Minutes of the Monetary Policy Meeting

on March 19 and 20, 2002
(English translation prepared by the Bank's staff based on the Japanese original)

May 7, 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 Tuesday, March 19, 2002, from 2:00 p.m. to 3:50 p.m., and on Wednesday, March 20, from 9:00 a.m. to 1:23 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. T. Taniguchi, Senior Vice Minister of Finance, Ministry of Finance²
Mr. H. Fujii, Deputy Vice Minister for Policy Planning and Coordination, Ministry of Finance³
Mr. H. Takenaka, Minister of State for Economic and Fiscal Policy, Cabinet Office⁴
Mr. Y. Kobayashi, Vice Minister for Economic and Fiscal Policy, Cabinet Office⁵

Reporting Staff
Mr. M. Matsushima, Executive Director⁶
Mr. M. Masubuchi, Executive Director
Mr. S. Nagata, Executive Director
Mr. M. Shirakawa, Advisor to the Governor, Policy Planning Office
Mr. T. Wada, Associate Director, Policy Planning Office⁷
Mr. M. Amamiya, Associate Director, Policy Planning Office
Mr. K. Yamamoto, Director, Financial Markets Department
Mr. H. Hayakawa, Director, Research and Statistics Department
Mr. K. Monma, Senior Manager, Research and Statistics Department
Mr. E. Hirano, Director, International Department

Secretariat of the Monetary Policy Meeting
Mr. Y. Hashimoto, 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. Umemori, Chief Manager, Planning Division 2, Policy Planning Office⁷
Mr. H. Yamaoka, 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 April 30, 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. Taniguchi was present on March 20.
3. Mr. Fujii was present on March 19.
4. Mr. Takenaka was present on March 20 from 10:55 a.m. to 12:20 p.m.
5. Mr. Kobayashi was present on March 19 for the whole of the session, and on March 20 from 9:00 a.m. to 10:42 a.m.
6. Mr. Matsushima was present on March 20 from 10:55 a.m. to 1:23 p.m.
7. Messrs. Wada and Umemori were present on March 20 from 9:00 a.m. to 9:11 a.m.

I. Summary of Staff Reports on Economic and Financial Developments⁸

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 February 28, 2002.⁹ The outstanding balance of current accounts at the Bank was at around 15 trillion yen toward the middle of March, but increased gradually thereafter reflecting the heightening demand for funds maturing beyond the fiscal year-end. Recently, the outstanding balance of current accounts was at around 17 trillion yen. As a result of these operations, the weighted average of the uncollateralized overnight call rate moved at 0.001-0.002 percent.

In addition, undersubscription, where bids fell short of the Bank's offers, continued to occur in most of the Bank's funds-supplying operations.

1. 8Reports were made based on information available at the time of the meeting.
2. 9The guideline was as follows:
   The Bank of Japan will conduct money market operations, aiming at the outstanding balance of the current accounts at the Bank at around 10 to 15 trillion yen.
   For the time being, to secure the financial market stability towards the end of a fiscal year, the Bank will provide more liquidity irrespective of the guideline above.

B. Recent Developments in Financial Markets

Confidence in the availability of funds became widespread among market participants in response to the Bank's decision at the previous meeting, and as a result, the money market was generally stable. In other financial markets, a rebound in stock prices triggered a rise in prices of Japanese government bonds (JGBs) and in the yen.

Interest rates on term instruments remained at extremely low levels. For example, yields on Treasury bills traded in the secondary market with maturity up to one year were at 0.001 percent. Euro-yen rates maturing beyond the fiscal year-end had strengthened slightly toward the end of February, but the uptrend was losing momentum because lenders in the markets had gradually started to become more willing to lend in response to the additional measures decided by the Bank.

Stock prices started to turn up due to the introduction of tighter regulations on short selling of stocks and the rise in U.S. stock prices, and they eventually recovered to the levels recorded in the summer of 2001 reflecting mounting expectations that the Japanese economy would hit bottom. A feature shown by a breakdown by type of investors was that foreign investors had become net buyers of Japanese stocks since around the end of February, and this might reflect the fact that foreign investors were starting to increase the weight of Japanese stocks in their portfolios instead of reducing it as they had been doing until recently.

The yen once appreciated to the 126-127 yen level against the U.S. dollar, a rise triggered by buybacks of Japanese stocks by foreign investors. However, the U.S. dollar was later bought back due to factors such as the gap between the market's view regarding economic conditions in Japan and that regarding conditions in the United States, and recently the yen was moving at around 131 yen against the U.S. dollar.

Yields on JGBs in the secondary market declined to the range of 1.4-1.5 percent from the range of 1.5-1.6 percent due to market participants' buybacks of JGBs reflecting expectations that Japanese banks' ability to take risks was recovering owing to the rebound in stock prices.

In spite of the rebound in stock prices, the yield differentials between corporate bonds and JGBs in the secondary market continued to be on a widening trend mainly in bonds issued by firms with low credit ratings, and this indicated the persistent cautiousness with regard to credit risk among market participants. Moreover, credit risk premiums on bonds issued by banks generally continued to be at high levels.

C. Overseas Economic and Financial Developments

Overseas, a recovery in the U.S. economy was coming into prospect, and gradual changes toward a recovery were being observed in economies in Europe and East Asia. Stock prices worldwide started to show an uptrend.

In the United States, there were signs indicating that the economy had hit bottom and was heading toward a recovery. In the household sector, automobile sales and housing investment remained firm. As for the corporate sector, inventory adjustment was nearing completion, and production increased from the previous month for the second consecutive month. Business fixed investment continued to be on a downtrend, but leading indicators were showing signs of improvement. With regard to employment conditions, adjustment pressures were weakening slightly as seen in the increase in nonfarm payroll employment for the first time in seven months and the decline in the unemployment rate.

Regarding the U.S. economic outlook, the pace and sustainability of an economic recovery would be the focus of attention. Many held the view that the pace of recovery in private consumption and business fixed investment would be moderate compared with past recovery phases. Moreover, the economy remained under structural adjustment pressures due partly to the accumulated current account deficits and the problem of excessive debts of households, and these risks continued to require monitoring.

In the U.S. financial markets, expectations for an economic recovery in the near future became prevalent, and long-term interest rates and stock prices started to rise from the end of February. Yields on U.S. federal funds futures factored in a raise of 25 basis points in the federal funds rate target in May or June 2002.

In Europe, economies on the whole had continued to decelerate due to a decline in exports and business fixed investment. However, there were signs that exports had stopped decreasing, for example, Germany's foreign orders continued to improve in volume. Furthermore, adjustment pressures on production were easing considerably as evident in the continuous improvement in the Purchasing Managers' Index (PMI) for the euro area manufacturing sector, mainly in new orders and output.

In East Asia, the decrease in exports and production was coming to a halt against the background of the substantial progress in adjustment in production and inventories of IT-related goods in the United States and elsewhere. Recently, the decline in domestic demand was also coming to a halt, and thus economies in the area appeared to have hit bottom. In Korea, the economy was being underpinned by the Government's effective economic and employment measures and the abatement of concern about the stability of the financial system, and thus the economy was starting to recover.

D. Economic and Financial Developments in Japan

1. Economic developments

Japan's economy still continued to deteriorate as a whole, as the severity of employment and income conditions was rather intensifying, although the downward pressure from exports and inventories was gradually abating.

The decline in exports had almost ceased given that inventory adjustment in IT-related goods worldwide had almost finished and overseas economies were showing signs of picking up. Furthermore, the recent firmness in automobile sales in the United States was a positive factor, because it had been anticipated that sales would decline in reaction to the upsurge due to sales incentive measures.

Inventory adjustment was progressing further in many industries including electronic parts. Against this background, the decline in production was moderating further.

Business fixed investment continued to decrease, and the downtrend was unlikely to come to an end for the time being. Among leading indicators, machinery orders had dropped significantly in the second half of 2001 and decreased again considerably in January 2002. With regard to corporate profits, many considered that they would fall sharply in fiscal 2001 but record a substantial increase in fiscal 2002.

Private consumption was holding up relatively well despite the weakness in income, and some sales indicators showed signs of firmness such as in passenger car sales. However, the severity of employment and income conditions was intensifying, and thus private consumption was likely to be lackluster.

The unemployment rate declined slightly, but this was merely due to the fall in the total labor force participation rate, and in fact, the number of those involuntarily unemployed was increasing considerably. Wages were falling faster, and winter bonuses had dropped sharply. The results of the spring wage negotiations were severe, and firms had successively reported no increase in wages. Against this background, compensation of employees was tending to decrease.

As for prices, the pace of decline in domestic wholesale prices was contracting somewhat against the background of the rise in import prices and the progress in inventory adjustment. Compared to three months earlier, prices of machinery continued to fall, but those of steel and construction materials had stopped declining and prices of nonferrous metals were rising. On the other hand, the consumer price index (CPI) continued to fall at a pace of a little less than 1 percent from the previous year. As for service prices, the effect of the downtrend in wages required monitoring.

2. Financial environment

The year-on-year rate of decline in bank lending slowed somewhat in February due partly to the fact that firms increased bank loans instead of, for example, issuing CP. As a trend, however, the pace of decline in bank lending seemed to be increasing gradually.

Regarding fund-raising through the markets, the year-on-year growth rate of the amount outstanding of CP issued continued to decline. Issuing conditions for CP with low credit ratings continued to be severe, as was evident in the fact that the weight of CP with A-2/P-2 or lower credit ratings in the total amount of CP issued was falling. The issuance of corporate bonds with low credit ratings was extremely small.

Thus, the year-on-year decrease in the total amount of funds raised by the private sector recorded the largest decline since 1997.

The year-on-year growth rate of the monetary base (currency in circulation plus current account balances at the Bank) had increased further in February due to the large increase in current account balances at the Bank in addition to the rise in the growth of banknotes. The latter was due partly to the fact that (1) the cost of holding cash declined against the background of extremely low interest rates, (2) many depositors were increasingly shifting their funds to safer financial assets in view of the removal of blanket deposit insurance, and (3) financial institutions further increased their cash on hand. In addition, the year-on-year growth rate of the money stock (M2+CDs) had increased slightly due to the shift of funds from investment trusts. In contrast, broadly-defined liquidity continued on a gentle downtrend.

Regarding fund-raising costs for firms, the long-term prime lending rate rose for the fourth consecutive month since December 2001. The average contracted interest rates on short- and long-term loans and discounts remained generally level.

Fund-raising conditions for firms with low creditworthiness, especially small firms, were gradually becoming severer, and therefore, future developments in corporate financing required careful monitoring.

II. Decisions concerning Amendments to Guidelines on Eligible Collateral

A. Staff Proposal

Following the decision made at the Monetary Policy Meeting on February 28, 2002, the Bank examined operational issues with a view to broadening the range of eligible collateral to include loans to the Deposit Insurance Corporation and those to the Government's Special Account for the Allotment of Local Allocation Tax and Local Transfer Tax. There was no problem with regard to the creditworthiness of these loans, and their marketability was ensured since the Deposit Insurance Corporation and the Ministry of Finance had decided to make these loans negotiable. It was therefore appropriate to amend the Guidelines on Eligible Collateral to accept these loans as eligible collateral.

B. Members' Discussion and Votes

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

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

A. Current Economic Situation and the Outlook

On the current state of Japan's economy, most members concurred that it was appropriate to revise the assessment of the economy at the previous meeting slightly upward, given that the downward pressure from exports and inventories was gradually abating against the background of an improvement in overseas economies. These members also shared the view that the economy still continued to deteriorate as a whole, partly because business fixed investment continued to decrease and the severity of employment and income conditions was intensifying.

As for the outlook for Japan's economy, a few members expressed the view that economic developments had been mostly in line with the standard scenario in the "Outlook and Risk Assessment of the Economy and Prices" released in October 2001, which forecasted that "Japan's economy will stop deteriorating towards the second half of fiscal 2002." Some members, however, commented that the economic outlook was still unclear given that the economic recovery depended largely on external demand and the momentum in domestic demand was still weak.

In response to the above views, one member said that the Bank should not revise its economic assessment upward at this stage because the U.S. economic outlook was highly uncertain, and furthermore, judging from the recent figures in the Indexes of Business Conditions, prospects for a full-fledged recovery of the overall economy remained unclear, although the inventory cycle showed signs of bottoming out.

Members first discussed overseas economic developments.

Many members expressed the view that it was increasingly being perceived that the U.S. economy had hit bottom given that inventory adjustment in IT-related goods was near completion and indicators related to private consumption were firm.

Views were also expressed, however, that there were still some uncertainties in the U.S. economic outlook. Some members gave the following reasons for this view. First, business fixed investment was not expected to recover in the near future. Second, the growth in consumption might not be sustainable because households still held excessive debts. Third, the outlook for employment conditions was uncertain. And fourth, the recovery of U.S. stock prices was insufficient, and there was a risk of them falling in the future.

A few members expressed the view that European and East Asian economies were showing signs of a recovery partly reflecting the recovery in the U.S. economy.

Members then discussed the current situation and the outlook for Japan's economy.

On the corporate sector, most members commented that (1) the decline in exports was coming to a halt following the improvement in overseas economies; (2) inventory adjustment, mainly in IT-related industries, was progressing further; and (3) reflecting these developments, the pace of decline in production was becoming moderate. One of these members pointed out that the deterioration in business sentiment was coming to a halt due partly to the recovery in stock prices, and business leaders were starting to perceive that the economy could be at a turning point.

A few members remarked that corporate profits could start to increase in fiscal 2002 on a year-on-year basis, particularly in manufacturing industries. Members then exchanged views on the relationship between corporate profits, wages, and business fixed investment.

A few members expressed the view that there was a possibility that an increase in corporate profits might not lead to an improvement in wages and consumption, judging from the previous recovery phase experienced during 1999 and 2000. These members remarked that this was because (1) downward pressure on wages remained strong given that the share of labor in income distribution had increased, and (2) firms increasingly placed importance on raising their return on assets (ROA).

Many members commented that business fixed investment continued to decrease. A few members said that an improvement in corporate profits would normally provide a basis for a recovery in business fixed investment, but in the current economic situation, investment could be directed abroad instead, and this possibility should be taken into account.

With regard to the household sector, many members attached importance to the fact that employment and income conditions were becoming severer. A few members expressed concern that negative developments in wages, such as the large decline in winter bonuses and the poor results for labor of the spring wage negotiations, would impair consumer confidence. A different member pointed out the risk that a decrease in wages would dampen consumption and push down prices, ultimately leading to a deflationary spiral. Some members said that wages would continue to deteriorate since their level was still high relative to labor productivity.

Members expressed the view that private consumption would remain weak reflecting such developments in employment and income conditions. One member said that consumption as a whole was within normal levels, although relatively weak, as consumption of services in areas such as telecommunications, food services, and travel was firm while consumption of goods was weak.

As for price developments, a few members remarked that the rate of decline in domestic wholesale prices contracted slightly reflecting the progress in inventory adjustment and the recovery in international commodity prices. One of these members said that some firms had adopted a business strategy giving priority to raising the prices of their products or services in line with industrial reorganization, and a breakdown by type of goods showed that the number of goods whose prices had stopped declining was gradually increasing.

As for consumer prices, some members expressed the view that monitoring was required of whether the decrease in wages would push down service prices. A few of these members pointed out that the pace of decline in consumer prices had not accelerated although the output gap was expanding. These members commented that a similar phenomenon had been observed in 1998 through early 1999, but some aspects of the relationship between the output gap, wages, and prices remained unclear.

One member expressed the view that crude oil prices were expected to continue rising gradually in the second half of 2002, and thus close attention should be paid to developments, including the effects of the situation in the Middle East.

Members discussed factors posing a risk to the economic outlook. A few members expressed the view that downside risks stemming from overseas economies had gradually decreased recently. However, many members including these members shared the view that attention should be paid to the risk that (1) the current state of the Japanese financial system would negatively affect corporate financing conditions and financial markets, and (2) employment and income conditions would deteriorate further.

A question was raised about how the relationship between the recent cyclical improvement of the economy and structural problems, such as the financial system problem, could be analyzed. Regarding this point, one member said that, bearing in mind the economic cycle during 1999 and 2000, a certain degree of economic growth could be brought about by cyclical momentum, but the sustainability and the pace of the growth would be affected by supply-side factors in the economy.

One member stressed that, from a medium- to long-term perspective, the economy would go through a severe phase for the next two years, but positive signs for the period after that were emerging. This member gave the reasons as follows: (1) the over-banking situation was expected to be resolved in about two years, taking the ratio of banks' lending outstanding to nominal GDP before the bubble as an indication of the appropriate level of their lending outstanding, and the disposal of nonperforming loans (NPLs) was expected to progress to some extent during the same period; (2) since autumn 2001, the monetary base had been increasing by over 15 percent year on year; and (3) stock prices seemed to have hit bottom recently after following a downtrend over the past twelve years.

B. Financial Developments

Many members judged that the money market had regained stability overall as concerns about the availability of liquidity toward the fiscal year-end had abated due partly to the measures decided at the previous meeting.

With regard to foreign exchange and capital markets, many members pointed out that a rebound in stock prices had triggered a rise in prices of JGBs and in the yen. One member presented two aspects regarding the rebound in stock prices: (1) the rebound would be temporary because it was due partly to the introduction of tighter regulations on short selling of stocks; and (2) the rebound directly reflected changes in the economic fundamentals, for example, the emergence of the prospect of production bottoming out. In the member's opinion, the latter might be reflected slightly more strongly in the rebound in stock prices. Another member said that based on a technical analysis, stock prices could have started to rise from the lowest levels. Against this view, a different member pointed to the risk that stock prices could start to decline again in the near future if the disposal of NPLs did not progress smoothly.

A few members said that cautiousness about credit risk was still strong in financial markets, although stock prices were rebounding. A different member expressed the view that the number of corporate bankruptcies was clearly on a rising trend as seen in the double-digit increase from the previous year in both January and February. Moreover, the member continued that the number of bankruptcies was increasing for firms that had used the special guarantee systems for the financial stabilization of small and medium-sized enterprises offered by credit guarantee corporations. In addition, this member referred to the risk of a possible rise in long-term interest rates given that the long-term rising trend in prices of JGBs seemed to have ended.

A few members commented on the current state of the financial system. One member expressed the view that credit spreads for bonds issued by banks remained high and therefore, the market continued to assess the condition of the financial system as severe. A different member expressed the opinion that, although the economy had started to improve, this improvement had scarcely affected heavily-indebted nonmanufacturers, and it would take time to reduce the burden of the banking sector.

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

Members discussed the monetary policy stance for the immediate future.

Most members agreed that against the background of an improvement in overseas economies, Japan's economy still continued to deteriorate as a whole, although the downward pressure from exports and inventories was gradually abating. Further, these members generally agreed that attention should be paid to developments in the financial system and in employment and income conditions for a while.

Based on the above assessment of the economic and financial situation, most members expressed the view that the Bank should maintain the current guideline for money market operations as it was essential to provide an ampler supply of funds toward the fiscal year-end and to make efforts to ensure that monetary easing effects permeated continuously. A few members stressed that it was extremely important that the Bank maintained financial market stability in view of the approaching removal of blanket deposit insurance in April 2002. These members continued that the Government and the private sector should press forward with structural reforms including decisive disposal of NPLs so that the Bank's provision of ample funds would be effective in revitalizing economic activity of firms and households.

Regarding the conduct of monetary policy and future developments in the outstanding balance of current accounts at the Bank, many members anticipated that liquidity demand in current accounts at the Bank was likely to increase further toward the fiscal year-end but developments thereafter were subject to uncertainty, and these members remarked that in conducting money market operations the Bank should carefully monitor developments in the market. One of these members said that the Bank should continue providing ample funds aiming as far as possible at the upper end of the range of "around 10 to 15 trillion yen" even in and after April 2002, and also examine if necessary the possibility of improving its means of funds provision and reviewing the range of eligible collateral.

One member pointed out that it was becoming difficult to gauge the degree of monetary easing from the amount of the outstanding balance of current accounts at the Bank in the situation where the liquidity demand in current accounts at the Bank was highly volatile reflecting precautionary demand. This member said that precautionary demand for liquidity could decrease in the future when concerns about the stability of the financial system subsided and expectations of an economic recovery strengthened, and if the growth rate of the outstanding balance of current accounts decreased due to this, the Bank should clearly convey its thinking to the public regarding the decrease to avoid possible misunderstanding that the Bank had started to tighten monetary policy.

Some members commented on the importance of NPL disposal and structural reforms. One member pointed out that the Bank had done its utmost through monetary policy, as was evident from the stability of short-term interest rates at extremely low levels and the growth of the monetary base by nearly 30 percent, but the current monetary policy had not solved the fundamental problems of Japan's economy. This member emphasized that the key to Japan's economy overcoming deflation would be immediate provision of a basis for stimulation of private demand by implementing drastic economic structural reforms and strengthening and stabilizing the financial system. As necessary concrete measures, some members referred to (1) tax reform to induce demand, (2) fiscal expenditure that would stimulate the supply side, and (3) measures to improve the productivity of public works.

In response to the above discussion, one member who took a more cautious view of the economy than other members said that more drastic measures should be taken in order to stop deflation, and the member proposed that the Bank should (1) introduce inflation targeting, (2) start purchasing foreign bonds, and (3) raise the target for the outstanding balance of current accounts at the Bank to around 20 trillion yen. This member stressed that the financial intermediary function would not work properly while the over-banking situation was being solved, and thus ampler provision of the monetary base was needed to improve the functioning of financial intermediaries. The member added that there was an argument supported by many people overseas, which the member considered correct, that deflation was a monetary phenomenon and the monetary base should be increased drastically.

On this point, one member, however, said that it should be noted that, despite the high growth in the monetary base, the money stock had not increased much, and banks' loan extension continued to decrease, and that some arguments overseas did not take account of this situation in Japan. Another member said that the ratio of the monetary base to nominal GDP in the past several years had been significantly higher than the past trend, but prices had been on a downtrend, and this showed that a simplistic monetarist view could not be applied to the present situation.

Regarding inflation targeting, one member said that it was not appropriate to introduce a numerical target with a specific time frame without having any concrete means to achieve the target, but it would be meaningful if the Bank shared a numerical target for prices with the Government in some way as a policy framework. In response to this, one member said that in setting a numerical target with the Government, the Government's policy commitment in achieving the target would be another important factor, but there could be a contradiction in the current deflationary situation between implementing fiscal consolidation and setting an inflation target.

V. Remarks by Government Representatives

The representative from the Cabinet Office made the following remarks.

(1) The Government released the "Emergency Countermeasures to Deflation" at the end of February 2002. The Government would like to express its appreciation of the Bank's decision to implement drastic measures at the Monetary Policy Meeting immediately after the release. Monetary policy measures could not be fully effective as long as the NPL problem remained, and therefore, the Government would take aggressive measures to solve the NPL problem thoroughly based on the results of special inspections.

(2) Progress in structural reforms in Japan was sometimes being criticized as being slow, but major reforms, such as those implemented by the Reagan administration and the Thatcher government, took several years to complete. The current administration had already decided on reforms, for example, reform of many special public corporations, in its first year in office, and thus the progress could not be called slow.

(3) From a long-term perspective, the Government would like the Bank to discuss some kind of new accord which would further the respect for both sides being independent while sharing the same aim.

(4) In its March issue of the Monthly Economic Report, the Government revised its assessment of the economy slightly upward, given the bottoming out of exports and industrial production and progress in inventory adjustment. This upturn of the economy was, however, merely cyclical, and it was extremely important to continue efforts to solve structural problems by, for example, implementing tax reform and deregulation.

(5)The Government would like the Bank to continue deliberating on drastic monetary policy measures and implementing them.

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

(1) Japan's economy continued to experience moderate deflation, and this had produced various kinds of negative effects on economic activity. The Government considered it essential to cooperate with the Bank in dealing with deflation comprehensively and continuously, and the Government would continue to do its utmost to press forward with structural reforms to achieve economic growth.

(2) The Government would like the Bank to give due consideration to developments in the economy and financial markets and to the stability of the financial system. From this viewpoint, the Government would like to ask the Bank to continue to do its utmost to deal promptly with developments in liquidity demand toward the end of the fiscal year so that there would not be anxiety in the market about the availability of liquidity. It was decided at this meeting to broaden the range of eligible collateral accepted by the Bank, and the Government hoped that the Bank would start accepting new eligible collateral as soon as possible.

(3) The downtrend in prices was unlikely to change, and the effects of the Bank's conventional market operations mainly using short-term Japanese government securities were limited. The Government would, therefore, like to ask the Bank to (a) stop the continuous price falls and stabilize prices by devising additional monetary policy measures, and (b) consider a variety of options and take drastic measures to prevent the economy from sliding into a deflationary spiral.

VI. Votes

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

One member, however, said that the member would like to propose that the Bank should (1) introduce inflation targeting, (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 20 trillion yen. The target under the current guideline for money market operations was, in the member's opinion, insufficient to deal with the current situation of the economy, which had deteriorated further. This member added that the Bank should also increase its outright purchases of JGBs from the current 1 trillion yen to 1.5 trillion yen per month.

This member gave the following reasons. First, it was important to indicate a specific numerical target for price stability and a specific time frame to achieve it, which would be easily understood by the public. Second, adoption of inflation targeting would be the most effective way for the Bank to coordinate with the Government. Third, the Bank should diversify its means of providing the monetary base, and purchases of a fixed amount of foreign bonds by the Bank on a regular basis would be distinct, legally speaking, from foreign exchange intervention by the Government. And fourth, strong support from the monetary side was essential in the course of resolving the over-banking situation.

In response to this, a different member asked the member who made the above proposals how it would be possible to assume, on one hand, a rise in the inflation rate and on the other, a resolution of the over-banking situation, or a reduction in bank credit, and a possible rise in long-term interest rates.

The member answered that (1) the time frame for inflation targeting was set in line with the period during which the over-banking situation was expected to be resolved, and (2) long-term interest rates would not surge, as the severe economic situation was expected to continue for some time.

As a result, the following proposals were submitted.

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

The Bank of Japan will (1) conduct money market operations, aiming at maintaining the average of the year-on-year CPI (excluding fresh food, on a nationwide basis) in the October-December quarter of 2003 at a target of 1.0-3.0 percent; and (2) start to purchase foreign bonds as soon as all arrangements are made. Foreign bonds will be purchased when it is judged necessary to increase the outstanding balance of current accounts at the Bank smoothly.

The proposal was defeated with one vote in favor, eight 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 20 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, eight against.

To reflect the majority view, the chairman formulated the following proposal.

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

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 1).

The Bank of Japan will conduct money market operations, aiming at the outstanding balance of the current accounts at the Bank at around 10 to 15 trillion yen.

For the time being, to secure the financial market stability towards the end of a fiscal year, the Bank will provide more liquidity irrespective of the guideline above.

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 should take more aggressive measures because employment and income conditions were deteriorating. Second, the Bank should pinpoint a specific target for the outstanding balance of current accounts at the Bank. And third, it was unclear whether the contingency clause in the guideline for money market operations implied further monetary easing by the Bank.

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

The Policy Board discussed "The Bank's View" of recent economic and financial developments, and put it to the vote. By majority vote, the Board decided to publish "The Bank's View" on March 22, 2002 in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background"). ¹⁰

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, it was too early to revise the Bank's assessment of the economy upward. Second, it should refer to the unemployment rate and developments in corporate bankruptcies. And third, the judgment that prices were expected to follow a "gradual" declining trend for the time being was not appropriate.

1. 10The original full text, in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on March 22, 2002 together with the English version of "The Bank's View." The English version of "The Background" was published on March 25, 2002.

VIII. Approval of the Minutes of the Monetary Policy Meeting

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of February 7 and 8, 2002 for release on March 26, 2002.

IX. Approval of the Scheduled Dates of the Monetary Policy Meetings in April-September 2002

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

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Attachment 1

For immediate release

March 20, 2002
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 conduct money market operations, aiming at the outstanding balance of the current accounts at the Bank at around 10 to 15 trillion yen.

For the time being, to secure the financial market stability towards the end of a fiscal year, the Bank will provide more liquidity irrespective of the guideline above.

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Attachment 2

For immediate release

March 20, 2002
Bank of Japan

Scheduled Dates of Monetary Policy Meetings in April-September 2002