Minutes of the Monetary Policy Meeting

on August 8 and 9, 2002
(English translation prepared by the Bank's staff based on the Japanese original)

September 24, 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, August 8, 2002, from 1:59 p.m. to 3:53 p.m., and on Friday, August 9, from 9:00 a.m. to 12:40 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. Y. Kobayashi, Vice Minister for Economic and Fiscal Policy, Cabinet Office

Reporting Staff
Mr. S. Nagata, Executive Director
Mr. E. Hirano, 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. A. Horii, 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. Shimizu, Senior Economist, Policy Planning Office

The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on September 17 and 18, 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 August 9.
Mr. Fujii was present on August 8.

I. Summary of Staff Reports on Economic and Financial Developments⁴

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 July 15 and 16, 2002.⁵ 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.

4Reports were made based on information available at the time of the meeting.
5The 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

In the money market, market participants were feeling even more strongly than before that there was abundant liquidity. As a result, yields on financing bills and treasury bills with up to one-year maturity were declining slightly, and three-month Euro-yen rates remained low and stable. Financial institutions gradually became more confident than before about the availability of funds, not only those maturing beyond the end of the first half of fiscal 2002 in September but also those maturing beyond the year-end. In this situation, bidding rates in the Bank's market operations were extremely low even when the Bank provided funds maturing beyond the year-end more than one month earlier than the previous year.

Developments in the Japanese capital market and the foreign exchange market continued to reflect market participants' nervousness about the fall in U.S. and European stock prices and about foreign investors' behavior. Japanese stock prices declined only slightly until the middle of July, even though U.S. and European stock prices continued to fall substantially. From late July, however, they declined at a faster pace as foreign investors repatriated their funds by selling Japanese stocks. The Nikkei 225 Stock Average was currently in the range of 9,500-10,000 yen. Reflecting these developments, the yen had depreciated to the 120-121 yen level against the U.S. dollar. Long-term interest rates moved around 1.3 percent in a wider range of fluctuation than before. The fluctuation was due to the downward and upward pressures stemming from the following two factors. First, some market participants expected that the commitment effect in terms of the duration of the Bank's policy would be strengthened by the fall in stock prices. And second, there was persistent anxiety among other market participants about the possibility that banks and investors would sell Japanese government bonds (JGBs) to take their profit.

Credit spreads, the yield differentials between corporate bonds or bank bonds and JGBs in the secondary market, were virtually unchanged despite the fall in stock prices.

C. Overseas Economic and Financial Developments

The U.S. economy continued to be on a recovery trend, but at the same time, there were an increasing number of indicators showing that the recovery was weak. Private consumption seemed to have been firm on the whole, judging from various sales statistics up to July. However, consumer confidence indexes deteriorated in July due to the effects of the fall in U.S. stock prices. As for the corporate sector, production was on an uptrend and corporate profits seemed to continue improving. Business sentiment, however, seemed to have worsened to some extent, judging from the decline in indexes compiled by the Institute for Supply Management (ISM) for both the manufacturing and nonmanufacturing sectors in July. With regard to employment, private nonfarm payroll employment increased only slightly in July. The real GDP growth rate for the April-June quarter, which had been released recently, was at an annualized rate of 1.1 percent, lower than the market's expectation of 2.3 percent, and significantly below the previous quarter's 5.0 percent.

In U.S. financial markets, market participants had become more cautious in their assessment of the present pace of economic recovery. As a result, stock prices remained weak and long-term interest rates were on a declining trend. Developments in U.S. federal funds futures indicated that the market expected the target for the federal funds rate to be reduced toward the end of the year. Market participants had become more risk averse, and as a result credit spreads of corporate bonds had widened. Against this background, issuance of corporate bonds decreased significantly in July with the revelation of accounting fraud at some companies.

In the euro area, the economy as a whole had bottomed out, since production was recovering due to an increase in exports. However, domestic demand components such as private consumption and business fixed investment continued to be weak. In Germany, the recent Ifo Business Climate Index showed that confidence in the current and future business situation had weakened. Market expectations that the key interest rates of the European Central Bank (ECB) would be raised had subsided considerably, and the majority of market participants considered that the ECB would leave its monetary policy unchanged at least until the end of 2002, judging from developments in the three-month EURIBOR futures.

NIEs and ASEAN economies remained on a recovery trend. Private consumption and business fixed investment started to recover, as exports continued to increase. There were, however, signs of slowdown in the pace of the increase in exports, since restocking of IT-related goods worldwide was near completion. In Taiwan and Singapore, the production level seemed to be decreasing. In China, on the other hand, economic growth remained high due to an uptrend in exports, in addition to an increase in fiscal spending and strong domestic demand.

Financial markets in emerging economies, particularly in Argentina, Brazil, and Uruguay, showed heightened instability, as overseas investors became more risk averse against the background of the fall in stock prices in Europe and the United States. However, those markets, particularly in Brazil and Uruguay, had stabilized somewhat very recently, reflecting movement toward extending international financial support to these two countries.

D. Economic and Financial Developments in Japan

1. Economic developments

Public investment was decreasing. The value of public works contracted for the April-June quarter decreased by 0.6 percent from the previous quarter. The effects of the implementation of the second supplementary budget for fiscal 2001 on the total value of public works contracted, including those ordered by local governments, seemed to have come to an end for the most part.

Exports increased further in the April-June quarter, by 7.8 percent quarter on quarter after the 4.7 percent rise in the January-March quarter. The increase was conspicuous in exports to East Asia and in those of IT-related goods. Regarding exports to East Asia, intermediate goods and also capital goods and parts were increasing steadily, in addition to IT-related goods, due to firm domestic demand in countries such as China and South Korea. Exports of IT-related goods, which increased substantially in the April-June quarter, were likely to continue rising in the July-September quarter. However, uncertainty regarding developments in such exports in and after autumn was heightening gradually, with an increasing number of people taking a cautious view of the outlook for final demand for personal computers and cellular phones.

Business fixed investment continued to decrease, but the pace of decline had been moderating. Some leading indicators of business fixed investment, such as machinery orders in the manufacturing sector, seemed to have stopped declining. As for corporate profits, the results of various surveys as of July suggested that large firms continued to expect an increase in their profits, and there were clearer signs that a decrease in small firms' profits was coming to a halt.

Private consumption remained weak on the whole. The indexes of aggregated sales had barely increased year on year up to July. Sales of passenger cars recovered in the April-June quarter but decreased in July. Indexes relating to consumer sentiment remained at low levels, but the sentiment was generally recovering against the background of a marginal improvement in the employment situation.

Reflecting these developments in demand components, industrial production increased further in the April-June quarter, by 3.6 percent quarter on quarter, following the 0.7 percent increase of the January-March quarter after four consecutive quarter-on-quarter decreases. The survey of production forecasts in the manufacturing sector suggested relatively high growth for July and August. However, according to anecdotal information, firms seemed to be slightly more cautious about the outlook for production than the survey suggested.

The employment and income situation, particularly in the manufacturing sector, continued to improve marginally with an increase in overtime hours worked and in new job offers for part-time workers. However, the overall situation remained severe because household income continued to decrease markedly. Summer bonuses, according to data already available for those paid in June, were likely to decrease substantially, by as much as last winter's bonuses.

Import prices declined considerably in July compared with those of a year ago and three months ago, due to price developments in international commodities such as nonferrous metals and the depreciation of the U.S. dollar against the yen since April 2002. In this situation, domestic wholesale prices (adjusted to exclude the effects of seasonal changes in electricity rates) declined by 0.2 percent in July from the previous month, even though prices of some items, such as steel, rose due to an improvement in the supply-demand balance. The background to the decline in domestic wholesale prices as a whole was the fading of the effects of the rise in crude oil prices until early spring and the developments in the foreign exchange market. Consumer prices continued to decline by slightly less than 1 percent year on year.

2. Financial environment

With regard to corporate finance, private banks remained cautious in extending loans to firms with high credit risks, while they continued to be more active in extending loans to blue-chip companies. The Bank's Senior Loan Officer Opinion Survey on Bank Lending Practices at Large Japanese Banks, released in July, suggested that banks maintained the stance of increasing interest rate margins. On the other hand, regarding terms and conditions of loans to firms other than lending rates, such as credit lines and credit risk assessment, some banks moderated the severity of their stance to some extent. The improvement in issuance conditions for CP and corporate bonds from April to June 2002 was coming to a halt in July, particularly for CP and corporate bonds with low credit ratings.

Credit demand in the private sector continued to follow a downtrend mainly because firms were decreasing their business fixed investment while they continued to reduce their debts. According to data regarding credit aggregates, banks' lending continued to decline by 2-3 percent year on year, and growth in corporate bonds and CP issued was slowing. Firms as a whole continued to perceive their funding situation as severe, but the deterioration had come to a halt due to an improvement in business conditions.

The monetary base continued to increase by 20-30 percent from the previous year in July. However, the year-on-year growth rate for July was less than that for the previous month, because of the high growth in demand from post offices for banknotes in preparation for expected massive withdrawals of cash from postal savings due to mature in the same month of the previous year.

The year-on-year growth rate of the money stock (M2+CDs) remained around 3.5 percent, and that of broadly-defined liquidity continued to be around 1.5 percent. A breakdown of the growth in broadly-defined liquidity showed that there was a marked increase in the growth rate of deposit money, or liquid deposits, until March against the background of the approaching partial removal of blanket deposit insurance in April 2002. Since April, the increase in the growth rate of deposit money had been coming to a halt, and the contribution of other safe financial assets, such as Japanese government securities (JGSs) and postal savings, to the overall growth rate of broadly-defined liquidity was increasing to some extent.

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 persistent weakness in domestic demand and increasing uncertainty regarding the global economy, it had almost stabilized as a whole with exports and production continuing to increase. They agreed to maintain the economic assessment unchanged from the previous month.

As for the outlook, members concurred that the Bank's scenario for the economy remained unchanged: the stabilization of Japan's economy would become more definite as the increase in exports and production, through the improvement in corporate profits, would underpin domestic private demand. At the same time, members were aware that the economic outlook was becoming more uncertain to some extent, given developments in overseas economies, particularly in the United States, and developments in the Japanese stock market that reflected market participants' nervousness.

Regarding developments in the corporate sector, many members concurred that the recent increase in exports and production was greater than had been expected in July and earlier. A few members said that the uptrend of exports and production would continue for some time. These members, however, added that the pace of increase in production was likely to slow, given the subsiding effects of inventory restocking, particularly in IT-related goods, and the deceleration of overseas economies. One member noted that there seemed to be no change in the pattern that the recovery in production was led by exports, as seen in industries such as materials and automobiles. Another member pointed out that business sentiment seemed to have become cautious due to the heightening uncertainty of the economic outlook.

Many members expressed the view that corporate profits remained on an uptrend, particularly those of large firms, reflecting an uptrend in exports and production. A few members, however, expressed a cautious view on the outlook for corporate profits, pointing out the following factors: some firms' profits forecasted at the beginning of April 2002 had already been revised downward; and there might be a further appreciation of the yen, which would have a negative impact on corporate profits. Most members agreed that business fixed investment had not yet stopped decreasing, although some leading indicators showed positive signs, for example, the downtrend in machinery orders in the manufacturing sector was coming to a halt.

As for the household sector, a few members pointed out that the supply-demand balance in the labor market was improving marginally, as was evident in an increase in overtime hours worked and in new job offers, against the background of the rise in exports and production. Most members, however, considered that the employment and income situation as a whole remained severe, with a faster pace of decline in the number of regular employees and a significant decrease in summer bonuses. Most members agreed that private consumption remained somewhat weak as a whole, judging from various sales indicators, although it was holding up relatively well considering the severity of the income situation.

Regarding prices, on the whole, there was no major change. A few members noted that domestic wholesale prices (adjusted to exclude the effects of seasonal changes in electricity rates), which had been level since the beginning of 2002, were starting to soften again. One member said that price raising seemed not to have permeated throughout the materials industry as expected, although manufacturers in the industry were eager to raise prices in early spring. Members agreed that consumer prices remained on a moderate downtrend at a pace of slightly less than 1 percent year on year. In relation to the downtrend in consumer prices, one member said that attention should be paid to the possible effects of the remuneration recommendation by the National Personnel Authority, which suggested a reduction in civil servants' salaries for the first time in history. A different member pointed out that, in food services and personal computers, there was currently a tendency toward a resurgence of a low-price strategy, which had been considered to be disappearing for the time being. This member added that these developments might reflect weakness in private consumption.

Based on the above discussion, members agreed that developments in the economy and prices remained within the range of the standard scenario in the "Outlook and Risk Assessment of the Economy and Prices" released in April 2002. At the same time, members were aware that the economic outlook was becoming more uncertain. All members concurred that this was because international capital markets, such as the stock market, continued to show unstable developments, and this was increasing uncertainty about the recovery of overseas economies, especially that of the United States, at a time when the recovery of Japan's economy still relied heavily on exports. Many members also referred to developments in Japanese stock prices, which were approaching a record low since the collapse of the bubble economy, and their effects on the Japanese financial environment.

Most members commented on the U.S. economy that the scenario of a gradual economic recovery remained unchanged, since private consumption, which had been the driving force of economic recovery, still remained firm. Members generally agreed, however, that economic recovery might be weaker than had been expected. A few members, on the other hand, said that the degree of weakness of the economic recovery was not clear yet, and therefore, it was not necessary to be too pessimistic about the U.S. economy.

Many members raised the following points as grounds for their cautious view of the U.S. economy. First, stock prices had been unstable. And second, weaker-than-expected economic indicators, such as the GDP growth rate for the April-June quarter, and employment statistics and indicators of business confidence in July, had been released one after another. A few members pointed out that an increasing number of market participants took a pessimistic view of the U.S. economy, including a concern about a possible double dip, and there were mounting expectations that the Federal Open Market Committee (FOMC) would reduce its target for the federal funds rate by the end of 2002. Regarding U.S. private consumption, many members also took a cautious view of the outlook, although it remained firm so far. Some members pointed out the negative wealth effect due to the fall in stock prices, and the deterioration in consumer confidence. A few other members took a cautious view of the sustainability of private consumption, which had been underpinned by firm housing prices and expansion of households' liabilities for some years. A few members pointed out that the market was becoming more risk averse, as was evident from, for example, the widening of credit spreads. They added that it was necessary to bear in mind the possibility that deterioration in the financial environment might place downside pressure on the economy.

Some members said that views of the U.S. economic outlook could differ significantly depending on how the background to the recent fall in U.S. stock prices and its macroeconomic implications were interpreted, and it was difficult to make such an assessment at present. One of these members said that the fall in U.S. stock prices was a downward revision of the overoptimistic expectations for the growth of the U.S. economy in the medium to long term. This member continued that this view was supported by the fact that the economic growth rates, corporate profits, and labor productivity of the past few years were revised downward with the recent retroactive revision of GDP statistics. Therefore, the possibility that the U.S. economy would undergo further adjustments could not be ruled out. At the same time, this member expressed the view that although the momentum for economic recovery might be weak, the economy was unlikely to slide into a double dip. This was because a virtuous circle was operating in the corporate sector, judging from the steady decline in labor costs and improvement in corporate profits, and there was room for further decline in both short- and long-term interest rates. A different member said that, as the U.S. government had taken drastic measures to dispel skepticism about firms' accounting, the U.S. economy could recover its credibility in the near future, although it was premature to make a judgment.

Members agreed that a depreciation of the U.S. dollar against all major currencies had come to a halt since the previous meeting. A few members said, however, that the possibility could not be ruled out that the depreciating trend of the U.S. dollar would intensify again, given the uncertainty about the U.S. economic outlook.

A few members pointed out that the outlook for European economies was becoming more uncertain as evident in the slowdown in growth in exports and production and a deterioration in consumer confidence. Some of these members pointed out that stock prices in Germany and France had fallen by around 30 percent since the start of the year, almost the same as the fall in the Nasdaq composite index, expressing concern about the negative effects on the financial markets and economies of these countries. A few members commented on Asian economies that domestic demand was firm particularly in China, South Korea, and Taiwan, and that this might offset negative effects of the deceleration of the U.S. and European economies on Japan's export conditions to some extent. Many members including these members agreed, however, that it was necessary to carefully monitor the outlook for Asian economies because it was uncertain to what extent domestic demand in these economies would remain firm if the deceleration of the U.S. and European economies intensified. A few members remarked that financial market developments related to emerging economies, such as those of Argentina, Brazil, and Turkey, were still cause for concern.

B. Financial Developments

Members' discussion centered on the following points. First, in line with the fall in stock prices in the United States and other countries, Japanese stock prices declined to close to the level recorded in February 2002, the lowest level reached since the bursting of the bubble. And second, the effects of the decline in Japanese stock prices on the financial environment could be a factor that would increase the uncertainty of Japan's economic outlook.

Most members agreed that there was no need to change the basic assessment of the overall financial environment: money market conditions remained extremely easy; the effects of easy money market conditions had not, however, fully permeated to corporate financing, and thus overall financing conditions, especially for small firms, remained severe, despite some signs of marginal improvement. In relation to the first point, a few members commented that market participants were recently feeling more strongly than before that there was abundant liquidity in the market, as was evident from the further fall in short-term interest rates and the decline in bidding rates and bid-to-cover ratios in the Bank's market operations. As for the second point, one member said that banks were trying to increase their interest margins on lending and this was making small firms' financing conditions more difficult.

Many members commented that the decline in stock prices could have negative effects on the financial environment, such as concern about the financial system, expansion of credit spreads, and cautiousness in the lending attitude of financial institutions. They said, however, that such negative effects had not materialized so far, and despite the fall in stock prices, there had been no heightening of concern about financial system stability, unlike in the period leading up to the end of March 2002. A few members cited the following points as the background to this. First, compared to the period leading up to the end of March, the economy had improved slightly and firms' sales and earnings were recovering. Second, in line with the passing of the effects of special inspections of financial institutions conducted until the end of March, market concern about possible bankruptcy of large firms had abated to some extent. And third, financial institutions' concern about the availability of liquidity was weakening because the rapid inflow of large amounts of funds to demand deposits had stopped.

Many members expressed the view that it was uncertain whether the current stable financial environment could be maintained if stock prices weakened further, because there remained many problems that needed to be resolved in the financial system. A few of these members pointed out the possibility that the decline in stock prices would cause banks to start reducing risk assets preemptively with a view to maintaining their current capital ratios and would also affect life insurance companies' risk-taking capacity. Some members commented on risks that could arise from the fact that the share of demand deposits in liabilities in financial institutions' balance sheets was increasing and that of JGSs purchased for investment purposes in assets was rising amid persistent market concern about fiscal discipline.

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 to underpin Japan's economic recovery, which had finally started. The Bank should continue its decisive monetary easing measures, even though market participants were feeling more strongly that money market conditions were recently extremely easy. This was because uncertainty about the economic outlook was growing slightly, although the Bank did not change the assessment of the current state of the economy from the previous meeting.

Many members commented on points to take into account in conducting market operations. Some members expressed the view that it was appropriate to continue aiming at the upper limit of the current target range for the outstanding balance of current accounts at the Bank of "around 10 to 15 trillion yen." One member said that it was essential that the Bank continue to provide ample liquidity to the money market to ensure its stability, given that funds transactions between banks were decreasing. A few members stressed that the Bank should provide liquidity in a flexible manner until the end of September in accordance with the contingency clause of the guideline for money market operations, if and when deemed necessary, given that the economic and financial situation was becoming slightly more uncertain. One member said that the Bank should continue utilizing market operations with relatively long maturity to reduce financial institutions' concern about the availability of liquidity to some degree, thereby creating conditions in which the financial intermediary function would operate smoothly. On the future conduct of monetary policy, a few members expressed the view that the Bank should start deliberating on possible additional measures in case further monetary easing became necessary. One member said that, so far, there was no immediate need for the Bank to consider ways to conduct market operations based on a particular risk scenario, and the Bank should watch economic developments at home and abroad closely.

Members discussed the Government's economic policies released recently as factors that would influence economic and financial developments and the Bank's conduct of monetary policy. A few members commented on the effects observed in the financial markets following the initiation of examination of measures to ensure the stability of the payment and settlement system. They pointed out that financial institutions were becoming more confident in their funding and were feeling more strongly than before that there was abundant liquidity in the money market. One member said that attention should be paid to the future course of discussions on this issue, the markets' reaction, and changes in the flow of funds because the effects on financial institutions' financing conditions would depend greatly on, for example, how the new scheme for ensuring the stability of the payment and settlement system turned out. Some members commented that it was important that financial institutions increase their credibility at home and abroad by tackling management tasks such as the disposal of nonperforming loans, since the Government's decision to examine measures would not fundamentally resolve the problems of the financial system.

One member commented on the Government's overall picture of the budget and the guidelines for budget requests for fiscal 2003. This member attached importance to the fact that, even at a time when Japan's fiscal condition was severe, the Government had noted that it would continue to endeavor to accelerate the pace of reform of the structure of government expenditure and had presented its policy regarding tax reductions that would help revitalize the economy. This member continued that monetary easing measures would be highly effective if such fiscal policy could stimulate economic activity in the private sector.

IV. Remarks by Government Representatives

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

(1) Movements of an incipient recovery could be seen in some areas of the Japanese economy. However, risk factors, such as concern about the U.S. economic slowdown, the worldwide decline in stock prices, and the depreciation of the U.S. dollar, were further increasing the uncertainty about the economic outlook.

(2) The Government would steadily advance various structural reforms in order to ensure self-sustained economic growth led by private demand. When formulating the fiscal 2003 budget, the Government would implement expenditure control and prioritize the "Four New Priority Areas" in the budget allocation from the viewpoint of budget consolidation. With regard to tax reform, the Government would establish a desirable tax system, which would contribute to revitalization of the economy and society. It would also deliberate on the implementation of a package of tax reforms including tax reductions, while maintaining fiscal soundness by realizing a neutral tax system over the course of several fiscal years.

(3) 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. Although movements of an incipient recovery could be seen in some areas of the economy, the prolonged deflation, though moderate, was having various negative effects on it. The Government would like the Bank to do its utmost as the central bank, sharing with the Government the view that overcoming deflation was the highest priority in Japan's economic policy over the next year or two in order to ensure self-sustained economic growth led by private demand.

(4) 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.

The representative from the Cabinet Office made the following remarks.

(1) The Government's assessment of the current state of the Japanese economy was as stated in the Monthly Economic Report released on August 8, 2002. The Government considered that developments in the economy would require closer monitoring than in the past, since there was increasing uncertainty surrounding the future of the world economy, and there were concerns over the downward pressure on the Japanese economy.

(2) The Government would, at an early stage, implement the "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2002" (hereafter the Basic Policies 2002). Based on the Basic Policies 2002, the Council on Economic and Fiscal Policy recently presented, for the first time, an overall picture of the budget for fiscal 2003. Regarding the formulation of the fiscal 2003 budget, the Government would accelerate reform of government expenditure, and would at the same time implement a full-scale and packaged tax reform aimed at revitalizing the economy. The Government and the Bank would cooperate continuously and implement powerful and comprehensive measures in order to overcome deflation.

(3) It was necessary to pay due attention to the unstable developments in financial markets as the uncertainty of the outlook for the world economy was increasing. The Government would therefore like the Bank to continue deliberating on monetary policy measures that were effective in overcoming deflation and implementing them.

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 August 12, 2002 in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background").⁶