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Minutes of the Monetary Policy Meeting

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

August 17, 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, June 28, 2001, from 9:02 a.m. to 12:43 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. T. Miki
Mr. N. Nakahara
Mr. K. Ueda
Mr. T. Taya
Ms. M. Suda
Mr. S. Nakahara

Government Representatives Present
Mr. S. Murakami, Senior Vice Minister of Finance, Ministry of Finance
Mr. H. Takenaka, Minister of State for Economic and Fiscal Policy, Cabinet Office

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. T. Wada, Associate Director, Policy Planning Office2
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. H. Onobuchi, Manager, Secretariat of the Policy Board
Mr. T. Umemori, Chief Manager, Planning Division 2, Policy Planning Office3
Mr. S. Shimizu, Senior Economist, Policy Planning Office
Mr. S. Nagai, Senior Economist, Policy Planning Office

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on August 13 and 14, 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. Wada was present from 9:02 a.m. to 9:15 a.m.
  3. Mr. Umemori was present from 9:02 a.m. to 9:15 a.m.

I. Decisions concerning Amendments to the "Principal Terms and Conditions for the Complementary Lending Facility"

A. Staff Proposal

The Bank's staff proposed amending the "Principal Terms and Conditions for the Complementary Lending Facility" decided on February 28, 2001 with a view to enhancing the smoothness of monetary operations. The amendments were to change the form of lending under the Complementary Lending Facility from loans on bills to electronic loans (an electronic lending facility), and to accept the collateral as part of the Bank's pooled collateral, which could also be used for the Bank's market operations such as bill purchasing.

B. Members' Discussion and Votes

Members unanimously approved the proposed amendments and decided that the decision should be made public.

II. Summary of Staff Reports on Economic and Financial Developments4

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 June 14 and 15, 2001 so that the outstanding balance of current accounts at the Bank was around 5 trillion yen.5 As a result, the uncollateralized overnight call rate moved at 0.01-0.03 percent, although the market tightened somewhat in late June due to a modest rise in yields on short-term Japanese government securities (JGSs) in the open market in addition to factors related to the month-end and the issuance of Japanese government bonds (JGBs).

  1. 4Reports were made based on information available at the time of the meeting.
  2. 5The 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

1. Developments in domestic financial markets

Short-term interest rates including rates on term instruments remained at extremely low levels, lower than those under the zero interest rate policy. Interest rates on short-term JGSs rebounded somewhat after dipping below 0.01 percent, and term instruments maturing beyond the end of June rose slightly.

Long-term interest rates declined somewhat, reflecting the abatement of concerns about deterioration in the supply-demand balance of JGBs following the approval of the "Structural Reform of the Japanese Economy: Basic Policies for Macroeconomic Management," (hereafter, "Basic Policies") by the Government. Developments in yields on JGBs with different remaining maturities showed that the "commitment effect" was particularly strong on a time horizon of up to five years: the yields on JGBs with five years remaining to maturity marked a new low, and the yield spreads between those with two and five years remaining to maturity narrowed to even less than those under the zero interest rate policy.

Stock prices remained weak until mid-June but recovered somewhat reflecting the fact that market participants received the "Basic Policies" favorably. Stocks in transportation equipment and banking contributed to the recovery: the former rose due to the depreciation of the yen, and the latter improved reflecting the expectation that the disposal of nonperforming loans would advance. Regarding bank stocks, however, performance was polarized, and many market participants took a cautious view of the outlook.

2. Developments in the foreign exchange market

The yen depreciated to as low as 124-125 yen against the U.S. dollar reflecting the downturn in Japan's economy and speculation that the U.S. government would tolerate a weaker yen. For the time being, indicators of market sentiment gave no strong clues as to the direction of future developments in the yen.

C. Overseas Economic and Financial Developments

Indicators released since the previous meeting offered no grounds for changing the overall assessment of the economy.

In the United States, while adjustments in production and employment continued in the corporate sector, demand in the household sector remained firm as shown in indicators such as those related to automobile sales and household confidence. As for the corporate sector, industrial production decreased from the previous month in May, the eighth consecutive decline, and capacity utilization in manufacturing industries declined to its lowest level since August 1983. Above all, the decline in IT-related industries was conspicuous. Regarding the balance of payments, both exports and imports remained on a downtrend. Specifically, a decrease in exports and imports of capital goods was becoming pronounced reflecting adjustments in manufacturing industries.

In this situation, the Federal Open Market Committee (FOMC) decided at its meeting on June 27 to lower its target for the federal funds rate to 3.75 percent from 4.0 percent.

U.S. stock prices recovered slightly reflecting market expectations of an interest rate cut, after declining toward mid-June against the background of market expectations that corporate profits in IT-related firms would deteriorate. Long-term interest rates had declined moderately since mid-June reflecting market expectations about an additional interest rate cut following the release of economic indicators which were less favorable than had been expected by the market. The actual interest rate cut, however, was only 25 basis points, and this resulted in a slight increase in interest rates, especially at the short end of the yield curve.

In the euro area, the slowdown in the economy was gradually spreading among the major countries as seen in the fact that industrial production had declined for the second consecutive month in April, business fixed investment in manufacturing industries had decelerated, and firms' view of the economy continued to deteriorate. The rate of price increase remained at a relatively high level: the Harmonised Index of Consumer Prices in May increased by 3.4 percent from the previous year reflecting a rise in food prices, due to foot-and-mouth disease, and in energy prices.

NIEs and ASEAN economies continued to decelerate. Production was on a downtrend and business confidence in manufacturing industries continued to deteriorate reflecting a continued fall in exports of goods, mainly those related to IT, to the United States and Japan. In Taiwan, firms' view of the economy became more gloomy due to its heavy dependence on IT-related industries. On the other hand, there were some signs of improvement in South Korea: corporate restructuring problems had moderated to some extent and exports in traditional industries had increased.

In the emerging economies, the widening of yield spreads of Argentine, Brazilian, and Turkish government bonds vis-à-vis U.S. Treasuries became distinct. In particular, yield spreads between Argentine government bonds and U.S. Treasuries expanded significantly due to market speculation that the peso might be devalued in the future, as the introduction of measures regarding exchange rates for domestic importers and exporters would have a similar effect to instituting a de facto dual currency system.

D. Economic and Financial Developments in Japan

1. Economic developments

There were few economic indicators released in the intermeeting period, and they offered no significant factors to change the judgment that adjustments in economic activities were gradually intensifying, as production was declining substantially reflecting a fall in exports.

Industrial production for May, released on June 28, fell by 1.2 percent from the previous month, and as a result, the rate of decrease in the April-June quarter was expected to be about the same as in the January-March quarter. There was, however, no notable change in the balance of inventories and shipments. On the other hand, the Indices of Tertiary Industry Activity for April, showing developments in nonmanufacturing industries, declined significantly reflecting a large fall in mobile communications, an industry often showing volatile movements.

Regarding real exports and imports, exports, especially intermediate goods exported to Asia and IT-related goods, continued to decline substantially, while imports remained almost flat after a significant fall in the January-March quarter.

According to the survey of small and medium-sized manufacturers conducted by the Japan Finance Corporation for Small Business, business fixed investment showed a double-digit year-on-year decrease, which was largely in line with the March Tankan (Short-Term Economic Survey of Enterprises in Japan). Past experience indicated that plans for business fixed investment were more or less certain to be revised upward, but it was still uncertain whether the final results for the business fixed investment by small and medium-sized manufacturers would exceed the level of fiscal 2000.

With regard to private consumption, growth in sales of electrical appliances for May slowed compared to the January-March quarter, when their sales had surged before a new law requiring consumers to pay the cost of recycling old appliances came into force. However, the underlying trend of sales in department stores, chain stores, and convenience stores remained unchanged. Survey results of large firms showed a year-on-year increase in summer bonus payments, reflecting an increase in corporate profits in fiscal 2000, but it remained uncertain whether the overall figure for bonus payments, including small and medium-sized firms, would exceed the previous year's level.

The Corporate Service Price Index for May declined further from the previous year, partly due to reductions in telephone charges brought about by the introduction of MYLINE, a new telephone service.

2. The financial environment

No indicators had been released since the previous meeting.

The year-on-year growth rate of the monetary base in June was expected to increase further from the 5.1 percent growth in May as post offices were expected to increase their cash holdings in preparation for large amount of postal savings maturing.

The number of corporate bankruptcies remained at more or less the same level, and there was no significant change in the trend. Some survey results indicated that fund-raising activities in small and medium-sized firms were beginning to show some deterioration, and thus developments, including the June Tankan, would warrant careful monitoring.

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

A. Current Economic Situation

The majority of members concurred that it was unnecessary to change the Bank's assessment of the economy at the previous meeting on June 14 and 15--which stated that "adjustments in economic activities were gradually intensifying, as production was declining substantially reflecting a fall in exports"--partly because not many economic indicators were released during the intermeeting period.

With regard to the corporate sector, many members noted a continuous decline in production. They pointed out that this decline was against the background of the fall in exports, a contraction in demand for construction, increased pressure for inventory adjustment, and a shift of production to overseas.

As for exports, one member emphasized that a worldwide fall in demand for IT-related goods, particularly those related to mobile phones as seen in a considerable downward revision of sales forecasts from 500-600 million to 400-500 million a year, was having an unexpectedly large impact, because most of the component parts were made in Japan. A different member expressed the view that external demand was expected to contribute negatively to GDP for the fourth consecutive quarter. This member continued that, given the long-term trend of an increasing ratio of global trade to GDP and more dependence on trade, an expected fall in the growth rate of global trade between 2000 and 2001, which could be the largest slowdown in history, was likely to lead to the first worldwide recession in the era of globalization. This member continued that Japan's economy had been severely damaged against the background of a considerable decline in the worldwide demand for products in which Japan had high competitiveness, such as those of the electronics and precision machinery industries, and a deterioration in Japan's terms of trade. This member noted that imports had not fallen recently, because firms had been developing business models to take advantage of Japanese consumers' recent tendency to buy lower-priced goods.

A different member remarked that the decline in production reflected the fact that demand for construction was contracting substantially with a widening gap in construction activity between different regions.

Another member emphasized that inventory adjustments were likely to be prolonged. This member explained that firms in the steel, electrical machinery, petrochemical, and paper and pulp industries had so far avoided making substantial cuts in production to maintain cash flow and their inventories had risen to the limits of available space. Thus, they had no choice but to reduce production from now on.

One member pointed out that the increase in consumer demand had not led to a rise in domestic production due to a further progress in horizontal international division of labor, as manufacturers of electrical machinery including IT-related goods and automobiles had shifted their production to sites overseas, mainly in China.

Regarding developments in the corporate sector, one member expressed concern that the index of all industry activity for April declined significantly from the previous month. Another member said that with regard to the forecast of corporate profits in the June Tankan, it was necessary to pay close attention to how far firms would incorporate the deterioration in the economy in their forecasts and thus revise their expected profits downward from the forecast in the March Tankan, in which large enterprises expected that the total for fiscal 2001 would increase with a decline in the first half followed by a recovery in the second half. A different member said that the business and funding conditions of small firms warranted monitoring and the member would examine the results of various surveys.

With regard to the household sector, a few members commented on the employment and income situation. These members said that summer bonus payments were expected to be at moderate levels reflecting the previous year's favorable corporate earnings, but the crucial point was a possible deterioration in the situation from the second half of 2001. One member said that private consumption was currently undergoing structural changes and a polarization, but if all the fluctuations in various indicators of private consumption were smoothed out, it would be seen to be at normal levels on the whole.

As an issue related to the prospect for wages, members discussed the implications of an analysis, released in June, by the Bank's Research and Statistics Department staff. The analysis concluded that the share of labor in income distribution in Japan, taking account of an upward trend in the share in line with a rise in labor productivity, had already decreased to around the equilibrium level in the medium to long term. One member said that it was necessary to examine whether these findings implied a weakening of downward pressure on wages, or continuous wage restraint in a situation where firms' profitability was still low in global terms. A different member said that the adjustment pressure to increase Japanese firms' profitability already existed before and it had not intensified recently, therefore, the analysis might indicate that labor's share in income distribution would stop declining and the correlation between corporate profits and wages would become stronger.

B. Economic Outlook

With regard to the outlook for Japan's economy, the majority of members said that the downside risk was increasing, although the economy had not deviated significantly from the path projected in the standard scenario in the "Outlook and Risk Assessment of the Economy and Prices" released in April 2001. A few members commented that the state of the economy was starting to fall below the standard scenario. One member said that the economy would deteriorate further toward the July-September quarter. Regarding risk factors in the near future, the discussion centered on the U.S. economy, worldwide developments in IT-related industries, and the effects of structural reforms. One member added that given the situation in the Middle East, developments in oil prices required close monitoring.

As for the U.S. economy, many members expressed the view that although it remained highly uncertain when the economy might recover, it seemed that the recovery would be later than previously predicted. A few members said that while old economy industries were supported by a series of monetary easings, new economy industries, which depended on future profit streams, were unlikely to be supported by low interest rates and it was hard to predict when they might hit bottom.

One member noted that although positive effects of tax reduction were expected to emerge from July onward, a rise in energy prices and adjustments in employment gave cause for concern. Another member expressed concern that U.S. banks were tightening their lending stance, and an increase in bankruptcies in the telecommunications industry might make them even more cautious.

A few members commented on the phenomenon that household spending remained firm amid a fall in stock prices. One member pointed out that, according to an analysis of the correlation between net worth and saving rate by income group prepared by economists at the Federal Reserve, the consumption boom as a result of a decrease in the saving rate subsequent to the rise in stock prices was attributable to households in the uppermost 20 percent of the income distribution. The member continued that a key to determining the course of the U.S. economy would be developments in U.S. stock prices toward September, and added that although it was hard to judge the direction of stock markets at this point, the economic outlook would become clearer during the summer.

Many members commented that in Japan there was a risk that structural reforms would have deflationary effects on the economy in the short run, while a few members pointed out that structural reforms might not necessarily be deflationary.

On fiscal structural reforms, one member commented that the approach in the "Basic Policies" prepared by the Council on Economic and Fiscal Policy was appropriate because in it the Government set out measures that it would take in a flexible manner to pursue medium-term goals with an eye on economic conditions. This member added that the effects of fiscal consolidation depended not only on the scale of expenditure cuts but also on how the components of expenditure would be reviewed, and therefore the effects should be assessed only after the broad outline of the fiscal 2002 budget became available. Another member expressed concern that in the area of public investment projects, local governments' independent public works were on a downtrend.

One member noted that structural reforms could bring positive effects to the economy through the following channel. If the expected rate of return were to increase as a result of measures such as deregulation and investment in social infrastructure, this would lead to an increase in investment and a surge in private consumption due to expectations of an increase in income. Moreover, positive effects on private consumption would also be expected if a plan for achieving fiscal consolidation was regarded as credible by the public and households' anxieties over the sustainability of the pension system were eased as a result. The member continued that although it was generally said that the effects of structural reforms would take time to materialize, it was necessary to examine whether this was the case for the concrete plans in each area of reform.

With regard to issues concerning the financial system, one member said that given the global competition in the banking industry, Japanese banks would be forced to take a more rigorous stance from a managerial point of view regarding their handling of loans not only to borrowers in danger of bankruptcy but also to those that needed special attention. This member continued that if such a stance were taken, the markets' assessment of Japanese banks would improve, but deflationary pressure on small and medium-sized firms might intensify. In response to this comment, another member expressed the view that it could be expected that disposal of nonperforming loans would have a positive effect in encouraging both borrowers and lenders to invest in new projects.

Based on the above discussion, one member pointed out that in assessing the effects of structural reforms, it was important to analyze and clarify how the reduction in public spending could be covered by other demand components in terms of the balance between investment and saving. Another member expressed the opinion that the balance between structural reforms and economic recovery was important, and thus it was not appropriate to accept negative growth as an inevitable concomitant of structural reforms.

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

Based on the above assessments of the economic and financial situation, members discussed the monetary policy stance for the immediate future.

Members' view of the economic and financial situation was as follows. First, there were no factors to change the judgment at the previous meeting that adjustments in economic activity were gradually intensifying, as production was declining substantially reflecting a fall in exports. Second, the adjustments, mainly in production, were likely to continue for some time. And third, (1) progress in structural reforms and its effects, (2) developments in overseas economies, especially in IT-related industries, and (3) permeation of the effects of monetary easing would require close monitoring. All members agreed that the Bank should maintain the current guideline for market operations.

A few members commented on the effects of the monetary easing measures decided in March. One member said that the effects were permeating into the financial markets on a larger scale and more widely than had been expected, as seen in (1) a further decline in medium- to long-term interest rates, (2) a rise in stock prices in the low-to-medium price range, reflecting abatement of concern about deterioration in firms' fund-raising conditions and speculation about a liquidity-driven rally, and (3) an increased willingness among firms to raise funds in the capital markets through such instruments as corporate bonds and CP.

A different member remarked that in this situation, if economic entities started to increase their risk-taking activities, the effectiveness of excess liquidity would become evident, sufficiently stimulating investment by economic entities.

In relation to the effects of monetary easing, members commented on recent developments in the financial markets that warranted attention. One member said that a rise in some interest rates on term instruments in the money markets should be regarded as part of a process of searching for an equilibrium rate under the new framework of monetary policy. A different member commented in regard to the yield curve that there was a distinct difference between the slope of the part of the curve for bonds with five to ten years remaining to maturity and that for bonds with less than five years remaining to maturity in that the former was steeper than the latter, which was very flat. This member continued that it was therefore necessary to examine what was going on in the formation of market expectations for bonds with five or more years remaining to maturity. In relation to monetary indicators, this member said that the money multiplier, which had been constantly declining since 1992, seemed to have stopped declining and there were signs that it might rise slightly. This member said that it was necessary to examine the implications of this development.

One member commented on the effects of monetary easing on the foreign exchange rate as follows. If expectations grew that the virtual zero interest rate would continue and the willingness of economic entities to take risks increased as a consequence, the most likely destination for investment would be foreign currency-denominated assets, and this was likely to lead to a depreciation of the yen. The member pointed out that the expected effects of a depreciation of the yen were (1) a rise in the inflation rate, (2) support for profits of exporting firms, and (3) innovations in corporate management triggered by an increased entry of foreign firms. On this basis, the member added that, although it was not appropriate to artificially control the foreign exchange rate, depreciation of the yen should be accepted as long as it occurred in the natural course of events.

With regard to the conduct of monetary policy for the near future, many members supported the idea that the Bank should wait and see what developments occurred in the economy. One member expressed the opinion that the key to deciding future monetary policy was the outlook for developments in the economy after autumn 2001. A different member said that the Bank should maintain its stance of responding to economic conditions in a timely manner. Another member noted that in order to advance disposal of nonperforming loans and structural reforms and achieve an economic recovery, not only efforts through monetary policy were required but also combined efforts by the private sector and by the Government to provide a better environment through tax measures.

Members exchanged views on additional monetary easing measures. One member said that it was necessary to examine the relation between an increase in the monetary base and the economy, since this had not been sufficiently explained. One member commented that a policy to influence the expected inflation rate by inflation targeting might become necessary under some circumstances. In response to this, a different member remarked that, since the commitment in terms of policy duration--"until the CPI registered stably a zero percent or an increase year on year"--was included in the measures decided in March, it might have been observed at this point that the measures had worked to raise the expected inflation rate to some extent, given the current price levels. The member said, however, that various survey results revealed no signs of such a rise.