Minutes of the Monetary Policy Meeting

on October 10 and 11, 2002
(English translation prepared by the Bank's staff based on the Japanese original)

November 22, 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, October 10, 2002, from 2:00 p.m. to 3:46 p.m., and on Friday, October 11, from 9:00 a.m. to 12:49 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 Board⁴
Mr. N. Ichikawa, Chief Manager, Press Division, Secretariat of the Policy Board⁵
Mr. H. Onobuchi, Manager, Secretariat of the Policy Board
Mr. K. Etoh, Senior Economist, Policy Planning Office
Mr. H. Yamaoka, Senior Economist, Policy Planning Office

The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on November 18 and 19, 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 October 11.
Mr. Fujii was present on October 10.
Mr. Nakayama was present on October 11.
Mr. Ichikawa was present on October 10.

I. Summary of Staff Reports on Economic and Financial Developments⁶

A. Money Market Operations in the Intermeeting Period

In the intermeeting period, the Bank conducted market operations in accordance with the guideline decided at the previous meeting on September 17 and 18, 2002.⁷ The Bank maintained the outstanding balance of current accounts at the Bank at around 15 trillion yen, except for September 30 and October 1. On these two days, the Bank conducted market operations so that the outstanding balance was higher than 15 trillion yen, in view of the increase in liquidity demand around the end of the first half of the fiscal year.

Stock prices continued to follow a downward trend, and money market participants were becoming nervous about developments in bank stock prices. Repo rates (the rate for lending/borrowing Japanese government securities [JGSs] against cash collateral) were rising, and bidding rates in the Bank's bill selling operations were increasing slightly. This had not, however, led to a rise in interest rates in general nor caused the nervousness to spread to financial markets overall.

The weighted average of the uncollateralized overnight call rate was generally 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

In the money market, participants were feeling strongly that there was abundant liquidity, reflecting ample liquidity provision by the Bank. Against this background, short-term interest rates generally remained low, although repo rates were rising.

Developments in financial markets in Japan continued to reflect market participants' nervousness about the fall in stock prices overseas and about speculation regarding the Government's measures for the resolution of the nonperforming-loan (NPL) problem.

Long-term interest rates surged temporarily following the release of the Bank's statement, "New Initiative toward Financial System Stability," on September 18, 2002 and the government auction of ten-year Japanese government bonds (JGBs) on September 20, 2002, where total bids fell short of the amount the Government offered. The rates, however, declined thereafter. Stock prices continued to decline due to market speculation regarding the Government's measures for the resolution of the NPL problem and to the fall in stock prices overseas.

Despite the decline in stock prices, the yield differentials between corporate bonds and JGBs in the secondary market remained virtually unchanged because regional financial institutions were willing to buy corporate bonds.

The yen weakened slightly against the U.S. dollar, as Japanese institutional investors purchased securities denominated in foreign currencies including the U.S. dollar.

C. Overseas Economic and Financial Developments

The U.S. economy stayed on a moderate recovery trend. Household spending remained firm on the whole with steady growth in sales of automobiles and housing investment. Turning to business fixed investment, equipment and software investment was increasing slightly, reflecting the continuing recovery in production. Consumer confidence and business sentiment, however, had weakened due to a further fall in stock prices and heightened uncertainty about geopolitical factors. Some areas of private consumption such as nondurable goods were sluggish.

In U.S. financial markets, long-term interest rates and stock prices were on a downward trend, reflecting the increasingly cautious views of market participants about the pace of economic recovery in the future. Such developments also seemed to reflect anxiety about the possibility of a recurrence of terrorist attacks and heightened uncertainty about geopolitical factors.

Developments in U.S. federal funds rate futures implied that an increasing number of market participants expected that the Federal Open Market Committee (FOMC) would reduce its target for the federal funds rate by 25 basis points by the end of 2002.

The economy had bottomed out in the euro area reflecting an increase in exports. However, it was not yet on a stable recovery path, since private consumption and business fixed investment remained sluggish.

In European financial markets, participants had become increasingly cautious about the economic outlook. Long-term interest rates were declining, and stock prices in major countries in Europe were at their lowest levels since 1996-97. Developments in three-month EURIBOR futures implied that the market had almost fully factored in a cut of 25 basis points in the key interest rates of the European Central Bank (ECB) until the end of 2002.

NIEs and ASEAN economies remained on a recovery trend with private consumption and business fixed investment starting to recover while exports, especially of IT-related goods, continued to increase.

Financial markets in emerging economies had become increasingly unstable due to growing concern about each country's political situation and uncertainty about geopolitical factors, as overseas investors became more risk averse with the fall in stock prices in Europe and the United States.

D. Economic and Financial Developments in Japan

1. Economic developments

Exports continued to increase, albeit at a slower pace. This uptrend was expected to continue for the time being as long as the moderate recovery in overseas economies continued into next year. However, the pace of the increase in exports would decelerate until around the year-end, as the effects of inventory restocking overseas, particularly in IT-related goods, dissipated. There was substantial uncertainty concerning developments in the U.S. economy, IT-related demand worldwide, and geopolitical factors. Also, stock prices in major countries remained unstable. Considering these developments, attention should be paid to the fact that there were risks to the scenario of a moderate recovery in overseas economies.

Production continued to increase in response to the developments in exports. The pace of the increase, however, was slowing gradually, like that of exports. This trend was likely to continue for some time.

Corporate profits were recovering against the background of the increase in exports and production. Business sentiment continued to improve as a whole. However, the pace of its improvement had become gradual due to substantial uncertainty of the global economy.

The decline in business fixed investment was coming to a halt. As for the outlook, if the recovery in corporate profits became more definite, it would gradually have a positive impact on business fixed investment. However, firms still maintained a cautious stance toward investment due to substantial uncertainty about the prospects for the economy. Therefore, a distinct recovery in business fixed investment would still require more time.

In the household sector, overtime hours worked continued to increase, and new job offers remained firm. However, the number of regular employees continued to decline, and household income continued to decrease noticeably.

In this situation, private consumption remained weak and was likely to be lackluster for some time.

Public investment was declining.

On the price front, import prices were bottoming out due to developments in prices of international commodities, such as crude oil. Meanwhile, domestic wholesale prices had weakened, reflecting the decrease in import prices to date. Consumer prices remained on a gradual downtrend.

With regard to the outlook, import prices were expected to start turning up. Domestic wholesale prices, on the other hand, were projected to remain weak for a while. Consumer prices were expected to stay on their current gradual declining trend for the time being, reflecting downward pressure stemming from the imbalance between supply and demand.

2. Financial environment

Banks' lending continued to decline by 2-3 percent year on year. The year-on-year increase in firms' financing through the corporate bond and CP markets was slowing. In this situation, the total amount of funds raised by the private sector continued to decline, at a somewhat faster pace than before, and credit demand in the private sector remained sluggish.

The year-on-year growth rate of the monetary base was still high at 21.4 percent in September, although it had slowed from the previous month. A breakdown indicated that the growth in banknotes remained high, whereas that of the outstanding balance of current accounts at the Bank showed a decline, reflecting the substantial increase in the outstanding balance in September 2001 following the terrorist attacks in the United States. The year-on-year growth rate of the money stock remained at 3-4 percent. The current levels of the monetary base and the money stock relative to nominal GDP were extremely high in historical terms.

The share of cash, deposits and savings, and JGSs was increasing in assets held by financial institutions, firms, and households. This showed these entities' strong preference for risk-free assets.

As for corporate financing conditions, credit spreads (the yield differentials between corporate bonds and JGBs) had contracted in the April-June quarter, but the pace of contraction decelerated somewhat in the July-September quarter. The diffusion indexes of corporate finance in the September Tankan (Short-Term Economic Survey of Enterprises in Japan) suggested the following developments: the financial position of firms had stopped tightening but was not easing further; interest rates on loans were on a slight upward trend; and the lending attitude of financial institutions as perceived by firms was becoming more severe, although only marginally.

Developments in the financial environment could be summarized as follows. Money market conditions continued to be extremely easy. The money stock and the monetary base maintained high growth rates relative to the level of economic activity. In corporate finance, the financing environment of firms with low credit risks remained accommodative, but investors' stance toward firms with high credit risks remained severe and banks' lending attitude toward them was becoming more cautious. Corporate financing conditions required close monitoring, including the effects of the fall in stock prices and of the possible acceleration of NPL reduction.

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

A. Economic Developments

Members generally agreed that there was no major change from the previous month in the state of Japan's economy. The pace of the increase in exports and production was slowing, but this had been more or less expected. The economy had stabilized as a whole with corporate profits recovering and the decline in business fixed investment coming to a halt. On the other hand, domestic demand remained sluggish and clear signs of a recovery had not been observed because the outlook for overseas economies was highly uncertain.

Many members commented on exports and production that the pace of the increase was slowing, even though the upward trend was being maintained. On this basis, they said that the pace of the increase in exports had been expected to decelerate in the second half of 2002, since the sharp increase in exports in the first half of 2002 was led by restocking of IT-related goods worldwide.

Many members pointed out the considerable uncertainty of the outlook for the environment for exports, including the global downward trend in stock prices and geopolitical factors, in addition to the uncertainty of future overseas economic developments including in the United States. One of these members said that the increase in exports to other Asian economies could decelerate significantly, given the state of worldwide demand for IT-related goods.

Members then discussed the outlook for overseas economies, especially that of the United States.

Many members commented on the U.S. economy that future downside risks were increasing, although the scenario of a gradual economic recovery remained valid.

One member said that the following were risks to U.S. household spending: the negative wealth effect stemming from the fall in U.S. stock prices and the resultant effect on consumer sentiment; and a delay in recovery in the employment situation. A different member pointed out that spending on nondurable goods was starting to show weak developments, although that on housing investment and durable goods, which was sensitive to interest rates, remained firm.

Another member said that the U.S. economy was unlikely to attain its potential growth rate for the October-December quarter, given that recovery in business fixed investment would be delayed and that there were signs of a deceleration in consumption. This member continued that, as a result, the output gap might widen, exerting downward pressure on developments in the employment situation and prices.

A different member noted the following risks. First, concern about the negative wealth effect and about a shortfall in reserves for pension benefits stemming from the fall in U.S. stock prices was increasing. Second, investors were becoming cautious about investing in stocks because they were distrustful of investment banks due to accounting scandals and because corporate reforms were incomplete. And third, tension in the financial system in European economies was intensifying due to excessive debts in the telecommunications sector and the associated NPL problem.

On this basis, some members expressed the view that overseas economic developments would continue to require careful monitoring, since the uncertainty of the overseas economic outlook was likely to heighten the uncertainty of the outlook for Japan's economic recovery in the current situation where the recovery in Japan's domestic demand was not distinct yet.

Many members commented on the corporate sector in Japan that business sentiment continued to improve, albeit at a moderate pace, and corporate profits were recovering, because exports and production remained on an upward trend. Some members noted, however, that firms were still unwilling to invest due to the uncertainty of the overseas economic outlook. Against this background, no recovery in business fixed investment could be observed, although corporate profits were already on an upward trend.

Members then discussed developments in the household sector.

Many members expressed the view that private consumption generally remained weak.

A few members commented that deterioration in various sales statistics for July was likely to prove to have been a temporary phenomenon, as sales statistics for August onward were generally recovering. At the same time, these members expressed the view that it was unlikely for the time being that private consumption would become the driving force of demand because firms were continuing their efforts to reduce personnel expenses and thus the income situation of households remained severe.

One member summed up the above discussion and commented as follows. First, a momentum for economic recovery was operating, but the channels were limited to those via the corporate sector, especially export-related manufacturers. And second, this mechanism was functioning under the heavy burden of the uncertainty of the environment for exports and firms' unwillingness to invest.

Members also discussed factors posing a risk to the economic outlook.

Many members said that downside risks stemming from deterioration in overseas economies particularly the U.S. economy and weak stock prices at home and abroad continued to require monitoring. Some members pointed out that there might be some signs of changes in the environment of the Japanese financial system, reflecting the mixed views on the possible acceleration of NPL reduction and the further postponement of the removal of blanket deposit insurance.

Members discussed the effects of these changes in the environment of the financial system, particularly an acceleration of NPL reduction, on the economy in the future.

Some members said that it was difficult to forecast at present the pace of NPL reduction in the future, because it depended heavily on banks' stance and the Government's policy on the NPL problem. Based on this, these members continued as follows. First, NPL reduction would increase the productivity of the economy in the medium to long term by redistributing resources effectively. Second, however, the reduction was likely to dampen demand and the level of employment in the short term. And third, on the financial front, NPL reduction would improve the environment for banks to increase lending in the medium to long term, but on the other hand, it might push down the volume of banks' lending through write-offs or cause a rise in lending spreads in the short term.

One member said that if the NPL problem were resolved by simply recording losses that had already emerged, this would not necessarily have negative effects on the economy. This member added, however, that in fact NPL reduction could negatively affect the economy in the short term through the following mechanism. First, it might become clear that the appropriate level of loan-loss provisions was larger than the banks' previous estimates. Second, corporate failures would negatively affect employment and demand. And third, firms that had been valued at their going concern value might be measured at a lower liquidation value in the process of NPL reduction.

One member added that there were various downside risks to the economy, and fiscal policy could not be expected to support demand for the time being, as national and local public investment would continue to be reduced.

B. Financial Developments

Many members said that concern about the availability of funds in the money market had almost been dispelled due to ample liquidity provision by the Bank, despite the fall in Japanese and overseas stock prices and growing speculation about an acceleration of NPL reduction.

These members noted, however, that the possible effects of unstable stock price movements and of any changes in the environment of the Japanese financial system required careful monitoring.

As factors behind the fall in Japanese stock prices, a few members pointed to the following. First, the fall in stock prices overseas and the increasing uncertainty of the outlook for overseas economies behind that fall. And second, concern about the possible negative impact of an acceleration of NPL reduction in the short term.

Many members warned that the fall in Japanese and overseas stock prices, together with concern about a possible short-term negative impact of an acceleration of NPL reduction on the economy, was likely to exert downward pressure on firms' financing.

A few members said that there were already some signs of tightening in corporate financing in Japan and overseas. One of these members pointed out that banks seemed to have been taking a more cautious lending stance since the end of September 2002 due to speculation about an acceleration of NPL reduction. Another member said that financing from public financial institutions and credit guarantees by public entities might be necessary, given that the financing situation of small firms was becoming more severe.

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

On the monetary policy stance for the immediate future, members agreed that the Bank should maintain the current guideline for money market operations and continue providing ample funds. They agreed based on the following view held by most members. First, the economy had stabilized as a whole, and there had been no significant change in the economic situation since the previous month. And second, the sense of abundance of liquidity had permeated throughout the money market given the Bank's ample provision of funds, and the anxiety about the availability of funds among market participants had been dispelled despite the fall in stock prices.

Some members pointed out that the anxiety about the availability of funds among market participants had almost been dispelled despite the fall in stock prices, and this showed that the Bank's ample provision of funds had been effective as a means of dispelling it. These members noted, however, that there was still a possibility that the market might become unstable due to developments in the stock market. These members said that the Bank should therefore continue to pursue market stability, and when necessary, provide liquidity flexibly in accordance with the contingency clause of the guideline for money market operations.

One member said that there was a possibility that liquidity demand might have been changing slightly against the background of the fall in stock prices of some banks, and that the financial environment might be on the verge of a crisis.

A few other members said that risks to the corporate financing situation would require attention. Weak stock prices and speculation about an acceleration of NPL reduction might negatively affect the financing situation of firms, including financially sound firms, and might cause the overall corporate financing situation to tighten. These members added that the Bank should examine what measures could be taken from the monetary policy standpoint if these risks materialized.

Some members noted that speculation about an acceleration of NPL reduction seemed to have been heightening the anxiety of market participants and the public about the prospects for the economy.

One member said there had been no clear plan that the public and market participants could regard as sufficiently feasible and appropriate after the further postponement of the removal of blanket deposit insurance. Based on this assessment, this member said that it was essential to promptly produce a revised plan that was highly credible for the resolution of the NPL problem and revitalization of the financial system to dispel the public's anxiety about the prospects for the economy. Another member said that the ultimate goal of NPL reduction was to reconstruct and revitalize firms, rather than to bring about their liquidation, and added that concrete steps to achieve this goal had not been made clear to the public, and this was having negative effects on public sentiment.

A different member noted that the authorities should be very careful when they made comments about NPL reduction to the public to avoid fueling their anxiety.

Members discussed a wide range of policy issues connected with the resolution of the NPL problem.

One member explained that the pain arising from the resolution of the NPL problem was mainly short-term negative effects on demand and employment, and corporate failures and liquidation. Based on this explanation, this member said that it was difficult to alleviate such pain by merely providing liquidity, and thus the following policy actions were essential. First, some employment policy measures should be taken to facilitate reemployment, given the increased mobility of labor. Second, steps should be taken to revise laws and redesign systems in order to facilitate revitalization and/or reorganization of firms. And third, the conditions for direct financing that would support new investment projects and business ventures must be improved.

A different member agreed with the need for these policy actions and added that substantial support from fiscal policy would be necessary to buffer the short-term negative impact of NPL reduction on employment and demand, including expenditure on a safety net for the unemployed. A few members including this member said that the NPL problem should be resolved at an appropriate rate, taking into account the conduct of fiscal policy.

Members discussed issues concerning inflation targeting.

Some members said that it was not appropriate to adopt inflation targeting in the current economic situation, since there was a strong probability that the negative effects on the economy and the financial system, such as damage to the credibility of economic policy and to financial markets, would exceed the positive effects.

One member said that the expected advantage of inflation targeting, the enhancement of monetary policy transparency, could be obtained provided that there were sufficient and credible policy tools and transmission mechanisms to achieve the target. This member added that the current situation did not provide such a basis, as past experiences proved that prices continued to decline despite an expansion of money stock indicators under the Bank's quantitative easing. In addition, this member pointed out that adoption of inflation targeting in the current situation where various policy measures were to be taken to accelerate NPL reduction, which was likely to cause the GDP gap to expand in the short term, would make achieving a numerical target through an appropriate mechanism even less feasible.

Members who commented on inflation targeting expressed the view that if inflation targeting were to be adopted in the current economic situation, the mechanism to achieve the target would rely mostly on an upward shift in inflationary expectations, unless public expenditures were substantially increased. These members then said that it was theoretically not possible to shift inflationary expectations upward unless there were sufficient and credible policy tools and transmission mechanisms to achieve the target, and that setting a target in the absence of such tools and mechanisms would impair public confidence in economic policy as a whole. They continued that if inflationary expectations were to shift upward, it was the bond markets that would be most likely to be affected. One of these members added that advocates of inflation targeting were assuming it would bring about a rise in nominal long-term interest rates.

Based on the above discussion, these members said that if long-term interest rates rose before economic activity was sufficiently stimulated, this was likely to cause the economy to make a hard landing, the opposite result to an easing of the pain arising from NPL reduction. This was because a rise in long-term interest rates would substantially increase the interest burden on the Government and firms and would negatively affect the financial position of banks since they held a huge amount of JGBs.

One member commented on the above discussions as follows. First, the question of whether adoption of inflation targeting was appropriate in terms of securing monetary policy transparency should be discussed in depth and a conclusion reached. Second, the effects of a rise in long-term interest rates on banks' balance sheets should be examined carefully, as they might be smaller than expected. This was because banks had been controlling risks through asset-liability management (ALM), by hedging positions and shortening the duration of their investment portfolios. And third, a moderate rise in long-term interest rates might benefit banks in obtaining income gains.

A different member responded to this view and said that although a rise in long-term interest rates might push up banks' profits to some extent, it would at the same time increase firms' financing costs. It would thus cause the economy as a whole to make a hard landing. Another member said that if inflationary expectations were to shift upward in the bond markets, the resulting rise in long-term interest rates would be unlikely to be moderate, for example, less than 1 percentage point.

Some members commented on the relationship between the Bank's current monetary easing and inflation targeting.

These members were of the opinion that the Bank's current monetary easing was already aimed at incorporating the advantages of inflation targeting, given the monetary policy measures the Bank could adopt in the current situation.

One of these members said that the Bank had already adopted inflation targeting policy in a broad sense, in that it made a commitment to continue the quantitative easing measure until the consumer price index registered stably zero percent or an increase year on year. On this basis, this member pointed out that the difference between the Bank's current easing policy and inflation targeting in a strict sense was mainly whether the specific period within which the target was to be achieved was indicated. This member added that the latter policy would inevitably require extreme measures that would have serious risks or adverse effects.

Another member said that the Bank's current monetary easing measures with the commitment effect in terms of policy duration had reduced interest rates with relatively long maturity to the lowest possible level, which in turn supported the Government's funding. In this sense, the current policy was desirable in terms of harmonization with the Government's policy. This member said that it was difficult to understand why some Government officials advocated inflation targeting in the current situation despite the possibility that it would cause a rise in long-term interest rates and would increase the Government's interest payments. This member expressed a wish to hear the Government participants' opinion, if possible.

<2>IV. Remarks by Government Representatives

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

(1) The Bank had been providing ample liquidity to financial institutions, but this had not led to deflation being overcome and prices continued to fall. Given this situation, some were of the opinion that, to reduce deflationary pressure arising from the acceleration of NPL reduction, further monetary easing was necessary. Others were of the opinion that the Bank should discuss the possible adoption of a new monetary policy measure in a flexible manner. The Government and the Bank should reaffirm the view that overcoming deflation was the most important task for Japan's economic policy over the next year or two, and should cooperate with each other in order to ensure self-sustained economic growth led by private demand. The Government would like the Bank to consider implementing drastic and effective monetary policy measures, which might not be based on conventional thinking or frameworks, from the viewpoint of improving both the quality and quantity of liquidity provision.

(2) The Bank released the "New Initiative toward Financial System Stability" on September 18, 2002 and announced that it would consider the possibility of purchasing stocks held by banks. The Government expected that the Bank's stock purchasing plan would enhance the effectiveness of the current monetary easing measures through a recovery of the financial intermediary function, as well as advance structural reforms of the economy through unwinding of cross-shareholdings. The Government hoped that the Bank would discuss the plan, including its possible effects, from various perspectives in this Monetary Policy Meeting.

(3) With regard to the stock purchasing plan, the Government had been exchanging views with the Bank's staff, mainly on the following points: (a) consistency with the objectives of the Bank of Japan Law; (b) appropriate methods of purchasing, holding, and disposing of stocks; and (c) the soundness of the financial condition of the Bank. The Government acknowledged that the final draft of the proposed plan would be approved in another Policy Board meeting later in the day. Given this and based on the discussion so far, the Government would take action based on the proposed plan in a swift and appropriate manner, respecting the objectives of the Bank of Japan Law.

(4) With regard to inflation targeting, which was discussed earlier, the representative did not think it was appropriate to adopt it in the current situation, and this was the majority view in the Ministry of Finance. The Government would like the Bank, before discussing other measures, to consider purchasing a certain amount of JGBs outright over a set period of time, given the current situation where funds provided through the Bank's outright purchases of JGBs simply accumulated in current accounts at the Bank.

The representative from the Cabinet Office made the following remarks.

(1) The Government's assessment was that movements of a moderate incipient recovery continued to be observable in some areas of the economy, though the economic environment had become more severe. As for the short-term prospect, the economy was expected to move toward an incipient recovery. On the other hand, the economic environment had become more severe, as seen, for example, in concerns over the future of the U.S. and other economies and in the decline in domestic stock prices. In addition, concerns over downward pressure on final demand that might be exerted by these developments were deepening. Economic and financial developments would therefore require closer monitoring than in the past.

(2) The Government would compile comprehensive measures by around the end of October to reinforce policies that would accelerate structural reforms, including financial system reforms and tax reforms, because such measures were necessary for rapid implementation of the "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2002." The Government considered that the Government and the Bank should cooperate continuously and implement powerful and comprehensive measures in order to accelerate the resolution of the NPL problem and to overcome deflation, as the Prime Minister had given instructions that these issues should be given particular attention.

(3) The Government would therefore like the Bank to continue deliberating on monetary policy measures that were effective in overcoming deflation from a wide range of options including ones which might not be based on conventional frameworks, and implementing them. The representative would report to the Minister the question about inflation targeting put by a Policy Board member at this meeting.

Based on the above remarks, one Policy Board member commented that the simplest and most effective way of overcoming deflation was to improve the supply-demand balance by increasing aggregate demand. This member added that what concrete measures the Government took to increase such demand would be especially important.

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 October 15, 2002 in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background").⁸

8The original full text, in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on October 15, 2002 together with the English version of "The Bank's View." The English version of "The Background" was published on October 16, 2002.

Attachment

For immediate release

October 11, 2002
Bank of Japan

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