Minutes of the Monetary Policy Meeting

on July 15 and 16, 2002
(English translation prepared by the Bank's staff based on the Japanese original)

August 14, 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 Monday, July 15, 2002, from 2:02 p.m. to 3:59 p.m., and on Tuesday, July 16, from 9:00 a.m. to 12:16 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. K. Ueda
Mr. T. Taya
Ms. M. Suda
Mr. S. Nakahara
Mr. H. Haru
Mr. T. Fukuma

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. S. Nagata, Executive Director
Mr. M. Shirakawa, Executive Director
Mr. H. Yamaguchi, Adviser to the Governor, Policy Planning Office
Mr. S. Kushida, Chief Manager, Planning Division I, 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. W. Takahashi, Associate Director, International Department

Secretariat of the Monetary Policy Meeting
Mr. Y. Hashimoto, Director, Secretariat of the Policy Board
Mr. Y. Nakayama, Adviser 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. Nagai, Senior Economist, Policy Planning Office

The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on August 8 and 9, 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.
Mr. Taniguchi was present on July 16.
Mr. Fujii was present on July 15.
Mr. Takenaka was present on July 16 from 10:32 a.m. to 11:41 a.m.
Mr. Kobayashi was present on July 15 for the whole of the session, and on July 16 from 9:00 a.m. to 10:30 a.m.

I. Summary of Staff Reports on Economic and Financial Developments⁶

A. Money Market Operations in the Intermeeting Period

Market operations in the intermeeting period were conducted in accordance with the guideline decided at the previous meeting on June 26, 2002.⁷ The Bank conducted market operations, aiming at an outstanding balance of current accounts at the Bank of around 15 trillion yen.

As a result, the weighted average of the uncollateralized overnight call rate was stable at 0.001-0.002 percent.

6Reports were made based on information available at the time of the meeting.
7The 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.
Should there be a risk of financial market instability, such as a surge in liquidity demand, the Bank will provide more liquidity irrespective of the guideline above.

B. Recent Developments in Financial Markets

Short-term interest rates continued to be stable in the intermeeting period. Recently, yields on three-month treasury bills (TBs) and financing bills (FBs) were declining slightly. Three-month Euro-yen rates continued to be at low levels but showed a slight seasonal increase reflecting the fact that market participants had started their funding for the period beyond the end of September, the time of firms' semiannual book closings.

Developments in the Japanese capital market and the foreign exchange market continued to reflect market participants' nervousness in response to unstable U.S. stock prices. Japanese stock prices fell temporarily in June in line with a decline in U.S. stock prices, but since the end of June they had remained generally firm compared to stock prices in the United States and Europe. In the foreign exchange market, the U.S. dollar continued to depreciate in response to the fall in U.S. stock prices. Long-term interest rates recently fell below 1.3 percent because banks and institutional investors became more eager to purchase Japanese government bonds (JGBs), especially when stock prices declined both at home and abroad.

As for credit spreads, the yield differentials between corporate bonds or bank bonds and JGBs in the secondary market, the downtrend which had continued since April came to a halt, and spreads between bank bonds and JGBs were expanding slightly. This was due to the fact that some institutional investors increased their profit-taking sales in response to the decline in stock prices in June.

C. Overseas Economic and Financial Developments

The U.S. economy continued to be on a recovery trend. Private consumption seemed to have been firm, as seen in the fact that retail sales statistics recovered in June, while on the other hand, the rate of growth in real private consumption was slightly slower in May compared to the previous month. As for the corporate sector, indexes compiled by the Institute for Supply Management (ISM) for June showed continued improvement in the manufacturing sector, particularly the new orders index, and thus production was projected to expand for the time being. There were some signs of an improvement in business fixed investment, for example nondefense capital goods orders, a leading indicator, seemed to be starting to increase. However, business fixed investment as a whole, including that in nonresidential structures, had not yet shown any clear indication of a recovery. With regard to employment, downward pressure was abating, as seen in the fact that private nonfarm payroll employment seemed to be starting to increase moderately.

In U.S. financial markets, stock prices continued to fall considerably due partly to skepticism about firms' accounting information and concern about the possibility of a recurrence of terrorist attacks. It was cause for concern that this could negatively affect household and business sentiment. Market expectations that the target for the federal funds rate would be raised in the near future were subsiding considerably, judging from, for example, developments in federal funds rate futures. Long-term interest rates were on a declining trend.

In the euro area, the economy as a whole seemed to have bottomed out. Domestic demand components such as private consumption and business fixed investment continued to be weak, but at the same time production was recovering due to an increase in exports. Regarding prices, the rate of increase in the Harmonised Index of Consumer Prices (HICP) remained stable. With regard to the outlook for prices, the appreciation of the euro could push down prices but there was concern that upward pressure on prices could intensify due to factors such as the agreements in negotiations on fairly large increases in wages in Germany.

In East Asian economies, particularly in economies with a high dependence on IT-related industries, exports to the United States and countries within the region continued to increase, and production also rose. Reflecting these developments, private consumption and business fixed investment were showing signs of a recovery.

Financial markets in emerging economies, particularly in Argentina, Brazil, and Turkey, experienced some instability as overseas investors became more risk averse against the background of the fall in stock prices in Europe and the United States.

D. Economic and Financial Developments in Japan

1. Economic developments

Exports increased further by 6.6 percent on a quarter-on-quarter basis in the April-May period from the January-March quarter of 2002. The increase was led by IT-related goods and also capital goods and parts. Imports were bottoming out due mainly to an increase in exports and production in the IT industry.

Regarding the situation concerning business fixed investment, corporate profits seemed to be recovering, particularly in the manufacturing sector, due to the increase in exports and production. Leading indicators of business fixed investment, such as machinery orders, seemed to have stopped declining, particularly in manufacturing, but firms remained cautious about increasing fixed investment, as reflected in their plans in the June Tankan (Short-Term Economic Survey of Enterprises in Japan).

Private consumption remained weak on the whole. However, as seen in a slight pick-up in the sales of passenger cars and electrical appliances and a moderate improvement in the business condition of retailers, private consumption seemed to be holding up relative to the weakness in household income. This might reflect the fact that consumer sentiment had improved somewhat from its worst.

Reflecting the above developments in demand, industrial production had picked up clearly. It had already increased slightly by 0.7 percent from the previous quarter in the January-March quarter of 2002 after declining for four consecutive quarters, and in the April-May period the quarter-on-quarter growth rate was fairly high at 3.0 percent. The growth rate of shipments was higher than that of production, and overall, inventory adjustment had been completed. However, the pace of the increase in exports and production was projected to slow because the effects of temporary factors, such as restocking of inventories abroad and spot exports due to the depreciation of the yen, were expected to fall off.

The rebound in production continued to have a positive influence on the employment and income situation, albeit marginally, with an increase in overtime hours worked and in new job offers for part-time workers. The ratio of job offers to applicants was also moving up gradually. In addition, the June Tankan indicated that excessiveness in the number of employees had receded somewhat. However, household income continued to decline significantly because the pace of decline in wages was accelerating moderately and the number of employees was decreasing.

With respect to prices, the month-on-month growth rate of domestic wholesale prices for each of the last five months had been either unchanged or slightly positive. Consumer prices remained on a gradual downtrend.

With regard to the outlook for prices, domestic wholesale prices had been level but were likely to soften again. This was because, although progress in inventory adjustment and a rise in capacity utilization rates would support prices, downward pressure on prices would gradually intensify given that international commodity prices had peaked out and the yen had recently appreciated. Consumer prices were expected to stay on a declining trend for the time being at the current gradual pace because both supply- and demand-side factors were likely to continue exerting downward pressure on consumer prices, and furthermore the pace of decline in wages was increasing moderately.

2. Financial environment

With regard to corporate finance, private banks' lending continued to decline by 2-3 percent on a year-on-year basis. The amount outstanding of corporate bonds and CP issued was above the previous year's level, but the year-on-year growth rate was slowing reflecting developments in credit demand. However, issuance conditions for corporate bonds and CP continued to improve, as evident in the fact that issuance of corporate bonds with single A ratings and CP with A-2/P-2 or lower credit ratings, which had been somewhat sluggish until recently, had started to increase.

The monetary base continued to increase substantially by 20-30 percent from the previous year's level in June, although the growth rate slowed slightly due partly to the fact that liquidity demand had abated after having increased against the background of the partial removal of blanket deposit insurance and a system failure of a major bank group.

The year-on-year growth rate of the money stock remained around 3.5 percent. In detail, M1 (cash currency plus deposit money) continued to mark high growth, but quasi-money such as time deposits remained on a downtrend. As for other financial assets, investment trusts continued to decrease while recently the growth rate of safe financial assets, such as Japanese government securities (JGSs), had increased further.

The average contracted interest rates on new loans and discounts remained stable, but financial institutions were gradually becoming eager to increase their interest margins. According to the June Tankan, firms' financial position and their perception of financial institutions' lending attitude had almost stopped deteriorating.

The number of corporate bankruptcies remained high in June, but was below the previous year's level after nine consecutive months of year-on-year increases.

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

A. Economic Developments

On the current state of Japan's economy, members concurred that despite continued weakness in domestic demand, the economy had almost stabilized as a whole with an increasing upward impetus from exports and production, and an improvement in corporate profits and business sentiment. They agreed to again revise the assessment of the economy slightly upward following the upward revision of the previous month.

Members agreed on this further upward revision of the economic assessment because there were clear signs that production was picking up due to the large increase in exports and the June Tankan showed improvement in corporate profits and firms' business sentiment. However, members considered that the upward revision should be small, partly because there were as yet no clear signs of an improvement in domestic demand components such as business fixed investment and private consumption.

As for the outlook, many members expected that the economy would show clearer signs of having stabilized. However, these members commented that it was necessary to continue to examine economic and financial developments closely given the fall in stock prices worldwide, particularly in the United States, and the depreciation of the U.S. dollar. They said that particular attention should be paid to Japan's exporting conditions which were becoming more uncertain, and to the risk that economic activity could be negatively affected if financial markets including the foreign exchange market became more unstable.

With regard to developments in the corporate sector, most members said that exports were increasing significantly, at a faster pace than expected, due to a recovery in overseas economies and the effects of restocking of IT-related goods abroad. Many members noted clearer signs that production was picking up due to the increase in exports and the completion of inventory adjustment. They also held the view that the pace of the increase in exports and production would gradually slow, given that the effects of restocking of inventories abroad were expected to fall off in the near future. One of these members referred to the fact that orders for IT-related parts were recently declining slightly, and explained that this was because firms were being cautious in their preparation for Christmas sales and not because they were holding excessive inventories.

Most members agreed that corporate profits seemed to be starting to recover, as evident in the increase in exports and production and the results of the June Tankan. One member expressed a cautious view that, although the June Tankan forecasted an increase in corporate profits in the future, there were no distinct signs that corporate profits of firms across the board were increasing at present, taking into account the situation of small firms and nonmanufacturing industries. A different member pointed out that the degree of recovery in corporate profits varied with the industry and from region to region, reflecting the fact that the economic recovery was being led by exports.

Many members said that firms were generally cautious about increasing business fixed investment according to statistics such as the June Tankan, although machinery orders were showing signs of bottoming out. One member said that business fixed investment of small firms and nonmanufacturers could not be expected to stop falling in the near future, given that the ongoing economic recovery was export-led.

Many members commented that firms' business sentiment was improving, as evident in the June Tankan. One member said that, although the results of the June Tankan were better than expected, some market participants had taken the results rather pessimistically because recently the yen's exchange rate against the U.S. dollar turned out to be higher than the expected exchange rate that firms used in their business plans. This member continued that the results of the June Tankan should have been interpreted more optimistically since the business condition of firms was improving over a wide range of industries and excessiveness in capital stock perceived by manufacturers had subsided considerably. A different member pointed out that there seemed to be a gap between firms' business condition as judged from macroeconomic indicators and as perceived by firms, and management was cautious about the outlook for their business condition. This member added that there was a widening gap in the perception of the economic situation between large and small firms as well as between firms in the Tokyo metropolitan area and in rural areas.

Members then discussed the household sector. Some members pointed out that the supply-demand balance in the labor market continued to improve marginally reflecting the increase in production, as was evident in an increase in overtime hours worked and new job offers. Many members, however, expressed the view that the employment and income situation of households overall remained severe, because some statistics showed that income conditions were weak and also firms were maintaining their stance on reducing personnel expenses.

Some members commented that, although sales were flat on balance according to various statistics, private consumption was holding up relatively well despite the deterioration in income. One member said that consumer sentiment was improving overall although it continued to show mixed developments, and therefore there was room to stimulate consumption by, for example, retailers' offer of a more diverse selection of goods to meet the needs of various consumers.

As for prices, many members expressed the view that domestic wholesale prices, which had been level since the beginning of 2002, were likely to soften again because the effects of the peaking out of crude oil prices and the appreciation of the yen since this spring would appear with a time lag. One member pointed out that, in domestic wholesale prices, prices of processing and assembling goods continued to decline while those of materials-related goods seemed to have stopped declining. Most members said that consumer prices were expected to stay on a declining trend for the time being at the current pace. Some members pointed out that recent developments in the prices of happo-shu (a type of low malt beer) and personal computers revealed a tendency toward a resurgence of a low price strategy, which had widely been abandoned.

Most members expressed the view that the above developments in the economy and prices remained within, and were very recently slightly above, the range of the standard scenario in the "Outlook and Risk Assessment of the Economy and Prices" released in April 2002. Members' discussion on risks for the near future centered on how the fall in stock prices particularly in the United States and the depreciation of the U.S. dollar would affect Japanese financial markets, as well as overseas economies including the United States, and international capital flows.

Regarding overseas economic developments, most members concurred that the U.S. economy basically remained on a moderate recovery trend.

In relation to this, many members commented on the implications of the significant fall in U.S. stock prices for further U.S. economic recovery in the future. One member said that attention needed to be paid to deterioration in indicators relating to consumer confidence, although the negative wealth effect stemming from the fall in U.S. stock prices had not restrained consumption much, partly because housing prices remained firm. A different member said that the recent fall in U.S. stock prices could be interpreted as reflecting the downward revision of the overoptimistic expectations for the growth of the U.S. economy in the medium to long term. This member explained that one of the factors behind the revision was the larger-than-expected fall in high-tech industries' investment, which had been excessive in the past four to five years. One member expressed the view that the fall in U.S. stock prices should be interpreted as due to the bursting of the bubble in stock prices in the telecommunications, media, and technology sectors, given that about 40 percent of the components of Standard & Poor's 500 Index stocks were rising, including ones related to consumer goods and materials, which tended to reflect the economic situation. This member continued that U.S. stock prices did not seem to be overvalued any longer judging from valuation indexes, but there would still be a risk of a further fall in stock prices unless skepticism about firms' accounting information was dispelled. A different member expressed the view that the weakness in U.S. stock prices was mainly attributable to investors' risk aversion due to skepticism about firms' accounting information and concern about the possibility of a recurrence of terrorist attacks, and thus U.S. stock prices would become steady as these factors dissipated.

One member said that skepticism about firms' accounting information and revisions to accounting systems were common phenomena at the end of an economic boom and were favorable in the medium to long term. This member expressed concern, however, that if many firms were forced to revise their past accounting information, this could dampen management's positive forward planning. A few members expressed concern about the risks that such skepticism could hinder the proper functioning of the mechanism of financing through the capital market, which played a central role in U.S. financial markets, and that a situation similar to a credit crunch could occur. In relation to this, a different member said that the credit ratings of many firms had been downgraded, and credit spreads were becoming more polarized between investment-grade bonds and speculative-grade bonds. This member continued that, judging from the steady issuance of corporate bonds in June, however, it had not reached the point where such developments would hamper the overall recovery of business fixed investment in the future.

Some members referred to the expansion of the U.S. fiscal deficit and pointed out the risk that a decrease in capital inflows to the United States might change the direction of international capital flows. One member said that the key to the U.S. economic outlook was whether labor productivity was actually increasing and whether the increase could be sustained, and if these points were confirmed, there would be little risk of selling of U.S. financial assets. A different member referred to a view that market participants worldwide had become more risk averse due to weak U.S. stock prices and the depreciation of the U.S. dollar, and in Europe, funds were flowing into the bond market from the stock market. In addition, a few members pointed out that developments in financial markets of emerging economies, such as Argentina, Brazil, and Turkey, were cause for concern.

Some members concurred that intra-regional trade in Asia had been expanding further in recent years, and therefore demand from these economies could be expected to buffer a decline in Japan's export demand even if the U.S. economic recovery turned out to be slower than expected. One of these members also pointed out that the increase in intra-regional trade in Asia including Japan reflected the expansion of production networks in the region in line with the building of plants of Japanese firms.

B. Financial Developments

Members' discussion centered on the possible effects of a fall in stock prices, particularly U.S. stock prices, and a depreciation of the U.S. dollar on Japanese financial markets. Many members agreed that Japanese financial markets were generally stable to date, since there were no signs that concern about credit risk and financial system stability would rekindle: for example, Japanese stock prices were relatively firm and issuance conditions for corporate bonds and CP continued to improve.

One member commented that the major development in the foreign exchange market in recent months should be regarded as the depreciation of the U.S. dollar against major currencies, but more recently developments could be better described as a slight appreciation of the yen, and thus its effects on corporate profits warranted attention. A different member said that, because the current recovery in production was driven by exports, it was vulnerable in that the risk that the yen would appreciate would be increased by the export-led recovery. Another member expressed the view that the yen's appreciation against the U.S. dollar was taken relatively calmly by market participants, and cited the following as the reasons. First, the prevailing view in the foreign exchange market was that the U.S. dollar would appreciate against the yen in the long term. Second, the yen had not appreciated much in terms of its real effective exchange rate. Third, exporting firms had mostly hedged against the risk in foreign exchange transactions. And fourth, it was the view of many market participants that the appreciation of the yen would not trigger a deterioration of the economy immediately. A different member pointed out that the yen had in fact depreciated against the euro and thus the effective exchange rate of the yen had not increased much, and therefore, no strong deflationary pressure on the economy had resulted to date from the developments in the foreign exchange market alone.

A few members expressed the view that foreign exchange intervention would be meaningful in dealing with the recent surge in the yen against the U.S. dollar if it was conducted effectively in a timely manner. In response to this, a few members said that foreign exchange intervention could be effective in changing the level of the exchange rate only when the rate was deemed to be excessively high or low. These members continued that there were limits to the extent to which foreign exchange intervention could change the recent trend of the U.S. dollar depreciating not only against the yen but also against other currencies.

One member commented that the fact that Japanese stock prices sometimes declined in tandem with and sometimes were relatively firm against U.S. stock prices implied that market participants were swinging between two views regarding the fall in U.S. stock prices. One was a view that the fall suggested a downward revision in market participants' perception of the fundamentals of the U.S. economy, and the other was that it was due to exceptional factors such as skepticism about firms' accounting information. A different member pointed out that a factor behind the relatively firm Japanese stock prices was a view that the U.S. economy might be paying for its quasi-bubble expansion in the second half of the 1990s. Another member said that, as the U.S. dollar weakened, it would not be surprising to see capital flow into the Japanese stock market from the U.S. stock market as long as international capital flows did not become sluggish due to a significant decline in market participants' risk-taking capacity.

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

On the monetary policy stance for the immediate future, all members expressed the view that it was appropriate to maintain the current guideline for money market operations and continue providing ample funds to the money market. This was because, although the assessment of the economy had been revised upward, uncertainty about the economic outlook was growing, and it was necessary to underpin it by continuing the Bank's decisive monetary easing measures in order to return it to a sustainable recovery path.

Regarding the level of the outstanding balance of current accounts at the Bank, some members commented that it was appropriate to continue aiming at the upper limit of the current target range of "around 10 to 15 trillion yen." One member pointed out that the bid-to-cover ratios in the Bank's market operations utilizing TBs and FBs were extremely high, while on the other hand bidding rates remained stable. The member commented that some market participants were hoping, in view of their asset-liability management (ALM) needs, that the Bank would increase the frequency of its market operations since market participants were becoming more dependent on them as transactions between participants in the money market were decreasing. A different member said that the nonperforming-loan problem was at the root of problems such as a decline in the function of the money market and the movements of funds in demand deposits, and therefore, it was necessary to maintain careful monitoring of developments in liquidity risk of financial institutions.

Many members agreed that the financial environment in Japan was relatively stable despite the fall in stock prices in the United States and the depreciation of the U.S. dollar. Having said this, many members commented that, since there was a risk that concern about the stability of the financial system and credit risk could rekindle, the Bank should not hesitate to implement the contingency clause in the guideline for money market operations if liquidity demand surged due to a heightening of such concern.

Some members commented on the removal of blanket deposit insurance for demand deposits, which would be one of the factors affecting liquidity demand in the future. They pointed out that the implications of the removal should be assessed from a broader point of view including the effect on the stability of the financial system. One member pointed out that the effects of the removal would be a problem not only for financial institutions whose customers withdrew their deposits, but also for those into which the funds flowed because it would greatly affect their ALM. Further, the member said that there was a possibility that the removal might cause a large amount of funds to shift from demand deposits to financial instruments such as JGSs and postal savings.

IV. Remarks by Government Representatives

The representative from the Cabinet Office made the following remarks.

(1) In the July issue of the Monthly Economic Report, the Government revised its economic assessment upward as follows: "While the economy continues to be in a difficult situation, movements of an incipient recovery can be seen in some areas." The outlook for the U.S. economy was an important risk factor in the near future, but the scenario of its recovery was unlikely to collapse as long as the uptrend in productivity continued. However, it was necessary to pay attention to continuing adjustments in U.S. asset markets and the effects of significant changes in the fiscal balance on the U.S. economy.

(2) Regarding Japan's fiscal policy, the national budget should be compiled taking into account developments in the investment-savings balance of the public sector.

(3) With regard to the financial system, the Financial Services Agency had been expected to compile a report with a view to strengthening the financial system, and recently the Roundtable Committee for the Minister of the Financial Services released "The Vision for the Future of the Financial System and Policy." Based on this report, the Government would hold comprehensive discussions on a wide range of issues, including that of the activities of government financial institutions.

(4) The Government would like the Bank to continue deliberating on monetary policy measures which were effective in overcoming deflation and implementing them.

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

(1) The Cabinet had recently approved the "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2002" (hereafter the Basic Policies 2002) to steadily advance structural reform and realize sustainable growth led by private demand. The Basic Policies 2002 would serve as the foundation for Japan's deflation countermeasures, and the Government would make efforts to examine which items in the Basic Policies 2002 could be selected for early implementation, and then realize them at the earliest possible date. In the Basic Policies 2002, the Government expressed its hope that the Bank would continue to conduct effective monetary policy to overcome deflation.

(2) The Government would like the Bank to deliberate further on various policy measures and to take drastic measures to overcome deflation in line with the Government's policies. The Bank's assessment of the economy at the meeting on July 15, 2002 was that Japan's economy had almost stabilized as a whole. As the representative of the Ministry of Finance had said at the previous meeting on June 26, monetary policy measures would be particularly effective in dispelling deflationary concern at this stage.

(3) With regard to the conduct of monetary policy, the Government would like the Bank to continue providing ample funds to the money market as it had done so far, and to give due consideration to developments in the economy and financial markets and conduct monetary policy in a flexible manner should there be a rapid surge in liquidity demand.

V. Votes

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

To reflect this 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).

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.

Should there be a risk of financial market instability, such as a surge in liquidity demand, 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. K. Ueda, Mr. T. Taya, Ms. M. Suda, Mr. S. Nakahara, Mr. H. Haru, and Mr. T. Fukuma.

Votes against the proposal: None.

VI. 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 unanimous vote, the Board decided to publish "The Bank's View" on July 17, 2002 in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background").⁸