Minutes of the Monetary Policy Meeting

on November 18 and 19, 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 Monday, November 18, 2002, from 2:00 p.m. to 4:17 p.m., and on Tuesday, November 19, from 9:00 a.m. to 12:54 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. 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. S. Shimizu, Senior Economist, Policy Planning Office
Mr. S. Nagai, Senior Economist, Policy Planning Office

The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on 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.
Mr. Taniguchi was present on November 19.
Mr. Fujii was present on November 18.

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 October 30, 2002.⁵ The Bank conducted market operations with the aim of gradually increasing the outstanding balance of current accounts at the Bank and then maintaining it at around the middle of the new target range of around 15 to 20 trillion yen.

The Bank started to utilize the following new types of money market operations: outright purchases at the Bank's head office and all branches of bills with maturities of over six months to a year or less; and purchases of Japanese government securities (JGSs) with repurchase agreements. The Bank also increased its outright purchases of long-term Japanese government bonds (JGBs) from 1 trillion to 1.2 trillion yen per month.

The weighted average of the uncollateralized overnight call rate stayed at 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 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.

B. Recent Developments in Financial Markets

The money market regained stability at one time, as evident in a decline in repo rates and in yields on financing bills (FBs) and treasury bills (TBs), which had increased toward the end of October. This was due to the Bank's provision of more liquidity based on additional monetary easing measures decided at the previous meeting. However, repo rates and yields on FBs and TBs started to increase thereafter. This reflected the fact that market participants' nervousness started to increase again because financial institutions' stance on investment became more cautious in response to a drop in bank stock prices.

The Japanese capital markets and foreign exchange markets remained sensitive to speculation about the specific measures in the "Program for Financial Revival" and about additional government measures to overcome deflation. Stock prices declined substantially due to the heightened pressure to sell stocks of banks and of firms with relatively low creditworthiness. Long-term interest rates declined to below 1.0 percent, their lowest level since November 1998. This reflected the fact that market participants' concern about fiscal discipline had abated and there was an expectation in the market that banks' reduction of risk assets would result in further purchases of JGBs. The rates, however, increased slightly afterward, partly due to speculation that banks would accelerate their selling of JGBs following the drop in bank stock prices.

Despite the decline in stock prices, the yield differentials between corporate bonds and JGBs in the secondary market remained virtually unchanged against the background of regional financial institutions' strong demand for corporate bonds.

The yen appreciated slightly against the U.S. dollar after the previous meeting, reflecting unwinding of short yen positions by investment funds overseas. However, it had not shown any particular direction recently.

C. Overseas Economic and Financial Developments

The U.S. economy stayed on a moderate recovery trend. However, the pace of improvement in production, employment, and income was slowing. Regarding private consumption, which had been supporting economic recovery, the weakness shown by indicators such as automobile sales had recently become marked. It was cause for concern that such developments might reduce the momentum for economic recovery in the future. In the corporate sector, business sentiment continued to deteriorate due to heightened uncertainty about the economic outlook and geopolitical factors, in addition to the effects of the fall in stock prices to date. In this situation, firms seemed cautious, as previously, about increasing the number of employees, despite an improvement in corporate profits. In addition, the outlook for business fixed investment remained uncertain.

U.S. financial markets had generally been stable since the previous Monetary Policy Meeting on October 30, 2002, despite such events as the off-year election on November 5, a reduction of the target for the federal funds rate by the Federal Open Market Committee (FOMC) on November 6, and the adoption of the United Nations Security Council Resolution on Iraq on November 8. Stock prices remained more or less unchanged in the intermeeting period. Long-term interest rates had declined to below 4 percent immediately after the reduction in the target for the federal funds rate, but they were in the 4-5 percent range recently.

The FOMC decided at its meeting on November 6, 2002 to lower its target for the federal funds rate by 50 basis points. The FOMC judged that the risk of a slowdown in economic activity was balanced by that of inflation in the foreseeable future. Against this background, developments in U.S. federal funds rate futures suggested that market expectations for a further interest rate cut had almost disappeared.

In the euro area, the economy had bottomed out, reflecting an increase in exports. However, there were signs that the economy might decelerate again, as private consumption and business fixed investment remained sluggish.

European financial market participants remained cautious about the economic outlook. Long-term interest rates were declining, while stock prices had remained virtually level since late October. Developments in EURIBOR futures suggested that there were mounting expectations that the European Central Bank (ECB) would reduce its key interest rates at the next regular meeting of the Governing Council on December 5, 2002.

NIEs and ASEAN economies remained on a recovery trend, as exports continued to increase and private consumption and business fixed investment remained firm.

Financial markets in emerging economies had stabilized recently, as evident in an increase in the inflow of funds to these economies. The recent stabilization was due to the following factors: overseas investors had somewhat eased their risk-averse stance owing to the rise in stock prices in Europe and the United States; and concern about the political situation in emerging economies had abated slightly.

D. Economic and Financial Developments in Japan

1. Economic developments

Exports were losing their momentum. They were expected to stay at the current level for the immediate future, because an increasing number of economic indicators were softening in overseas countries, particularly in the United States. Given the environment for exports, production was expected to stop increasing and remain more or less unchanged in the future, although the completion of the cutbacks in inventory stocks was still underpinning an increase in production currently.

Corporate profits continued to improve, partly due to firms' restructuring efforts, but the pace of improvement seemed to be slowing.

The decline in business fixed investment had almost come to a halt. However, the investment stance of firms was unlikely to become positive in the near future, since exports and production were expected to remain more or less unchanged for some time and the environment surrounding investment was becoming increasingly uncertain.

The employment and income situation of households overall remained severe. Although overtime hours worked continued to increase and the number of employees, a figure including a wide range of non-regular employees such as temporary workers, appeared to have stopped declining, household income continued to decrease noticeably due to an ongoing decline in wages and a continuing decrease in the number of regularly employed workers.

In this situation, private consumption continued to be weak, with the underlying trend of various sales statistics remaining unchanged. Some indicators showed a deterioration in consumer confidence, and private consumption was likely to be lackluster for some time.

Public investment was declining.

On the price front, import prices were starting to turn up, reflecting developments in prices of international commodities, such as crude oil, and in foreign exchange rates. Meanwhile, domestic wholesale prices were virtually level. Consumer prices remained on a gradual downtrend, and corporate service prices continued to decline.

With regard to the outlook, import prices were projected to continue firming up for the time being. Domestic wholesale prices were expected to remain virtually level for a while, since there were two opposing factors: the ongoing decline in machinery prices on the one hand; and the slight increase in import prices and the improvement in the supply and demand balance of materials on the other.

2. Financial environment

Banks' lending continued to decline by about 2-3 percent on a year-on-year basis. Growth rates of the amount outstanding of corporate bonds and CP issued were on a declining trend, and the amount outstanding of each dropped slightly below the previous year's level in October. In this situation, the total amount of funds raised by the private sector declined at a somewhat faster pace than before, and credit demand in the private sector continued to follow a downtrend.

Regarding monetary aggregates, the monetary base exhibited a high year-on-year growth rate of around 20 percent in October. The year-on-year growth rate of the money stock was around 3.0-3.5 percent.

As for corporate financing conditions, funding costs remained at low levels for firms with high credit ratings. The credit spreads of firms with different credit ratings remained large. According to a survey by the Japan Finance Corporation for Small Business, the lending attitude of financial institutions improved somewhat in the July-September quarter but deteriorated slightly in October. This might imply that financial institutions were being more cautious in extending loans to firms with high credit risks.

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 were maintaining high growth rates relative to that of overall economic activity. In corporate finance, the financing environment of firms with low credit risks remained accommodative, but with regard to firms with high credit risks, the stance of investors remained severe and the lending attitude of private banks was becoming more cautious.

Given this situation, the effects on corporate finance of the Government's measures to accelerate the disposal of nonperforming loans (NPLs) would require close monitoring. Although more details of the measures were necessary to assess the extent of these effects, the following points required attention.

Concerning measures to accelerate NPL disposal, the key points were as follows: the extent to which the stricter assessment of assets, resulting from the review of the standards, would accelerate NPL disposal as well as the number and type of firms that would be affected; and the degree of possible damage to the capital of financial institutions due to NPL disposal. In connection with the review of the assessment standard, a key point was how the measures to accelerate NPL disposal would be applied to regional financial institutions. Concerning the capital of financial institutions, how the treatment of deferred tax assets would be reviewed was important.

Although the actual effects would vary depending on the specifics of the measures, it was necessary to take into account the following risks: that financial institutions might become more cautious about extending loans to firms with low creditworthiness; and that financial institutions might have to be more careful about their capital in managing their assets. Furthermore, given these possible effects, financial markets might become more sensitive to credit risk.

In assessing the effects of the measures relating to corporate financing, it was not appropriate to focus solely on the direct impact of the measures to accelerate NPL disposal, and the following points should also be considered. First, the specifics of the Government's measures to reinforce safety nets, such as plans to revitalize industries and enterprises and financial support schemes for small and medium-sized enterprises. Second, whether firms would continue to prioritize repaying their debt. And third, to what extent other entities could take credit risk in place of major banks.

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 agreed as follows. Japan's economy had stabilized as a whole, but exports were losing their momentum and the pace of the increase in production had become slower. In addition, the uncertainty of the economic outlook was increasing as evident in weak economic indicators in the United States and in the considerable fall in Japanese bank stock prices amid growing concern about the acceleration of NPL disposal and its effects on the economy. Given this situation, members concurred that it was appropriate to revise the assessment of the economy slightly downward, with the phrase "there is greater uncertainty toward recovery."

One member expressed concern that it was inevitable that the economy would temporarily experience a downturn.

Members agreed that exports were losing their momentum against the background of the pause in restocking of inventories of IT-related goods and the decrease in automobile sales in the United States. Some members expressed the view that Japan's exports were underpinned by Asian economies that were growing steadily, particularly in terms of domestic demand, although the growth rates of exports to Europe and the United States were slowing. One of these members pointed out that an increasing number of firms were shifting their production sites to China, and this had led to an increase in exports of machinery and equipment during the process of factory construction, and then to an increase in those of parts and materials after the factories started operation. This member commented that similar developments had occurred in the past when firms moved their production sites to other parts of Asia.

Many views were put forward regarding developments in overseas economies, especially the United States, which were a key determinant of the outlook for exports.

Many members commented on the U.S. economy that it was not necessary to revise the standard scenario of a gradual recovery at this point. These members agreed, however, that the weakness in recent economic indicators, particularly ones relating to private consumption, suggested that expenditure, production, and employment were being restrained by the increasing uncertainty of the economic outlook, including geopolitical risks centering on Iraq.

With regard to the FOMC's reduction of the target for the federal funds rate by 50 basis points, which was larger than the market's expectation, some members expressed the view that close monitoring was required of its effects, because it was uncertain how much impact it would have. One member pointed out that automobile sales were already peaking out, and that they were no longer bolstered by sales promotion measures such as the zero interest loan program. As for the U.S. financial sector, a different member commented that, despite some increase in NPLs, U.S. banks had maintained strong capital bases by diversifying risks utilizing various risk transfer tools. However, household financial assets broadly defined, including pension assets, might have been devalued considerably as a result of this risk transfer. This member added that household expenditure might slow down in the future if the housing market did not respond to the decline in interest rates.

One member said that it would be necessary to examine closely the background of the recent recovery in U.S. stock prices, which had occurred despite the growing uncertainty of the U.S. economic outlook.

A few members commented on European economies that the degree of economic deterioration and the impact of stock price falls in Germany were more serious than in the United States.

One of these members said that, given the global deflationary trend evidenced by clear signs of deflation even in Asia, it was necessary to monitor developments in capital flow and foreign exchange rates.

Regarding Japan's domestic private demand, members agreed that the positive momentum arising from the increase in exports and production to date had not had much effect on private demand yet.

With regard to developments in the corporate sector, many members agreed that the decline in business fixed investment had almost come to a halt, reflecting the improvement in corporate profits due to the increase in exports and production to date and to firms' restructuring efforts. One member commented that the improvement in corporate profits was also attributable to the fact that some firms had succeeded in establishing business models adapted to the deflationary environment, in addition to corporate restructuring. This member pointed out that some of these firms were adapting well to the environment by keeping inventory levels lower than in inventory adjustment phases in the past.

As for the outlook for business fixed investment, most members expressed the view that the investment stance of firms was still unlikely to become positive, judging from their plans for business fixed investment. One member commented that it was difficult to make an assessment of the considerable decline in the forecasts for machinery orders for the October-December quarter because it might be the result of fluctuations in statistics relating to the telecommunications industry. The member continued that close attention should be paid to it.

Many members commented on developments in the household sector that private consumption continued to be weak on the whole. One member said that when various sales statistics showed a decline in the summer, it had been cause for concern that private consumption might deteriorate further, but it was encouraging that they had been leveling off since September. A different member pointed out that, according to the Bank's opinion survey on lifestyle and financial behavior, the diffusion index of judgment of living conditions and household spending remained almost unchanged, despite a decrease in income. This member said that it was necessary to examine carefully the relatively large increase in private consumption in GDP statistics for the July-September quarter because it might have been boosted by irregular factors arising in the process of calculating them.

Many members said that a recovery in private consumption could not be expected, since household income was likely to continue decreasing and an increasing number of indicators were showing a modest deterioration in consumer confidence.

One member commented on developments in prices that wholesale prices were expected to remain virtually level for a while, because the rise in import prices would continue to be offset by the decline in machinery prices and the reduction in electricity charges. This member expressed the view that the deflationary situation had not improved, judging from the GDP deflator for the July-September quarter.

B. Financial Developments

Members agreed that there was considerable uncertainty regarding the degree of an acceleration of NPL disposal and its effects on financial institutions and the economy. In this situation, the significant fall in prices of stocks, particularly bank stocks, had increased financial institutions' liquidity demand in the money market, and this had led to a rise in some interest rates.

Most members agreed that the stock market and the money market reflected participants' nervousness, while there was no major change in the environment for corporate financing through the corporate bond and CP markets. This was evident in the fact that corporate bond issuance rates and interest rates in the CP market had been stable on the whole.

Regarding developments in the stock market, a few members presented their analysis that the correlation between Japanese and U.S. stock prices was weakening, and that the fall in Japanese stock prices was due to domestic factors. One of these members said that the recent fall in stock prices was attributable to rumors and market participants' nervousness and did not necessarily reflect the fundamentals of Japan's economy. This member expressed concern that the effects of the fall in stock prices would be significant, since it would negatively affect profits of both financial institutions and nonfinancial firms and would cause a shortfall in reserves for pension benefits.

With regard to developments in the money market, members agreed that the upward pressure on short-term interest rates since the middle of October had been dispelled for a while as a result of the monetary easing decided at the previous meeting. Most members concurred that a modest rise in interest rates on term instruments and in bid rates in the Bank's market operations thereafter was a reflection of market participants' investment stance, which had become more cautious in response to the fall in bank stock prices. One member expressed the view that there was a slight upward pressure on short-term interest rates, since financial institutions were increasing their liquidity position to prepare for possible reputational risk.

As for the effects on the economy of an acceleration of NPL disposal, one member explained two channels through which they would be transmitted. First, nonviable firms would be liquidated and this would reduce business fixed investment and the number of employees, thereby having a direct negative impact on the economy. And second, the lending stance of financial institutions would become more cautious, and as a result, the corporate sector as a whole including even viable firms might not be able to obtain sufficient financial support. On this basis, this member expressed the view that further downward pressure on the economy through the first channel would be limited, since the business fixed investment and the number of employees of those firms had been reduced already. On the other hand, the effects of the second channel warranted closer monitoring.

A different member, who basically agreed with this analysis, said that there was a risk that financial institutions would accelerate collection of loans even from firms with somewhat higher creditworthiness than those that should be liquidated. In addition, in the short term, market overreaction to such a situation might lead to a further fall in stock prices, which could in turn cause a larger-than-expected credit contraction.

One member said that it was encouraging that the importance of firms' restructuring, which should be dealt with in line with resolution of banks' balance-sheet problem, was again a focus of attention. In this situation, the role of the Institution for Industrial Revival and the Resolution and Collection Corporation (RCC) would be extremely important. This member expressed the hope that restructuring in firms and industries would progress in tandem with the stricter review of standards for assessment of assets.

Some members pointed out that banks had become more cautious about the creditworthiness of borrower firms, and expressed concern about the effects on small firms. One member said that from around the time of the release of the "Program for Financial Revival," some financial institutions had changed their lending stance and had started to reduce risk assets preemptively. This member added that in some regions, public financial institutions were supporting small firms' financing by extending loans to cover loan collection by major banks. This member expressed concern that since the specific measures of the "Program for Financial Revival" were not clear yet, some large firms were planning to bring forward their schedules for raising funds and this might increase overall liquidity demand. In the meantime, banks were likely to reduce the volume of lending by accelerating collection of loans while offering higher lending spreads.

One member expressed the view that the situation with regard to firms' financial condition as a whole differed significantly from that in 1997-98 and explained as follows. First, there was a large excess of cash flow in the corporate sector recently, while in 1997-98, investment and saving were almost balanced and credit contraction tended to immediately tighten firms' financing conditions. Second, banks were not aiming to reduce lending to all categories of firms but were becoming more cautious about the creditworthiness of borrower firms. And third, the current monetary policy could fully accommodate liquidity demand. A different member expressed the view that, compared to 1997-98, banks were prepared to absorb a possible shock stemming from the rise in market volatility, given that they were pressing forward with sales of stocks and had significantly reduced their assets, including foreign currency-denominated assets.

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

On the monetary policy stance for the immediate future, members generally agreed on the following. The overall economic assessment should be revised slightly downward from the previous meeting, given the greater uncertainty of the outlook for Japan's economic recovery. It was, however, appropriate for the Bank to maintain the guideline for money market operations that was decided at the previous meeting and continue providing ample funds with the target for the outstanding balance of current accounts at the Bank at around 15 to 20 trillion yen. In the meantime, the Bank should monitor the effects of its liquidity provision as well as developments in liquidity demand.

Given the market operation guideline of around 15 to 20 trillion yen, members discussed whether to continue aiming at around the middle of the target range, the level that was agreed at the previous meeting, in daily market operations conducted by the Bank's staff. The discussion was mainly focused on factors causing the current increase in liquidity demand and on its likely duration.

Members agreed that, in the money market, interest rates on term instruments and bid rates in the Bank's market operations, which had declined for a while, were increasing slightly, since market participants had become more cautious in providing funds and active in raising funds in response to a significant fall in bank stock prices. At the same time, many members commented that it was difficult to judge whether the current increase in liquidity demand was a temporary phenomenon or would continue for some time, since it reflected, to some extent, market participants' precautionary reactions to many uncertain factors surrounding the money market. One member pointed out that foreign banks' outstanding balance of current accounts at the Bank had been increasing significantly in the past two weeks, and said that this would require monitoring for a while because the duration and the stability of this development were uncertain.

One member cited the following as possible factors behind the early resurgence of strong demand for liquidity, despite the Bank's additional liquidity provision of 2 to 3 trillion yen after the previous meeting. First, with the Bank's series of actions to contain a rise in liquidity demand by increasing its provision of funds, funds were tending to accumulate at financial institutions that were not willing to invest in the market. Second, credit lines extended to financial institutions tended to be linked to developments in their stock prices. And third, although there was abundant liquidity in the overnight call market, the transaction volume of term instruments with relatively long maturities was very small and as a result dependence on the Bank's market operations was increasing.

A different member expressed the following view and a few other members agreed with it: in the current situation where the overnight call rate remained at close to zero and there was concern about the stability of the financial system, the amount outstanding in the call market was contracting; and the Bank's role when conducting money market operations was becoming increasingly similar to that of a fund broker. The member continued that, given this situation, the outstanding balance of current accounts at the Bank should be increased to the 20 trillion yen level as soon as possible, taking into account demand for funds for the current accounts. In addition, the Bank should accommodate various types of liquidity demand of market participants by increasing the frequency and diversifying the maturity of the Bank's market operations.

The chairman requested the staff to comment on the feasibility of increasing the outstanding balance of current accounts at the Bank to around 20 trillion yen. The staff explained that given the current strong demand for liquidity provided by the Bank through its market operations employing term instruments with relatively long maturities, it would be feasible to increase the amount to 20 trillion yen if a modest amount of deviation from that level was allowed.

In the course of the above discussion, members gradually came to share the view that the current increase in liquidity demand was unlikely to subside soon, although there were uncertain factors such as the outcome of a future acceleration of NPL disposal. On this basis, members generally concurred that given the target range of around 15 to 20 trillion yen for the outstanding balance of current accounts, the Bank should aim at 20 trillion yen, the highest possible amount within the range, through daily market operations conducted by the staff. Members also agreed that the Bank should announce this to the market through the Bank's staff immediately after this meeting without waiting for another two days until the regular press conference held by the Governor.

Members exchanged views on the future conduct of monetary policy.

Some members said that they expected the staff to continue deliberating on measures that the Bank could take to secure smooth functioning of corporate financing, taking into account the specific measures in the Government's "Program for Financial Revival" and their effects on the corporate financing environment.

Members discussed future monetary policy action in a situation where liquidity demand increased further. One member compared the current framework of monetary easing policy to the zero interest rate policy, and commented as follows. Both policies would have similar effects in terms of preventing the economy from falling into a vicious circle due to liquidity constraints. However, under the current policy framework, it would be difficult to provide the public with an easily comprehensible explanation for a decrease in the outstanding balance of current accounts at the Bank when a temporary increase in liquidity demand subsided. In such a situation, the higher level of the current account balance that had been achieved would constrain the Bank's conduct of monetary policy in the following period. This member continued that the Bank should also consider how it would deal with a situation where the market stabilized and liquidity demand subsided, given that the duration of the current increase in liquidity demand could not be predicted due to the current high degree of uncertainty.

One member said that it might be appropriate for the Bank to provide more liquidity by altering the current guideline to set only the lower limit for the outstanding balance of current accounts at the Bank. This was because there was a possibility that demand for liquidity might increase further toward the year-end, given that demand for funds for the current accounts was very strong and highly unpredictable. A different member, however, pointed out that this type of guideline could be problematic, as the Bank's staff would have no specific level to aim at in daily market operations.

One member said that the member was not making a formal proposal but one policy option could be to increase the Bank's outright purchases of JGBs to 1.4 trillion yen if the Bank decided to aim at increasing the outstanding balance of current accounts to 20 trillion yen, and gave the following two reasons. First, it would facilitate achievement of the new target level for the outstanding balance of current accounts at the Bank. And second, it could be expected to have additional effects resulting from purchases of assets with low substitutability for funds in current accounts at the Bank. In response to this, a few members pointed out that if the Bank were to purchase such assets with a view to the purchases having additional effects on the economy, it would mean that the Bank would be conducting monetary policy based on a different monetary easing framework from that of the current quantitative easing. This was because the aim of the current framework was to bring about monetary easing effects by increasing the outstanding balance of current accounts at the Bank, and the types of the assets the Bank purchased to provide liquidity were not considered to make a difference in that respect. A different member expressed the opinion that, in order to influence prices of assets with low substitutability for funds in current accounts at the Bank, the Government's debt management policy might be more effective in influencing prices of JGBs, given the large amount of JGBs issued. Therefore, when pursuing such a policy effect, one of the options would be to request the Government to change its debt management policy.

IV. Remarks by Government Representatives

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

(1) The Government and the Bank should implement powerful and comprehensive measures to overcome deflation, since it was the most important task for Japan's economic policy. The Government released the "Comprehensive Measures to Accelerate Reforms" on October 30, 2002, and the Bank decided on additional monetary easing at the previous Monetary Policy Meeting.

(2) However, deflationary concern remained and could intensify in the process of an acceleration of NPL disposal. Some market participants were expressing their opinion that additional monetary easing based on conventional thinking or frameworks would not be enough to persuade the market that the Bank had a strong commitment to dispel deflationary concern. The Government would like the Bank to consider a variety of options in devising effective monetary easing measures that would improve both the quality and quantity of liquidity provision and to implement them.

(3) There was concern that the recent appreciation of the yen would exert downward pressure on the economy, thereby triggering further deflation. In order to make the foreign exchange rate more stable, the Government would like the Bank to consider not sterilizing the Government's yen-selling intervention. This was for the following reasons. First, sterilized intervention would not change the ratio of the money stock of the yen to that of the U.S. dollar. And second, market participants might interpret it incorrectly and form a mistaken expectation that the effects of the foreign exchange intervention would not last or that the Bank was not willing to see a depreciation of the yen. Such an expectation would reduce the signaling effect of foreign exchange intervention.

(4) The corporate financing environment was projected to become more severe toward the year-end. The Government would therefore like the Bank to provide more liquidity to accommodate a possible surge in liquidity demand. In the press release following the previous meeting, at which the Bank decided on additional monetary easing, the Bank stated its intention to explore possible measures to secure the smooth functioning of corporate financing. The Government would like the Bank to start on this as soon as possible.

The representative from the Cabinet Office made the following remarks.

(1) The Government revised its assessment of the economy slightly downward as follows: "Movements towards an incipient recovery continue to be seen in the economy, though its pace has become more gradual." As for the short-term prospect, concern over the future of the United States and other economies and the sluggishness of domestic stock prices were very likely to place downward pressure on final demand. Economic and financial developments would therefore require closer monitoring than before.

(2) On October 30, the Government released the "Comprehensive Measures to Accelerate Reforms" as a specific measure to swiftly implement the "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2002." The Government had also started deliberating on the content and the size of the supplementary budget for fiscal 2002 to finance projects such as those that would reinforce safety nets, taking into account the state of tax revenues.

(3) The Government would continue to cooperate with the Bank and implement powerful and comprehensive measures in order to overcome deflation. The Government would like the Bank to continue deliberating on and implementing further monetary policy measures, considering a wide range of options to overcome deflation.

In response to these views, one of the Policy Board members said that it would be difficult for the Bank to accept the request not to sterilize foreign exchange intervention, if the Government expected the Bank to automatically raise the target for the outstanding balance of current accounts at the Bank by the amount of the intervention in order to increase its effects. A different member said that, given that a vast amount of funds was supplied and absorbed in the money market reflecting the fluctuations in banknotes and treasury funds, it would be meaningless to treat separately the funds movement accompanying the foreign exchange intervention and discuss whether to sterilize it or not. The member continued that the Bank had been implementing strong monetary easing measures regardless of whether intervention in the foreign exchange market had been conducted or not, and the Bank would continue to supply ample liquidity to the money market in various ways, including making use of the funds supplied through foreign exchange intervention.

A few members also added that the Bank had been paying attention to the fluctuation of foreign exchange rates and giving due consideration in its conduct of monetary policy to how such fluctuation would affect the economy, prices, and financial developments.

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 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.

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 November 20, 2002 in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background").⁶

6The original full text, in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on November 20, 2002 together with the English version of "The Bank's View." The English version of "The Background" was published on November 21, 2002.

VII. Approval of the Minutes of the Monetary Policy Meeting

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of October 10 and 11, 2002 for release on November 22, 2002.

Attachment

For immediate release

November 19, 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: