Minutes of the Monetary Policy Meeting

on October 30, 2002
(English translation prepared by the Bank's staff based on the Japanese original)

December 20, 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 Wednesday, October 30, 2002, from 9:00 a.m. to 2:33 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 Finance
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. T. Wada, Associate Director, 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. N. Yoshioka, Chief Manager, Planning Division II, Policy Planning Office²
Mr. K. Etoh, Senior Economist, Policy Planning Office
Mr. S. Nagai, Senior Economist, Policy Planning Office
Mr. M. Osawa, Chief Manager, Money and Capital Markets Division, Financial Markets Department²

The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on December 16 and 17, 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.
Messrs. Yoshioka and Osawa were present from 9:00 a.m. to 9:10 a.m.

I. Extension of Maturities for Bills Purchased in the Bank's Bill Purchasing Operations

A. Staff Proposal

With a view to further facilitating money market operations, the staff proposed that the Principal Terms and Conditions Pertaining to the Purchase of Bills and the rules for conducting the Bank's business be amended to extend maturities for bills purchased in bill purchasing operations from six months or less to a year or less effective from October 30, 2002.

B. Members' Discussion and Vote

Members voted unanimously to approve the proposal and decided to make the approval public.

II. Summary of Staff Reports on Economic and Financial Developments³

A. Money Market Operations in the Intermeeting Period

In the intermeeting period, the Bank conducted money market operations in accordance with the guideline decided at the previous meeting on October 10 and 11, 2002.⁴ The Bank maintained the outstanding balance of current accounts at the Bank at around 15 trillion yen by, for example, increasing both funds-supplying and funds-absorbing operations against the background of the increase in yields on financing bills (FBs) and treasury bills (TBs) and in repo rates as described below.

As a result, the weighted average of the uncollateralized overnight call rate was at 0.001-0.002 percent. Bid rates on both funds-supplying and funds-absorbing operations had increased slightly.

3Reports were made based on information available at the time of the meeting.
4The 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, interbank rates had been stable at low levels given the Bank's continued provision of ample liquidity. Meanwhile, yields on FBs and TBs and repo rates had risen slightly, reflecting the more cautious attitude of financial institutions toward investment in those instruments after the fall in bank stock prices. Euro-yen rate futures had risen marginally, as financial institutions' concerns about the availability of funds maturing beyond the fiscal year-end had increased.

Developments in the Japanese capital markets and foreign exchange markets continued to reflect market participants' nervousness with the Government's announcements about measures to accelerate nonperforming-loan (NPL) disposal and to overcome deflation imminent.

Specifically, stock prices increased temporarily due to a rebound in U.S. and European stock prices, but had fallen again thereafter reflecting the growing uncertainty about the Government's measures to accelerate NPL disposal. Developments in stock prices by industry showed conspicuous weakness in banking, retailing, and construction stocks. Long-term interest rates had very recently fallen to close to 1.03 percent, the most recent bottom marked in the middle of September. This was because banks and investors were willing to invest in Japanese government bonds (JGBs) in the face of limited investment opportunities, although there continued to be a high level of concern about a possible expansion of fiscal spending.

The yield differentials between private bonds and JGBs in the secondary market remained unchanged in general, but those for private bonds with BBB/Baa or lower ratings remained high.

The yen had fluctuated in the range of 123-126 yen against the U.S. dollar reflecting both upward and downward pressures: downward pressure stemming from market speculation about the Government's measures to accelerate NPL disposal and their effects on the Japanese economy; and upward pressure arising from concerns over the increasing uncertainty of the prospects for the U.S. economy.

C. Overseas Economic and Financial Developments

The U.S. economy stayed on a moderate recovery trend.

U.S. economic indicators for September such as those related to retail sales, housing starts, industrial production, and prices were released in the intermeeting period. These provided no grounds for significantly changing the assessment of the economy, but there were some signs of downside risks. Specifically, the growth of private consumption was generally sluggish, although housing starts and consumption of durable goods were firm given the low interest rate environment. Household sentiment continued to deteriorate, as evident in the Consumer Confidence Index for October, which was at its lowest level in nine years, and thus developments in private consumption required careful attention. New orders for nondefense capital goods in September showed a significant decline.

In U.S. financial markets, market participants remained generally cautious about the pace of economic recovery in the future. Stock prices had rebounded since the previous meeting, as investors' undue anxiety about corporate profits had subsided after the release of firms' business performance for the July-September quarter of 2002. Long-term interest rates rose temporarily, reflecting the rebound in stock prices, but had fallen again recently due to various weak economic indicators. Based on developments in U.S. federal funds rate futures, expectations that the Federal Open Market Committee (FOMC) would reduce its target for the federal funds rate, which had been subsiding due partly to the rebound in stock prices, were recently mounting again.

In the euro area, the economy had bottomed out reflecting an increase in exports. However, it was not yet on a stable recovery path, since private consumption and business fixed investment remained sluggish. The economic indicators released in the intermeeting period, including those related to exports and industrial production, showed that the slowdown in the growth of the economic components they represented was becoming distinct.

In European financial markets, participants remained generally cautious about the economic outlook, but stock prices were rebounding reflecting the developments in the U.S. stock markets. Developments in EURIBOR futures implied that market participants continued to expect a cut in the key interest rates of the European Central Bank (ECB).

NIEs and ASEAN economies remained on a recovery trend. However, recent statistics confirmed that the pace of the increase in exports and production was slowing somewhat in Taiwan and Singapore, as the restocking of inventories of IT-related goods worldwide had almost been completed.1

Regarding financial markets in emerging economies, stock prices increased and foreign exchange rates appreciated in many of them, including East Asian economies, reflecting the increase in stock prices in Europe and the United States. However, the terrorist attacks in Indonesia and the Philippines gave new cause for concern about financial markets, and market participants remained nervous due to political developments in Brazil and Turkey.

D. Economic and Financial Developments in Japan

1. Economic developments

It was becoming clear that growth in exports was slowing, as they showed an increase of only 0.6 percent quarter on quarter in the July-September quarter, and had in fact decreased from the previous month in September. By type of goods, the growth in IT-related exports decelerated clearly. Anecdotal evidence suggested that the prevailing view was that exports of other goods would remain firm for the time being, judging from the continued strength in overseas demand. However, the outlook for exports should be carefully monitored, given the slower growth in the July-September quarter.

Reflecting the above developments in exports, the pace of increase in industrial production was slowing. The pace of recovery in the Indices of All Industry Activity remained moderate, as the Indices of Tertiary Industry Activity remained unchanged on the whole.

Regarding the employment and income situation in the household sector, the unemployment rate for September remained unchanged. The pace of increase in new job offers, however, was slowing, reflecting the deceleration in the pace of increase in production. In the Monthly Labour Survey for August, nominal wages were revised slightly upward from the preliminary figures, but it was confirmed that the plunge in summer bonuses for June-August was greater than that of winter 2001.

In this situation, sales data related to private consumption dropped significantly in July, but recovered in August and remained virtually level in September. In the July-September quarter, they generally either remained unchanged or decreased slightly from the previous quarter. They reconfirmed the weak trend in private consumption, although it was holding up relatively well considering the weakness in household income. The Consumer Confidence Index for September improved marginally. A breakdown showed that items that had a strong influence on consumer sentiment, such as employment conditions and income growth, started to contribute negatively, and thus future developments should be carefully monitored.

On the price front, corporate service prices continued to decline from levels three months before and showed a year-on-year decrease of slightly more than 1 percent in September. Consumer prices continued to decline by slightly less than 1 percent year on year. The pace of year-on-year decline in the Consumer Price Index for Ku-area of Tokyo (23 wards) contracted slightly in October due to the reduction in the rate of decline in prices of goods. The breakdown of the index showed that the reduction in the rate of decline was conspicuous in clothes and food products.

2. Financial environment

The year-on-year growth rate of the monetary base in October was projected to be slightly less than 20 percent, a marginal slowdown from 21.4 percent in September. This was because the growth of the outstanding balance of current accounts at the Bank slowed, compared with that of October 2001 when the Bank increased its funds provision significantly following the terrorist attacks in the United States, although growth in banknotes, which made up most of the monetary base, remained high.

Regarding developments in corporate financing, there had been no major changes in credit spreads in the corporate bond and CP issuance markets since the previous meeting. However, issuance of corporate bonds, including those issued by firms with high credit ratings, remained sluggish.

The Bank's Senior Loan Officer Opinion Survey on Bank Lending Practices at Large Japanese Banks for October showed that firms' demand for loans as perceived by banks remained on a downtrend. As for the lending attitude of banks, banks continued to tighten terms and conditions of loans, such as the loan rates and premiums charged on riskier loans. Lending remained on a decreasing trend due mainly to the continued weakness in firms' demand for loans. It could also be said that banks' cautious lending attitude might be restraining firms' investment, encouraging debt repayment and thereby weakening demand for loans. The Quarterly Survey of Small Businesses in Japan conducted by the National Life Finance Corporation revealed that the financial position of small firms worsened somewhat in the July-September quarter.

With regard to corporate financing conditions, although selection of borrowers according to their creditworthiness continued, the degree of deterioration in financing conditions was limited compared with 1997-98 when there was widespread concern about the stability of the financial system. Developments in corporate financing conditions were, however, somewhat nervous, given the unstable stock prices and the increasing uncertainty about the economic outlook. In this situation, the Government was deliberating on measures to accelerate NPL disposal. Their effect on the financial environment would depend on the specifics of the measures, but selection of borrowers according to their creditworthiness could become stricter. The Government's plan in relation to the postponement of the removal of blanket deposit insurance, the treatment of deferred tax assets, the means of injecting public funds, and other institutional frameworks would be examined in the near future and could have significant effects on the entire financial environment. Future developments in corporate financing conditions would thus require closer monitoring.

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

A. Recent Economic and Financial Developments

Members generally agreed on the current state of Japan's economy as follows. First, the economy had stabilized as a whole, but clear signs of recovery had not yet been observed. Second, the uncertainty of Japan's economic outlook was increasing due partly to the uncertainty of the prospects for the global economy and the possible effects of an acceleration of NPL disposal.

Most members noted that economic indicators released in the intermeeting period showed that the slowdown in the pace of increase in exports and production was becoming more evident. One member said that closer monitoring would be required of whether exports were continuing to increase, even at a moderate pace. A different member said that production in some industries such as automobiles and steel was firm, but production as a whole showed mixed developments given the slowdown in the pace of increase in exports. A few members pointed out a possibility that Japan's economy was becoming more vulnerable to external shocks, given the slowing of the increase in exports and production and the weakness in the positive momentum in the economy.

Many members said that developments in overseas economies showed that the uncertainty of the environment for exports was increasing. Many members noted that U.S. stock prices were recovering in the intermeeting period, but some U.S. economic indicators, such as those relating to employment, consumer confidence, and capital goods orders, were weak. In addition, the Beige Book released by the Federal Reserve Board (FRB) in the intermeeting period showed that many Federal Reserve District Banks reported a slowdown or stagnation in the economic activity of their Districts. One member pointed out a weakness in domestic demand in the euro area and a slowdown in the pace of increase in exports in East Asian economies.

Regarding domestic demand, members agreed that private consumption continued to be somewhat weak, given the severe employment and income situation. One member commented that it could be said that private consumption was holding up relatively well considering the weakness in income, but it was necessary to pay close attention as to whether this situation would continue. A few members said that although the decline in business fixed investment was recently coming to a halt, business sentiment might deteriorate reflecting the Government's policy of accelerating NPL disposal and a heightening of uncertainty stemming from that policy, and this might accelerate firms' restructuring and make their stance on business fixed investment cautious. One member expressed concern about the economic outlook, saying that there was a possibility that a further slowdown in the growth of exports and production might cause Japan's economy to peak out before a recovery in domestic demand.

Regarding prices, members agreed that consumer prices remained on a gradual downtrend, and there had not been a significant change in the pace of decline.

Members noted that it was a crucial change in recent financial developments that market participants' cautiousness regarding credit risks was increasing somewhat, as seen in the fall in stock prices reflecting the uncertainty about the Government's measures to accelerate NPL disposal, and in the unstable developments in the money market.

Regarding the possible effects of the Government's measures to accelerate NPL disposal, most members expressed the view that the level of uncertainty of their effects was very high in the current situation where the specifics of the measures were not yet clear. These members said that this was because financial institutions' behavior could change significantly, depending on the extent of additional loan-loss provisions required of them and on the treatment of deferred tax assets as capital. Many members pointed out that, considering the uncertainty of the situation, there was a risk that financial institutions' lending attitude might become even more cautious in the future. Specifically, some members said that the extent and the pace of credit contraction would depend on the specific measures soon to be released by the Government, but some degree of credit contraction seemed inevitable in any case. A few other members expressed the view that financial institutions would have to manage their assets with a stronger awareness of their capital constraints. One member said that if major banks were to reduce their lending to local firms in regional areas reflecting the Government's measures to accelerate NPL disposal, there was a risk that regional financial institutions would not be able to extend sufficient loans to cover the decrease in major banks' lending, and expressed concern about the negative effects on small local firms.

In this situation, many members pointed out that the continued unstable stock price developments gave cause for concern. In addition, these members noted that demand for liquidity in the money market was increasing, as evident in the increase in yields on FBs and TBs and in repo rates. A few members explained the following as the main factors behind the increase in demand for liquidity. First, since the opportunity cost financial institutions incurred by holding funds in their current accounts at the Bank had become extremely low, they tended to hold back from investing their assets in reaction to even a slight increase in uncertainty. And second, market participants' view of financial institutions' soundness was becoming severer, as evident in the downtrend in bank stocks, with some price differentials between banks.

B. Outlook and Risk Assessment of the Economy and Prices

Members discussed the standard scenario for Japan's economy and prices in fiscal 2002 and fiscal 2003 and risk factors which might influence this scenario, given that the final text of the "Outlook and Risk Assessment of the Economy and Prices" (hereafter the Outlook Report) was to be decided for publication at this meeting.

Members generally agreed that the standard scenario for the economy would be as follows. Based on the assumption that a gradual recovery of overseas economies would continue, exports and production would remain on an uptrend during fiscal 2002 and fiscal 2003. In this situation, Japan's economy would start to recover in the first half of fiscal 2003, as business fixed investment would start to recover and private consumption would gradually gain more resilience. However, the expected recovery would be quite modest, as it would continue to be constrained by the persistence of excessive debts and employee numbers against the background of the weak growth prospects for Japan's economy.

Members agreed that prices would continue to decline gradually, as the output gap was not likely to narrow significantly in view of the above economic developments.

Members then discussed risk factors to the standard scenario. Many members expressed the view that the possibility that the standard scenario might not materialize as expected was higher than in the past, and the economic outlook was very uncertain. Members raised the following five risk factors. First, developments in overseas economies, especially that of the United States. Second, the strength of domestic private demand. Third, NPL disposal and its effects. Fourth, the impact of fiscal developments, including fiscal reform, on the economy. And fifth, financial market developments. Among the above risk factors, most members pointed to developments in overseas economies and the effects of NPL disposal as factors that were increasing the uncertainty about the economic outlook.

Most members acknowledged that one key to the realization of the standard scenario was whether overseas economies, especially the United States, would continue to recover even at a gradual pace, as the standard scenario in the Outlook Report was based on a recovery mechanism starting from external demand. Given that several U.S. economic indicators had recently been somewhat weak, members pointed out more downside than upside risks to the U.S. economy, such as an asset price decline, a deterioration in the confidence of the business and household sectors, and concerns about the widening of both the current account and fiscal deficits. In addition, members were aware that, if the U.S. economy slowed, European and East Asian economies were highly likely to slow as well. However, some members also referred to the possibility that the U.S. economy could turn out better than expected, pointing out the following. First, the firmness in automobile sales and housing investment might continue longer than expected if it was the result of a demographic factor. And second, if the recent rebound in stock prices was sustained, it would have positive effects on the economy. Some members pointed out the large event risk from geopolitical developments.

Regarding the effects of NPL disposal, members were strongly aware of downside risks to the economy, although the prospect was still unclear, as the specifics of the Government's measures to accelerate NPL disposal had not yet been released. Members noted that although the standard scenario in the Outlook Report factored in, to some extent, the lending attitude of financial institutions, which would continue to make efforts to set interest margins according to borrowers' creditworthiness, it did not factor in the possibility of a radical change in the lending attitude of financial institutions or a credit contraction like that of 1997-98. On these grounds, many members pointed out, as in the earlier discussions on the recent economic and financial developments, that there was a risk that financial institutions' lending attitude might become severer than expected, depending on the details of the Government's measures to accelerate NPL disposal. Some members commented that it was necessary to examine the effects of the following. First, measures had been implemented to establish proper safety nets, for example, provision of full protection of demand deposits and capital injection of public funds in case there was a financial crisis. And second, the Government was deliberating on measures to reinforce the safety nets for small and medium-sized enterprises and the unemployed, together with measures to accelerate NPL disposal. It was also noted that an acceleration of NPL disposal would have positive effects on the economy if it was accepted favorably by market participants, and it would also contribute to a revitalization of the economy through progress in structural reforms.

Members agreed that, given the high degree of uncertainty, such as that stemming from developments in overseas economies and the possible effects of NPL disposal, the strength of domestic private demand could vary significantly. In relation to this, some members pointed out risk factors, such as the increasing burden on households associated with social security reform, given the continued severe employment and income situation, and a possible withering of firms' willingness to invest due to the high degree of uncertainty. On this basis, a few members commented that the impact of fiscal developments, including fiscal reform, particularly whether built-in stabilizers of fiscal policy would function properly if the economy became weaker than expected, was important in view of the need to support domestic demand. In addition, members generally agreed that financial market developments, such as stock price developments at home and abroad and the international flow of funds, were key risk factors and would continue to require close monitoring, given the increasing uncertainty at home and abroad.

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

Based on the above discussion, members agreed on the following basic assessment. First, clear signs of an economic recovery had not yet been observed, and uncertainty about the economic outlook was greater than before, partly reflecting the uncertainty regarding future developments in the global economy and the possible effects of an acceleration of NPL disposal. Second, on the financial front, stock prices had been falling and developments in the money market had been somewhat unstable due partly to the heightening of liquidity demand. And third, it should be borne in mind that there was a risk that, depending on future developments including the process of NPL disposal, liquidity demand might increase further or the severity of corporate financing conditions might intensify.

On the monetary policy stance for the immediate future, all members concurred that the Bank should increase the target for the outstanding balance of current accounts at the Bank to around 15 to 20 trillion yen, with a view to taking the best possible measures to maintain the smooth functioning and stability of financial markets, thereby strengthening support for economic recovery from the monetary side. Members generally agreed that the target should continue to be a range of around 5 trillion yen rather than a specific amount, and it should also be accompanied by the contingency clause of the guideline for money market operations, given the unstable liquidity demand.

Many members then commented on the necessity of an increase in the Bank's outright purchases of JGBs on the assumption that the Bank would increase the target for the outstanding balance of current accounts at the Bank. The chairman requested the Bank's staff to comment from a practical viewpoint on the necessity of an increase for market operations and the possible reaction of the market to an increase. The staff explained as follows.

(1) Given that liquidity demand had recently been increasing in the money market, there was no urgent need for an increase in the Bank's outright purchases of JGBs to provide funds smoothly. However, if the Bank were to significantly increase the target, an increase in the Bank's outright purchases of JGBs would be necessary in order to provide funds smoothly regardless of future developments in liquidity demand.

(2) Regarding the effects of an increase in the outright purchases of JGBs on the market, it seemed to have already factored in an increase to some extent. Apart from some reactions in the very short term, long-term interest rates were unlikely to be greatly affected even if the Bank did not increase its outright purchases on this occasion. This was because financial institutions that had limited investment opportunities would continue to invest in JGBs.

Market participants were pointing out the possibility that the Bank's JGB holdings might reach their ceiling of the outstanding amount of banknotes issued in the near future, depending on the increase in the outright purchases of JGBs. The staff said that, although it was difficult to make a precise estimate, this was unlikely with an increase of around 200 billion yen per month, which was the same amount as the previous increases.

Based on these comments, members discussed the Bank's outright purchases of JGBs. Many members said that under the current framework for money market operations, the Bank would increase the amount of its outright purchases of JGBs in cases where it considered that an increase was necessary for providing liquidity smoothly. These members continued that from this viewpoint the Bank should increase it by 200 billion yen per month, the same amount as on previous occasions when the Bank increased the target for current account balances at the Bank. On the other hand, a few other members said that it would be appropriate to increase the outright purchases of JGBs significantly, for example by around 400 to 500 billion yen per month, not only in view of the need to ensure smooth provision of funds following a significant increase in the target for the current account balances at the Bank, but also in expectation of a possible positive impact on the market.

With regard to the possible effects on the market of an increase in the outright purchases of JGBs, some members expressed the view that a significant increase would cause the JGB market to overheat, leading to even greater volatility, while some others commented that the risk was small, judging from the view that the market had already factored in an increase to some extent. One member said that it was important to examine the possibility that if an increase went so far beyond 200 billion yen per month, the market might react differently from before, expecting that the Bank's JGB holdings would reach their ceiling of the outstanding amount of banknotes issued although in fact that would not necessarily happen. The chairman summarized the discussions above as follows to reflect the majority view: (1) the Bank should increase its outright purchases of JGBs by 200 billion yen per month in view of the need to provide funds smoothly; and (2) a public statement to be released on October 30, 2002 should include this point. Most members agreed with the chairman. A few members, however, said that they still considered that it would be appropriate to increase the Bank's outright purchases of JGBs by around 400 to 500 billion yen per month, and they would like to emphasize their view by dissenting from the public statement.

Members agreed that, when increasing the target for the outstanding balance of current accounts at the Bank, the Bank, as it had been doing to date, should set a target with a range of around 5 trillion yen. In relation to this, one member pointed out that there had been a consensus hitherto in the Policy Board that the Bank would aim at the upper limit of the target range of "around 10 to 15 trillion yen" as far as possible, and the market had also acknowledged that. On this basis, this member said that, from the viewpoint of the transparency of monetary policy, it was necessary for the Bank to indicate a level it would aim at within the new target range.

This member expressed the view that since the Bank was employing the framework of quantitative easing, it should make clear to the public that, although the target was set with a range of around 15 to 20 trillion yen in view of the instability of liquidity demand, it would aim at 20 trillion yen, the upper limit of the target range, as far as possible. In response to this, a different member said that the feasibility of market operations should also be taken into account, although the member understood the basic idea of the above view. A few other members commented that the idea behind the Bank's decision to set a target with a range of 5 trillion yen was for the Bank to provide funds flexibly within the range depending on developments in liquidity demand, and if it was going to mention a certain level within the target range to the public, it should be made clear that the level was based on the above idea. A few members requested the Bank's staff to comment from a practical viewpoint on these issues. The staff explained that it was uncertain whether the Bank would be able to increase the current account balances to 20 trillion yen at a relatively early stage and maintain them at that level, although it would be able to do so if the level was around the middle of the range. Based on these discussions, most members agreed that the Bank would show the level it would aim at within the target range, and that the level should take into account developments in liquidity demand and the feasibility of market operations. The chairman concluded by saying that the Bank would aim at around the middle of the target range for the time being, and that he would like to make this clear to the public at the chairman's press conference. Most members agreed with him. One member, however, stressed that the Bank should continue to aim at the upper limit of the target range, saying that there was a problem in aiming at around the middle of the target range in view of the fact that the Bank was employing the framework of quantitative easing. This member added that the following points were unclear: how to interpret the difference between the middle of the target range and 20 trillion yen, the upper limit of the target range, in relation to the contingency clause of the guideline for money market operations; in what situation the level the Bank would aim at within the target range should be increased; and whether an increase in the level would be a further monetary easing measure.

It was also pointed out on many occasions in the discussions so far that economic and financial developments in the future might vary significantly depending on the possible effects of an acceleration of NPL disposal on corporate financing. On the basis of these discussions, a few members said that the Bank should give due attention to this point, and also explore possible measures to secure the smooth functioning of corporate financing, including consultations with the parties concerned. Other members also agreed, and it was decided that such a stance would be included in the public statement to be released on October 30, 2002.

V. Remarks by Government Representatives

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

(1) The Government would release the "Comprehensive Measures to Accelerate Reforms" to overcome deflation and ensure sustainable growth led by private demand. It would include measures to promote structural reform, for example measures to ensure financial system stability, including an acceleration of NPL disposal, and measures to reinforce safety nets. It would also include a statement that the Government would like the Bank to implement drastic monetary policy measures which might not be based on conventional frameworks.

(2) The Bank had been providing ample liquidity to financial institutions, but this had not led to deflation being overcome and prices continued to fall. The Government and the Bank should reaffirm the view that overcoming deflation was the most important task for Japan's economic policy. On this basis, the Government would like the Bank to show a firm resolution to implement policy measures to overcome any heightening of deflationary concern that might be caused by an acceleration of NPL disposal. Specifically, the Government would like the Bank to implement drastic and effective monetary easing measures, which might not be based on conventional thinking or frameworks, from the viewpoint of improving both the quality and quantity of liquidity provision.

The representative from the Cabinet Office made the following remarks.

(1) The Government would release the "Comprehensive Measures to Accelerate Reforms" on October 30, 2002, with a view to realizing a rapid recovery of the financial intermediary functions, through an acceleration of NPL disposal, and a speedy revival of finance and industry. The Government would reinforce policies to accelerate structural reforms through the following four main pillars: financial system reform; tax reform; regulatory reform; and reform of the government expenditure structure. The aim of these policies would be to simultaneously ensure self-sustained economic growth led by private demand and overcome deflation.

(2) The Government considered that the Government and the Bank should cooperate continuously and implement powerful and comprehensive measures in order to overcome deflation. 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 policy frameworks, and to implement them in tandem with the Government's measures.

VI. Votes

Based on the above discussions, members considered that it was appropriate for the Bank to raise the operating target, the outstanding balance of current accounts at the Bank, and to take the best measures possible to maintain the smooth functioning and stability of financial markets, thereby strengthening support for economic recovery from the monetary side.

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

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

1. The guideline for money market operations in the intermeeting period ahead will be as follows.

The Bank of Japan will conduct money market operations, aiming at the outstanding balance of current accounts held at the Bank at around 15 to 20 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 above target.

2. A public statement will be decided separately.

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.

VII. Discussion on the Public Statement

Following the above discussions, members discussed the draft of the public statement prepared by the staff regarding the decision of the Policy Board, and put it to the vote. By majority vote, the Board approved "Change in the Guideline for Money Market Operations" and decided to release it on October 30, 2002 (see Attachment 1).

Votes for the proposal: Mr. M. Hayami, Mr. S. Fujiwara, Mr. Y. Yamaguchi, Mr. K. Ueda, Ms. M. Suda, Mr. H. Haru, and Mr. T. Fukuma.

Votes against the proposal: Mr. T. Taya and Mr. S. Nakahara.

Mr. T. Taya and Mr. S. Nakahara dissented, saying that they considered that the Bank should increase the amount of the Bank's outright purchases of JGBs by more than 200 billion yen per month and thus did not approve of the part of the public statement which concerned the size of the increase, although there was no problem with the rest of the statement.

VIII. Discussion on the "Outlook and Risk Assessment of the Economy and Prices"

The Policy Board discussed the draft of the "Outlook and Risk Assessment of the Economy and Prices" and put it to the vote. By unanimous vote, the Board decided to publish it on October 30, 2002.