously damaged economic activity so far. A few members, however, warned that continued attention should be paid to the possible emergence of "event risk," which in this case would be the risk that the fall in stock prices would highlight the problems of firms including financial institutions, thus negatively affecting the confidence and proper functioning of the market. One of these members added that the fact that most financial institutions did not plan to introduce mark-to-market accounting for the business year ending March 2001 would not reduce the possibility of "event risk" emerging since the market would base its assessment of the health of financial institutions on their actual condition. Further, one member pointed out that, in credit default swaps, which were traded among institutional investors in Europe and the United States to hedge medium- to long-term credit risks, the rates for credit to Japanese banks and for Japanese government bonds were rising, suggesting that their assessment of the Japanese economy and financial institutions was becoming more severe.
Following the above discussions, many members agreed that, although it was still reasonable to envisage the scenario of a gradual recovery, the economy, which was in a lull, might deteriorate depending on the extent of the slowdown of the world economy and the fall in stock prices. One member said that it was becoming extremely difficult to judge whether such risk factors would hamper the recovery of the economy, which was just managing to stay above the lower limit of the standard scenario. A different member expressed a more cautious view than other members, saying that risks to the economy had already started to materialize.
As for prices, many members shared the view that, although supply-side factors, such as deregulation, technological innovation, and a narrowing of the price differential between Japan and other countries, were exerting strong downward pressure, demand-side factors were becoming more significant than before due to the slowdown of economic recovery. One member expressed the view that the output gap would remain unchanged or widen slightly if GDP growth for fiscal 2000 was in the range of around 1.0-1.5 percent, and added that this view was generally in line with developments in various price indexes. On this basis, this member remarked that, although downward pressure stemming from the demand side was not increasing dramatically at present, it might increase significantly if the economic growth rate for fiscal 2001 declined further from that of fiscal 2000. A different member said that it might become necessary to change the assessment of the strength of downward pressure on prices stemming from weak demand if the slowdown in production growth was protracted. One member said that the risk of prices falling due to a deterioration in the supply-demand balance was becoming a reality. The member continued that it was cause for concern that prices were already falling as a consequence of lack of progress in structural reform--viable firms had been damaged in a price war triggered by nonviable firms that had adopted an aggressive price strategy ignoring production costs.
Many members pointed out that, although the current slowdown in Japan's economic recovery was due mainly to the deceleration of the world economy, its roots lay in the structural problems in Japan's economy. One member said that markets had a more cautious view about the economy than actual economic developments warranted because they were unable to picture what the economy would be like after structural reforms were completed. In relation to the fall in stock prices, a different member pointed out that foreign investors were focusing on whether final and comprehensive measures to resolve financial system problems would be announced. This member said that comprehensive measures to promote structural reform in both the financial and corporate sectors were essential. A different member pointed out that the worsening of the market's view of the economy had been caused by the lack of progress in structural reform, partly due to survival of firms that had been kept alive despite their inability to respond to changes in demand. This member continued that it was necessary to aim for "economic recovery through structural reform," rather than "structural reform through economic recovery" and to have the private sector advance structural reform in accordance with market principles, and it was also necessary to dispel concern about the financial system. The member raised the following three specific points. First, in order to alleviate the corporate and household sectors' concern about the future, the Government should present a vision of how it would deal with issues such as the fiscal deficit, the tax system and the social security system, in particular the pension and medical system, and the disposal of nonperforming assets. Second, the Government should concentrate on supporting business through deregulation and tax measures, increasing mobility in the labor market, and also on creating the basis for the development of new industries. And, third, to prevent deflationary pressure arising from structural reform, it was important that monetary policy should ensure availability of liquidity by keeping interest rates low and providing ample funds. Another member commented that in order to achieve a sustainable economic expansion, it was necessary to increase productivity by changing the economic structure and that it was partly these structural changes that were increasing downward pressure on the economy.
III. Improvements in the Way of Liquidity Provision
A. Staff Report
In accordance with the chairman's instructions at the previous meeting, the Bank's staff reported on ways to further improve provision of liquidity to financial markets.
The current methods of liquidity provision were not in any particular way inadequate for achieving the overnight call rate target. However, given the recent developments in domestic and overseas economies and in financial markets, there might be room for improvement with regard to the following points.
First, the current framework of monetary operations did not always allow the Bank to respond to an unexpected rise in funds demand in a flexible and timely manner. Furthermore, even when ample funds were provided to the market as a whole, there might be cases where a large proportion was held by a handful of financial institutions, leaving other institutions short of funds. Therefore, there was room to strengthen the Bank's capability to respond to changes and shocks in the market in a flexible manner. Second, under the current framework, the Bank provided liquidity to major financial institutions but small financial institutions basically had no access to the Bank's credit. Thus, the range of institutions with access to the Bank's credit could be expanded. And third, most of the Bank's buying operations put repayment pressure on the market as they involved repurchase agreements. The way of stably providing short-term funds could be improved.
Based on the above, the following three measures could be taken: (1) introduction of a "Lombard-type" lending facility; (2) an increase in outright operations of short-term government securities (TBs and FBs); and (3) preparation for the introduction of bill purchasing operations at all of the Bank's business offices.
Members shared the view that measures basically in line with the staff report should be formulated to improve the way liquidity was provided and decided to discuss specific schemes. The chairman instructed the staff to draw up and present detailed drafts of the three measures.
The staff prepared the following proposals and presented them to the Policy Board.
- (1) Introduction of a "Lombard-type" lending facility
It might be appropriate to introduce a lending facility through which the Bank would extend loans at the request of a wide range of counterparties at the official discount rate, which was currently higher than money market rates. By setting up a standby lending facility to prevent unexpected funds shortages in the Bank's counterparties, the Bank could make the market feel confident about availability of liquidity. The official discount rate, the rate that would be applied to these loans, would put a ceiling on the overnight call rate. With regard to counterparties, it might be appropriate for the Bank to extend loans to a wider range of financial institutions including small financial institutions with accounts at the Bank's head office and branches.
- (2) Increase in outright operations of short-term government securities
It might be appropriate to increase outright operations of short-term government securities--the amount outstanding of TBs and FBs obtained through these operations was currently zero--in order to provide short-term funds with relatively long maturities without putting repayment pressure directly on the market.
- (3) Preparation for the introduction of bill purchasing operations at all business offices
In order to facilitate provision of funds to a wider range of counterparties including regional small financial institutions, it might be appropriate for the Bank to expedite its preparation for bill purchasing operations at all of its business offices, the introduction of which was announced earlier, to initiate the operations by July 2001. Also, it might be appropriate to announce that the Bank would begin in March the procedure for selecting counterparties for the operations.
B. Discussion on the Staff Report
All members agreed with the staff report. Members concurred that introduction of the "Lombard-type" lending facility would be appropriate for the following reasons. First, it would enable the Bank to provide funds in a flexible manner even when there was a shock to the market. Second, the establishment of a facility that would allow the Bank to extend loans to a wider range of counterparties at their request would dispel sound financial institutions' anxiety about liquidity problems, and the market as a whole would feel confident about availability of liquidity. Third, putting a ceiling on the overnight call rate would prevent the rate from surging on end dates of fiscal years and when shocks emerged. And fourth, by making the market feel confident about the availability of liquidity and by preventing surges in the overnight call rate, the Bank could help stabilize not only the overnight rate but also money market interest rates as a whole.
One member remarked that the existence of such a facility would make the market feel secure and help stabilize it regardless of whether the facility was actually used or not. A different member explained that the facility would lower term interest rates not by affecting expectation of a policy change but by reducing the risk premium arising from uncertainty about funds availability.
Based on the above views, members discussed some specific points.
Many members commented that the measure would give the official discount rate a new role as a ceiling on the overnight call rate, thereby helping to stabilize money market rates. One member raised the question of whether the loan rate of the "Lombard-type" lending facility should be the official discount rate or a different rate. In response, many members expressed the view that giving a new role to the official discount rate, which at present had virtually no significance other than its announcement effect, was a positive move as it would strengthen the rate's role in the conduct of monetary policy. A different member said that although it might take time for the new role of the official discount rate to be fully understood, it would eventually be accepted as the Bank continued to explain it thoroughly.
One member said that in the event that the Bank reinstated a lending facility as a monetary policy tool, it was important that the Bank did not exercise its discretion. Thus, a "Lombard-type" lending facility, through which the Bank would provide loans at borrowers' request based on conditions clearly pre-specified by the Bank, would be desirable.
A few members remarked that one of the characteristics of the measure was that by improving the way it provided liquidity, the Bank could support financial institutions' credit creation. One of these members commented that implementation of the measure would help dispel concerns about the liquidity of sound financial institutions. Therefore, if bank credit did not recover, it would imply that there were other problems. Another member said that measures to improve liquidity provision might not be very effective when the credibility of financial institutions was in question as was the case in 1997 and 1998. Such measures were, however, appropriate to deal with the current situation. A different member commented that although monetary policy could not solve structural problems, the central bank could enhance the stability of the financial environment by improving the way liquidity was provided. The measure was therefore appropriate in view of the current state of the economy, which was recovering against a background of structural adjustment.
One member commented that the Bank should explain the purpose of the measure to the public, for example, in a statement in order to avoid any misunderstanding that the measure was designed to rescue financial institutions in poor financial health. A few members added that the "Lombard-type" lending should be given an easily understood Japanese name.
With regard to the two other policy measures--an increase in outright operations of short-term government securities and preparation for the introduction of bill purchasing operations at all business offices--members concurred that they would be effective in stable provision of funds to a wide range of counterparties. One member expressed the view that measures that would allow a wider range of counterparties than at present access to central bank credit would help spread a sense of confidence about availability of liquidity throughout the market. A different member said that an increase in outright operations of short-term government securities would be effective because such operations would enable the Bank to provide funds without putting repayment pressure on the market.
Based on the above discussions, the chairman proposed that the Bank should introduce a lending facility through which the Bank would provide loans at the official discount rate in response to requests from counterparties and make necessary preparations so that the facility could be put in place in March 2001 (see Attachment 2, Outline of the "Lombard-Type" Lending Facility). The Board unanimously approved the proposal.
IV. Summary of Discussions on Monetary Policy for the Immediate Future
Members discussed the monetary policy stance for the immediate future.
Many members' view of the economic and financial situation was as follows: (1) Japan's economy continued to recover gradually, but the pace was slowing due to decelerating export growth; (2) downside risks to the economy, such as a further slowdown in overseas economies and negative developments in capital markets at home and abroad, were becoming more distinct; and (3) prices were expected to be somewhat weak.
Based on the above view, the majority of members concurred that the economy was still broadly in line with the standard scenario of a gradual recovery, and thus there was no need to consider a return to the zero interest rate policy. These members continued, however, that the Bank should consider employing new measures to increase the effects of the easy monetary policy, given that the economy was slowing and risk factors were becoming distinct. Views were divided on the appropriate measures to be taken in the current environment where scope for further monetary easing was limited.
Many members were of the opinion that the Bank should consider reducing the official discount rate while maintaining the overnight call rate target at the current level. One of these members commented that while the introduction of the "Lombard-type" lending facility would reduce term interest rates, a cut in the official discount rate would prompt a further fall in term rates and have some announcement effect, thereby strengthening support for the economy. Another member pointed out that with regard to the "Lombard-type" lending facility, the effectiveness of the facility depended on the size of the differential between the overnight call rate target and the official discount rate, and that the differential should be as narrow as technically possible to enhance the effects of monetary easing.
In the course of the above discussions, some members put the following questions to the staff. First, whether there were any calculations showing specifically to what extent interest rates on term instruments would be reduced with the introduction of the "Lombard-type" lending facility. And second, to what extent the interest differential between the overnight call rate and the official discount rate could be narrowed without disrupting market operations. On the first question, the staff replied that with certain assumptions and the current interest rate differential between the overnight call rate and the official discount rate of 0.25 percentage point, introduction of the facility would reduce interest rates on term instruments by about 0.05 percentage point. A narrower interest differential would further reduce term rates somewhat. The effect, however, would vary depending on the borrowing conditions, for example, for how many days a borrowing through the facility could be rolled over, and it should therefore be taken with a considerable degree of latitude. On the second, the staff said that the new facility was likely to be used frequently if the differential was smaller than 0.1 percentage point, considering the movements in the overnight call rate in the past and the size of the differential between overnight call rates and rates on short-term instruments, such as one-week money market rates.
On these grounds, many members shared the view that the desirable differential between the overnight call rate and the official discount rate as a result of reducing the latter would be around 0.1-0.15 percentage point. One member commented that to date the official discount rate had always been changed in multiples of 0.25 percentage point, but if a cut of this size was not possible this time, a reduction of 0.125 percentage point, half of 0.25 percentage point, might be appropriate. Another member said that in order to obtain the maximum effect, the official discount rate should be set at 0.35 percent, which was 0.1 percentage point higher than the overnight call rate and a multiple of 0.01. Many members agreed with the latter opinion.
A different member disagreed with a reduction in the official discount rate at this time, on the grounds that any changes in the rate should be considered after the effects and usage of the new facility at the current discount rate became clear.
A few other members proposed an easing of the guideline for market operations and a reduction in the official discount rate. One of these members remarked that, although the member was not considering abandoning the scenario of a moderate recovery, it was becoming unlikely that the economic recovery would gain the momentum described in the Outlook Report. This member continued that from the viewpoint of employing monetary policy measures in line with the economic developments, it would be appropriate for the Bank to reduce (1) the overnight call rate by 0.15 percentage point to 0.10 percent, and (2) the official discount rate by 0.25 percentage point to 0.25 percent. This member added that the Bank would be considered inflexible if it did not react to changes in the economy, a reputation to be avoided. Another member remarked that the effects of (1) a slight reduction in the overnight call rate target, (2) introduction of a "Lombard-type" lending facility, which would reduce interest rates on term instruments, and (3) a cut in the official discount rate would be significant if these measures were implemented simultaneously although the effect of each measure by itself would not be significant.
Many members said that it was very regrettable that there had been speculative media reports while the meeting was still in progress that the official discount rate would be cut.
A different member advocated adopting monetary base targeting accompanied by a target for the rate of increase in the consumer price index (CPI) and raising current account balances at the Bank to achieve these targets.
The reasons were as follows. First, the economy was very likely to stall, and it had become clear that the standard scenario envisaged by many members had failed to materialize. Second, various price indexes had generally declined on a year-on-year basis, and there was a risk that the economy would fall into a deflationary spiral. Third, against this backdrop, real interest rates remained high, and thus the Bank should adopt monetary base targeting and make clear its intention to combat deflation.
Another member said that the following would warrant attention: (1) whether concerns about the financial system would give rise to systemic risk; (2) whether the economy, which was currently in a lull, would deteriorate; and (3) whether the risk of a price fall due to a deterioration in the supply-demand balance would materialize. This member stressed that if any of these actually occurred, the Bank should conduct monetary policy in a more flexible manner. The member, while acknowledging quantitative easing through an increase in the Bank's outright purchase of government bonds as a possible policy option in the future, added that there were many conditions to be met before the Bank could adopt such a policy.
V. Remarks by Government Representatives
The representative from the Ministry of Finance made the following remarks.
(1) Japan's economy as a whole was recovering at a slower pace, with the employment situation remaining severe and private consumption generally unchanged, and production growth decreasing against the background of a decline in exports. Moreover, the rapid slowing of the U.S. economy and developments in the stock market were factors that gave cause for concern about Japan's economic outlook. Regarding prices, the CPI and the GDP deflator continued to decrease year on year despite the surge in crude oil prices, and the impact of the fall in prices on the economy through the rise in real interest rates and real debt burden required monitoring.
(2) The Government was doing its utmost to implement the fiscal 2000 supplementary budget smoothly and steadily, and to obtain the Diet's approval of the fiscal 2001 budget as promptly as possible in order to put the economy on a self-sustained recovery track.
(3) The Government would like to ask the Bank to flexibly provide funds giving due consideration to developments in the economy and the market to achieve a full-scale economic recovery led by private demand. Monetary policy conduct for the near future, including possible introduction of measures to improve provision of liquidity, had drawn much attention from financial markets both at home and abroad. In view of the growing concerns for the outlook of the economy, the Government would like to ask the Bank to give due consideration to the continuing decline in prices, and implement policy appropriately and in a timely manner.
The representative from the Cabinet Office made the following remarks.
(1) Japan's economy was continuing to improve moderately heading toward a self-sustained recovery with corporate profits and business fixed investment increasing, but the pace of improvement was slowing. Factors that gave cause for concern and required monitoring were intensifying, namely the deceleration in production due to weakening exports, the slowdown of the U.S. economy, and instability in stock prices at home and abroad.
(2) Against this background, the Government considered it important to continue conducting economic policies focusing on the recovery of the economy. Thus, the Government would take measures to put the economy on a self-sustained recovery track and promote proactive structural reform of the economy, as stated in the "Economic Outlook and Basic Policy Stance on Economic Management for FY 2001."
(3) The Council on Economic and Fiscal Policy held a meeting on February 2, and the contents of the discussion were as follows. Council members agreed that the pace of economic recovery had slowed further and that attention should be paid to the deceleration in production growth reflecting the sluggishness in exports due to the U.S. economic slowdown. Mr. Hamada, president of the Economic and Social Research Institute of the Cabinet Office, attended the meeting and expressed the view that the Bank of Japan should use other tools in addition to controlling short-term interest rates to help the economy shift to a "strong equilibrium" from a "weak equilibrium." Several members of the Council said that the Council should discuss economic and fiscal policies, taking account of monetary policy.
Based on the above discussion, the majority of members considered it appropriate to reduce the official discount rate by 0.15 percentage point to 0.35 percent while maintaining the current guideline for market operations.
However, the following opinions were also put forward: (1) that targets should be set for the rate of increase in the CPI and the growth rate of the monetary base, and the monetary base should be expanded to achieve these targets; and (2) that the target for the overnight call rate should be reduced by 0.15 percentage point to 0.10 percent, and the official discount rate should be reduced by 0.25 percentage point to 0.25 percent.
As a result, the following 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.
Mr. Taya proposed the following guideline for money market operations for the intermeeting period ahead and reduction of the official discount rate: The Bank of Japan will encourage the uncollateralized overnight call rate to move on average around 0.10 percent.
The Bank of Japan will reduce the official discount rate, with effect from February 13, 2001, by 0.25 percentage point to 0.25 percent per annum.
The proposal was defeated with three votes in favor, six against.
To reflect the majority view, the chairman formulated two related proposals.
Chairman's Policy Proposal on the Guideline for Market Operations:
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, and Ms. E. Shinotsuka.
Votes against the proposal: Mr. N. Nakahara, Mr. K. Ueda, and Mr. T. Taya.
Mr. Nakahara dissented for the following reasons. First, pressure on the Bank to take monetary action was mounting, and thus maintaining the rate at the current level was likely to heighten such pressure. Second, the majority's view of the economic situation did not appropriately reflect the rapid slowing of the economy. And third, a wide variety of price indexes had fallen, and the economy was on the verge of falling into a deflationary spiral.
Mr. Ueda dissented and said that the reasons had already been made clear in the discussion earlier at the meeting.
Mr. Taya dissented for the following reasons. First, although he was not considering abandoning the scenario of a moderate recovery, some of the downside risks had materialized and it was taking longer than expected for the improvement in corporate profits to affect household income. And second, the Bank should change its monetary policy in line with the state of the economy.
Chairman's Policy Proposal on the Official Discount Rate:
The official discount rate (the basic discount rate in relation to the discounting of bills pursuant to Article 33, Paragraph 1, Section 1 of the Bank of Japan Law and the basic loan rate in relation to the loans made pursuant to Article 33, Paragraph 1, Section 2 of the Bank of Japan Law) will be reduced by 0.15 percentage point to 0.35 percent, with effect from February 13, 2001. A public statement will be decided separately.
Votes for the proposal: Mr. M. Hayami, Mr. S. Fujiwara, Mr. Y. Yamaguchi, Mr. S. Taketomi, Mr. T. Miki, Mr. N. Nakahara, Mr. K. Ueda, and Mr. T. Taya.
Vote against the proposal: Ms. E. Shinotsuka.
Ms. Shinotsuka dissented for the following reason. Although downside risks to the economy had become more evident than before, the scope for further monetary policy easing was limited and the Bank should therefore reserve some room for maneuver so as to be able to employ the measures available to it more effectively if downside risks increased further. Further, it was necessary to first examine how the market reacted to the introduction of the "Lombard-type" lending facility at the current official discount rate.
VII. Discussion on the Public Statement
Following the above decision, the staff were instructed to draft a public statement. The meeting was adjourned from 4:03 p.m. to 4:11 p.m. while the staff prepared the draft. After the meeting resumed, members discussed the draft and put it to the vote. The Board unanimously approved "Improvements in the Way of Liquidity Provision and Reduction in the Official Discount Rate" and decided to release it after the meeting (see Attachment 2).
Referring to the speculative media reports that had appeared while the meeting was still in progress, one member said that the member would like to reemphasize to all those present that they should handle monetary policy information with the utmost care, keeping in mind the fact that it tended to be followed with keen interest by the public, and all members agreed.
VIII. 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 decided to publish "The Bank's View" on February 13, 2001 in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background").10
Votes for the proposal: Mr. M. Hayami, Mr. S. Fujiwara, Mr. Y. Yamaguchi, Mr. S. Taketomi, Ms. E. Shinotsuka, Mr. K. Ueda, and Mr. T. Taya.
Votes against the proposal: Mr. T. Miki and Mr. N. Nakahara.
Mr. Miki voted against the proposal on the following grounds. In the first paragraph of "The Bank's View," which attracted keen attention from the public, the recovery of the Japan's economy was described only as "slowing," and as this did not reflect the current state of the economy, it could lead the public to consider the Bank's view overoptimistic. He argued that expressions such as "a standstill" and "a lull," which would suggest that the economy was showing almost zero growth, should be added, and "The Bank's View" as a whole should convey a slightly more severe view of the economy.
Mr. Nakahara dissented for the following reasons. First, the basis of the Bank's assessment of the state of the economy was unclear as was the case in the past when the Bank discussed whether deflationary concern had been dispelled: the Bank should base its judgment on specific indicators and express its judgment in terms of concrete numbers. Second, he did not agree with the statement on private consumption that "there are somewhat positive signs in some indicators." Third, it was inappropriate to judge that "inventories as a whole still remain at a low level." Fourth, it was inappropriate to state that "employment conditions are on an improving trend," while firms were stepping up restructuring. And fifth, he did not support the assessment in the report that "the balance between supply and demand in the domestic market is projected to be on a gradual improving trend."
- 10The original full text, written in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on February 13, 2001 together with the English version of "The Bank's View." The English version of "The Background" was published on February 14, 2001.
For immediate release
February 9, 2001
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.
For immediate release
February 9, 2001
Bank of Japan
Improvements in the Way of Liquidity Provision and Reduction in the Official Discount Rate
1. At the Monetary Policy Meeting held today, the Bank of Japan has decided both to take measures to improve the way in which liquidity is provided to financial markets and to reduce the official discount rate by 0.15 percentage points to 0.35 percent.
Improvements in the way of liquidity provision
- a. Introduction of a standby lending facility at the official discount rate
In the current framework of monetary policy, the Bank provides the market with liquidity by the monetary operations that the Bank initiates. In addition to these, the Bank will introduce a standby lending facility ('Lombard-type' lending facility) through which the Bank extends loans at the requests of counterparties with the conditions pre-specified by the Bank. The Bank will prepare necessary arrangements so that the facility be put in place in March 2001.
- b. Increase in outright operations of short-term government securities
With a view to providing short-term funds without putting repayment pressure on the market, the Bank will make active use of outright operations of short-term government securities.
- c. Preparation for the introduction of Bill Purchasing Operations at all business offices
In order to facilitate stable provision of short-term funds with relatively longer maturities to a wider range of counterparties including local financial institutions, the Bank will expedite its preparation for the Bill Purchasing Operations at all of its business offices, the introduction of which was announced earlier. To initiate the operations by July 2001, the Bank will begin, in March, the procedure for selecting counterparties of the operations.
Reduction in the official discount rate
The official discount rate be reduced by 0.15 percentage points to 0.35 percent, effective on February 13, 2001, with a view to enhancing the effectiveness of the newly created lending facility described above in stabilizing short-term interest rates.
2. In light of recent developments in domestic and overseas economies as well as financial and capital markets, the Bank has decided upon these policy measures with a view to both enhancing flexibility of monetary operations and facilitating stable provision of funds widely in the market, thereby strengthening the effects that monetary ease has for supporting economic recovery. The Bank also reaffirms its commitment to providing ample funds through its daily monetary operations as the fiscal-year-end draws nearer.
3. With these policy measures, the Bank is determined to ensure both smooth functioning and stability of financial markets, thereby continuing to support economic recovery.
Outline of the 'Lombard-Type' Lending Facility
- In order to facilitate monetary operations for smooth functioning and stability of financial market, a standby lending facility be introduced through which the Bank extends loans at the requests of counterparties with the conditions pre-specified by the Bank
- Sufficiently creditworthy financial institutions with which the Bank has loan agreements (including securities companies, tanshi money market dealers, and securities finance companies in addition to banks)
- Location of Operations:
- The Bank of Japan's head office (Operations Department) and its branches
- Loan Rate:
- The basic loan rate (the official discount rate)
A higher rate will be applied to frequent borrowers who use the facility longer than the number of days pre-specified by the Bank.
A borrower can roll over the loan at the Basic Loan Rate up to the number of days pre-specified by the Bank.
- Eligible collateral
- Access to the Facility:
- The Bank extends loans at the requests of counterparties.
- When the Bank specifically deems it necessary, it may reject a borrowing request or set a limit on the amount of credit.