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Minutes of the Monetary Policy Meeting

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

January 21, 2002
Bank of Japan

A Monetary Policy Meeting of the Bank of Japan Policy Board was held in the Head Office of the Bank of Japan in Tokyo on Thursday, November 29, 2001, from 9:00 a.m. to 12:21 p.m.1

Policy Board Members Present
Mr. M. Hayami, Chairman, 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. H. Takenaka, Minister of State for Economic and Fiscal Policy, Cabinet Office2
Mr. T. Komoda, Deputy Director General for Economic and Fiscal Management, Cabinet Office3

Reporting Staff
Mr. M. Matsushima, 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. 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 January 15 and 16, 2002 as "a document which contains an outline of the discussion at the meeting" stipulated in Article 20, Paragraph 1 of the Bank of Japan Law of 1997. Those present are referred to by their titles at the time of the meeting.
  2. Mr. Takenaka was present from 9:00 a.m. to 11:37 a.m.
  3. Mr. Komoda was present from 11:39 a.m. to 12:21 p.m.

I. Summary of Staff Reports on Economic and Financial Developments 4

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 November 15 and 16, 2001.5 As a result of these market operations, the uncollateralized overnight call rate was generally stable at 0.002-0.003 percent. The Bank provided ample liquidity to the money market as liquidity demand remained unstable against the background of the fact that foreign banks held a large amount of excess reserves in their current accounts at the Bank. So far, financial institutions had made steady progress in their funding beyond the year-end, but careful monitoring was still required with due attention to the impact of excess reserves of foreign banks.

  1. 4Reports were made based on information available at the time of the meeting.
  2. 5The guideline was as follows:
    The Bank of Japan will 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

1. Developments in domestic financial markets

During the intermeeting period, Japanese stock prices rose against the background of a recovery in U.S. stock prices and a further depreciation of the yen, but later declined due to widespread unwinding of cross-shareholdings and bankruptcies of listed firms. As for the outlook, Japan's stock market was factoring in a downward revision of corporate profits to some extent, but many market participants expected that Japanese stock prices would lack buoyancy because there was a risk that optimism about the U.S. economy could be revised or selling pressures on bank stocks could intensify.

Short-term interest rates on term instruments remained at extremely low levels due to ample funds provision by the Bank. Long-term interest rates were basically unchanged compared to the time of the previous meeting due to more or less equal downward and upward pressures on the rates: the downward pressure stemmed from the fact that the second supplementary budget would not require new issuance of Japanese government bonds (JGBs), and the upward pressure from market speculation about downgrading of the credit rating of JGBs.

Under these circumstances, concern about credit risk was gradually spreading in the markets, and this warranted attention. Specifically, credit spreads, the yield differentials between corporate bonds and JGBs, remained mostly unchanged for bonds issued by firms with high credit ratings while those for bonds issued by firms with BBB/Baa or lower ratings were widening because market participants continued to be more cautious about taking credit risk. In the CP market, interest rates on some newly issued CP were increasing substantially reflecting the failure of a high-rated nonlife insurance company.

Bank stocks rose temporarily after large banks revised their earnings forecasts, but they returned to a downtrend thereafter. Credit spreads for bonds issued by some banks were expanding.

2. Developments in the foreign exchange market

The yen declined to the 124-125 yen level from the 121-122 yen level against the U.S. dollar due to the following factors: (1) market participants, especially overseas participants, became more concerned about the stability of the Japanese financial system and a possible downgrading of JGBs; (2) some U.S. economic indicators were better than expected; and (3) progress in the situation in Afghanistan. Recently, the yen had been undergoing adjustment and had appreciated slightly.

C. Overseas Economic and Financial Developments

In the intermeeting period, many indicators pointed to the slowdown and deterioration of the global economy.

In the United States, final demand continued to be weak despite the fact that inventory adjustments in manufacturing industries excluding IT-related industries seemed to be coming to an end. Industrial production fell substantially in October, as in September, due mainly to a decrease in the production of automobiles. In the household sector, weak indicators were observed in consumer confidence and housing starts, and therefore, the outcome of Christmas sales warranted attention although they had made a relatively good start.

As for the U.S. financial market, the swing back from "flight to quality" resulted in a rise in long-term interest rates, a decline in the volatility of stock prices, and a narrowing of credit spreads for bonds issued by firms with low credit ratings. Yields on U.S. federal funds futures had factored in an expectation of a cut of around 25 basis points in the federal funds rate target at the next Federal Open Market Committee (FOMC) scheduled for December 11, 2001 but were also anticipating a raising of the target in and after mid-2002.

In Europe, more indicators pointed to economic deterioration especially in Germany. Germany marked negative economic growth for the second consecutive quarter as business fixed investment declined and private consumption started to decrease. In addition, the Ifo Business Climate Index, which includes assessment of the outlook, deteriorated significantly.

NIEs and ASEAN economies, especially the economies of Taiwan, Singapore, and Malaysia, continued to deteriorate substantially due to a decline in their exports. In Korea, active public investment and steady growth in private consumption underpinned the economy. As for China, although exports were slowing, the economy continued to maintain high growth reflecting strong domestic demand supported by an increase in fiscal spending and a high level of direct investment from abroad.

D. Economic and Financial Developments in Japan

1. Economic developments

Economic indicators released in the intermeeting period did not offer enough grounds for changing the judgment on the economy: "Adjustments in economic activity are becoming more severe, as the substantial decline in production is beginning to have an adverse effect on private consumption through decreases in employment and income."

With regard to final demand, exports and imports were generally on a downtrend, although they increased marginally in October due partly to the larger number of business days at customs clearance. Final demand for IT-related items remained weak, and DRAM (dynamic random access memory) spot prices started to fall from mid-November after a surge in the first half of the month. A private research institute's survey showed that worldwide sales of mobile phones in the July-September quarter of 2001 were below the level of the same quarter in the previous year, as in the previous quarter.

Some indicators were beginning to suggest that private consumption was gradually weakening. For example, sales of electrical appliances in October remained slightly weak mainly due to a drop in sales of personal computers, and sales at chain stores recorded fairly large declines owing partly to weather conditions.

Reflecting these developments in final demand, production continued to fall substantially, and the index of industrial production for October declined by 0.3 percent from the previous month. The ratio of inventories to shipments remained high, but inventories, particularly those of transport equipment and electrical machinery, declined for the second consecutive month. In the Indices of Tertiary Industry Activity, indices, especially those of communications, transport (particularly freight transport), and wholesale trade, were declining, and this suggested that downward pressures from economic adjustment were spreading to nonmanufacturing industries, which had been showing relatively stable developments compared with manufacturing industries.

As for prices, the corporate service price index continued to decline in October. A comparison with three months earlier showed that prices for communications had stopped falling and the rate of decline for leasing was mostly unchanged. On the other hand, against the background of sluggish demand, there were noticeable price declines in advertising services and in general services, such as transportation and temporary worker services.

2. Financial environment

There were few new indicators released since the previous meeting.

The monetary base for November was expected to grow at the same high rate of around 14-15 percent as in September and October due to the continued high growth, around 8 percent, of banknotes in circulation and the substantial increase in the outstanding balance of current accounts at the Bank. The high growth of banknotes reflected the fact that a large amount of maturing postal savings stayed in the form of cash, and as a new phenomenon, financial institutions started to increase their cash holdings.

With regard to firms' fund-raising, the average contracted interest rates on new short- and long-term loans and discounts for September declined from the previous month, marking a new low. Interest rates on short-term loans and discounts in particular fell substantially. This seemed to reflect banks' efforts to increase lending by setting low interest rates toward end-September to achieve the targets laid down in their plans to restore sound management. In this situation, various diffusion indexes indicated that small firms' financial position and banks' lending attitude as perceived by such firms were gradually becoming tighter.

The number of corporate bankruptcies rose significantly to 1,843 cases in October from the previous level of about 1,500 cases per month until September, and this was the fourth highest level. In detail, the share of small firms in the total number of bankruptcies increased, and bankruptcies related to the termination of special guarantee systems for the financial stabilization of small and medium-sized enterprises increased to 549 cases from 402 cases in the previous month. In November, four listed companies had filed for bankruptcy in a single month, and attention should be paid to this development.

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

A. Current Economic Situation

Regarding the current economic situation, given that not so many new economic indicators were released in the intermeeting period, most members shared the view that there was no need to change the judgment on the economy: "Adjustments in economic activity are becoming more severe, as the substantial decline in production is beginning to have an adverse effect on private consumption through decreases in employment and income." A few members said that the ongoing economic adjustment appeared to be spreading to private consumption to a greater extent than before, but this did not necessitate a change in the overall judgment, and they would like to review the judgment after examining the statistics to be released in the first half of December, such as the Financial Statements Statistics of Corporations by Industry, Quarterly, GDP data, and the December 2001 Tankan (Short-Term Economic Survey of Enterprises in Japan), and developments in relation to the second supplementary budget for the current fiscal year and the budget for fiscal 2002.

One member expressed a more pessimistic view than other members that the Japanese economy was in the early stages of a deflationary spiral.

As for the economic outlook, members shared the view that adjustments in economic activity, starting from the decline in exports since the beginning of the year, would surely dampen domestic demand further. One member said that the unemployment rate would increase to around 7-8 percent in the future.

Regarding overseas economic developments, which were an important factor for Japan's economic outlook, many members pointed out that a mildly optimistic view of the U.S. economic outlook was becoming prevalent in the U.S. stock and bond markets. One member remarked that given the Christmas sales forecast and the decline in initial claims for unemployment insurance, the U.S. economy might not fall as sharply as had been anticipated. However, many members considered that the outlook for the U.S. economy continued to be subject to high uncertainty because (1) the markets' optimistic view of the U.S. economy was not well grounded, being partly based on progress in the situation in Afghanistan; and (2) the recovery in some indicators of private consumption was merely a rebound following the sharp plunge after the terrorist attacks, and this should be taken into account in evaluating the recovery of these indicators.

A few members said that a recovery of the U.S. economy would only be a moderate one, and a "V-shaped" recovery could not be expected. One of these members said that a recovery in overseas economies as assumed in the standard scenario of the "Outlook and Risk Assessment of the Economy and Prices" of October 2001 was becoming unlikely. The reasons were as follows: (1) it would take time to adjust excessive investment in IT-related and communications sectors; (2) layoffs were being postponed, and employment adjustment was expected to continue even after the ongoing intensive adjustment of the October-December quarter; (3) a disinflationary trend worldwide was likely to cause a paradigm shift in consumption in the U.S. household sector; and (4) in relation to the states' budgets, which accounted for two-thirds of the total fiscal spending, 28 states were planning to reduce and/or were actually reducing the spending initially planned in their budgets, based on the balanced budget doctrine.

Aside from the U.S. economy, one member commented that the economic deceleration in Europe was becoming clear especially in Germany, and a simultaneous slowdown of economies worldwide was becoming more evident. A different member pointed out that the current account surpluses of Asian economies were decreasing rapidly due to the bursting of the IT bubble, and they were facing difficulty in raising funds smoothly in international capital markets.

As for price developments in Japan, some members expressed the view that, as economic adjustment intensified, careful monitoring would be required of the possibility that Japan's economy could fall into a deflationary spiral, a vicious cycle of continuous price falls and economic contraction. Attention should also be paid to the stability of the financial system in addition to developments in corporate profits, private consumption, and employment and income conditions.

Against this view, one member said that Japan's economy was already in the early stages of a deflationary spiral, and that the pace of decline in prices would accelerate in 2002 because the deterioration in corporate profits and employees' income would start to have a substantial impact on consumption.

One member said that crude oil prices failed to stop declining due to lack of coordination between OPEC and non-OPEC member countries. In the medium to long term, crude oil prices would depend on how the situation in the Middle East would develop and the outcome of coordination between the United States and Russia concerning the crude oil production of the Caspian Sea.

B. Financial Developments

Members noted the following financial developments in the intermeeting period: (1) an increase in the amount of nonperforming-loan (NPL) disposal by major banks at the interim book closings; (2) a recent increase in the number of bankruptcies; and (3) heightened concern about credit risk due mainly to the failure of a nonlife insurance company and the failure of merger negotiations involving a major U.S. energy company.

Most members welcomed the increase in NPL disposal by major banks at the interim book closings as a concrete move toward resolving the NPL problem but considered the conditions surrounding the problem remained severe. One member said that even though each bank had taken drastic action to dispose of NPLs, it was insufficient to stabilize the markets. Another member said that some banks would have to strengthen their capital bases from the viewpoint of enhancing their financial strength, and if these banks could not strengthen their capital bases by themselves, public funds injection would have to be considered. The member said that this observation was made against the background of further progress in NPL disposal and the recorded losses of stocks due to the introduction of mark-to-market accounting, in the situation where some banks were beginning to transfer funds from legal reserves since their earned surplus was exhausted. Many members raised the following as future risks requiring attention: (1) an increase in the number of corporate bankruptcies due to NPL disposal; and (2) instability of the financial system and associated credit contraction before the termination of measures to fully protect bank deposits in case of bank failures.

Members exchanged views on the effects of the progress in NPL disposal and structural reforms on the conduct of monetary policy. Many members concurred that as financial institutions' NPL disposal and structural reforms progressed, it was highly probable that financial institutions' lending attitude would tighten, and lending spreads would widen, causing a decline in bank lending outstanding and an increase in the number of corporate bankruptcies. One member said that progress was finally being made in full-scale downsizing of excessive assets, and NPL disposal and structural reforms would continue over the next few years. A different member commented that, due to the over-lending situation in Japan, a decline in bank lending outstanding was inevitable even if new demand for loans emerged.

A few members expressed the opinion that as long as these conditions persisted, the effects of the Bank's monetary policy on the economy were unlikely to materialize clearly, and there would continue to be a problem that positive effects of the increase in the outstanding balance of current accounts at the Bank would not spread outside the financial system.

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

Members discussed the monetary policy stance for the immediate future.

Most members agreed that (1) there were no new factors to change the Bank's assessment of the economy at the previous meeting; and (2) given that liquidity demand had continued to be volatile in the money market, the Bank should provide ample liquidity to the market in a timely manner while maintaining the current guideline for money market operations, which did not set an upper limit to the outstanding balance of current accounts at the Bank.

Many members noted as the background to the unstable liquidity demand the excess reserve holdings of foreign banks and the waning incentive to lend in the market due to the substantial lowering of interest rates. Many members shared the view that demand for funds was likely to increase further toward the year-end, but it was difficult to predict whether such an increase in demand would continue after the turn of the year as it would also be affected by various developments in the financial system. These members pointed to the importance of maintaining the current accommodative market conditions by meeting the unstable liquidity demand.

Members discussed how much monetary easing effect could be anticipated as a result of providing ample liquidity on the current scale.

A few members remarked that the effects were still being examined, but it was fairly difficult to find any positive impact so far. These members said that the recent sharp fall in Japanese banks' investment in foreign bonds after a temporary increase mainly reflected their view of the U.S. yield curve, and that it was difficult to interpret such movements as being caused by the rebalancing of their portfolios as a result of quantitative easing. One of these members pointed out a dramatic drop in the number of market participants calling for a further increase in the outstanding balance of current accounts at the Bank.

In response to this, one member said that the Bank should stick to the current monetary easing strategy of stabilizing the medium- to long-term interest rates at low levels and waiting for the effects of monetary easing to permeate into the markets through rebalancing of financial institutions' portfolios by providing liquidity in a determined manner with the outstanding balance of current accounts at the Bank as the target. This member said that the Bank should further discuss other policy options such as: (1) setting a specific target for the outstanding balance of current accounts and raising it; and (2) utilizing assets that had low substitutability for funds in current accounts at the Bank, for example, corporate bonds, CP, asset-backed securities, and foreign bonds. A different member noted that, as the Japanese economy was in the early stages of a deflationary spiral, the member would propose, as in the previous meeting, that the Bank should (1) introduce a price level target, (2) start to purchase foreign bonds to provide funds smoothly, and (3) adopt a guideline for money market operations aiming at an outstanding balance of current accounts at the Bank at around 10 trillion yen.

In response to a request from a member, the representative of the Ministry of Finance made the following remarks on purchases of foreign bonds by the Bank.

(1) Thorough discussion was necessary regarding purchases of foreign bonds by the Bank, including the interpretation of the provisions in the Bank of Japan Law.

(2) The Government would like to ask the Bank's Policy Board to discuss the possible effects of purchasing foreign bonds as well as the necessity of the Bank purchasing them when there could be alternative means of funds provision.

In response to this, one member said that the choice of the policy measures should be left to the Bank if the Government sought to overcome deflation through liquidity provision by the Bank. The representative of the Ministry of Finance responded that the comment made earlier was made with the intention of pointing out the need to examine the interpretation of the provisions relating to foreign exchange in the Bank of Japan Law, and not with the intention of discussing the appropriateness of individual policy measures.

In relation to overall economic policy, a few members commented on the draft of the Medium-Term Economic and Fiscal Perspectives, which was submitted to the Council on Economic and Fiscal Policy at its meeting held on November 27, 2001. One member said that it was stated in the draft that the objective would be to make the inflation rate positive in the period of intensive adjustments when the effects of economic and fiscal structural reforms and NPL disposal were expected to appear fully, but that downward pressure on prices was likely in this period. Therefore, if the highest priority was placed on resolutely implementing structural reforms, continuous price falls to a certain extent would have to be tolerated together with near-zero economic growth, and in the conduct of economic policy, most attention should be paid to avoiding a deflationary spiral rather than preventing continuous price falls.

A few other members remarked that it had to be borne in mind that structural reforms would logically be expected to have negative effects on the economic growth rate and prices in the short term.

Based on these discussions, one member said that given the uncertainty about the effects of structural reforms on the supply-demand balance, it was not appropriate to divide the roles of the Government and the Bank, with the former concentrating only on structural reforms and the latter being responsible for stopping deflation. Another member remarked that if the Government and the Bank formulated their policies in a coordinated manner during the period of intensive adjustments, they should attach more importance to preventing a deflationary spiral than to achieving a positive inflation rate.

IV. Remarks by Government Representatives

The representative from the Cabinet Office made the following remarks.

(1) Following the Prime Minister's instruction at an extraordinary Cabinet meeting on November 26 to draw up the Immediate Action Program for Structural Reform, the Government decided to compile the second supplementary budget for fiscal 2001. The program would contain projects that would revitalize the economy greatly, and they would be chosen from the solid policy framework's seven priority areas contributing to acceleration of structural reforms. As the issuance of JGBs would be limited to 30 trillion yen, interest-free loans totaling 2.5 trillion yen would be provided from the Government's cash holdings to finance the second supplementary budget so that the budget could have a medium-scale effect on the economy.

(2) Guidelines for formulating the fiscal 2002 budget would be discussed at the Council on Economic and Fiscal Policy on November 30 and then approved by the Cabinet in the following week, and the Government would also plan to formulate the Medium-Term Economic and Fiscal Perspectives in December 2001.

(3) In the Medium-Term Economic and Fiscal Perspectives, it was forecasted that the economic growth rate would be at very low levels of around zero percent on average, but would rise gradually during the period of intensive adjustments reflecting progress in structural reforms, and that as a result, the inflation rate would become positive from the latter half of this adjustment period. Thus, there would not be any inconsistency between developments in the economic growth rate and those in prices.

(4) The Council on Economic and Fiscal Policy had intensive discussions on deflation and the NPL problem at its meeting on November 20, and agreed that a comprehensive policy package to deal with deflation should be discussed. The Government would like to examine the policy options taking into account the technical discussions by experts. The Government would like to ask the Bank to understand the Government's efforts in formulating economic policies, and implement monetary policy in an appropriate and timely manner to stop deflation communicating closely with the Government.

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

(1) At the meeting of the Council on Economic and Fiscal Policy on November 20, it was decided that priority would be given in the conduct of the Government's economic policies to preventing continuous price falls, and the Government and the Bank would work together with firm determination to achieve this aim. The Government also decided to draw up the Immediate Action Program for Structural Reform and compile the second supplementary budget for fiscal 2001 to deal with the current severe economic situation.

(2) The Bank had continued to provide ample funds since the previous meeting with the result that the outstanding balance of current accounts at the Bank was generally at around 9 trillion yen. The increase in the outstanding balance of current accounts at the Bank was expected to support the economy through alleviation of the market's concerns, and therefore, the Government would like to ask the Bank to continue providing ample funds, giving due consideration to economic and financial developments.

(3) The consumer price index (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.

(4) 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.

(5) The effects of the Bank's conventional market operations using mainly short-term financial assets were limited as short-term interest rates were virtually zero, and the Government would like the Bank to discuss monetary policy that would be more effective in relation to the economy considering a wide variety of options, for example adoption of new measures for market operations in order to dispel deflationary concerns.

V. 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, proposed that the Bank should (1) introduce a price level target, (2) start purchasing foreign bonds in order to provide funds smoothly, and (3) raise the target for the outstanding balance of current accounts at the Bank to around 10 trillion yen.

This member gave the following reasons. First, the Bank should make clear to the public its strong determination to prevent price falls below the current level by setting a price level target and a specific time frame so that the Bank's policy would be clearly evaluated. Second, the economy was in the early stages of a deflationary spiral. At this point, by starting to purchase foreign bonds, the Bank should expand the range of assets it could purchase to include assets with low substitutability for funds in current accounts at the Bank with a view to improving its ability to provide liquidity. And third, with regard to the target for the outstanding balance of current accounts at the Bank, the Bank should provide funds aggressively so that they were not merely sufficient to accommodate liquidity demand but exceeded the level of demand. With regard to purchases of foreign bonds, this member commented that purchases of foreign bonds of around 200-300 billion yen per month on a regular basis could be easily distinguished from foreign exchange intervention, and that the U.S. authorities did not seem to oppose purchases of foreign bonds by the Bank.

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, seven against.

This member also proposed the following procedures for money market operations:

The Bank of Japan will start to purchase foreign bonds as soon as all arrangements are made. Foreign bonds will be purchased when judged necessary to increase the outstanding balance of current accounts at the Bank smoothly.

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

Further, this member 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.

The proposal was defeated with one vote in favor, seven 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. 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 should adopt a more drastic quantitative target given that Japan's economy was in the early stages of a deflationary spiral. Second, the policy directive proposed by the chairman allowed a wide range of interpretations and gave the staff too much discretion and authority. Third, the chairman's proposal merely dealt with the unstable liquidity demand and did not fully deal with the current severe economic situation. And fourth, the current guideline, which did not set a specific target for the outstanding balance of current accounts at the Bank, was virtually the same as an interest rate target policy and was not consistent with the framework for money market operations decided in March 2001.

VI. Approval of the Minutes of the Monetary Policy Meeting

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of October 29, 2001 for release on December 4, 2001.


Attachment

For immediate release

November 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.