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Minutes of the Monetary Policy Meeting

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

November 1, 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 Tuesday, September 18, 2001, from 2:00 p.m. to 6:48 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. T. Miki
Mr. N. Nakahara
Mr. K. Ueda
Mr. T. Taya
Ms. M. Suda
Mr. S. Nakahara

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

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. Y. Nakayama, Advisor to the Governor, Secretariat of the Policy Board
Mr. H. Onobuchi, Manager, Secretariat of the Policy Board
Mr. T. Wada, Associate Director, Policy Planning Office2
Mr. T. Umemori, Chief Manager, Planning Division 2, Policy Planning Office
Mr. H. Yamaoka, 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 October 29, 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. Messrs. Wada and Umemori were present from 4:40 p.m. to 6:48 p.m.

I. Chairman's Proposal on the Change in the Proceedings of the Meeting

The chairman began the meeting by making the following proposal regarding the proceedings, and the members gave their assent. It was also agreed that the proposal would be made public immediately.

Given the terrorist attacks in the United States and subsequent developments in financial markets, the Bank of Japan must decide on appropriate monetary policy measures and release the decision as soon as possible. Therefore, I propose the meeting should proceed to decide the guideline for money market operations and release it today.

II. Summary of Staff Reports on Economic and Financial Developments3

A. Money Market Operations in the Intermeeting Period

Until September 11, market operations were conducted in accordance with the guideline determined at the previous meeting on August 13 and 14, 2001 so that the outstanding balance of current accounts at the Bank was around 6 trillion yen.4 From September 12 onward, after the terrorist attacks in the United States, the Bank provided ampler liquidity to ensure smooth funds settlement and the stability of financial markets, in accordance with the latter half of the guideline: "Should there be concern for financial market instability such as a rapid surge in liquidity demand, the Bank will provide ample liquidity irrespective of the above guideline." As a result, the outstanding balance of current accounts at the Bank was around the 8 trillion yen level. Due to the ample provision of funds, major disruptions in trading and settlement had been avoided. Although the uncollateralized overnight call rate rose to 0.11 percent briefly on September 12, it was moving stably below the 0.01 percent level thereafter.

  1. 3Reports were made based on information available at the time of the meeting.
  2. 4The guideline was as follows:
    The Bank of Japan will conduct money market operations, aiming for the outstanding balance of current accounts held at the Bank at around 6 trillion yen.
    Should there be concern for financial market instability such as a rapid surge in liquidity demand, the Bank will provide ample liquidity irrespective of the above guideline.

B. Recent Developments in Financial Markets

1. Developments in domestic financial markets

Interest rates on term instruments declined further, albeit slightly, reflecting the fact that confidence about the availability of funds maturing beyond end-September had spread throughout the market due to the monetary easing measures decided at the previous meeting.

Long-term interest rates rose somewhat, even after the implementation of further monetary easing decided at the previous meeting. This reflected (1) market speculation about the supplementary budget for fiscal 2001 and the deterioration of the supply-demand balance of Japanese government bonds (JGBs), (2) financial institutions' profit-taking sales before the interim book closings at the end of September, and (3) the fall in stock prices. After the terrorist attacks, the rates remained more or less flat as upward pressure from the above three factors was offset by downward pressure caused by a flight-to-quality flow of funds to JGBs.

Stock prices continued to decline even after the implementation of monetary easing decided in August. The Nikkei 225 Stock Average plunged below the 10,000 yen level after the terrorist attacks, with a substantial decline in stock prices in transportation and transportation machinery.

The impact of the bankruptcy of Mycal, one of Japan's largest retailers, required attention, as default on Mycal's bonds could cause investors to take a more cautious stance on investing in firms with low ratings, although credit spreads of various corporate debts had so far remained generally stable.

2. Developments in the foreign exchange market

The yen rose against the U.S. dollar, reaching the 118.00-118.50 yen level at the end of August, reflecting an increase in uncertainty about the U.S. economic outlook and market speculation that Japanese financial institutions might sell foreign currency-denominated assets in preparation for the interim book closings at the end of September. Thereafter, it depreciated to around 122 yen due partly to anticipation of a possible intervention, but it appreciated again after the terrorist attacks. Indexes showing market sentiment suggested that the U.S. dollar was on a downtrend.

C. Overseas Economic and Financial Developments

In the intermeeting period, some indicators started to show deterioration in the U.S. household sector, which had been firm, and a clearer slowdown in economies in the euro area. Functioning of the U.S. financial markets showed a fairly fast recovery, although it was too early to judge the effects of the terrorist attacks in the United States at this point.

The recent pattern in the U.S. economy of the household sector showing resilience despite the ongoing adjustments in the corporate sector, mainly in information technology (IT)-related industries, was showing signs of breaking down. This was evident in a significant rise in the unemployment rate for August and a deterioration in consumer confidence. In view of the possible effects of the terrorist attacks, it could not be denied that the downside risk to the U.S. economy as a whole was increasing.

Functioning of the U.S. financial markets after the terrorist attacks showed a fairly fast recovery in terms of settlement, market liquidity, and pricing as observed on September 17. Yield spreads between corporate bonds and U.S. Treasuries widened and volatility in prices of bonds and stocks increased, but these developments were within the expected range. The Federal Open Market Committee (FOMC) decided on September 17 to lower its target for the federal funds rate by 50 basis points to 3.00 percent from 3.50 percent as an emergency measure. The federal funds rate futures market factored in an expectation of an additional rate cut of 50 basis points before the year-end.

In the euro area, a slowdown of the economy had become distinct due to a deceleration in the growth of exports and business fixed investment. An economic slowdown in Germany had been spreading to neighboring countries. For example, the GDP for the April-June quarter marked negative growth from the previous quarter in Germany and Italy, and the growth rate decreased in France. The rate of increase in industrial producer prices and the Harmonised Index of Consumer Prices continued to decline reflecting abatement of the effect of the past rise in energy prices. The Governing Council of the European Central Bank (ECB) decided at its regular meeting on August 30 to reduce the minimum bid rate on the main refinancing operations by 25 basis points to 4.25 percent, and it further reduced the rate to 3.75 percent on September 17 as an emergency measure following the terrorist attacks in the United States.

NIEs and ASEAN economies continued to decelerate reflecting a continued fall in exports, mainly in IT-related goods, to the United States and Japan. The GDP for the April-June quarter continued to show negative growth from the previous quarter in Taiwan, Singapore, and Malaysia whose economies depended heavily on IT-related industries, and in Hong Kong it changed to negative growth.

The emerging markets had been nervous partly reflecting the effects of the terrorist attacks in the United States. In particular, yield spreads between the Argentine government bonds and U.S. Treasuries, which had contracted after approval of a loan disbursement by the International Monetary Fund in August, were again widening significantly.

D. Economic and Financial Developments in Japan

1. Economic developments

Adjustments in economic activity were becoming more severe, as the substantial decline in production, starting from a fall in exports, was beginning to have a negative influence on employment and income conditions.

Real exports continued to decline substantially in July, mainly in IT-related goods, with a decline in those to Europe becoming clearer in addition to a decline in those to Asia. A scenario where exports would recover promptly was becoming less likely to materialize, given the global trend of slack demand for IT-related goods and the effects of the terrorist attacks in the United States. The weakness in demand for IT-related goods was evident in a decline in shipments not only of personal computers but also of mobile phones in the April-June quarter.

Reflecting the above developments, industrial production was projected to fall substantially in July-September following the significant declines in the previous two quarters. The decrease in production was expected to continue for the October-December quarter due to a prolonged adjustment in IT-related goods and an anticipated decrease in capital goods and construction materials. Inventory adjustments were likely to be prolonged as a whole as there seemed to be no sign yet of improvement in inventories of materials and other industries, although those of electronic parts showed a decrease.

Business fixed investment was decreasing noticeably, particularly in manufacturing industries including electrical machinery. Business fixed investment in nonmanufacturing industries stood almost flat, with quarterly seasonal fluctuations. Business fixed investment was likely to follow a downtrend on the whole, judging from developments in leading indicators, firms' plans for such investment in fiscal 2001, and a deterioration in corporate profits mainly in manufacturing industries.

Private consumption remained flat on the whole, although there were some indicators showing weak developments. Employment and income conditions, however, were becoming more severe as evident in a rise in the unemployment rate, a decrease in hours worked, and a slight fall in summer bonus payments from a year earlier despite companies' good performance in fiscal 2000. Furthermore, some indicators had begun to show a deterioration in consumer confidence. Thus, developments in private consumption should continue to be monitored closely.

Domestic wholesale prices were declining somewhat faster reflecting the following factors: (1) a fall in prices owing to progress in technological innovation; (2) a downtrend in prices of electronic parts and steel due to an easing of the supply-demand balance; and (3) a fall in prices of nonferrous metals due to weak developments in international commodity markets. The Consumer Price Index (CPI) was weakening due mainly to a decline in prices of imported products and domestic products competing with them.

2. Financial environment

Weakness in credit demand became more evident compared with the time of the previous meeting reflecting the economic developments. The year-on-year rate of decline in private banks' lending was accelerating, while fund raising through issuance of corporate bonds and CP continued to exceed the level of the previous year.

With regard to monetary aggregates, the year-on-year growth rate of the monetary base increased further to 9.0 percent in August from the 8.0 percent of the previous month, due to a surge in the outstanding balance of current accounts at the Bank. The year-on-year growth rate of money stock (M2+CDs) in August was slightly higher than in the previous month, increasing to 3.4 percent from 3.3 percent, mainly due to the inflow of funds from postal savings.

Regarding the financial environment, the effects of monetary easing were permeating through the economy as observed in (1) the higher growth in monetary indicators, (2) further easing in money market conditions and a further decline in short-term interest rates in response to monetary easing measures decided at the previous meeting, and (3) an improvement in the fund-raising conditions for firms through markets. However, fund-raising conditions for small firms seemed to be becoming more severe against the background of deteriorating corporate earnings and more cautious lending attitude of financial institutions. Therefore, developments in the behavior of financial institutions and in corporate financing needed careful monitoring.

In addition, it was necessary to carefully monitor the effects of the terrorist attacks in the United States on global financial markets and economic activities.

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

A. Current Economic Situation

Most members agreed that the current state of the economy was more severe than at the time of the previous meeting on August 13 and 14. As the background to this assessment they noted that (1) a delay in the recovery of the world economy, mainly the U.S. economy, and a global weakness in IT-related demand were becoming more evident, (2) adjustments in Japan's corporate sector were intensifying further as evident in a decrease in business fixed investment, and (3) the effects of the adjustments were spreading to the household sector.

One member said that the economy had entered a full-scale recession reflecting structural factors such as excessive employee numbers, debts, and capital stock, in addition to cyclical factors. This member continued that the economy was already contracting, given that annualized nominal GDP for the April-June quarter of 2001 fell below 500 trillion yen for the first time since the July-September quarter of 1995. The member also noted that the speed of the contraction was almost as fast as that following the first oil shock, judging from the rapid decline in the Indexes of Business Conditions.

Regarding adjustments in the corporate sector, many members noted the delay in inventory adjustments and the decline in business fixed investment. One member pointed out that firms' break-even point had started to rise after the turn of the year, and that the conditions for corporate profits were becoming even more severe given the limited scope for further reduction in fixed costs that increased profits by improving efficiency. This member said that the decline in business fixed investment was likely to continue in the July-September quarter given the fall in sales and corporate profits.

One member focused on the fact that corporate activity in the nonmanufacturing sector was firm although the decline in production since the end of 2000 had been larger than that in 1997 and 1998. Another member also pointed out that sales and profits of tertiary industry were firm. Some members including these members, however, expressed the view that the environment surrounding the nonmanufacturing sector would become more severe in the July-September quarter amid a continued deterioration in the employment and income situation.

A different member noted that an acceleration of firms' shifting of production to countries overseas such as China as one of the factors forcing adjustments in the corporate sector. This member continued that the shift was posing problems for industrial structure and employment in Japan, and remarked that it was desirable to ensure a fair environment for competition, including the exchange rate level, once China entered the World Trade Organization (WTO).

Regarding the household sector, some members remarked that private consumption had not decreased substantially to date. These members, however, said that there was a risk that adjustments in the corporate sector might have negative effects on the household sector through the labor market, and this would require monitoring. One member said that the problem was that the separation rate was higher than the accession rate in the labor market in recent years.

B. Economic Outlook

With regard to the economic outlook, most members shared the view that, although it was too early to judge the effects of the terrorist attacks in the United States, the following points were already recognized even before the attacks: (1) a delay in the recovery in the world economy including the United States was becoming distinct; (2) adjustments in the corporate sector were expected to intensify further; and (3) the risk was increasing that the effects of adjustments in the corporate sector would spread to the household sector.

A different member said that developments in stock prices suggested that there was a risk that Japan's economy might experience greater deterioration than in 1997-1998.

As for the U.S. economic outlook, the majority of members agreed that adjustments in the corporate sector were intensifying further especially in IT-related industries, and therefore, they took a cautious view about the timing and the pace of economic recovery in the future. One member expressed the view that the ratio of inventories to shipments for IT-related goods was still high and inventory adjustments would not be completed before the end of 2001. Many members pointed out that the risk was increasing that such adjustments in the corporate sector would negatively affect the household sector through deterioration in the labor market.

One member expressed concern that (1) deceleration of economic growth in the euro area, in addition to that of the United States, was becoming more distinct, and (2) a fall in East Asian economies' exports was starting to negatively affect domestic demand in the region. A different member said that the world GDP growth rate for 2001 was likely to decline by about 0.5 percent due to the terrorist attacks.

One member commented on adjustments in the corporate sector in Japan that it was inevitable that inventory adjustments would be prolonged, noting that the outlook for completion of inventory adjustments in IT-related industries was unclear and that adjustments in materials industries such as steel would not be completed before the beginning of the first half of fiscal 2002. A different member said that the outlook for such adjustments in the corporate sector had become uncertain due to a deterioration in the environment for exports after the terrorist attacks, although the pace of production cuts of electrical machinery had been expected to decelerate reflecting a slight decline in the growth rate of inventories of producer goods of electrical machinery.

With regard to how the effects of adjustments in the corporate sector would spread to the household sector, one member presented the view that adjustment pressure would spread to the household sector in the second half of fiscal 2001, since there was an increasing number of factors that gave cause for concern about private consumption, such as a decrease in the number of regular employees in manufacturing industries and in overtime payments. A few members expressed concern that large firms' restructuring plans and a failure of a large retailer could undermine consumer sentiment.

As for the financial environment, a few members said that it was necessary to watch closely the impact of the recent fall in stock prices on financial institutions and life insurance companies and any resultant negative effects on the economy. One member pointed out that, although the liquidity crunch seen in 1997-1998 was not observed currently, there were growing concerns that the financial conditions, such as the lending attitude of financial institutions, could amplify the cyclical movement in the economy.

One member commented that the recent downtrend in prices was due to a mixture of the following two factors: (1) structural factors of adjustment of domestic prices to an internationally competitive level and correction of the high cost structure of Japan's economy; and (2) downward pressure on prices stemming from deterioration in the supply-demand balance, and that such adjustment of domestic prices and correction of the cost structure were inevitable to form a basis for economic growth in the future. This member emphasized that the fall in prices was pushing down corporate profits and increasing the real debt burden of firms and the Government, and it was, therefore, important to halt deflation to achieve economic recovery. A different member said that the output gap was widening judging from the recent developments in the economy, and therefore, downward pressure on prices was intensifying gradually.

Based on the above assessments of the economic and financial situation before the terrorist attacks, members discussed the effects the terrorist attacks would have on the world economy in the future. Members generally shared the view that they could intensify future downside risks to the economy both in Japan and abroad, although it was difficult to judge since the effects would largely depend on developments subsequent to the attacks. Members mainly discussed the possible negative effects of the attacks on the U.S. household sentiment, stock prices worldwide, and crude oil prices.

One member expressed the view that the terrorist attacks might turn out to be a historical turning point, ending the over-consumption in the United States and disrupting or reversing globalization.

Many members pointed out that the effects of the terrorist attacks on the U.S. household sentiment, which had been relatively firm, was important in assessing the prospects for the world economy. A few members expressed concern that there were indexes showing deterioration in consumer confidence and the employment situation even before the attacks. One member expressed concern that the terrorist attacks might weaken U.S. consumer sentiment more significantly than the Gulf War. A different member said that the personal saving rate might rise significantly reflecting the attacks, given the high level of consumer debt in the United States. This member said that a recession in the United States was therefore inevitable and it was unlikely that the U.S. economy would recover in the first quarter of 2002.

One member, however, said that spending might increase due to reconstruction demand and an expansion of fiscal spending, and more time was needed to examine these and other developments.

A few members expressed concern about the extent of the effects of the terrorist attacks on stock markets in the future, given that U.S. stock prices had already entered a full-scale adjustment phase even before the attacks. One member expressed the view that there was no longer a possibility that U.S. stock prices would exceed its record high during 2001 and that they would fall to around the lowest level marked in 1998. A different member explained the background to the more than 20 percent decline in Japanese stock prices since the previous meeting as (1) the terrorist attacks in the United States, (2) anxiety about a deterioration in corporate earnings, and (3) the delay in the disposal of nonperforming loans (NPLs). This member expressed concern about a possible additional deflationary effect on the economy stemming from the fall in Japanese stock prices.

A different member commented on developments in financial markets after the attacks that (1) there had been little buying of U.S. dollars at the time of the crisis, and (2) financial markets had become more risk averse, as evident in the fact that the yield on 30-year instruments rose while that on 2-year instruments declined to the lowest level in 50 years, reflecting uncertainty about the economic outlook.

Many members shared the view that it was difficult to examine the effects of the terrorist attacks on crude oil prices at this stage since they would be determined largely by subsequent developments such as actions to be taken by the U.S. government. One member warned that the effects might spread to the Middle East, leading to a surge in crude oil prices. This member pointed out the possibility that the unemployment rate in the United States might rise further until autumn 2002, quoting a research paper on the relation between movements in oil prices and the U.S. unemployment rate.

IV. Summary of Discussions on Monetary Policy

A. 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.

Most members shared the following view. First, adjustments in economic activity were becoming more severe, as the substantial decline in production, starting from a fall in exports, was beginning to have a negative influence on employment and income conditions. Second, regarding the outlook, adjustments in economic activity were expected to have a negative influence on domestic demand gradually and this in turn would possibly prolong the ongoing adjustments. And third, the terrorist attacks in the United States had further increased downside risks and uncertainty regarding the economic outlook in Japan.

Members generally agreed that the key points for conducting monetary policy for the immediate future were as follows: (1) it was necessary to continue carefully monitoring the effects of the terrorist attacks on financial markets and economic activity in Japan; and (2) there was a risk that the permeation of effects of the policy measures taken so far could be interrupted, should any event occur to hamper smooth funds settlement or the functioning of financial markets. Based on this thinking, most members agreed that the Bank should ensure smooth funds settlement and proper functioning of financial markets by (1) continuing to provide ample liquidity to the money market, for the time being aiming at maintaining the outstanding balance of current accounts held at the Bank at above 6 trillion yen and (2) reducing the official discount rate.

One member, however, expressed a different view that the Bank should provide a clearly specified target of aiming the outstanding balance of current accounts held at the Bank at 8 trillion yen, in order to stop the deterioration in the economy and the decline in prices including stock prices.

Members discussed the effects of the monetary easing measures decided in August 2001. Many members judged that there had not been much effect to date except for the slight decline in short-term interest rates. These members explained as follows. First, there had been no increase in speculation about a liquidity-driven rally in the stock market. Second, the yen had appreciated against the U.S. dollar given the modification of the strong dollar. Third, credit spreads remained almost unchanged. And fourth, developments in long-term interest rates suggested the increase in the Bank's outright purchases of JGBs was not welcomed by the market, but concern about its possible negative impact on fiscal discipline was observed. One member said that the increase in the outstanding balance of current accounts at the Bank had hardly had any effect on people's inflation expectations, judging from the shape of the yield curve and the results of surveys on the outlook for prices. A few members said that it was difficult to influence the credit-creating activities of financial institutions by providing more liquidity, as firms' demand for funds was weak and there were no liquidity constraints on the financial institutions' side. A different member commented that financial markets' reactions to the easing measures so far revealed the limit of the effects of an increase in the outstanding balance of current accounts at the Bank, and this recognition was spreading to market participants.

At the same time, some members including these members expressed the opinion that it was too early to judge the effects of the monetary easing measures taken so far, since it took time for the effects of monetary policy to materialize. In relation to this, one member expressed the view that the effects of termination of the zero interest rate policy in August 2000 might be emerging in the form of the fall in stock prices and deterioration of the economy.

With regard to the conduct of monetary policy in the immediate future, members agreed that it was necessary to take measures to cope with developments in the financial markets and the increase in liquidity demand after the terrorist attacks. All members were appreciative of the action taken by the Bank's staff following the terrorist attacks to increase the provision of funds in a timely and flexible manner, in accordance with the contingency clause in the guideline for money market operations. On this basis, they agreed that it was necessary to continue implementing measures to encourage smooth funds settlement and stabilize the financial markets given the fact that (1) the financial markets and the economy warranted careful monitoring after the terrorist attacks, and (2) Japanese firms' interim book closings at the end of September were approaching. Some members said that such measures would contribute not only to stabilization of the financial markets, but also to further permeation of the effects of monetary easing. A few members emphasized that taking such measures was also important from the viewpoint of international policy coordination among central banks.

Regarding specific policy measures to be taken, members agreed that the Bank should continue to provide ample liquidity to the money market, aiming at maintaining an outstanding balance of current accounts held at the Bank at above 6 trillion yen. Many members expressed the view that it was not appropriate to set a specific target for the outstanding balance of current accounts for the following reasons. First, the extent to which the demand for liquidity in the financial markets might increase could not be estimated at this point, and second, the current high level of funds provision might not need to be maintained once the market regained stability and liquidity demand weakened. Therefore, most members agreed that the guideline for money market operations should be changed to an aim of maintaining the outstanding balance of current accounts at the Bank at above 6 trillion yen, in order to show the Bank's determination to continue provision of ample liquidity to the market and give the guideline flexibility to cope with a change in liquidity demand. One member said, however, that a specific target of 8 trillion yen should be stated clearly in the guideline.

A few members expressed the view that ample liquidity could be provided without increasing the Bank's outright purchases of JGBs given the increase in liquidity demand. A few other members said that they would further examine developments in the JGB market including the effects of the Bank's decision in August 2001 to increase its purchases and the decision not to increase them this time.

Most members shared the view that reduction of the official discount rate would be effective to some extent in ensuring stability in financial markets. However, a few members said that, in the present situation where market interest rates including those on term instruments had declined substantially, a discount rate cut would not have much easing effect, and it should rather be considered as a measure to secure liquidity in the markets. Against this view, a few other members noted that (1) an official discount rate reduction could exert downward pressure, albeit marginally, on interest rates on term instruments through a decline in liquidity premiums and (2) stabilizing markets through liquidity provision measures would have an easing effect by encouraging further permeation of the effects of the past easing measures.

One member was opposed to a further reduction of the official discount rate saying that little room would be left for interest rate movements.

Regarding the size of a reduction in the official discount rate, one member expressed the opinion that the Bank should reduce it by 15 basis points to 0.10 percent from the present 0.25 percent in view of the fact that the uncollateralized overnight call rate reached 0.11 percent briefly on September 12. A different member said that in order to allow the price mechanism to continue to function in the money markets, the official discount rate should not be below 0.10 percent.

A few members said that it was appropriate to increase the maximum number of days on which the official discount rate could be applied for the use of the Lombard-type lending facility from five business days to ten business days for the current reserve maintenance period (from September 16 to October 15) which included the day of the interim book closings at the end of September.

B. Monetary Policy for the Near Future

Members discussed the conduct of monetary policy for the near future. Most members concurred that there was a limit to the extent to which monetary policy alone could prevent a continuous decline in prices and make Japan's economy return to a stable and sustainable growth path. It was therefore essential to (1) resolve the financial system problem, and (2) improve the supply-demand balance in the economy by reviewing the components of government expenditure and advancing structural reforms. Many members expressed the opinion that, when the Government was taking initiatives in dealing with the above issues, the Bank as a central bank should study ways to support such initiatives.

Many members shared the view that it was vital to improve the supply-demand balance in the economy in order to prevent deflation. These members concurred that the Bank's provision of ample funds had not yet resulted in an increase in demand due to the NPL problem and the persisting pressure to adjust firms' balance sheets. A few of these members said that there was a view that price developments were a monetary phenomenon and thus issues related to prices could be solved by means of monetary policy alone, but this view did not reflect the realities of the financial and economic situation and was neither realistic nor productive. One member expressed the view that monetary easing was necessary but not sufficient to prevent deflation.

Based on these discussions, many members contended that, in order to prevent deflation, it was essential to generate private demand by reviewing the components of government expenditure and advancing structural reforms. A few members commented that given the large amount of government debt and the recent nervous developments in the Japanese government securities market, it was important to consider changes that would win the market's trust in the future of fiscal consolidation when reviewing the components of government expenditure. A different member remarked that as a measure to stimulate demand, government expenditure should be reviewed focusing on the multiplier effect, while, on the supply side, resolution of the NPL problem and progress in structural reforms were essential to eliminate excessive capital stock, employee numbers, and debts. In addition, a combination of efforts in fiscal policy, in monetary policy, and, last but not least, by the private sector was essential.

Many members expressed views on the relationship between the financial system problem and monetary policy. A few members pointed out that one of the reasons why the current monetary easing was not permeating into the economy was that financial institutions' ability to take risks was impaired by their NPLs and the fall in stock prices. One member said that reducing financial institutions' assets was an inevitable part of the process of revitalizing the financial system when credit demand was weak, and thus there was a limit to the extent to which monetary policy could encourage financial institutions to expand their balance sheets. One member said that the key to solving the financial system problem was (1) an enhancement of the functions of the Resolution and Collection Corporation (RCC), including an expansion of its lending function, and (2) disposing of NPLs from financial institutions' balance sheets by transferring them to the RCC.

Many views were put forward regarding inflation targeting in the discussion of the above problems in the overall economy. Some members shared the view that the key issue was not deciding whether to set a numerical target for prices but considering what would be effective policy measures that could be employed to achieve a target. One of these members remarked that the Bank had already made a very strong commitment to price stability, but the present problem was that it was difficult to stop the price decline by means of monetary easing alone. Regarding a criticism that the Bank's current commitment did not clearly specify the timetable for achieving zero percent inflation, a different member said that this would depend largely on the Government's policy implementation. This member said that if almost zero growth was inevitable for the next two to three years as a result of advancing structural reforms and fiscal consolidation, it would be difficult to make any great progress in addressing deflation during this period. A different member said that (1) it was not appropriate to adopt inflation targeting when the economy was still having structural problems, and (2) a numerical price target should be considered as a means to improve the transparency of monetary policy when the economy returned to a normal state and deflation had ended.

A different member said that in order to show the central bank's determination to halt deflation in the current state of the economy, it would be desirable to introduce price level targeting rather than inflation targeting. This was because with the latter type of targeting, if prices fell below a target rate in the first year, a denominator (the updated price index) in the formula used to calculate inflation rates for the next fiscal year onward would have to be changed in line with the price fall.

Based on the above discussions, some members' view on the conduct of monetary policy in the near future was as follows: it was necessary to (1) continue providing ample funds for a while to stabilize the financial markets and ensure permeation of the effects of monetary easing, and (2) examine ways in which the central bank could support the Government's efforts to advance structural reforms and to solve the NPL problem. A few members remarked that the coordination between the Government and the Bank should be considered in relation to various measures to advance structural reforms. In relation to this point, one member said that there had been some cases where remarks by the Government about monetary policy confused market participants at home and abroad, and the member would like to ask the Government to put forward its opinion about monetary policy at Monetary Policy Meetings in accordance with the framework stipulated in the Bank of Japan Law.

V. Remarks by Government Representatives

The representative from the Cabinet Office made the following remarks.

(1) The Government was highly appreciative of the Bank's prompt action, which was the earliest response to the terrorist attacks in the United States to maintain the stability of the financial system, by increasing the outstanding balance of current accounts at the Bank.

(2) Members of the Policy Board had pointed out earlier in the meeting that structural reforms were essential. The present Cabinet was placing a high priority on structural reforms. The Government was making efforts to bring forward the date of the release of the "Advanced Reform Program" from the initial schedule of the end of September. It was in its final drafting stage, and the Government was working under the leadership of the Prime Minister to take a step forward in advancing the resolution of the NPL problem and the reform of special public corporations.

(3) Regarding fiscal policy, the Cabinet had been taking a position to limit the issuance of new government bonds to 30 trillion yen. At the same time, the Government acknowledged the importance of stimulating demand. Therefore, the Government clearly stated in the guideline for the compilation of the supplementary budget for fiscal 2001 and the budget for fiscal 2002 that it would adopt projects that would significantly boost employment and demand.

(4) The Government considered that the independence of the Bank was important, but at the same time it acknowledged that there was a view that independence of the Bank in terms of its objective and in terms of its monetary policy measures should be defined separately. The Government was aware that stopping deflation was the common policy objective of the Government and the Bank, and deflation could not be stopped by means of monetary policy measures alone. There was, unfortunately, a view that the Bank alone was responsible for addressing deflation, and the Government considered that it was important for the Government and the Bank to prevent this view from becoming prevalent.

(5) In order to achieve the common policy objective of halting deflation, the Government would like to discuss the division of roles for taking measures among entities including the Bank of Japan at meetings of the Council on Economic and Fiscal Policy. The Government was pressing forward with structural reforms and would like to ask the Bank to continue giving support from the monetary side and the Government expected much from timely action by the Bank.

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

(1) Based on its the conviction that without structural reforms there could be no recovery and expansion of the economy, the Government would compile the "Advanced Reform Program," which included measures to be decided and implemented immediately, and was preparing the supplementary budget for fiscal 2001. In line with these, the instructions from the Prime Minister indicated that he expected the Bank to adopt appropriate policies.

(2) The decline in the CPI was becoming clearer despite the monetary easing measures taken by the Bank on August 14, 2001. The current continuous price fall was having various negative effects including those on corporate activity and private consumption, and the Government would like to ask the Bank to further discuss ways to stop the price decline.

(3) The Government considered that in a situation where there were no signs of a rise in prices, despite the Bank's strong determination to stop the continuous price fall, more effective monetary easing measures were necessary that would work on people's sentiment. The Government would like to ask the Bank to conduct monetary policy in a timely manner. Also, the Government would like to ask the Bank to consider the current situation which called for international policy coordination as seen in the emergency interest rate cuts by the FRB and the ECB on September 17, 2001.

(4) On these grounds, the Government would like the Bank to examine a variety of policy options that would have a greater impact on the economy, including the continuation of the current emergency procedure for market operations. The Government considered that utilizing the yen funds provided through the foreign exchange intervention could be one of the options in conducting the Bank's money market operations.

VI. Votes

Based on the above discussion, most members agreed that the Bank would take the following measures in order to maintain stability in the financial markets and ensure further permeation of the monetary easing. First, provision of ample liquidity to the money market by aiming at maintaining the outstanding balance of current accounts held at the Bank at above 6 trillion yen. Second, a reduction of the official discount rate by 15 basis points to 0.10 percent. And third, an increase in the maximum number of days on which the official discount rate can be applied for use of the Lombard-type lending facility from five business days to ten business days for the current reserve maintenance period (September 16 to October 15).

One member, however, said that the procedures for money market operations decided on March 19, 2001 should be changed partially to aim at maintaining the CPI at or raising it to a certain target within a specified period. In proposing this idea, the member acknowledged the need to avoid a situation where Japan might trigger a worldwide economic crisis, in view of the serious effects of the stock price fall and the NPL problem amid the current economic situation, which was worsening at a faster pace than at the time of the first oil crisis. In addition, the member said that the Bank should raise the outstanding balance of current accounts at the Bank to around 8 trillion yen, allowing an increase in the Bank's outright purchases of JGBs to 800 billion yen per month from 600 billion yen, and, in order to achieve that outstanding balance smoothly, the Bank should remove the restriction that the amount of its JGB holdings should not exceed the amount of banknotes issued.

As a result, the following proposals were submitted.

Mr. N. Nakahara proposed the following procedures for money market operations:

The Bank of Japan will conduct money market operations, aiming at maintaining the CPI (excluding perishables, on a nationwide basis) in the January-March quarter of 2003 at or raising it to a target of 99.1, which was the average of the CPI in the January-March quarter of 2001.

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

This member also proposed the following guideline for money market operations for the intermeeting period ahead:

The Bank of Japan will conduct money market operations, aiming at an outstanding balance of current accounts at the Bank of around 8 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. In addition, in order to smoothly achieve the outstanding balance, the Bank will remove the following restriction in the New Procedures for Money Market Operations and Monetary Easing determined on March 19, 2001: --"The outright purchase is, on the other hand, subject to the limitation that the outstanding amount of long-term government bonds effectively held by the Bank, i.e., after taking into account of the government bond sales under gensaki repurchase agreements, be kept below the outstanding balance of banknotes issued."

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

To reflect the majority view, the chairman formulated the following three proposals.

The Chairman's Policy Proposal on the Change in the Guideline for Market Operations:

1. The guideline for money market operations in the intermeeting period ahead will be as follows:

For the time being, the Bank will provide ample liquidity to the money market by aiming at maintaining the outstanding balance of current accounts held at the Bank at above 6 trillion yen.

2. A public statement will be decided separately.

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

Mr. N. Nakahara dissented for the following reasons. First, the phrase in the guideline, "maintaining the outstanding balance of current accounts held at the Bank at above 6 trillion yen" was unclear and this would impair the Bank's accountability. And second, the Bank's view of the effects of the terrorist attacks in the United States on the Japanese economy, such as the fall in stock prices, and on the outlook for overseas economies was too optimistic, and thus this guideline was insufficient to stop the deterioration of the economy, the price decline, and the fall in stock prices.

The Chairman's Policy Proposal on the Reduction in the Official Discount Rate:

The official discount rate (the basic discount rate for the discounting of bills pursuant to Article 33, Paragraph 1, Section 1 of the Bank of Japan Law and the basic loan rate for loans made pursuant to Article 33, Paragraph 1, Section 2 of the Bank of Japan Law) will be reduced by 0.15 percentage points to 0.10 percent, with effect from September 19, 2001. A public statement will be decided separately.

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

Mr. N. Nakahara dissented for the following reasons. First, room for interest rate movements in the market would be reduced too much. And second, the official discount rate should be sufficiently higher than market rates to avoid providing any incentive for moral hazard behavior on the part of financial institutions.

The Chairman's Policy Proposal on the Increase in the Maximum Number of Business Days for Using the Lombard-Type Lending Facility:

1. As for the current reserve maintenance period, September 16 to October 15 (one month as defined in Paragraph 3, Article 7 of the Law Concerning the Reserve Deposit Requirement System, Law No.135 of 1957), the maximum number of days on which the official discount rate can be applied for use of the Lombard-type lending facility will be increased, as a temporary measure, from five business days as prescribed in item 5 (2) of the "Principal Terms and Conditions for the Complementary Lending Facility" (Policy Board Decision on February 28, 2001) to ten business days, with effect from September 19, 2001.

2. A public statement will be decided separately.

Votes for the proposal: Mr. M. Hayami, Mr. S. Fujiwara, Mr. Y. Yamaguchi, Mr. T. Miki, Mr. N. Nakahara, Mr. K. Ueda, Mr. T. Taya, Ms. M. Suda, and Mr. S. Nakahara.
Vote against the proposal: None.

VII. Discussion on the Public Statement

Following the above decision, members discussed the draft of a public statement prepared by the staff and put it to the vote. By majority vote, the Board decided to publish "Change in the Guideline for Money Market Operations and Reduction in the Official Discount Rate" (see Attachment 1).

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

Mr. N. Nakahara dissented for the same reason as he opposed the proposal regarding the guideline for money market operations in the intermeeting period ahead.

VIII. Discussion on the Bank's View of Recent Economic and Financial Developments

The Policy Board discussed "The Bank's View" of recent economic and financial developments and put it to the vote. By majority vote, the Board decided to publish "The Bank's View" on September 20, 2001 in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background").5

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

Mr. N. Nakahara dissented for the following reasons. First, "The Bank's View" should point out the depth and speed of the economic deterioration. Second, it was too optimistic on when inventory adjustments of IT-related goods would come to an end. Third, it did not mention the size of the impact of the decrease in public works on Japan's regional economies. Fourth, it did not include sufficient assessment of the effects of the terrorist attacks in the United States. And fifth, it was too optimistic in its assessment regarding the price declines.

  1. 5The original full text, in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on September 20, 2001 together with the English version of "The Bank's View." The English version of "The Background" was published on September 21, 2001.

IX. Approval of the Minutes of the Monetary Policy Meeting

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of August 13 and 14 for release on September 25, 2001.

X. Approval of the Scheduled Dates of the Monetary Policy Meetings in October 2001-March 2002

At the end of the meeting, members approved the dates of Monetary Policy Meetings to be held in the period October 2001-March 2002, for immediate release (see Attachment 2).


Attachment 1

For immediate release

September 18, 2001
Bank of Japan

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

  1. At the Monetary Policy Meeting held today, the Bank of Japan decided to take the following measures.
    1. 1) Change in the guideline for money market operations (by majority vote)
      For the time being, the Bank will provide ample liquidity to the money market by aiming at maintaining the outstanding balance of current accounts held at the Bank at above 6 trillion yen.
    2. 2) Reduction in the official discount rate (by majority vote)
      Effective tomorrow, the official discount rate will be reduced by 0.15 percentage points to 0.10 percent.
    3. 3) Increase in the maximum number of business days for using the Lombard-type lending facility (by unanimous vote)
      As for the current reserve maintenance period, September 16 to October 15, the maximum number of days on which the official discount rate can be applied for use of the Lombard-type lending facility will be increased from five business days to ten business days.
  2. In response to a surge in demand for liquidity caused by the terrorist attacks in the United States on September 11, the Bank has taken every necessary measure, including a significant increase in the outstanding balance of current accounts held at the Bank exceeding eight trillion yen, in order to ensure smooth fund settlement and proper functioning of financial markets.
  3. In financial markets at home and abroad, disruption in transactions and settlements has so far been successfully avoided, reflecting ample liquidity provision by major central banks as well as appropriate responses by market participants. However, it is still necessary to carefully monitor the effect of the incident on global financial markets and economic activities. Should any event hamper smooth fund settlement or the functioning of financial markets, it could interrupt the permeation of monetary easing effects stemming from the policy measures taken so far.
  4. Against this background, the Bank found it appropriate to take the above measures in order to secure proper functioning of financial markets and to enhance the effective permeation of monetary easing effects.
  5. As the Bank has repeatedly stressed, in order to make monetary easing more effective and to bring Japan's economy back to a stable and sustainable growth path, it is indispensable that progress is made in the area of structural reforms with respect to the financial system as well as the economy and industry. From this viewpoint, the Bank strongly hopes that steady progress in structural reforms will continue overcoming the effect of the recent tragedy in the United States and various pains associated with structural reforms.
  6. The Bank will continue to make every effort as a central bank to prevent a continuous decline in prices and to establish a basis for the stable and sustainable growth of Japan's economy, including efforts to cope with the non-performing loan problem.

Attachment 2

For immediate release

September 18, 2001
Bank of Japan

Scheduled Dates of Monetary Policy Meetings in October 2001-March 2002

Table :Scheduled Dates of Monetary Policy Meetings in October 2001-March 2002
Date of MPM Publication of Monthly Report6 Publication of MPM Minutes
Oct. 2001 11 (Thur.), 12 (Fri.) 15 (Mon.) Nov. 21 (Wed.)
29 (Mon.) -- Dec. 4 (Tue.)
Nov. 15 (Thur.), 16 (Fri.) 19 (Mon.) Dec. 25 (Tue.)
29 (Thur.) -- Jan. 21 (Mon.)
Dec. 18 (Tue.), 19 (Wed.) 20 (Thur.) Jan. 21 (Mon.)
Jan. 2002 15 (Tue.), 16 (Wed.) 17 (Thur.) Mar. 5 (Tue.)
Feb. 7 (Thur.), 8 (Fri.) 12 (Tue.) Mar. 26 (Tue.)
28 (Thur.) -- To be announced
Mar. 19 (Tue.), 20 (Wed.) 22 (Fri.) To be announced
  1. 6Outlook and Risk Assessment of the Economy and Prices (October 2001) will be published on Tuesday, October 30 following MPM's discussion and decision on Monday, October 29.