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Minutes of the Monetary Policy Meeting

on February 28, 2001
(English translation prepared by the Bank's staff based on the Japanese original)

April 18, 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 Wednesday, February 28, 2001, from 9:01 a.m. to 12:57 p.m., and from 1:46 p.m. to 3:48 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 Office

Reporting Staff
Mr. M. Matsushima, Executive Director
Mr. M. Masubuchi, Executive Director
Mr. M. Shirakawa, Advisor to the Governor, Policy Planning Office
Mr. M. Samejima, Associate Director, Policy Planning Office4
Mr. M. Amamiya, Chief Manager, Planning Division 1, Policy Planning Office
Mr. I. Yamashita, Director, Financial Markets Department
Mr. H. Hayakawa, 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. H. Tanaka, Chief Manager, Planning Division 2, Policy Planning Office5
Mr. H. Yamaoka, Senior Economist, Policy Planning Office
Mr. S. Shimizu, Senior Economist, Policy Planning Office

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on April 12 and 13, 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.
  2. Mr. Wakabayashi was present from 9:01 a.m. to 10:57 a.m.
  3. Mr. Tamura was present from 10:57 a.m. to 3:48 p.m.
  4. Mr. Samejima was present from 9:01 a.m. to 9:36 a.m.
  5. Mr. Tanaka was present from 9:01 a.m. to 9:36 a.m.

I.Strict Observance of the Confidentiality of Privileged Information concerning Monetary Policy Meetings

At the beginning of the meeting, the chairman urged all those present at the meeting to be extremely careful about the maintenance of secrecy in regard to privileged information concerning Monetary Policy Meetings as follows.

(1) It was very regrettable that when Monetary Policy Meetings had recently been held, the media had made speculative reports on discussions at meetings yet to be disclosed. In order to maintain public confidence in Monetary Policy Meetings, those who attended meetings and staff who handled confidential information should exercise extreme prudence in their handling of confidential information.

(2) The Bank's executives and staff were required to abide by their duty of confidentiality stipulated in the Bank of Japan Law and the Bank's own internal rules regarding ethical discipline, and violation of that duty would incur penalties. The members of the Policy Board had formally drawn up the Agreement on Public Comments on Monetary Policy.

(3) The chairman urged all those present at the meeting to strictly observe the law, rules, and agreement in order to prevent leakage of privileged information and to make sure that staff who handled privileged information were fully aware of their duty of confidentiality.

II.Approval of the Minutes of the Monetary Policy Meeting Held on January 19, 2001

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of January 19 for release on March 5, 2001.

III.Decisions regarding the Establishment of Principal Terms and Conditions for the Complementary Lending Facility

A. Staff Proposal

1. Establishment of Principal Terms and Conditions for the Complementary Lending Facility

At the previous meeting held on February 9, in order to improve the way it provided liquidity, the Bank decided to introduce a standby lending facility through which it would extend loans at the requests of counterparties with the conditions pre-specified by the Bank ("Lombard-type" lending facility). Accordingly, the Bank's staff proposed establishing the Principal Terms and Conditions for the Complementary Lending Facility with effect from March 16, 2001, the first day of the next reserve maintenance period.

2. Abolition or suspension of lending facilities that had been losing significance in the conduct of monetary policy

The staff proposed (1) abolishing the import bills refinancing facility at the end of June 2001, (2) suspending the discounting of commercial bills at the end of June 2001, and (3) abolishing the lending facility at a non-basic loan rate with immediate effect, in line with the following guideline adopted at the meeting held on October 13, 2000: "The loan schemes which favor bills based on specific types of transactions, such as 'bills corresponding to commercial bills,' should be reconsidered and might be abolished in light of their diminishing significance in the conduct of monetary policy."

B. Members' Discussion and Vote

Members unanimously approved the proposals and decided to make the decision public.

IV.Summary of Staff Reports on Economic and Financial Developments6

A. Money Market Operations in the Intermeeting Period

Market operations in the intermeeting period were conducted in accordance with the guideline determined at the previous meeting on February 9, 2001.7 As a result, the overnight call rate was generally steady around 0.25 percent.

In the intermeeting period, the Bank had carried out operations to purchase outright short-term government securities twice in line with the policy to increase such operations. On both occasions, the bid-to-cover ratios exceeded 300 percent, partly because the short-term government securities the Bank offered to buy had relatively long maturities of more than three months.

  1. 6Reports were made based on information available at the time of the meeting.
  2. 7The guideline was as follows:
    The Bank of Japan will encourage the uncollateralized overnight call rate to move on average around 0.25 percent.

B. Recent Developments in Financial Markets

1. Developments in domestic financial markets

Stock prices had been moving at their lowest levels since the beginning of 2000 reflecting a fall in the U.S. Nasdaq composite index, downward revisions in the profits of information technology (IT)-related firms in Japan, and the unwinding of cross-shareholdings ahead of the fiscal year-end. Recent developments worthy of note in the Japanese stock market were as follows. First, investors were buying back bank stocks encouraged by the Bank's decision at the previous meeting to improve the ways in which it provided liquidity and remarks by officials of a monetary authority suggesting expedited disposal of banks' nonperforming loans. Second, overseas investors, who had been large net buyers of Japanese stocks in January, were becoming cautious again about buying them because of the weakness in overseas stock prices in February. Many market participants expected that Japanese stocks would test the market's floor in the short term, given the uncertainty about developments in the Japanese and U.S. economies and concerns that the supply-demand balance of stocks might deteriorate due to the unwinding of cross-shareholdings.

Short-term interest rates had fallen, especially those on instruments with relatively long maturities such as three-month Euro-yen and one-year treasury bills. The fall could be attributed to (1) increased confidence about the availability of funds maturing beyond the fiscal year-end due to the Bank's policy measures decided at the previous meeting, (2) the market's positive reception of the Bank's outright purchases of short-term government securities, and (3) growing expectations of further monetary easing.

Yields on ten-year government bonds had been around 1.4 percent. Although some market participants doubted that interest rates would decline further given the increasing interest rate risk, many considered that long-term interest rates were unlikely to rise for a while because cautious views about the economic outlook and speculation about a further easing of monetary policy were encouraging buying of government bonds.

Yield spreads between corporate bonds and government bonds had recently been narrowing slightly, but those between bonds issued by some financial institutions and government bonds had continued to expand and would require monitoring.

2. Developments in foreign exchange markets

The yen was generally in the range of 115-118 yen against the U.S. dollar. Sales by Japanese institutional investors of assets denominated in foreign currencies ahead of the fiscal year-end were pushing up the yen, while uncertainty about economic developments in Japan and anticipation of a further monetary easing were weighing it down. Many market participants expected the market to be directionless for a while as these two factors were likely to continue to offset each other.

C. Overseas Economic and Financial Developments

With regard to U.S. economic indicators, the consumer confidence index had fallen sharply in January and February, and production in January had declined from the previous month for the fourth consecutive month, leading to a fall in capacity utilization in the manufacturing industry to its lowest level since February 1992. Against this background, pessimism over the U.S. economic outlook was increasing. Private research institutes had revised their economic growth forecasts further downward in February. The federal funds rate futures market had factored in a further cut in the federal funds target rate toward mid-2001. Core producer and consumer price indexes in January had risen slightly faster than the recent trend.

U.S. stocks including the Nasdaq composite index continued to fall due to a string of downward revisions in the profit forecasts of high-tech-related firms. This had affected stock prices in the euro area, the United Kingdom, and emerging markets, causing a global downturn in stock prices in February. The following developments were observed in global stock markets: (1) a sharp fall in stock prices in the technology, media, and telecommunications sectors; (2) weakness in stock prices in the financial sector; and (3) a deterioration in market sentiment due to the slowdown in the U.S. economy and the fall in U.S. stock prices.

As for emerging markets, Turkey's financial markets were in turmoil. Growing uncertainty about political developments had triggered heavy selling of the Turkish lira, prompting the Turkish monetary authorities to intervene to support the currency. As a result, the country's external reserves decreased sharply. The effects of this turmoil on other emerging economies were limited at this point, but developments would continue to require monitoring.

D. Economic and Financial Developments in Japan

1. Economic developments

Indicators for exports, business fixed investment, and production that had been released in the intermeeting period showed that downside risks to the economy had increased since the previous meeting.

Real exports in January had declined by 8 percent from the previous month, and were also down sharply from the monthly average for the October-December quarter of 2000. The sharp fall was partly due to a marked decrease in exports of automobiles. In addition, a weak trend in exports overall was also evident as in a further fall in exports of IT-related goods. Real imports, on the other hand, had declined only marginally. Net exports had thus plummeted.

With regard to indicators related to business fixed investment, machinery orders had risen in October-December 2000 for the sixth consecutive quarter, but were forecasted to fall in the January-March quarter of 2001 by 6.4 percent. Machinery orders might continue to fall for a while, given the slowdown in the U.S. economy. According to the interim results of a survey conducted by the Nihon Keizai Shimbun, business fixed investment planned by Japan's industry as a whole for fiscal 2001 was expected to decrease by 6 percent. Although the results might be revised upward in the final report as the interim results did not include the investment plans of major telecommunications firms, the results were a matter of concern in relation to the outlook for business fixed investment.

As for employees' income, special cash earnings for December 2000 were revised downward in the final figures of the Monthly Labor Survey. Turning to indicators related to private consumption, various sales statistics for January were relatively firm. This was due to the somewhat colder-than-usual weather in January and a surge in demand for appliances before a new law requiring electrical appliance makers to recycle old appliances took effect in April. Private consumption continued to show mixed developments.

The industrial production index for January released that day (February 28) had fallen by a sharp 3.9 percent from the previous month, and the forecast index showed that production in the January-March quarter was expected to fall by 1.7 percent from the previous quarter. The recent slowdown in production could be attributed to a decrease in exports of IT-related goods and automobiles. Inventories of electronic parts and some materials had been increasing.

2. The financial environment

Figures for the monetary base in December 2000 and January 2001 were lower than for the same months the previous year, when banknotes in circulation and the Bank's current accounts had increased significantly due to concerns about the Year 2000 problem. The figure for February was, however, likely to be higher than a year earlier because Year 2000 concerns had almost disappeared and the monetary base had dropped in February 2000. The growth rate of money stock (M2+CDs) had been rising somewhat since August 2000, partly due to an inflow of funds to bank deposits from postal savings that had matured.

The number of corporate bankruptcies in January had decreased by 0.4 percent from the previous year, and viewing the situation in a longer time frame, the trend had been flat since summer 2000. With regard to future developments in corporate bankruptcies, the sales and profits of small firms, banks' lending attitude toward small firms, and the effects of termination of special guarantee systems for the financial stabilization of small and medium-sized enterprises at the end of March 2001 would require careful monitoring.

V.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 assessment of economic indicators released since the previous meeting on February 9.

Many members expressed the view that the outlook for the economy would warrant closer attention than before, citing the fact that (1) a downtrend in exports had become evident, (2) production, which had been at a temporary standstill, was gradually decreasing, and (3) some relatively negative signs were appearing regarding the outlook for business fixed investment.

One of these members said that there was an increasing risk of the economy deteriorating after the current lull, and thus the Bank should change its view of economic and financial developments for February decided at the previous meeting as it did not properly reflect the actual situation. A few other members said that two risk factors that had been noted as warranting close attention--the effects of the slowdown in overseas economies and of developments in capital markets at home and abroad--were gradually materializing.

On these grounds, the majority of members agreed that (1) the pace of the ongoing economic recovery had been slowing further against the background of deceleration in overseas economic growth and declines in domestic stock prices, and (2) uncertainty over economic prospects had also increased.

With regard to developments in the corporate sector, many members expressed the view that the downtrend in exports and production had become clearer. A few members commented that the slowdown in exports had significantly affected production. One of these members added that future developments in production needed to be watched vigilantly.

Many views were put forward regarding business fixed investment. Many members said that firms' capital spending for fiscal 2001 was increasingly likely to slow, given the results of the survey conducted by the Nihon Keizai Shimbun and the fact that machinery orders for the January-March quarter were forecasted to decline from the previous quarter after increasing for six consecutive quarters. A few of these members remarked that the fall in stock prices and the need for firms to record special losses related to adjustments for retirement benefits when they closed their books for fiscal 2000 at the end of March might be dampening their willingness to invest. One member said that firms had become more cautious about their fixed investment, noting postponement of a total of about 600 billion yen worth of fixed investment in the April-June and July-September quarters according to the Business and Investment Survey of Incorporated Enterprises.

One member expressed concern about the downward revisions in corporate profits of some major electrical equipment manufacturers. Another member pointed out that firms' financial statements for fiscal 2000 were increasingly likely to show a deterioration because stock prices had fallen recently and firms had to record their shareholdings at market value as a result of a change in accounting rules.

With regard to the household sector, one member said that the increase in retail sales in January for the first time in nearly four years was one of the few bright signs in the economy, even though the increase was partly due to special factors such as the cold weather and the fact that a new law requiring electrical appliance makers to recycle old appliances was about to come into force. Another member remarked that there were some positive signs in indicators related to private consumption in late December to early January. In contrast, some members mentioned the downward revision of the special cash earnings for December in the final figures of the Monthly Labor Survey. A few of these members said that this was further proof that the improvement in corporate profits would not easily lead to an increase in household income. A different member remarked that the firmness in the income situation might be undermined by the weakness in production, and thus relevant information should be carefully monitored.

A different member referred to an analysis of the price elasticity of consumption. After pointing out that consumption by high- and medium-income households had become inelastic to price changes in the second half of the 1990s, this member said that consumers, with the prolonged deflation, had become accustomed to restraining their spending. This member added that this tendency had caused the noticeable decline in nominal consumption.

Against the background of these developments in the corporate and household sectors, members exchanged views on the mechanism for economic recovery. A few members said that, although a marginal slowdown in the corporate sector due to the deceleration in overseas economies would not be a problem if the household sector could offset it, it was unlikely that the household sector would become the driving force of economic growth. One of these members, however, said that private consumption had been relatively firm, and thus it could be said that the mechanism for a moderate economic recovery was continuing to operate. Another member expressed concern that this mechanism for an economic recovery led by the corporate sector might break down if the slowdown in production due to a decline in exports gradually increased downward pressure on corporate profits and restrained spending.

A different member took a more cautious view of the economy than other members. This member pointed out the following. First, the contracted value of public works in January had declined by 10 percent from the previous month. Second, sales of passenger cars including those under 660cc and the ratio of monthly condominium sales to supply had fallen significantly from the previous month. Third, the results of various surveys of views about the Japanese economy were lackluster. Fourth, with regard to the U.S. economy, productivity growth had peaked out in the April-June quarter of 2000, and with the economic growth rate likely to be negative in the first half of 2001, a recovery in the second half was unlikely. This member continued that the Indexes of Business Conditions showed that Japan's economy was likely to fall into recession in May-July 2001 at the latest.

Regarding prices, a few members expressed concern that the domestic supply-demand balance might deteriorate again. These members said that there was a risk that the weak trend in prices might negatively affect corporate profits and wages. One of these members commented that prices were falling partly because nonviable firms that were managing to survive due to a delay in structural adjustment had been slashing prices ignoring production costs. Another member said that land prices in addition to various price indexes had been falling and judged that deflation was in progress. On the basis of these discussions, the majority of members agreed that prices had been displaying weak developments, and there was a renewed concern that downward pressure on prices stemming from weak demand might intensify.

B. Financial Developments

On the financial front, some members pointed out that short-term market rates including those on instruments with relatively longer maturity, for example, instruments maturing beyond the fiscal year-end, had declined significantly due to the Bank's decisions at the previous meeting to reduce the official discount rate and to adopt measures to improve the way in which liquidity was provided. These members said the decline in the market rates was evidence that these decisions had been successful in further easing the financial environment, and was expected to support the economy. One of these members added, however, that the rate decline had partly reflected the speculation in the market about further monetary easing by the Bank including a reduction of the call rate target.

Some members commented on the fall in stock prices. One member pointed out that while the Nikkei 225 Stock Average had briefly dipped below its post-bubble low, TOPIX (Tokyo Stock Price Index) had remained about 20 percent above its post-bubble low, and care was therefore necessary in assessing the fall in stock prices. This member continued that the effects of the fall in stock prices on household and corporate sentiment required continued monitoring. A different member expressed the view that Japanese stock valuations were still relatively high, judging from the price-earnings ratio of Japanese stocks, which was much higher than, for example, that of Standard & Poor's 500 Index stocks in the United States. Another member said that the view was becoming more prevalent among firms that the fall in stock prices would weaken the financial strength of Japanese banks and result in a tightening of their lending attitude.

In relation to the above, one member commented on developments in the U.S. stock market. This member expressed the view that bubble-like characteristics were noticeable recently, with last year's ratio of stock value traded to GDP at substantially higher levels than before the stock market crash of 1929. This member continued that it was cause for concern that the recent plunge in the S&P index, together with the decline in the Nasdaq composite index, could lead to a substantial decline in the Dow Jones Industrial Average.

Members exchanged views on the nonperforming-loan problem of financial institutions. A few members said that, although it was not yet clear what measures the Financial Services Agency and related ministries would take, they hoped that measures that would pave the way for a complete disposal of nonperforming loans would be formulated this time. One of these members explained that, although measures aimed at fundamentally resolving Japan's financial system problems might have a deflationary effect on the economy, they could improve market conditions provided that they satisfied market participants at home and abroad. This member, however, added that attention should be paid to the risk that deflationary pressure could intensify temporarily if the amount of nonperforming-loan disposal increased significantly in the short term.

VI.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: (1) the pace of the ongoing economic recovery in Japan had been slowing further against the background of deceleration of overseas economic growth and the decline in domestic stock prices; (2) uncertainty over the economic prospects had increased; and (3) prices had been displaying weak developments, and there was a renewed concern that downward pressure on prices stemming from weak demand might intensify.

Based on the above view, members discussed the following points concerning monetary policy for the immediate future: (1) whether the Bank should further ease monetary policy at this meeting, and (2) if so, what specific measures the Bank could take.

One member expressed the opinion that, although the decisions at the previous meeting had dispelled concern about a liquidity shortage in the market and its possible negative impact on economic recovery, it would be worth discussing whether the Bank should take further action in view of the unfavorable economic data released since the previous meeting. This member added that, since the scope for reducing interest rates was very limited, it might be appropriate to wait for more information on the economy and formulate a more innovative measure.

In response, many members expressed views that supported taking further action at this meeting.

A few of these members said that the Bank should convey the message to the public that the Bank was concerned about the economic outlook, and this would be effective in emphasizing the flexibility of the Bank's monetary policy. One member said that a slight reduction in the overnight call rate target and the official discount rate was desirable as the specific methods of conveying the Bank's message to the public, and these measures, together with the release of the details of the Lombard-type lending facility, were likely to work synergistically to some extent.

A different member said that the Bank should take measures to cope with the risks that (1) the economy might deteriorate from the current lull as firms were suffering from a fall in the prices of their products due to a deterioration in the supply-demand balance and a fall in stock prices, both of which had the potential to depress profits, and (2) strong deflationary pressure might emerge in the process of working toward economic recovery through structural reform and through the disposal of nonperforming loans at a time when it was important that the economy returned to a moderate recovery path. This member said that to deal with the former risk, the Bank should take additional measures under the current monetary policy framework, such as a slight reduction of the overnight call rate target and a further increase in the provision of liquidity. With regard to the second, taking into account (1) the fact that the relationship between the monetary base and money stock had become weaker, and (2) the necessity to consider adopting powerful measures based on totally unconventional thinking, it was necessary to reduce the overnight call rate to close to zero percent and further increase liquidity provision by increasing the amount of outright purchases of government bonds and the eligible types of issue. In addition, it was worth discussing changing the framework of monetary policy, for example, switching from interest rate targeting to quantitative targeting or setting a price target. This member, however, cautioned that careful consideration was necessary to judge whether the Bank should adopt drastic measures, including those above, at once or gradually.

Another member said that the Bank should (1) clearly convey to the public that it had no intention of allowing prices to fall in the current environment where downside risks to the economy were intensifying, (2) take a flexible position toward increasing the Bank's outright purchases of government bonds, and (3) to be specific, continue to buy a larger amount of government bonds outright in market operations until the consumer price index (CPI), excluding perishables, registered stably a year-on-year increase of zero percent or more. This member explained that these moves would have a positive effect on the expectations of economic entities and either reduce or stabilize long-term interest rates and induce a decline in the yen, thereby preventing prices from falling further. This member added the following two points. First, such a commitment in terms of the duration of the Bank's increased outright purchases of government bonds would secure fiscal discipline. And second, the amount of purchases of government bonds should be about 800 billion yen per month; any capital losses on the Bank's government bond holdings after the increase could be covered by the Bank's reserve for possible losses on securities transactions.

A different member remarked that the Bank's monetary policy measures in the past were considered to be "too little and too late." The member continued that although it would be desirable to adopt monetary base targeting accompanied by a numerical target for price stability, it would be appropriate to first reinstate the zero interest rate policy on the following grounds. First, the standard scenario envisaged by the Bank had failed to materialize, with external demand decreasing and concern emerging that business fixed investment would stall. Second, stock prices had fallen to their lowest level since the bursting of the bubble, and this could damage the economy by affecting market sentiment. Third, a wide variety of price indexes were lower than a year earlier, and this was evidence that the economy was experiencing deflation. And fourth, the current state of the economy was so severe that it was at risk of falling into a deflationary spiral unless prompt action was taken.

On the other hand, a few other members were cautious with regard to taking further policy action at this meeting. One member explained as follows. First, although the market's and businesses' view of the outlook for the economy was worsening, it was unlikely that the economy would immediately deteriorate. Second, the Policy Board should discuss thoroughly both the theory and practice of policy measures the Bank might adopt if it was to change the monetary policy regime, for example, to one in which the Bank would increase outright purchases of government bonds. And third, in addition to preparing additional monetary policy measures to deal with deflationary pressures arising from structural adjustment, in particular from the disposal of nonperforming loans, it was necessary to establish a social safety net and these points should also be discussed thoroughly. Another member remarked that (1) the current state of the economy differed from that in early 1999 when the zero interest rate policy was introduced, (2) at present, it was important to advance structural reform through competition, making full use of the functions of interest rates and the market, and (3) a decline in interest rates on bank deposits could damage consumer sentiment.

Members also exchanged views on the effectiveness of measures that were unlikely to be taken under ordinary circumstances, such as making a policy duration commitment, quantitative easing, or increasing the Bank's outright purchases of government bonds.

One member summed up the discussions so far as follows. If interest rates fell to almost zero percent, a mere increase in funds provision would not have a substantial effect. On this basis, the member explained that measures that would be effective in easing monetary conditions at present included (1) increasing the Bank's outright purchases of government bonds that would directly affect long-term interest rates, (2) inducing a depreciation of the yen as foreign exchange rate policy, which was a matter for the Ministry of Finance, and (3) making a commitment at this point to maintain an easy monetary policy. This member asked the member who advocated increasing the Bank's outright purchases of government bonds to prevent prices from falling what would be the objective of the drastic policy, since this member thought that the effect produced by making a commitment to maintain an easy policy for a certain period of time would suffice to prompt a decline in long-term interest rates.

In response, the member who advocated increasing the Bank's outright purchases of government bonds explained as follows. First, the significance of increasing outright purchases of government bonds was that it would convey a clear message that the Bank would not allow prices to fall. Second, it could be expected to help stabilize long-term interest rates at a low level and induce a weaker yen without a change in the current guideline for market operations (to encourage the overnight call rate to move on average around 0.25 percent). Third, when, as at present, a funds shortage was increasing due to the net receipt of funds by the Government, an increase in the Bank's outright purchases of government bonds would help reduce the burden of providing short-term liquidity, thereby enhancing the flexibility of the Bank's market operations.

In relation to the above points, one member expressed the view that the effects on long-term interest rates of outright purchases of government bonds were not necessarily certain. A different member said that the Bank should not increase its outright purchases of government bonds with the aim of reducing long-term interest rates, as it could undermine the credibility of monetary policy and government bonds, resulting in a rise in long-term interest rates.

On the basis of the above discussions, the majority of members shared the following view.

(1) Information obtained since the previous meeting revealed that downside risks to the economy had increased further, and it would be appropriate for the Bank to take policy action at this meeting.

(2) The Bank should discuss further at coming meetings whether the Bank should, taking into account economic and price developments, adopt measures unlikely to be taken under ordinary circumstances.

(3) It would be appropriate for the Bank to reduce slightly its policy interest rate target at this meeting from the viewpoint of conducting monetary policy in a timely and flexible manner.

One member summed up the discussions as follows: it would be appropriate to reduce both the overnight call rate target and the official discount rate by 0.1 percentage point. In the course of the discussion, many members, including those who had been cautious about taking policy action at this meeting, came to agree with this opinion.

One member, however, expressed the view that the Bank should readopt the zero interest rate policy at this point in time for the following reasons. Compared with the state of the economy in February 1999, when the zero interest rate policy was introduced, the current situation was more severe, given that (1) each demand component of nominal GDP was significantly lower, (2) government debt outstanding had increased substantially and scope for employing fiscal policy was limited, (3) financial institutions' unrealized capital gains on their stock holdings had decreased further, and (4) the economy was approaching a downward phase from the viewpoint of economic cycles, while in February 1999, it was about to bottom out. Further, the member who advocated increasing the Bank's outright purchases of government bonds in order to stop prices falling said that the member agreed with taking policy action at this meeting. This member, however, was against reducing the interest rate target in a way that could lead to a revival of the zero interest rate policy, unless the advantages and disadvantages of the zero interest rate policy were examined comprehensively.

Members also discussed the necessity of structural reform. Some members pointed out that even if the Bank, as the central bank, adopted necessary measures, this alone would not solve the fundamental problems of the Japanese economy. They stressed that structural reform in the financial system as well as in the economy and industry was essential to ensure a sustainable economic recovery. In relation to this, one member raised the following points. First, structural reform should be undertaken by the private sector itself according to market principles. Second, the role of the Government was to create the environment for such structural reform and to provide a clear picture of the future economy. And third, with regard to fiscal policy, quality, not quantity, of fiscal spending was important. These members said that the Bank should encourage various sectors to further accelerate structural reform by, for example, solving financial system problems through the disposal of nonperforming loans.

VII. Remarks by Government Representatives

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

(1) Japan's economy was recovering at a slower pace, with the employment situation remaining severe and private consumption generally unchanged, and production growth decelerating against a background of a slowdown in exports. In addition, factors such as the slowing of the U.S. economy 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 would implement the fiscal 2000 supplementary budget smoothly and steadily, and 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. The statement released by G-7 finance ministers and central bank governors after their recent meeting said the following: "In Japan, while a modest recovery is expected, prices continue to decline and downside risks remain. In this context, monetary policy should continue to ensure that liquidity is provided in ample terms."

(3) The Government would like to ask the Bank to provide ample funds in a flexible manner by carrying out the measures to improve provision of liquidity decided at the Monetary Policy Meeting on February 9. Monetary policy conduct for the near future had drawn much attention from financial markets both at home and abroad. In view of the concerns about the economic outlook, the Government would like to ask the Bank to give due consideration to the continuing decline in prices, and implement policies appropriately and in a timely manner.

The representative from the Cabinet Office made the following remarks.

(1) In the monthly economic report released on February 16, the Government changed its assessment of the economy to "the pace of economic recovery has become more moderate," from "activities on the whole continue to rise modestly" in the January report. The following developments were noted. First, reflecting the slowdown of the U.S. economy, Japanese exports had weakened, resulting in a moderation in the rise in industrial production. Second, the economy remained in a severe situation, with private consumption remaining broadly flat and the unemployment rate stubbornly high. However, third, movements toward a self-sustained recovery were continuing, as seen in the rise in corporate profits and business fixed investment. As for the economic outlook, factors such as the slowdown of the U.S. economy gave cause for concern.

(2) The Council on Economic and Fiscal Policy held its fourth meeting on February 27, and many members were of the opinion that structural reform of the economy and society was necessary for Japan to display its potential strength of growth, and that comprehensive measures to revitalize the economy, including measures to encourage the disposal of nonperforming loans, should be drawn up.

(3) The Government would like to ask the Bank to conduct monetary policy in an appropriate, timely, and preemptive manner--for example, flexibly provide the market with ample funds, bearing in mind the factors that gave cause for concern about the economic outlook--to ensure a self-sustained recovery of the economy.

VIII.Votes

After the above discussion, the majority of members considered it would be appropriate to reduce the target for the uncollateralized overnight call rate by 0.1 percentage point to 0.15 percent and reduce the official discount rate by 0.1 percentage point to 0.25 percent on the basis that the Policy Board would examine further the issue of whether the Bank should adopt measures unlikely to be taken under ordinary circumstances, taking into account economic and price developments.

However, one member proposed that the Bank should adopt the zero interest rate policy again, and reduce the official discount rate to 0.1 percent to make financial institutions feel more confident about funds availability at the end of the fiscal year. This member added that if a return to the zero interest rate policy was not sufficient, the Bank should adopt quantitative easing that set targets for the rate of increase in the CPI and the monetary base, a measure that this member had been proposing for quite a while.

Another member proposed maintaining the current guideline for money market operations and increasing the Bank's outright purchases of government bonds with a view to enhancing the effectiveness of market operations, and continuing this policy until the CPI (excluding perishables) registered stably a year-on-year increase of zero percent or more. This member added that the amount of government bonds to be purchased outright should be double the current amount for the time being; any capital losses incurred on the Bank's government bond holdings after the increase could be covered by the Bank's reserve for possible losses on securities transactions.

As a result, the following policy proposals were submitted.

Mr. Nakahara 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 flexibly provide ample funds and encourage the uncollateralized overnight call rate to move as low as possible.

The Bank of Japan will reduce the official discount rate by 0.25 percentage point to 0.10 percent, with effect from March 1, 2001.

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

Ms. Shinotsuka proposed the following guideline for money market operations for the intermeeting period ahead and an increase in the Bank's outright purchases of government bonds:

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

The Bank of Japan will increase its outright purchases of government bonds from the current amount of around 400 billion yen per month with a view to enhancing the effectiveness of market operations, and continue this policy until the CPI (excluding perishables) registered stably a year-on-year increase of zero percent or more. Outright purchases will be increased to and maintained at about 800 billion yen per month for the time being.

The proposal was defeated with two votes in favor, seven 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. A public statement would be decided separately.

The Bank of Japan will encourage the uncollateralized overnight call rate to move on average around 0.15 percent.

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

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

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 0.10 percentage point to 0.25 percent, with effect from March 1, 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. K. Ueda, and Mr. T. Taya.

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

Mr. Nakahara dissented for the following reasons. First, it could be said that termination of the zero interest rate policy in August 2000 was a mistake given that the economy had been deteriorating since that month, and with the pace of economic deterioration accelerating at present, this was no time for half-measures. Second, the standard scenario envisaged by the Bank had failed to materialize and the Bank's current view of the economy still did not reflect the actual state of the economy, judging from (1) the rapid economic slowdown, (2) the stronger deflationary trend seen in, for example, land prices, and (3) the decrease in nominal GDP. Third, if the Bank did not adopt drastic monetary easing, demands for monetary easing would heighten further, and the Bank's independence could even be threatened. And fourth, the current downtrend in stock prices was serious and required careful monitoring toward the end of March.

Ms. Shinotsuka dissented for the following reasons. First, the Bank should not rush to reduce interest rates, as this could lead to a return to the zero interest rate policy at a time when the effects of the zero interest rate policy had not yet been thoroughly assessed. And second, it was necessary, against a background of increasing downside risks to the economy, for the Bank to give the public a strong message in order to stop the downtrend in prices. She said that although her proposal of using the CPI as the basis for a policy commitment and increasing outright purchases of government bonds had been defeated, she would like the staff to continue examining its feasibility.

IX.Discussion on the Public Statement

Following the above decision, the Board approved "Change in the Guideline of Money Market Operations and Reduction in the Official Discount Rate" by majority vote and decided to release it (see Attachment).

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

Abstentions: Mr. N. Nakahara and Ms. E. Shinotsuka.

The chairman would hold a press conference after the meeting, following the established custom when a policy change was decided.

Attachment

For immediate release

February 28, 2001
Bank of Japan

Change in the Guideline of Money Market Operations and Reduction in the Official Discount Rate

  1. At the Monetary Policy Meeting held today, the Bank of Japan has decided on the following policies.
    1. a) Change in the guideline of money market operations (by majority vote)
      Encourage the uncollateralized overnight call rate to move on average around 0.15 percent.
    2. b) Reduction in the official discount rate (by majority vote)
      Reduce the official discount rate to 0.25 percent, effective on March 1, 2001.
  2. The pace of ongoing economic recovery in Japan has been slowing further against the background of deceleration of overseas economic growth and declines in domestic stock prices. Uncertainty over economic prospects has also increased. At the same time, prices have been displaying weak developments, and there is a renewed concern that downward pressure on prices stemming from weak demand might intensify.
  3. In light of these developments, the Bank of Japan decided on the policy measures above for the purpose of strengthening further the Bank's support for economic recovery as well as ensuring price stability.
  4. With a view to restoring Japan's economy on an autonomous growth path led by private demand, the Bank will continue to conduct monetary policy in a timely and flexible manner.
  5. In order to ensure a sustainable recovery of Japan's economy, structural reforms in the financial system as well as in the area of economy and industry are essential. The Bank strongly hopes that such reform efforts accelerate further in a variety of fields.