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Minutes of the Monetary Policy Meeting

on May 17 and 18, 2001
(English translation prepared by the Bank's staff based on the Japanese original)

June 20, 2001
Bank of Japan

A Monetary Policy Meeting of the Bank of Japan Policy Board was held in the Head Office of the Bank of Japan in Tokyo on Thursday, May 17, 2001, from 2:00 p.m. to 3:41 p.m., and on Friday, May 18, from 9:00 a.m. to 12:18 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
Mr. K. Ueda
Mr. T. Taya
Ms. M. Suda

Government Representatives Present
Mr. Y. Tamura, Deputy Vice Minister for Policy Planning and Coordination, Ministry of Finance
Mr. T. Komoda, Deputy Director General for Economic and Fiscal Management, Cabinet Office2
Mr. Y. Kobayashi, Director General for Economic and Fiscal Management, Cabinet Office3

Reporting Staff
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. Amamiya, Associate Director, 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. T. Umemori, Chief Manager, Planning Division 2, Policy Planning Office4
Mr. S. Uchida, Senior Economist, Policy Planning Office
Mr. S. Nagai, Senior Economist, Policy Planning Office
Mr. T. Kurihara, Manager, Financial Markets Department5

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on June 14 and 15, 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. Komoda was present on May 17.
  3. Mr. Kobayashi was present on May 18.
  4. Mr. Umemori was present on May 18, from 9:00 a.m. to 9:18 a.m.
  5. Mr. Kurihara was present on May 18, from 9:00 a.m. to 9:18 a.m.

I. Summary of Staff Reports on Economic and Financial Developments6

A. Money Market Operations in the Intermeeting Period

Market operations in the intermeeting period were conducted in accordance with the guideline determined at the previous meeting on April 25, 2001.7 Specifically, operations were conducted so that the outstanding balance of current accounts at the Bank was around 5 trillion yen except for May 15, when the outstanding balance amounted to around 6 trillion yen, that day being the last of the reserve maintenance period that started on April 16. As a result, the uncollateralized overnight call rate was generally steady at around 0.01-0.02 percent, although it rose somewhat above that level on May 15.

There had been cases where the total amount of bids in market operations fell short of the amount the Bank offered, that is to say, under-subscription, in the intermeeting period reflecting the permeation of the effects of monetary easing. This, however, had not caused problems in achieving the operating target for market operations.

  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 conduct money market operations, aiming the outstanding balance of the current accounts at the Bank at around 5 trillion yen.
    Should there be a risk of financial market instability, e.g., a rapid surge in liquidity demand, the Bank will provide ampler liquidity irrespective of the guideline above.

B. Recent Developments in Financial Markets

Short-term interest rates including rates on term instruments with relatively long maturities were at levels below those under the zero interest rate policy, and this indicated that the "commitment effect" of the current monetary policy was strong.

In the bond market, yields on ten-year Japanese government bonds had declined to 1.2-1.3 percent due partly to the fact that concerns about a deterioration in the supply-demand balance of government bonds had been alleviated following the result of the Liberal Democratic Party presidential election.

Stock prices had risen reflecting expectations that structural reform would make progress under the new administration and the uptrend in U.S. stock prices, but they subsequently declined somewhat in response to the slight fall in U.S. stock prices.

In the foreign exchange market, the yen had been trading at 120-121 yen against the U.S. dollar due partly to purchases of Japanese stocks by foreign investors prompted by expectations that structural reform in Japan would advance. Subsequently, the yen weakened slightly reflecting the fall in Japanese stocks and was moving in the 123-124 yen range recently.

C. Overseas Economic and Financial Developments

In the United States, although private consumption remained firm, business fixed investment decelerated amid the continuing adjustments in production and employment, and the economy as a whole remained sluggish. The U.S. economic outlook was still uncertain and the following would require monitoring. First, how long private consumption would remain firm amid an expected deterioration in the employment and income situation. Second, how long the adjustments in information technology (IT)-related sectors would continue and how they would affect corporate profits. In financial markets, the yield curve of U.S. Treasuries steepened, stock prices recovered, and the U.S. dollar remained firm, all of which suggested that the markets' expectations of medium- to long-term economic growth remained undiminished.

Against this background, the Federal Open Market Committee (FOMC) decided at its meeting on May 15 to lower its target for the federal funds rate by 50 basis points to 4.0 percent.

Euro-area economies seemed to be slowing. Growth in both production and manufacturing orders was declining and the confidence of manufacturers continued to deteriorate, although private consumption remained firm.

In this situation, the Governing Council of the European Central Bank (ECB) decided at its meeting on May 10 to reduce the minimum bid rate on the main refinancing operations by 25 basis points to 4.50 percent.

NIEs and ASEAN economies were decelerating with production decreasing due to a fall in exports and the confidence of manufacturers continuing to deteriorate. In China, although export growth had slowed, domestic demand remained buoyant and economic growth remained strong.

D. Economic and Financial Developments in Japan

1. Economic developments

With regard to final demand, exports continued to decrease reflecting an economic slowdown in the United States and East Asia. In domestic demand, the recovery in private consumption continued to be weak as a whole, but there were somewhat positive signs in some indicators. Business fixed investment, which had been increasing, seemed to be leveling off. In this situation, industrial production was declining and excessive inventories of electronic parts and some materials were building up. Corporate profits seemed to have started to decrease, particularly in the manufacturing sector. The income conditions of households had not yet deteriorated, but the decline in production was starting to affect the household sector mainly through the decrease in hours worked. In summary, adjustments in economic activities had been under way, as production was declining reflecting a fall in exports.

As for the economic outlook, exports were likely to continue decreasing for a while. Business fixed investment was projected to peak out and decline as corporate profits began to fall. In addition, inventory adjustments mainly in electronic parts were likely to cause industrial production to follow a declining trend at least until summer 2001. Household income was expected to weaken gradually reflecting the continuing decline in production. Overall, the adjustments were likely to continue for some time, mainly in production.

As adjustments were concentrated mainly in exports and production at present and prospects for an endogenous recovery were dim, economic developments in the second half of fiscal 2001 would be influenced to a great extent by overseas economies, particularly that of the United States. In addition, developments in stock prices, their effects on corporate and household sentiment, and the effects of a possible acceleration in the disposal of nonperforming loans would warrant monitoring.

The past depreciation of the yen was likely to exert upward pressure on prices. However, they were also likely to be subject to downward pressure from the imbalance between supply and demand in the domestic market as economic adjustments continued. In addition, technological innovation, together with deregulation, which had led to lower communications charges, would continue to restrain prices, and the effects of the streamlining of distribution channels, for example by the apparel sector, were likely to continue for a while. Against this background, various price indexes were likely to be generally weak for the time being. If downside risks to the economy materialized due to weaker-than-expected overseas economies, downward pressure on prices stemming from weak demand might intensify, and this would warrant careful monitoring.

2. The financial environment

The year-on-year growth rate of the monetary base in April remained modest as in March, reflecting developments in the same period of the previous year when financial institutions had increased excess reserves at the Bank toward the fiscal year-end and post offices had increased their cash holdings in preparation for an expected massive withdrawal of postal savings due to mature. The year-on-year growth rate of money stock (M2+CDs) was around 2.5 percent recently.

With regard to corporate financing, private banks continued to be more active in extending loans mainly to firms displaying good performance, while carefully evaluating borrowers' creditworthiness. There seemed to be no significant change in firms' perception of financial institutions' lending attitude. Closer examination, however, suggested that banks were eager to increase lending to firms displaying good performance but were becoming somewhat cautious about lending to firms with low creditworthiness. In other words, there was growing polarization of banks' lending stance. Meanwhile, the fund-raising environment for firms in the capital markets through such instruments as corporate bonds and CP was improving further owing to the decline in interest rates and an increased willingness among investors to take credit risks. The amount outstanding of CP issued marked the highest level to date.

Firms' funding costs declined reflecting the fall in market interest rates due to the Bank's further monetary easing.

In sum, the lending attitude of financial institutions and corporate financing conditions remained easy. For the time being, attention should be paid to the effects of the monetary easing measures taken by the Bank, and careful monitoring was still required of the effects of developments in stock prices and corporate profits on financial institutions' behavior and firms' fund-raising conditions.

II. Decisions concerning Revision of the Principal Terms and Conditions Pertaining to the Purchase of Bills

A. Staff proposal

With a view to further facilitating money market operations through an improvement in the Bank's provision of funds, the staff proposed extending the maximum maturity of the bills it purchased in bill purchasing operations to six months from three months. To this end, the Bank would revise the Principal Terms and Conditions Pertaining to the Purchase of Bills and the rules for conducting the Bank's business.

B. Members' Discussion and Votes

By unanimous vote, members approved the proposal and decided to make the decision public along with other measures the staff had explained that would be taken to facilitate market operations: increasing the number of eligible counterparties in bill purchasing operations at the Bank's head office; adding medium-term government bonds to the list of government bonds eligible for outright purchases; and accepting bid rates in smaller units in competitive yield auctions.

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

Members discussed economic and financial developments taking into account the results of economic and financial indicators that had become available since the previous meeting.

Members agreed to maintain the judgment at the previous meeting that adjustments in economic activities had been under way, as production was declining reflecting a fall in exports. Many members, however, expressed the view that an increasing number of indicators suggested that the slowdown in the corporate sector was becoming more evident, especially in production, inventories, and business fixed investment. One member said that analysis of indicators such as the Indexes of Business Conditions confirmed that the economy had changed its trend in early 2001 at the latest and had entered a recession. A different member said that the economy continued to deteriorate gradually.

Many members said that, in the corporate sector, the decrease in exports and production had become more evident. One member remarked that, because production in export-oriented industries had contributed to the recovery that continued until late 2000 to a larger extent than previous recoveries, the deceleration in exports was having a significant effect on production, and would ultimately affect business fixed investment.

A few members said that corporate profits had started decreasing due to a fall in production and prices. Many members expressed the opinion that, given this situation, business fixed investment, which had been increasing, seemed to be leveling off and was likely to start decreasing. One member commented that the decrease in business fixed investment and cancellations of investment projects were beginning to affect sectors other than those related to IT. The member added that projects in progress were mainly those that could not be cancelled, such as construction of factories. One member added that there were no signs at present that the decrease in business fixed investment would accelerate.

The following view on private consumption was put forward: (1) the results of some indicators had been favorable recently; (2) however, the decrease in production was beginning to affect the employment and income situation, such as hours worked, which was in turn affecting consumer confidence; and (3) close attention should be paid to the possibility that such developments in private consumption would intensify, leading to a cycle of negative interaction between the corporate and household sectors.

One member commented that private consumption remained at normal levels--that is, it was neither strong nor stagnant--as seen in the strong sales of some consumer durables, for example, passenger cars, and sales at department stores in Tokyo. A different member said that although private consumption had lacked momentum for recovery, the mixed developments it had been showing could be assessed as a relatively strong performance. The member continued that the difference in momentum between the corporate and household sectors was a typical phenomenon in the early stage of an economic adjustment and that the member would like to monitor whether adjustments in the corporate sector would spread to the household sector with a time-lag. Another member remarked that the member would take into account the following when assessing the economic outlook for the second half of fiscal 2001: (1) future developments in corporate profits, which seemed to have started decreasing; and (2) measures firms might take with regard to employment when their earnings deteriorated. In relation to this, one member pointed out that the current decrease in hours worked partly reflected firms' efforts to convert fixed costs into variable costs, and that adjustments in employment and income might differ somewhat from those in the past. A different member said that the unemployment rate was likely to increase further since there was a growing mismatch between the jobs on offer and the ages and skills of those seeking jobs.

One member said that it was necessary to watch closely developments in consumer confidence, which had deteriorated due to concerns about the employment and income situation against the background of the clearer downward trend in production. A different member, on the other hand, commented that the propensity to consume was rising despite the deterioration in consumer confidence, and attributed this to the fact that some households seemed tired of being thrifty and to the public's hopes for change.

A few members said that public investment was likely to increase until the middle of 2001 but decrease thereafter unless the Government adopted a supplementary budget. One member expressed the opinion that housing investment had already peaked out and the tax cuts on housing loans were no longer having much effect.

Based on the above discussions, members agreed that adjustments in Japan's economy, mainly in production, were likely to continue for the time being and it was becoming unlikely that the mechanism of income generation starting from the corporate sector would continue to operate.

Many members said that Japan's economic outlook would continue to be affected strongly by developments in the U.S. economy and in global IT-related demand. One member said that the member would monitor the new administration's efforts for structural reform carefully. A different member remarked that the effects structural reform, including the disposal of nonperforming loans and the planned reduction in the outstanding balance of public debt, might have on the economy should be examined. This member added that the results should be taken into account by the Board members.

Regarding the U.S. economy, many members agreed that it was difficult to judge the likelihood of a recovery in the second half of 2001, since there were both positive and negative factors.

One member pointed out that while there were some positive signs such as higher-than-expected GDP growth in the January-March quarter of 2001 and firm developments in the household sector, there were some factors that gave cause for concern; for example, labor productivity, which had been improving, had declined in the January-March quarter. A few members said that financial market participants seemed to consider that the risk of the worst-case scenario for the U.S. economy was decreasing, given the rise in stock prices and long-term interest rates and the firmness of the U.S. dollar.

In response, one member expressed the opinion that the risk that U.S. economic adjustments would be prolonged was increasing on the following grounds: (1) the decline in labor productivity and the rise in energy prices could push up prices and this might lead to a full-scale employment adjustment, which might in turn dampen private consumption, and (2) while capacity utilization was decreasing mainly in high-tech industries, production capacity continued to increase as a result of excess investment in the past, and thus capital stock adjustment would be inevitable. A different member pointed out that (1) the debt of the household sector was on an increasing trend, (2) consumer goods producers had excess capacity, and (3) consumption might be dampened by the negative wealth effect, and commented that the next few months would be crucial for the economy. The member commented that crude oil prices might exceed US$30 per barrel in the near future, given the decrease in low-pollutant gasoline stocks and concerns that the electricity crisis would spread. This member continued that the U.S. economy might experience stagflation depending on developments in energy prices. This member also expressed the view that a revival of an IT-related boom in the United States was unlikely, and if there was any possibility of a boom, it would be one in energy-related investment.

One member said that the decrease in Japan's production and exports was substantial relative to the pace of the U.S. economic slowdown. On this basis, the member said that developments in IT-related sectors might have a larger effect on Japan's economic outlook than the pace of the U.S. economic recovery as a whole.

As for European economies, one member commented that they were at a difficult stage where attention needed to be paid to both the slowdown in the corporate sector, evident in the decline in the growth of production and orders and in a deterioration in the business confidence of manufacturers, and the risk of inflation due to the rise in energy and livestock product prices.

Based on the above assessments of the economic and financial situation, members concurred that prices in Japan continued to be weak due to both supply and demand factors. One member noted that, in addition to the sluggishness in the economy, the following would have a significant effect on prices for the time being: (1) reductions in the prices of domestic products, such as clothes, which were competing with imported goods; and (2) MYLINE, a new telephone service, enabling customers to be connected to a selected telephone company without having to dial its access code. A different member said that although prices were falling due to various factors, the price falls that were hurting corporate profits were those caused by weak demand and by ultimately nonviable firms slashing prices to survive. Another member remarked that even though prices of imports had risen by about 10 percent from the previous year due to the depreciation of the yen, prices of domestic consumer goods were subject to downward pressure because prices of imported goods and domestic products competing with them continued to decline at the consumer level.

Many members expressed the view that the financial environment had generally eased further since the previous meeting.

Many members said that the current monetary easing measures were very effective as seen in the decline in both short- and long-term interest rates to levels around or below those under the zero interest rate policy. One of these members said that the under-subscription in market operations was a clear indication of the abundance of funds that were being provided by the Bank. Another member remarked that the decline in interest rates was providing further support to corporate profits.

Some members pointed out that the environment for raising funds through the capital markets by, for example, issuing corporate bonds and CP had improved. One member said that the narrowing of credit spreads suggested that effects encouraging investors to take risks were showing results more rapidly under the current policy than they had under the zero interest rate policy. Another member pointed out that the decline in various interest rates under the current policy had made investors more inclined to take risks. For example, individual investors had become more eager to invest in stock investment trusts, corporate bonds, and municipal bonds, and institutional investors had increased investment in low-rated corporate bonds and foreign bonds and had also expanded the duration of their bond portfolios.

A few members said that so far there had not been any significant change in financial institutions' behavior, for example their lending attitude. One of these members pointed out that the growth in monetary base was not immediately leading to an increase in lending or money stock because financial institutions remained cautious about taking credit risk and firms continued to give priority to repaying their massive amount of debts.

On the basis of these discussions, members agreed that although more data was needed to make a thorough assessment of the current monetary policy measures, the anticipated effects were more or less starting to appear in financial markets.

Some members pointed out that, in addition to support from the decline in interest rates due to monetary easing and the recovery of U.S. stock prices, Japanese stock prices had been underpinned by hopes that structural reform would advance. One member said that the Bank's monetary easing had alleviated the market's concerns and this had contributed to the rise in Japanese stock prices. A few members, however, said that it was still uncertain whether structural reform, including the disposal of nonperforming loans, would make progress, and this uncertainty in the market was being reflected in recent developments in stock prices. One of these members added that it was important to draw up and implement a concrete plan for structural reform that would be supported by participants in capital markets and would thereby have a positive effect on the economy. Another member commented that technical analyses indicated that the short-term uptrend in Japanese stock prices since March 2001 had ended. Regarding U.S. stock prices, this member said that the Dow Jones Industrial Average might exceed its record high marked in January 2000.

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

Members discussed the monetary policy stance for the immediate future.

Members concurred that the Bank should examine the effects of the current policy measures for a while given that (1) the economy had on the whole continued to be in line with expectations, and (2) the effects of the monetary easing measures were starting to be observed in financial markets. All members therefore agreed that the Bank should maintain the current guideline for market operations. On this basis, members said that the following required close monitoring: (1) the extent to which the monetary easing measures would permeate into the economy; (2) developments in the U.S. economy and IT-related demand; and (3) progress in structural reform. One member commented that it was still necessary to examine carefully how a full-scale recovery could be brought about through progress in structural reform and the disposal of nonperforming loans, supported by a combination of efforts by the private sector and monetary and fiscal policy.

Members also discussed the recent under-subscription in market operations. Many members said that this shortfall had been predicted to a certain degree as financial institutions felt they had abundant liquidity, and that it had not caused problems in achieving the 5 trillion yen target for the outstanding balance of current accounts at the Bank. These members said that there was thus no need at present to increase outright purchases of long-term government bonds, which was within the framework of the Policy Board's decision on March 19. Some members added that they hoped that the measures decided at this meeting would further facilitate the Bank's provision of funds. One of these members, however, added that, while it was essential to improve the Bank's market operation methods, it was inappropriate to give the impression that the Bank would not increase outright purchases of long-term government bonds under any circumstances, as this might cause the public to pay an undue degree of attention to whether or not the Bank would increase outright purchases. Another member remarked that close examination was required of the effectiveness of increasing the Bank's outright purchases of long-term government bonds as a means of meeting the target for the outstanding balance of current accounts at the Bank as well as of the effects of an increase in the outright purchases on financial markets.

V. Remarks by Government Representatives

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

(1) Japan's economy was weakening further: the employment situation remained severe, private consumption was generally unchanged, and inventories were increasing, while production was declining reflecting a decrease in exports. In this situation, the effects of the fall in prices on the economy still gave cause for concern.

(2) The Government considered that comprehensive structural reforms were imperative to achieve a full-fledged recovery of the economy, as balance sheet adjustments and the public's anxieties about the future of Japan's economy were causing a delay in economic recovery. Therefore, the new Cabinet led by Prime Minister Koizumi would resolutely implement economic and fiscal structural reforms based on the thinking that "without structural reforms there can be no economic recovery." Specifically, the Government would aim to have financial institutions finish disposing of their nonperforming loans within the next two to three years. Regarding fiscal structural reforms, the Government would aim to limit the issuance of new government bonds to less than 30 trillion yen in the fiscal 2002 budget and review fiscal expenditures thoroughly as the first step to achieving fiscal soundness. Thereafter, the Government would do its utmost to fully rebuild the fiscal system through such steps as setting the goal of restricting new borrowing exclusively to the payment of principal and interest on existing debts, to make the system sustainable.

(3) The Government would like to ask the Bank to conduct monetary policy appropriately--for example, flexibly provide the market with ample funds under the new procedures for money market operations giving due consideration to developments in the economy and markets--and take into consideration the Government's measures to contribute to economic growth through the achievement of price stability.

The representative from the Cabinet Office made the following remarks.

(1) The Government's assessment of the economy and its conduct of economic and fiscal policy were just as described by the Ministry of Finance representative.

(2) The Council on Economic and Fiscal Policy led by the Prime Minister would formulate in June a solid policy framework that would include the basic guideline for the fiscal 2002 budget and other issues related to the conduct of economic and fiscal policy and economic and social structural reforms.

(3) The Government would like to ask the Bank to continue to conduct monetary policy in an appropriate, timely, and preemptive manner to achieve price stability, taking into account the possibility of downward pressure on prices strengthening as a result of weakness in demand.

VI. Votes

Based on the above discussion, the members shared the view that the current guideline for money market operations should be maintained. To reflect this view, the chairman made the following proposal.

Chairman's Policy Proposal:

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

The Bank of Japan will conduct money market operations, aiming the outstanding balance of the current accounts at the Bank at around 5 trillion yen.

Should there be a risk of financial market instability, e.g., a rapid surge in liquidity demand, the Bank will provide ampler liquidity irrespective of the guideline above.

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

Votes against the proposal: None.

VII. 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 unanimous vote, the Board decided to publish "The Bank's View" on May 21, 2001 in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background").8

  1. 8The original full text, written in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on May 21, 2001 together with the English version of "The Bank's View." The English version of "The Background" was published on May 22, 2001.

VIII. Approval of the Minutes of the Monetary Policy Meeting

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of April 12 and 13, 2001 for release on May 23, 2001.


Attachment

For immediate release

May 18, 2001
Bank of Japan

At the Monetary Policy Meeting held today, the Bank of Japan decided, by unanimous vote, to maintain the following guideline for money market operations for the inter-meeting period:

The Bank of Japan will conduct money market operations, aiming the outstanding balance of the current accounts at the Bank at around 5 trillion yen.

Should there be a risk of financial market instability, e.g., a rapid surge in liquidity demand, the Bank will provide ampler liquidity irrespective of the guideline above.