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Minutes of the Monetary Policy Meeting

on October 29, 2001
(English translation prepared by the Bank's staff based on the Japanese original)

December 4, 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 Monday, October 29, 2001, from 9:00 a.m. to 1:59 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. Fujii, Deputy Vice Minister for Policy Planning and Coordination, Ministry of Finance
Mr. Y. Kobayashi, Director General for Economic and Fiscal Management, Cabinet Office

Reporting Staff
Mr. M. Matsushima, Executive Director
Mr. M. Masubuchi, Executive Director
Mr. 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. T. Nunami, Associate 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. K. Etoh, Senior Economist, Policy Planning Office
Mr. S. Shimizu, Senior Economist, Policy Planning Office

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on November 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.

I. A Change in the Release Schedule of the "Outlook and Risk Assessment of the Economy and Prices"

The chairman proposed that the "Outlook and Risk Assessment of the Economy and Prices" (hereafter the Outlook Report) be published on October 29, a day earlier than previously scheduled. The proposal was approved by the Policy Board, and it was decided to release the statement regarding the change immediately.

II. Summary of Staff Reports on Economic and Financial Developments2

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 October 11 and 12, 2001.3 The Bank provided liquidity to the money market flexibly, and toward October 15, the last day of the reserve maintenance period for September, the outstanding balance of current accounts at the Bank increased to over 9 trillion yen. This was because the Bank increased the amount of funds provision to meet the slight increase in overall demand for funds in the market, as it was anticipated in the market that the amount of excess reserves held at the Bank, especially those of some foreign banks, was increasing. Thereafter, the Bank conducted market operations aimed at gradually reducing the outstanding balance of current accounts, giving due consideration to liquidity demand in the market. As a result of these market operations, the overnight call rate was generally stable at 0.002-0.003 percent. As for the future, developments in demand for excess reserves would become an important factor in the Bank's market operations. It was likely that the total amount of excess reserve holdings in the current accounts at the Bank would continue at a high level because some foreign banks were increasing their excess reserve holdings again and lenders in the money market, such as regional banks, were becoming cautious about lending in the market.

  1. 2Reports were made based on information available at the time of the meeting.
  2. 3The guideline was as follows:
    The Bank of Japan 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.

B. Recent Developments in Financial Markets

Japanese stock prices increased and the yen depreciated against the U.S. dollar reflecting factors such as the firmness in U.S. stock prices. In addition, long-term interest rates in Japan declined slightly, and the overall bond market conditions were favorable in general. However, the trading volume was decreasing in these markets, and it was thought unlikely that developments in these markets would show a clear direction in the near future.

Japanese stock prices rose in tandem with U.S. stock prices, and they recovered to the levels before the terrorist attacks in the United States. By industry, stock prices in electrical appliances, banking, and telecommunications showed relatively large increases, recovering to the levels before the terrorist attacks except for bank stocks. As for the outlook, many market participants considered that Japanese stock prices would undergo adjustment again if optimism about the U.S. economy subsided.

Long-term interest rates declined gradually due partly to market participants' favorable response to the Government's determination to continue fiscal structural reform in compiling the supplementary budget for the current fiscal 2001. It was expected that a negative factor and a positive factor would produce a seesawing in the supply-demand balance in the Japanese government bond (JGB) market. The negative factor would be the possibility of an increase in the issuance of JGBs resulting from possible additional fiscal measures, which would give rise to concern about a deterioration in the balance in the JGB market. The positive factor would be the flow of funds into the JGB market resulting from very low demand for funds in other markets. The yield differentials between corporate bonds and government bonds in the secondary markets, or credit spreads, declined slightly for bonds issued by firms with high credit ratings while those for bonds issued by firms with low credit ratings continued to widen reflecting investors' concern about credit risk.

In the foreign exchange market, the yen had depreciated against the U.S. dollar recently. This was because the U.S. dollar was purchased due to a recovery in U.S. stock prices and expectations that domestic investors would continue to increase investment in foreign bonds. The bearish sentiment with respect to the U.S. dollar seemed to have subsided considerably in the market.

C. Overseas Economic and Financial Developments

In the United States, the large impact of the terrorist attacks on the economy was confirmed in economic indicators released after the previous meeting. Specifically, corporate and household confidence deteriorated considerably, and the economy was greatly affected as evident in the fall in private consumption and the plunge in production. Some statistics, such as a weekly measure of sales at chain stores, had recently improved slightly after falling substantially, but were still below the levels before the terrorist attacks. It was anticipated that if this decline in economic activity did not turn out to be temporary, there was a risk that the U.S. economy would slow further, with negative effects on the world economy. Against this background, U.S. federal funds rate futures factored in an expectation of a cut of 25 basis points in the federal funds rate at the next Federal Open Market Committee (FOMC) meeting on November 6, 2001.

U.S. stock prices generally recovered to the levels before the terrorist attacks due partly to expectations of an early recovery of the U.S. economy supported by aggressive monetary and fiscal policy measures. However, it could not be considered that the recent recovery of stock prices was the first sign of a strong recovery of the U.S. stock market given the recent weak economic indicators and the downward revision in the forecasts of corporate profits.

In Europe, major economies, such as Germany, France, and Italy, were showing clear signs of an economic slowdown due to a deceleration in the growth of exports and business fixed investment. Employment conditions were deteriorating, as seen in the rising unemployment rate, and private consumption seemed to be declining.

East Asian economies continued to slow. Production declined due to a fall in exports, mainly in IT-related goods. The economic downturn was especially distinct in Taiwan and Singapore, and both were expected to record negative growth from the previous year. The Chinese economy maintained a high growth rate of around 7 percent from the previous year, but the growth rate was declining quarter after quarter due to the slowdown in exports.

In the emerging economies, Argentina's economic condition gave rise to concern. Yield spreads between Argentine government bonds and U.S. Treasuries had recently declined slightly but were still over 20 percent, and the situation should be watched closely. Furthermore, there was a risk that the economic instability in Argentina could spread to Brazil and Turkey.

D. Economic and Financial Developments in Japan

1. Economic developments

Economic indicators that had become available since the previous meeting and the reports on the regional economies made at the meeting of general managers of the Bank's branches did not provide any new factors that could change the basic judgment on the economy: "Adjustments in economic activity are becoming more severe, as the substantial decline in production has a negative influence on employment and income conditions. In addition, the terrorist attacks in the United States have further heightened uncertainty in Japan's economy."

Exports continued to decline in the July-September quarter at the same pace as before. The industry's projection for shipments of semiconductors worldwide, a key indicator for the future course of exports, was revised downward substantially for 2001 from the projection made in the spring. However, exports were projected to start increasing from the spring of 2002. Imports recorded a slightly larger decline than exports in the July-September quarter due partly to the sluggish domestic sales of personal computers and a decline in production of IT-related goods.

As for employment conditions, summer bonus payments declined from the previous year's level, mainly for nonmanufacturers and small firms. The level of summer bonus payments was regarded as somewhat low given that corporate profits increased for two consecutive years.

As for private consumption, various sales statistics showed different movements but slightly weak indicators were increasing recently in these statistics. It was also confirmed from the Consumer Behavior Survey for September that consumers were becoming cautious because of concern about employment conditions in particular.

Regarding prices, the corporate service price index continued to decline. The year-on-year decline in the consumer price index (CPI) excluding fresh food for September was slightly smaller than the previous month. By type of goods, the rate of decline in the prices of clothes and consumer durables slowed somewhat.

The Indices of Industrial Production for September released on October 29 declined by 2.9 percent from the previous month. This was a larger fall than had been forecasted in the previous month, mainly due to the larger-than-expected decline in electrical machinery and general machinery. Industrial production declined by 4.3 percent in the July-September quarter from the previous quarter, and the quarter-on-quarter rate of decline had therefore expanded slightly for three consecutive quarters. As for inventories, those of electronic parts were decreasing and those of materials were starting to peak out, but more time was needed before inventory adjustments were completed throughout Japanese industry.

2. Financial environment

The year-on-year growth rate of the monetary base was likely to remain high in October, following on from the previous month, given that banknotes in circulation continued to rise steadily and the outstanding balance of current accounts at the Bank increased considerably.

The year-on-year growth rate of money stock rose to 3.7 percent in September. Among the components of money stock, high growth of deposit money was notable. The increase in deposit money was attributable to a surge in firms' liquidity demand following the terrorist attacks in the United States and the bankruptcy of a large firm in Japan.

As for corporate financing, the Senior Loan Officer Opinion Survey on Bank Lending Practices at Large Japanese Banks for October suggested that credit demand mainly of large and medium-sized firms continued to decrease, but there was no significant change in banks' lending stance. However, banks were setting stricter standards for credit lines, credit risk assessment, and collateral policies, and therefore, firms' financing required careful monitoring.

The number of corporate bankruptcies remained more or less unchanged.

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

A. Current Economic Situation

The discussions of members centered on the assessment of economic indicators released after the previous meeting on October 11 and 12. Most members concurred that there were no new factors to change the Bank's assessment of the economy at the previous meeting: "Adjustments in economic activity are becoming more severe, as the substantial decline in production has a negative influence on employment and income conditions. In addition, the terrorist attacks in the United States have further heightened uncertainty in Japan's economy." Many members especially pointed out that adjustments in the corporate sector were gradually spreading to the household sector.

Regarding developments in the U.S. economy after the terrorist attacks, one member pointed out that excessive pessimism about the U.S. economy was subsiding recently due mainly to (1) implementation of aggressive monetary and fiscal policy measures, (2) a recovery in the functioning of financial markets, such as the stock market and the corporate bond issuance market, and (3) the stable crude oil prices. Some members, including this member, however, expressed the view that a slowdown of the U.S. economy in the short term was inevitable, considering the weak consumer sentiment and its effects on private consumption. A few members said that an increase in various costs related to security might lower productivity. One member added that exports remained subdued in East Asian economies, which relied heavily on the U.S. economy, and therefore the resulting decrease in production and corporate profits could dampen domestic demand in these economies.

One member expressed concern that crude oil prices would be negatively affected if tension between the United States and some countries in the Middle East increased.

Against the background of the slowdown in overseas economies, many members pointed out that Japan's exports and production in export-related industries continued to decline. Some members remarked that it had become clear that the completion of adjustments in inventory and production would lag into 2002. A different member expressed concern about the significant decline in the trade surplus due to the decrease in exports.

As for private consumption, a few members noted that consumer confidence was becoming substantially weaker due to the deterioration in employment conditions. These members remarked that the extent to which consumer sentiment would affect private consumption required monitoring.

A few members referred to the continued decline in the CPI. One of these members pointed out that the economy as a whole had not yet fallen into a deflationary spiral, a situation defined as a vicious cycle of price falls and recessions. However, some members including this member expressed concern that both commodity prices and shipments were decreasing in some materials industries, thereby greatly affecting their corporate profits.

One member expressed a more cautious view of the economy than other members, citing the following. First, the Indexes of Business Conditions had all been revised downward. Second, given the presence of labor hoarding, the unemployment rate might increase beyond 7 percent in the future. Third, it would not be long before the decrease in wages and the rise in the unemployment rate would have adverse effects on private consumption. And fourth, stock prices in the United States and Japan were highly likely to fall again in the future, probably in 2002 or later, and economic and financial developments in Japan would become more unstable by end-March 2002.

B. Financial Developments

Some members considered that stock prices and the yen's exchange rate had returned to the levels before the terrorist attacks in the United States, and the markets were regaining stability on the whole. One member pointed out that yen-selling intervention by the Government in the latter half of September and the recent increase in foreign bond investment by Japanese investors had contributed to the stability of the U.S. bond market and the abatement of concerns about the appreciation of the yen. Further, a few members including this member noted that the emerging markets had also recovered their stability.

A few members said that although U.S. stock prices were on a recovery trend recently, there was a risk that they might fall again depending on future economic developments.

Many members acknowledged that liquidity demand in the money market in Japan remained volatile. These members pointed out that the total outstanding amount of excess reserve holdings at the Bank tended to fluctuate because foreign banks and some regional banks were becoming reluctant to invest in the money market and they were increasing their excess reserve holdings. One of these members said that investors such as life insurance companies were reducing the weight of their investment in short-term financial assets because money market interest rates had declined to levels at which they were unable to cover transaction costs.

Regarding credit risk observed from market developments, one member pointed to the movements of the credit default swap rate, and said that market participants continued to view the condition of Japanese financial institutions as severe even after the interim book closings. In addition, this member expressed concern that the risk premium on JGBs was expanding slightly.

On corporate financing, one member said that a credit crunch like that of 1997-98 had not occurred, but banks continued to be selective about their borrowers, and some firms were facing difficulty in financing because their corporate profits were declining, and thus future developments required monitoring. In addition, another member said that financial institutions would inevitably remain selective about their borrowers as long as the current economic situation continued.

A different member expressed the view that the decline in the functioning of the money market and the fall in prices under the excessive competition stemming from the survival of nonviable firms were negative side effects of the prolonged monetary easing.

C. Outlook and Risk Assessment of the Economy and Prices

Members discussed the outlook for Japan's economy in the second half of fiscal 2001 and fiscal 2002 and risk factors which might influence the standard scenario, given that the Outlook Report was to be decided for publication at this meeting.

Some members emphasized that uncertainty was greater than usual in assessing the outlook for economic and price developments in Japan at this time. These members pointed out that factors behind this uncertainty were that (1) the outlook for global IT-related demand and the U.S. economy had been uncertain even before the terrorist attacks in the United States, (2) the terrorist attacks took place, whose effects were even more difficult to assess, and (3) the progress in Japan's structural reform and the impact of fiscal reform were making it harder to foresee the economic outlook.

On this basis, most members considered that the most likely scenario for the economy was as follows. In the second half of fiscal 2001, it seemed inevitable that Japan's economy would continue to experience severe adjustment as the effects of a sharp fall in exports and production would spread to domestic demand. In fiscal 2002, assuming that overseas economies, especially the United States, recovered in the first half, Japan's overall economy would stop deteriorating toward the second half. Even in this case, however, more time would be needed to see a clear recovery in the economy. A few members added that there were few factors that could lead to a self-sustained recovery of domestic demand, and that, for the time being, not only structural adjustment pressure but also developments in overseas economies would become important in determining the course of Japan's economy.

Reflecting the above developments in the economy, members shared the view that prices would probably continue to decline gradually in fiscal 2001 and 2002 as demand-side factors were likely to exert more downward pressure together with supply-side factors such as imports of low-priced goods and improved productivity.

In relation to the standard scenario, one member commented on the assessment of the continuous price fall. This member said that the important issue was whether deflation would accelerate and negative effects stemming from it would spread to the economy, but the economy was not expected to fall into a deflationary spiral in the standard scenario. On this basis, this member added that it was necessary to examine carefully (1) why the decline in prices was only a small one, (2) what kind of effects the price fall would have on firms with heavy debts and on the public sector, which had huge debts, and (3) how portfolios would change between financial assets and real assets.

Members then discussed both the upside and downside factors constituting risks to the standard scenario. Many members pointed out developments in overseas economies, especially the United States, and also in IT-related areas as the first risk factor.

One member stressed that the outlook for the world economy was extremely uncertain, and there was a risk that it might not recover in the first half of 2002 as predicted in the standard scenario. A different member said that the risk that the U.S. economy might remain stagnant should be taken into account, since it was unlikely that the effects of the terrorist attacks would turn out to be merely temporary. Another member expressed the view that macroeconomic policies might not necessarily be very effective, as the U.S. economy was undergoing adjustments due to excessive investment and over-consumption. This member added that it was cause for concern that the volume of international trade might contract further due to a rise in protectionism given the simultaneous slowdown of the world economy.

On the other hand, some members pointed out the possibility that adjustments in IT-related industries and in overseas economies might progress fairly smoothly. A few members said that inventory adjustments in IT-related industries were progressing steadily. A few other members expressed the view that aggressive monetary and fiscal measures in the United States could be expected to reduce the pace of the slowdown in the U.S. economy and also the world economy, although the effects of such measures should not be overestimated.

Some members pointed out that financial market developments were another risk to the standard scenario.

These members said that international capital flows had become more unstable since the terrorist attacks, and in such a situation, attention must be paid to the risk that Japanese stock prices might fall, exerting downward pressure on economic activity in Japan. One of these members expressed concern that capital flows might be restrained to some extent due to measures to restrict the flow of funds connected to terrorism. A few other members expressed the view that, although U.S. stock prices were recovering, they were overvalued judging from various valuation indexes, and thus there was a risk that they might fall again in the future.

A different member expressed hope that the decisive stance on easy monetary policy taken by monetary authorities in various countries would help to stabilize financial markets.

Many members pointed to progress in dealing with nonperforming loans (NPLs) and its effects. One member regarded progress in the disposal of NPLs as the most important risk factor, and said that economic activity and financial markets could be greatly affected in the course of disposal of NPLs. Another member said that prompt disposal of NPLs could increase corporate bankruptcies and unemployment, while on the other hand, slow disposal could impair the credibility of the Japanese financial system, and thus the Japanese economy could be in a difficult situation either way. A few members including this member stressed that it was necessary to monitor the progress in the disposal of NPLs closely so that the NPL problem would not trigger a credit crunch such as was experienced in 1997-98.

Some members pointed out that structural reforms of economic and fiscal policies were another factor that could affect future developments in the economy and prices. One member remarked that it was fairly difficult to predict the effects of structural reforms when a detailed plan for the reform had just started to be determined, and therefore both positive and negative effects of structural reform should be anticipated as it progressed. A few members including this member expressed their strong hope that the positive effects of structural reform would emerge soon. A different member expressed the view that if excessive competition was reduced through a change in the industrial structure to one led by domestic demand, price falls would be prevented and industrial competitiveness would be strengthened.

With regard to fiscal structural reform, one member expressed the view that the economic outlook should be based on the probability that public works would continue decreasing, given the Government's current policy stance. Another member said that fiscal reform was not an objective for a single fiscal year, but fundamentally it was a long-term policy objective to influence people's future expectations. This member continued that, given the severe economic situation, the Government should avoid conducting fiscal policy in a way that would impair its built-in stabilizer function.

In response to the above outlook and risk assessment of the economy and prices, one member expressed a more severe view than other members on the following grounds. First, Japan's economy was deteriorating rapidly, and the pace was expected to accelerate further in the second half of fiscal 2001. Second, it was very unlikely that overseas economies would recover in the first half of fiscal 2002. Third, the effects of the price fall would eventually spread to private consumption through a cut in nominal wages. And fourth, currency issues in emerging economies were cause for concern.

The forecasts of Policy Board members (in terms of year-on-year changes) for inclusion for reference in the Outlook Report were as follows.

Forecasts of the majority of Policy Board members for fiscal 2001:4
-1.2 to -0.9 percent for real GDP; -1.2 to -1.0 percent for the domestic
WPI; and -1.1 to -1.0 percent for the CPI (excluding perishables).5Forecasts of the majority of Policy Board members for fiscal 2002:4

-1.1 to 0.1 percent for real GDP; -1.3 to -0.9 percent for the domestic
WPI; and -1.3 to -0.9 percent for the CPI (excluding perishables).5

Forecasts of all Policy Board members for fiscal 2001:6
-1.6 to -0.6 percent for real GDP; -1.5 to -0.9 percent for the domestic
WPI; and -1.3 to -0.9 percent for the CPI (excluding perishables).5Forecasts of all Policy Board members for fiscal 2002:6
-1.7 to 0.2 percent for real GDP; -1.9 to -0.5 percent for the domestic
WPI; and -1.7 to -0.5 percent for the CPI (excluding perishables).5

  1. 4This time, given that uncertainty was greater than usual, each member made a forecast range with a maximum width of half a percentage point. In total, 18 figures were submitted by nine board members indicating the upper and lower limits of their forecasts. If a single figure instead of a range was submitted, it was double counted. Forecasts of the majority of Policy Board members are shown as a range, with the highest two and lowest two figures excluded.
  2. 5The base year for the CPI forecasts was 2000.
  3. 6Forecasts of all Policy Board members are shown as a range, i.e., the highest and lowest figures among members' forecasts.

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

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

Most members shared the following view. First, there had not been any new factors since the previous meeting that offered grounds for changing the assessment of the economy: "Adjustments in economic activity are becoming more severe, as the substantial decline in production has a negative influence on employment and income conditions. In addition, the terrorist attacks in the United States have further heightened uncertainty in Japan's economy." Second, it was inevitable that the economy would undergo severe adjustment. And third, liquidity demand had continued to be volatile in the money market.

Based on the above assessment of the economy, these members concurred that, for the time being, the Bank should provide ample liquidity to the market in a timely manner while maintaining the current flexible guideline for money market operations, which did not set a specific target for the outstanding balance of current accounts at the Bank. One of these members added that if the outstanding balance of current accounts at the Bank fluctuated greatly as a result of such operations, the staff should give the Policy Board an explanation of the background.

On the other hand, one member expressed the view that the Bank should introduce a price level target and at the same time further increase the outstanding balance of current accounts at the Bank. This was because (1) the Bank needed to adopt additional easing measures given the severe economic situation, and (2) the effects of the current monetary policy with a quantitative target seemed to be gradually emerging. To significantly increase the outstanding balance of current accounts, the Bank would have to increase its outright purchases of JGBs and start to purchase foreign bonds. The member also commented on the opinion that the increase in the Bank's liquidity provision was not necessarily contributing to a rise in prices, and argued that prices would eventually rise and deflation would be overcome if the Bank continued increasing the monetary base through purchases of assets such as long-term JGBs.

Many views were put forward regarding the effects of the current ample funds provision. One member said that the monetary easing measures taken in August 2001 had not had a significant effect on stock prices and long-term interest rates due partly to the fact that the measures were taken prior to the interim book closings at the end of September and that there was market speculation about the supplementary budget for the current fiscal year. On this basis, this member expressed the view that the fact that the stock market and the foreign exchange market had been showing favorable developments since October could be indicating that the effects of the increase in the outstanding balance of current accounts at the Bank were starting to permeate through the economy. A different member added that the effects of the increase in the outstanding balance of current accounts were emerging. For example, Japanese investors were shifting their funds from the money market and investing them in assets with a higher expected rate of return. As another example, a different member mentioned that foreign investors' reaction showed that they were sensitive to the increase.

A different member, however, expressed the view that such permeation merely reflected the changes in interest rates, for example, the decline in the overnight call rate to 0.001 percent from 0.01 percent and developments in the yield curve of U.S. Treasuries. In response to this, another member said that there was a time lag between monetary policy change and the market's reaction to it, and thus, it was fairly difficult to judge whether the recent developments in the market were the direct effect of the increase in the outstanding balance of current accounts at the Bank or due to the changes in interest rates.

Based on these discussions, many members agreed that a little more time was required to judge whether the effects of the Bank's funds provision to maintain the outstanding balance of current accounts held at the Bank at above 6 trillion yen would permeate further into financial markets. One of these members considered it important that the Bank maintain its stance of continuing to provide more ample funds than the amount necessary to ensure permeation of monetary easing effects throughout financial markets. This member added that it was necessary to minimize risk premiums on medium- to long-term interest rates and those related to asset price formation so that the effects of monetary easing could permeate into the economy.

Some members commented on the roles of the Government, for example in structural reforms. These members contended that the economy still faced the deep-rooted problem of weak demand and the persistent pressure from structural adjustments, and therefore, a recovery of the economy or a halt in price declines could not be achieved by monetary easing measures alone. One of these members remarked that, in order to overcome the current hardships of the economy, it was important to revitalize the functions of the financial system through disposal of NPLs and to stimulate private demand through deregulation and by reviewing and improving the content of fiscal spending. The member expected the Government to play the leading role in implementing these. Another member remarked that the Bank and the Government both shared the aim of stopping the price falls. The member continued that the Bank was determined to do its utmost to deal with the current situation where deflationary pressure was likely to intensify in the short term due to progress in structural reform, and the Bank also expected the Government to take necessary measures.

A few members commented on the relationship between the Outlook Report, which was to be decided and released on October 29, and the Bank's recent conduct of monetary policy. One member said that calls for further monetary easing might increase with the release of the Outlook Report, but the Bank should respond by explaining convincingly that it was making every effort to continue monetary easing, and that when various structural reforms gradually bore fruit, this, in synergy with monetary easing measures, would also greatly contribute to preventing deflation. Another member agreed with this member's view and said that the Bank as a central bank should continue to make efforts to adopt appropriate measures and to take the lead in constructive discussions on revitalizing the Japanese economy.

In the course of the discussion, one member said that a continuation of the liquidity provision to the economy could cause inflation at some time in the future, as prices were determined based on the balance between goods and services in the economy and the amount of liquidity. This member continued that the Bank should take account of this inflationary risk in conducting monetary policy, although it was impossible to predict when inflation would emerge. In response to this, several members commented that, in view of the importance of fighting deflation, if the Bank explained to the public its policy stance in the same way as this member it would be inappropriate, because the Bank's view on which currently constituted the main risk, deflation or inflation, might not be conveyed correctly to the public.

V. Remarks by Government Representatives

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

(1) In the intermeeting period, the Bank had been providing ample funds in order to maintain the outstanding balance of current accounts at the Bank at over 8 trillion yen. The increase in the outstanding balance of current accounts at the Bank was expected to support the economy by alleviating market concerns. Accordingly, the Government would like to ask the Bank to continue providing ample funds as it had done to date, giving due consideration to developments in the economy and financial markets, so that the outstanding balance of current accounts would continue to be over 8 trillion yen.

(2) The CPI showed that prices continued to fall and the current continuous decline in prices was having a negative effect on various aspects of the economy such as corporate activity and private consumption, and the Government would like to ask the Bank to further discuss measures to stop the price falls.

(3) The "Advanced-Reform Program," recently compiled by the Government, expressed the hope that the Bank would conduct monetary policy in an appropriate and flexible manner to eliminate the deflationary tendency, in view of future developments in the economy, price developments in particular, and the Government's substantial measures to accelerate structural reforms. The Bank had announced its determination to do its utmost as a central bank to stop the continuous price falls. As the downward trend in prices was still unlikely to change, the Government would like to ask the Bank to conduct monetary policy in a timely manner to make its firm policy intention permeate into financial markets by way of working strongly on people's expectations, thereby making the policy intention effective.

The representative from the Cabinet Office made the following remarks.

(1) The "Advanced-Reform Program" was decided at the Ministerial Meeting on Economic Measures on October 26, 2001 after being discussed at the meetings of the Council on Economic and Fiscal Policy which the Governor of the Bank attended. The following were incorporated in the Program: (a) acceleration of structural reforms; (b) institutional reforms, such as deregulation, that should be implemented ahead of schedule; (c) amendment of the Financial Reconstruction Law; and (d) compilation of specific measures for which appropriations would be made in the supplementary budget. The Government would accelerate the pace of structural reforms in line with the Program and implement the reforms steadily according to the "Reform Schedule," which showed the process of overall structural reforms. The Government considered that, through such efforts, a self-sustained economic growth led by private demand could come into prospect.

(2) The "Advanced-Reform Program" included the Government's hopes regarding the Bank's policy. The Government considered it essential to cooperate closely with the Bank to stop deflation as soon as possible, and in this regard, it would like to ask the Bank to take decisive measures to stop deflation.

VI. Votes

Based on the above discussion, the majority of members considered it appropriate to maintain the current guideline for money market operations.

One member, however, contended that the Bank should introduce a price level target and raise the outstanding balance of current accounts to around 10 trillion yen, and that, in order to achieve the target for the outstanding balance smoothly, it should remove the restriction that the amount of the Bank's long-term JGB holdings should not exceed the amount of banknotes issued.

This member gave the following reasons. First, there were concerns that further prolongation of U.S. military action might have negative effects on the global economy. In this situation, the recovery of the Japanese economy led by external demand could not be expected, and caused the deflationary gap to expand further. Second, it was still uncertain when the NPL problem would be resolved, and furthermore, there was a risk that the financial situation might become very unstable toward end-March 2002 depending on the results of the special inspections which would be conducted by the Financial Services Agency. Third, the Bank should explain to the public its strong determination as a central bank to prevent further price falls below the current level by setting a specific time frame. And fourth, the Bank's current provision of funds which was maintaining the outstanding balance of current accounts held at the Bank at around 8 trillion yen was merely accommodating demand in the money market, and therefore, in order to conduct further quantitative easing, the Bank should raise the target for the outstanding balance of current accounts. The member suggested increasing the outright purchases of long-term JGBs to around 800 billion yen per month, as well as purchasing foreign bonds to the value of around 200 billion yen per month on a regular basis as a supplementary means to achieve this target. This member remarked that purchases of a fixed amount of foreign bonds on a monthly basis would be within the scope of regular business of the Bank prescribed in Article 33 of the Bank of Japan Law, and this would not be recognized as foreign exchange intervention by the Government nor be in contravention of the law, and would be feasible in actual practice.

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 average of the CPI (excluding fresh food, on a nationwide basis) in the January-March quarter of 2003 at or raising it to or above a target of 99.1, which was that 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 10 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 proposal.

The Chairman's Policy Proposal:

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

The Bank of Japan 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.

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 current guideline, which did not specify a numerical target, was unclear as it gave scope for speculation that an interest rate target implicitly existed, and gave the staff too much discretion. Second, under the framework for money market operations decided in March, a guideline without a specific numerical target might impair the Bank's credibility. Third, the Bank's current provision of funds was merely accommodating demand in the money market, and therefore the Bank should supply funds beyond the level of demand to achieve further quantitative easing. And fourth, if the Bank did not set a numerical target for prices with a specific time frame of its own accord, there was a risk that the Bank might have to accept a target for prices with a time frame set by entities outside the Bank.

VII. Discussion on the "Outlook and Risk Assessment of the Economy and Prices"

The Policy Board discussed the draft of the "Outlook and Risk Assessment of the Economy and Prices" and put it to the vote. By majority vote, the Board decided to publish it on October 29, 2001.

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 report was generally too optimistic. And second, it said that overseas economies were likely to recover in the first half of fiscal 2002, but the member considered this highly unlikely, considering in particular the serious effects on the U.S. economy such as the deterioration in the labor market, the decrease in business fixed investment reflecting the deterioration in corporate profits, and the cuts in fiscal spending of local governments.

VIII. Approval of the Minutes of the Monetary Policy Meeting

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of September 18, 2001 for release on November 1, 2001.


Attachment

For immediate release

October 29, 2001
Bank of Japan

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

The Bank of Japan 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.