Minutes of the Monetary Policy Meeting

on March 4 and 5, 2003
(English translation prepared by the Bank's staff based on the Japanese original)

April 11, 2003
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 Tuesday, March 4, 2003, from 2:01 p.m. to 3:58 p.m., and on Wednesday, March 5, from 9:00 a.m. to 12:32 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 Japan²
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 Finance³
Mr. H. Tsuda, Deputy Vice Minister for Policy Planning and Coordination, Ministry of Finance⁴
Mr. Y. Kobayashi, Vice Minister for Economic and Fiscal Policy, Cabinet Office

Reporting Staff
Mr. E. Hirano, Executive Director
Mr. M. Shirakawa, Executive Director
Mr. A. Yamamoto, Executive Director
Mr. H. Yamaguchi, Adviser to the Governor, Policy Planning Office
Mr. T. Wada, Associate Director, Policy Planning Office⁵
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 Board⁶
Mr. N. Yoshioka, Chief Manager, Planning Division II, Policy Planning Office⁷
Mr. H. Onobuchi, Manager, Secretariat of the Policy Board
Mr. S. Nagai, Senior Economist, Policy Planning Office
Mr. T. Hiroshima, Senior Economist, Policy Planning Office

The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on April 7 and 8, 2003 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. Fujiwara was not present on March 5 from 9:42 a.m. to 11:34 a.m. due to his attendance at a Diet session.
Mr. Taniguchi was present on March 5.
Mr. Tsuda was present on March 4.
Mr. Wada was present on March 5.
Mr. Nakayama was present on March 4 from 2:01 p.m. to 2:25 p.m., and on March 5 for the whole of the session.
Mr. Yoshioka was present on March 5 from 9:00 a.m. to 9:13 a.m.

I. Summary of Staff Reports on Economic and Financial Developments⁸

A. Money Market Operations in the Intermeeting Period

The Bank conducted market operations in accordance with the guideline decided at the previous meeting on February 13 and 14, 2003.⁹ It aimed at an outstanding balance of current accounts at the Bank of around 20 trillion yen. As a result, the weighted average of the uncollateralized overnight call rate remained at 0.001-0.002 percent.

Major banks, particularly city banks, had been raising funds that would mature beyond the fiscal year-end smoothly owing to the Bank's active provision of such funds. Bid rates in the Bank's bill purchasing operations, which had remained somewhat high until around February 20, were declining recently.

8Reports were made based on information available at the time of the meeting.
9The 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.
For the time being, the Bank will provide more liquidity irrespective of the above target when necessary to secure financial market stability towards the end of a fiscal year.

B. Recent Developments in Financial Markets

Money market rates had been stable, despite the approach of the fiscal year-end on March 31. Interest rates on term instruments including yields on financing bills and treasury bills had stayed at low levels, reflecting the Bank's provision of ample liquidity. Interest rates on uncollateralized funding instruments, such as three-month Euro-yen rates, were substantially below their previous year's levels. This was because major banks, particularly city banks, had advanced their raising of funds that would mature beyond the fiscal year-end and thus they felt relatively secure regarding financing through the money market.

In the stock market, the Nikkei 225 Stock Average remained sluggish, moving at around 8,500 yen, partly due to weak stock prices overseas reflecting increasing concerns about geopolitical risks. Since the middle of February, bank stocks had fallen markedly. In particular, those of city banks had declined significantly in response to some major banks' announcements of additional measures to increase their capital, as market participants started to be wary of the risk that the value of their stocks might be diluted and that their burden of dividend payments might increase. In addition, there was considerable speculative selling of such stocks by short-term investors overseas.

In the bond market, yields on ten-year Japanese government bonds (JGBs) fell to the 0.7-0.8 percent level again, reflecting the persistent uncertainty about Japan's economic outlook, continuing weak stock prices at home and abroad, and a decline in interest rates overseas. The yield differentials between JGBs and corporate bonds in the secondary market, especially those with low credit ratings, were narrowing despite weak developments in the stock market. This was partly because regional banks were actively purchasing such corporate bonds. The yield differentials between JGBs and bank bonds had narrowed distinctly since late January. This suggested that major banks' measures to increase their capital were perceived as a positive factor for bank bonds in the sense that they were likely to reduce the risk of the financial system becoming unstable and of such banks being nationalized, while they were perceived as a negative factor for bank stocks.

In the foreign exchange markets, the U.S. dollar continued to depreciate reflecting increasing concerns about geopolitical risks and the significant deterioration in the U.S. trade balance. In addition, there was unwinding of long euro positions against the yen by investment funds overseas. As a result, the yen had appreciated to the 117-118 yen level against the U.S. dollar, and to the 126-127 yen level against the euro.

C. Overseas Economic and Financial Developments

The U.S. economy had stayed on a modest recovery trend, but the pace of improvement in production, employment, and income was slowing.

Regarding developments in U.S. final demand, private consumption remained on a moderate upward trend. However, the effects of the deterioration in the employment situation and a further worsening of consumer confidence gave cause for concern. In particular, the consumer confidence index for February deteriorated significantly from January due to the deterioration in the employment situation, a heightening of geopolitical risks, and the effects of a rise in fuel prices. Housing investment remained firm reflecting lower mortgage interest rates, but the pace of increase in housing prices was slowing. Business fixed investment was judged to have stopped declining. However, due to the persistence of uncertainty about the outlook for corporate profits, there had been no sign that business fixed investment was on a recovery trend. In this situation, the pace of recovery in production remained sluggish.

In U.S. financial markets, a cautious view regarding the prospects for economic recovery remained prevalent, reflecting great anxiety about geopolitical risks. In this situation, long-term interest rates tended to decline partly due to a "flight to quality." Stock prices, on the other hand, showed mixed developments.

In the euro area, the economy was decelerating, especially in Germany, since domestic demand components, such as private consumption and business fixed investment, remained sluggish and exports were slowing recently. In European financial markets, long-term interest rates followed a downward trend and stock prices had declined, reflecting market participants' increasingly cautious view about the economic outlook due to great anxiety about geopolitical risks.

NIEs and ASEAN economies stayed on a recovery trend. Domestic demand components, such as private consumption and business fixed investment, remained firm, although the pace of increase in exports, especially of IT-related goods, slowed slightly. In China, economic growth remained high due to an uptrend in exports in addition to strong domestic demand supported by an increase in fiscal spending and large direct investment from abroad.

Financial markets in emerging economies remained stable overall. This was because, although geopolitical risks were monitored carefully, indigenous destabilizing factors in each economy had eased. In particular, the policy stance of the new administration in Brazil had been viewed favorably by the market.

D. Economic and Financial Developments in Japan

1. Economic developments

Net exports remained virtually level, with both exports and imports increasing at a very modest pace. Exports increased by 0.6 percent in January 2003 from the October-December quarter of 2002, after increasing for two consecutive quarters. This development confirmed that exports remained on a modest uptrend. Exports to East Asia were increasing against the background of firm domestic demand in the region and structural factors such as the progress in international division of the production process among Asian economies, although it was difficult to make an accurate assessment based on a single month's data. As for the outlook, the increase in real exports was expected to remain very modest for a while because recovery in the U.S. and European economies was likely to be very weak for the time being, although Asian economies, particularly China, were likely to remain firm.

With regard to domestic demand, housing investment remained sluggish and public investment was on a declining trend. Business fixed investment had been virtually level against the background of improvement in corporate profits. However, there had been no sign that the investment stance of firms would become positive given the substantial uncertainty about the outlook for overseas economies.

As for private consumption, although many sales indicators deteriorated in December 2002, sales were generally recovering recently. For instance, sales of electrical appliances and at department stores recovered in January. In addition, passenger-car sales were higher than the previous month for the second consecutive month in February. However, private consumption remained sluggish overall. As for consumer sentiment, the number of weak indicators was increasing.

Production remained virtually level. It increased by 0.6 percent in January compared to the October-December quarter of 2002 after it inched down by 1.0 percent in that quarter on a quarter-on-quarter basis. Inventories were at low levels, reflecting the cautious stance of firms on production. Although production was unlikely to regain momentum, the risk of a vicious circle of production cuts stemming from adjustment pressure on inventories seemed small.

As for the employment and income situation, the number of new job offers was on a gradual rising trend, and the number of employees in the Labour Force Survey, which covered various types of employees including non-regular employees such as temporary workers, appeared to be declining at a slower pace. However, the employment and income situation overall remained severe because wages continued to decline and the number of regular employees continued to fall reflecting firms' stance of continuously reducing personnel expenses.

On the price front, import prices were on a rising trend, reflecting the rise in international commodity prices such as that of crude oil. Prices of a wide range of domestic commodities had been rising, reflecting the upward trend in crude oil prices and tightening of the supply-demand balance of raw materials such as steel and chemicals. Consumer prices had been declining gradually, but the pace of year-on-year decline was expected to become somewhat slower in general. This was partly because the burden on households of medical costs was projected to rise from April due to public insurance reforms.

2. Financial environment

With regard to credit aggregates, private banks' lending continued to decline by 2-3 percent on a year-on-year basis. The amount outstanding of funds raised through issuance of CP and corporate bonds was generally moving at around the previous year's level. The total amount of funds raised by the private sector continued to follow a downtrend.

As for monetary aggregates, the year-on-year growth rate of the monetary base was slowing from the previous month. This reflected the significant increase in banknotes in the same month of the previous year against the background of the partial removal of blanket deposit insurance. The year-on-year growth rate of the money stock was around 2 percent. That of broadly-defined liquidity was about 1 percent.

In corporate financing, credit demand in the private sector continued to follow a downtrend, as business fixed investment remained sluggish and firms continued to reduce their debts.

Private banks remained cautious in extending loans to firms with high credit risks, while on the other hand they continued to be more active in extending loans to blue-chip firms. Recently, however, banks that had received an injection of public funds seemed to have gradually become willing to lend to small firms, in line with the "Business Improvement Administrative Order." The survey by the Japan Finance Corporation for Small Business showed that financial institutions' lending attitude as perceived by firms remained unchanged in February, after improving for two consecutive months in December and January.

Credit spreads in the CP market remained stable despite increasing issuance of CP maturing beyond the fiscal year-end. This was against the background of the increase in market participants' purchases of CP, which partly reflected a sense of excess liquidity in the money market. Credit spreads at issuance on corporate bonds were also stable overall.

There had been no significant change in the corporate financing environment as a whole since the previous meeting. Market participants' excessive cautiousness stemming from uncertainty about the prospects for corporate financing had been subsiding recently. However, the financial environment through the fiscal year-end required careful monitoring because there remained uncertainty in, for example, the effects of the implementation of the measures in the Government's "Program for Financial Revival" and of special inspections of financial institutions.

II. Maintenance of a Designated Minimum Balance by Japan Post with the Bank

A. Staff Proposal

Japan Post, which was to be established on April 1, 2003, would have a current account at the Bank for its funds settlement. The overall demand for current accounts at the Bank should be stable and predictable to ensure smoothness in the Bank's money market operations. The staff would therefore like to propose to the members of the Policy Board that the Bank make a contract with Japan Post in which the latter would undertake to maintain a designated minimum balance and also decide the method of calculation of the maintenance ratios.

According to estimates at present, Japan Post's maintenance ratios for fiscal 2003 were expected to be about 0.5 percent for time postal savings, and about 0.8 percent for other postal savings including deposits received for funds transfer. Based on calculations using these ratios, the total designated minimum balance was estimated at about 1.5 trillion yen.

B. Members' Discussion and Vote

Members voted unanimously to approve the proposal and agreed that the decision should be made public.

C. Treatment of Japan Post's Current Account Balance in Relation to the Guideline for the Bank's Money Market Operations

Following the vote, members discussed how to treat Japan Post's current account balance at the Bank in relation to the guideline for money market operations.

One member presented the following basic thinking from the technical point of view.

(1) It was natural for the Bank to regard Japan Post's current account balance at the Bank as a part of the total current account balance for which there was a target in the current guideline for money market operations. This was because Japan Post would hold at least a designated minimum amount of funds in its current account at the Bank in accordance with the contract, which would include clauses comparable to the reserve requirements.

(2) It was necessary for the Bank to raise the target for the current account balance at the Bank in order to maintain the same degree of monetary easing effects as the current guideline. Given the estimate that Japan Post's total designated minimum balance would be about 1.5 trillion yen, the ceiling and the floor of the current target range should each simply be increased by 2 trillion yen.

(3) Since Japan Post was to be established on April 1, the guideline for money market operations should refer separately to the period until March 31 and the period from April 1 onward.

(4) There was concern that Japan Post's liquidity management would destabilize financial markets if it held a much larger amount of funds than required, causing funds that could have otherwise been held by other financial institutions in current accounts at the Bank to be reduced. In such a situation, it would be appropriate for the Bank to provide more liquidity irrespective of the target, as a case to which the contingency clause of the guideline for money market operations was applicable.

All the other members agreed with the above thinking. Some members asked the staff to explain the following to confirm their understanding: how accurately Japan Post could forecast the amount of funds it needed to put into its current account at the Bank; what would be Japan Post's stance on holding funds in its current account; and in what situation the contingency clause in the guideline would be implemented. In response to this, the staff explained as follows. Taking into account the vast size of its funds, it would be difficult at first even for Japan Post itself to fully foresee the liquidity position. Therefore, for a while after its establishment, Japan Post might keep a rather larger amount of funds than required. However, as it became used to the operations over time, it would not hold a larger amount of funds than required.

Based on the above discussions, members agreed on the following regarding the guideline for money market operations from the technical point of view: to simply increase both the ceiling and the floor of the target for the outstanding balance of current accounts at the Bank by 2 trillion yen. It was agreed that the meeting's discussions on the conduct of monetary policy would be based on the above agreement.

III. 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 that economic activity remained flat, and there was still strong uncertainty, mainly about future developments in economies overseas and the effects of nonperforming-loan (NPL) disposal. Members therefore concurred that it was appropriate to maintain the previous month's assessment.

As for domestic demand components, members expressed the view that exports continued to show relatively good growth, partly reflecting the firmness in Asian economies, and generally concurred that the sustainability of the increase required careful monitoring. In relation to this, some members raised the following as cause for concern: uncertainty about the outlook for external demand; and downward pressure on the exchange rate of the U.S. dollar stemming from geopolitical risks and the "twin deficits," the federal budget deficit and the current account deficit, in the United States.

With regard to recent domestic private demand, members generally agreed that there had not been any marked developments in economic indicators to greatly change the assessment made at the previous meeting. Business fixed investment had been virtually level, but there were no clear signs of a recovery. Private consumption remained weak on the whole, although it was relatively firm considering the severe employment and income situation.

Many members pointed out that indicators related to private consumption had recovered in January after the deterioration in December, and expressed the view that on the whole there was no major change in the underlying trend of private consumption. One member, however, was concerned about the effects of the following on consumer sentiment: the increasing number of firms reforming their entire traditional wage system, and intending to discontinue wage base raises and reduce annual raises; and progress in discussion regarding the reform of the social security system, such as medical care provision and pensions.

One member said that corporate profits had recently been improving and that, given the improvement in their financial condition, an increasing number of firms were becoming confident of making a profit even in the present deflationary situation. This member commented that these developments suggested that reforms on the supply side seemed to be progressing. A few members including this member, however, expressed concern about the possibility that the rise in crude oil prices, the appreciation of the yen, and a decline in the valuation of stockholdings might squeeze corporate profits.

With respect to the economic outlook, most members said that, assuming that overseas economies would recover gradually, the basic scenario of an increase in exports and production generating the momentum for a recovery remained valid. However, these members expressed concern that the uncertainty of the economic outlook was becoming stronger. In particular, many members noted concerns about the heightening of geopolitical risks such as those centering on Iraq and the uncertainty about the outlook for overseas economies. At the same time, members concurred that, although developments on the financial side that might exert downward pressure on the economy should continue to be monitored carefully as a risk factor, the probability of this happening was declining to some extent.

As a risk factor for the immediate future, members concurred that it was important to focus on the outlook for the U.S. economy.

Many members said that, although the U.S. economy currently remained on a modest recovery trend, it was facing many uncertainties, particularly geopolitical risks. Some members expressed concern that some indicators of private consumption were somewhat weak recently and that indicators of consumer confidence were deteriorating substantially. These members expressed the view that these developments were mainly due to the rise in energy prices, a slow recovery in the employment situation, and consumers' anxiety caused by the increasing geopolitical risks. They continued that the situation required careful monitoring for the time being. A few members pointed out that the "twin deficits" had been expanding. These members said that if military action started, these deficits would expand further, and even after it ended the accumulated government and external debt would remain as a factor that could increase the vulnerability of the U.S. economy. One member added that accumulation of households' and firms' debt was also increasing the potential vulnerability of the economy.

As for overseas economies other than the United States, a few members said that the appreciation of the euro, in addition to weak domestic demand, was beginning to affect European economies. In particular, the German economy showed weak developments. Many members said that Asian economies, particularly the Chinese economy, had been firm. However, at the same time, a few members were concerned about the effects of the rise in crude oil prices on countries in the region, particularly non-oil-producing countries.

Members exchanged views on the effects of geopolitical risks on Japan's and overseas economies from a wide-ranging perspective.

Members concurred that the effects of geopolitical developments on Japan's and overseas economies were basically difficult to assess because they depended on various uncertainties such as the duration and geographical spread of possible military action. Based on this understanding, one member expressed the view that economies at home and abroad had been subdued due to the heightened geopolitical risks. A few members including this member said that a continued situation of strong uncertainty could itself increase downside risks. Some members expressed a cautious view that, although some people's standard scenario was a short period of military action followed by economic recovery, geopolitical risks could materialize in an unexpected way and therefore it was inappropriate at this stage to rely on any specific scenario.

One member expressed the view that geopolitical risks had already been affecting Japan's economy both directly and indirectly through developments in crude oil prices, stock prices, foreign exchange rates, consumer sentiment, and firms' stance on investment. A different member said that, although geopolitical risks were mostly discussed in the context of the situation in the Middle East, the U.S. and European media were increasingly concerned about the situation in East Asia. Japan should also give more consideration to the situation in the region.

One member commented on price developments that the pace of decline in prices seemed to be decelerating, although prices continued to follow a gradual downward trend. This member said that it was worth noting that the background to the rise in prices of raw materials such as steel was an increase in demand for raw materials in China.

Based on the above discussion, one member expressed the view that, from a longer-term perspective, attention should be focused on the following when trying to induce a positive growth rate in the nominal GDP. First, whether exogenous demand would continue to increase, making up for the decrease in fiscal spending, and thus prevent the economy from falling into a deflationary spiral as it did last year. And second, whether the current unsustainable situation-where the decline in the share of labor in income distribution was contributing to improvement in corporate profits and private consumption was underpinned by a decline in the personal saving rate-could switch to a virtuous circle where improvement in firms' cash flows would lead to an increase in business fixed investment and household income.

B. Financial Developments

With regard to the overall financial environment, most members said that risks stemming from the financial side in the remainder of the fiscal year ending March 31 had subsided somewhat partly for the following reasons. First, the money market was very stable despite the approach of the fiscal year-end, as major banks had advanced their raising of funds that would mature beyond the fiscal year-end. And second, there had not been any extensive tightening in corporate financing conditions, as evidenced by developments in the yield differentials between JGBs and corporate bonds, which had been narrowing. Many members, however, stressed that there were several factors that gave cause for concern, such as the heightening of geopolitical risks and the weakness in prices of stocks, particularly bank stocks.

With regard to developments in the money market, most members agreed that participants continued to feel strongly that there was excess liquidity despite the approach of the fiscal year-end. These members said that the background to this was the Bank's early provision of ample funds that would mature beyond the fiscal year-end.

One member said that another factor that had alleviated the market's liquidity concern was that the Bank's communication with the market through its market operations, such as extending the maturity of its funds-supplying operations, had been successful. This member added that the current quantitative easing had had the following effects on financial markets. First, a high level of the outstanding balance of current accounts at the Bank had been very effective in securing availability of funds for financial institutions. Second, by conducting operations that were friendly to financial market participants, such as operations using bills with relatively longer maturity, the Bank had been providing sufficient funds to meet the needs of the market without necessarily further increasing its outright purchases of JGBs. And third, the Bank had been increasingly playing the role of a broker in the money market after the partial removal of blanket deposit insurance in April 2002. Moreover, it could still increase its supply of funds by improving its market operation measures by, for example, allowing more flexibility in the maturity of its funds-supplying operations.

A different member raised the following as points requiring attention. At present, the Bank was necessarily employing forceful policy measures that prevented liquidity risk and credit risk from materializing, and accordingly this made it difficult for the Bank to receive the information that it could normally receive through market transactions. Therefore, potentially there was a growing risk that fundamental problems would increase without being noticed.

Members were generally agreed on the following view on stock prices, which had been weak, moving at around the lowest level recorded since the bursting of the bubble: although the weakness in stocks had not led to any increase in liquidity risk or credit risk, the effects of the fall in stock prices, including those on life insurance companies and other firms that held bank stocks, required careful monitoring.

A few members said that the continued weakness in stock prices despite the distinct recovery in corporate profits reflected the following. First, the sustainability of the improvement in corporate profits was in question, since the improvement had been brought about by fairly large-scale restructuring of firms. And second, a sustainable increase in corporate profits was unlikely to come into prospect in the near future. In relation to this, one member expressed hope that financial assets of households, which were currently heavily concentrated in deposits and insurance, might flow into the stock market after the securities tax system was simplified. This member added that it was necessary to enable households to invest in a diversified range of instruments and noted the importance of promoting the internationalization of the yen by, for example, improving the market for yen-denominated bonds issued by nonresidents.

Members then discussed the fact that bank stock prices had recently been declining markedly after major banks announced plans to increase their capital.

One member pointed out that these banks' plans to increase their capital had been effective to some extent in stabilizing the money market. For instance, they had alleviated market participants' excessive concern about the approach of the end of fiscal 2002. However, in the stock market, the same plans were cause for concern that they might reduce existing shareholders' benefit, and the feasibility of these banks' increasing their profits was being strictly examined. A few members explained the background to the situation where a series of major banks' measures to increase their capital, which had initially been viewed favorably by the market, were now regarded as selling factors for the following reasons. First, there was concern about the feasibility of such plans. Second, the banks had not presented a long-term prospect of an increase in profits to cover the burden of paying increased dividends. And third, there was speculative selling of stocks. One of these members said that the recent developments in bank stock prices suggested the following. First, avoiding business failure in the short term and making steady progress in the disposal of NPLs were the minimum requirement for banks, and banks should present business models that would enable them to produce added value in the long term. And second, such developments made clear what the Bank could and could not do with its ample provision of funds.

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

On the monetary policy stance for the immediate future, members agreed that it was appropriate to maintain the current stance on the guideline for money market operations, for the following reasons. First, there were no major changes in the Bank's assessment of economic and financial developments since the previous meeting. And second, financial markets had been extremely easy and remained stable overall.

Members stressed that the Bank should provide ample liquidity in a timely and flexible manner if there was any risk of financial markets becoming unstable. This was because there were unpredictable risk factors, for example geopolitical developments, and also because there was the risk that the weakness in financial conditions would increase through the fiscal year-end depending on stock price fluctuations, the effects of special inspections of financial institutions, and the results of capital increase by banks. One member pointed out that the Bank had decided to change the contingency clause of the guideline for money market operations at the previous meeting, and had made it clear publicly that it would take necessary measures to secure financial market stability through the end of the fiscal year. Therefore, the Bank had already taken steps to ensure that it would be able to deal even with an emergency situation.

In relation to the future conduct of monetary policy, members exchanged views on the assessment and implications of developments in real long-term interest rates.

One member expressed the following view. First, real long-term interest rates of various countries including Japan calculated based on one method showed that they had recently converged almost to the same level. Therefore, the view that real interest rates in Japan were high due to deflation and the zero constraint on nominal interest rates and that they were adversely affecting effective demand was inappropriate. And second, sluggish domestic investment in the situation where real long-term interest rates were at around the same level as those overseas was evidence that marginal efficiency of investment was low in Japan. Thus, instead of encouraging inefficient investment through a decrease in real interest rates, it was necessary to stimulate investment through an increase in the potential growth rate. A different member commented that downward pressure on the economy from the current level of real interest rates was marginal. This member explained that it was unlikely that real interest rates would be an impediment to investment because the expected rate of return of sectors that could lead the business cycle was extremely high, for example around 20-30 percent, relative to real long-term interest rates, which were usually a few percent. However, given that expected growth of these sectors fluctuated greatly, challenges for Japan as well as other countries currently were how to strengthen confidence in expected growth and how to increase the rate of return on real assets. In the past, investment in inefficient sectors had been brought about by an increase in the availability of funds rather than a decline in interest rates. Recently, investment in such sectors was being restrained mainly by a decline in prices of financial assets.

A different member further pointed out that Japan's real long-term interest rates had been declining at a moderate pace since the early 1990s and they were currently at extremely low levels. On this basis, this member added that, from the macroeconomic standpoint, it could not be said that high real interest rates arising from the fall in general prices were weakening the economy, nor that they were causing debt deflation, which would lead to balance-sheet problems and financial system problems. Therefore, the various current problems in Japan's economy stemmed primarily from asset-price deflation.

In relation to these views, one member stressed that it was necessary to distinguish between a view that the current pace of decline in general prices was not the main problem in Japan's economy, and a view on policy issues that it was desirable to aim at an increase in prices to some extent, taking into account strong pressure for balance-sheet adjustment, the upward bias of price indexes, and the zero constraint on nominal interest rates. Moreover, another member commented that in reality it was unlikely that deflation would have no effect on debtors' behavior. In response to this, a different member, who said that the effect of real long-term interest rates on the economy was marginal, explained that the member would not support the idea of leaving prices to fall at the current pace. This was because the member was aware that there was a risk that real interest rates might rise higher than the current level, as room for further decline in nominal long-term interest rates was limited. In addition, lower real interest rates could be appropriate to prevent further price falls.

One member commented regarding calls for direct provision of liquidity by the Bank to the nonfinancial sector. First, liquidity provision by the Bank would have significance in the situation where there were liquidity constraints on the side of recipients. However, at present, the nonfinancial sector, consisting of firms and households, had surplus funds as a whole. And second, while a closer examination revealed that there were entities in the sector that were experiencing fund shortages, a central bank could only provide liquidity in exchange for assets of equivalent value. Therefore, a central bank could not provide liquidity directly to such entities in dire need of funds that did not have highly liquid financial assets. On this basis, the member concluded that it was important for the Bank to continue to support the nonfinancial sector by resolving liquidity constraints of financial institutions and fostering financial markets. As an example, this member pointed out that the Bank was striving to facilitate securitization of small firms' accounts receivable. The member added that if the Bank was requested to underpin asset prices, not to provide liquidity, this was inconsistent with the current policy direction of the Government. This was beyond the scope of monetary policy, and thus the Bank could not decide such a measure on its own.

Some members commented on the conduct of monetary policy from a longer-term perspective.

One member said that the member would agree to maintaining the current monetary policy stance and gave the following reasons. It would be appropriate for the Bank to employ available measures to overcome deflation given that the inflation rate was unlikely to become positive in the near future, although the rate of decline in prices was tending to slow. However, even if measures to increase the probability of a price rise were taken under the current policy framework, they seemed unlikely to be very effective. The feasibility and side effects of policy measures that would have a stronger influence on the outlook for prices had not yet been discussed thoroughly.

In response to this, a different member said that a mere increase in liquidity would not have much significance in terms of its stimulative effect on economic activity. The member continued that, essentially, the following two options would be available as measures that could be taken by the Bank on its own. First, to broaden the range of assets used in the Bank's market operations and of eligible collateral. And second, to establish a new framework for market operations oriented toward influencing the price of financial assets. On this basis, this member expressed the view that monetary policy decisions were made, taking into account the present and possible future situations, through discussions in which no specific measure was ruled out. It would be necessary to deliberate thoroughly on the purpose and logic of each policy measure and which entity ought to be responsible for taking it.

V. Remarks by Government Representatives

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

(1) Governor Masaru Hayami and the staff had been committed to the maintenance of price stability and sound economic development since the enforcement of the new Bank of Japan Law. They had implemented unprecedented monetary policy measures such as the zero interest rate policy and the quantitative monetary easing policy. The Government would like to express its appreciation of their efforts over the past five years.

(2) The Bank was providing ample liquidity to financial institutions, but this had not stimulated the flow of funds in the economy. This was evident in a decrease in financial institutions' lending and a slower pace of increase in the money stock. Against this background, deflation continued, with prices showing no sign of a rebound. Given this, some market participants were expressing their opinion that the Bank should review the effects of the quantitative monetary easing policy it had implemented in the last two years.

(3) The Government would like the Bank to devise other effective monetary easing measures that would improve both the quality and quantity of liquidity provision and to implement them, giving due consideration to the situation in the household and corporate sectors. The Government would like to ask the Bank to do its utmost to deal with developments in liquidity demand toward the end of the fiscal year in a swift and appropriate manner so that there would not be anxiety in the market about the availability of liquidity.

(4) As in the previous meeting, the representative stated his personal view as follows: the Bank's outright purchases of JGBs should be increased to, for example, 2 trillion yen per month from the current 1.2 trillion yen per month, to promote rebalancing of financial institutions' portfolios; and the current ceiling on the Bank's outright purchases of JGBs of the outstanding amount of banknotes should therefore be removed for a set period of time and should be reviewed again after the effects of the above measures materialized.

(5) The pace of increase in the money stock had been slowing more or less in parallel with the pace of increase in the monetary base since the beginning of 2003. The growth of the monetary base was undoubtedly the driving force for the increase in the money stock. The Government would therefore like the Bank to consider and conduct monetary policy from the viewpoint of maintaining the high growth of the monetary base. This would enable the Bank to show a firm resolution to overcome deflation.

(6) The current contingency clause of the guideline for money market operations might be giving the staff too much discretion, although it was effective in dealing with emergency situations in a timely manner. The main clause of the guideline should therefore be revised to enable the Bank to deal with every situation without depending too much on the contingency clause except in an emergency situation, and this was desirable from the viewpoint of enhancing the transparency of monetary policy.

The representative from the Cabinet Office made the following remarks.

(1) While movements of an incipient recovery could be seen in some areas of the economy, the state of the economy had weakened somewhat. Regarding the outlook, there were concerns that the uncertainty surrounding the future of the world economy and the weakening of consumer confidence might continue to exert downward pressure on final demand. It was, therefore, necessary to monitor economic and financial developments more closely than in the past, taking into account global political and economic developments.

(2) In order to realize sustainable growth led by private demand, the Government considered it important to make efforts to steadily implement the "Program to Accelerate Reforms" and the supplementary budget for fiscal 2002, which was formulated in accordance with the program, as well as to obtain as soon as possible the Diet's approval for the fiscal 2003 budget and tax reform measures and to implement them. The fiscal 2002 version of "Structural Reform and Medium-Term Economic and Fiscal Perspectives" stated as follows: overcoming deflation was the most important task in the intensive adjustment period through fiscal 2004, and comprehensive measures, including ones to deal with the financial situation, were essential, and thus the roles of the Government and the Bank were vital.

(3) Based on this thinking, the Government would like the Bank to deliberate further on effective monetary policy measures from a wide range of options, including ones that might not be based on conventional frameworks, and implement them to make the inflation rate positive as soon as possible giving due consideration to the recent developments in financial institutions' lending and the money stock.

VI. Votes

Based on the above discussions, members considered that it was appropriate to maintain the current stance on the guideline for money market operations. However, in view of the establishment of Japan Post, members agreed that from April 1, 2003 it was appropriate to increase both the ceiling and the floor of the target for the outstanding balance of current accounts at the Bank by 2 trillion yen.

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 1).

Until March 31, 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. From April 1, considering necessary adjustment due to the establishment of the Japan Post, the Bank will conduct money market operations, aiming at the outstanding balance of current accounts held at the Bank at around 17 to 22 trillion yen.

For the time being, the Bank will provide more liquidity irrespective of the above target when necessary to secure financial market stability towards the end of a fiscal year.

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 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 March 6, 2003 in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background").¹⁰

10The original full text, in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on March 6, 2003 together with the English version of "The Bank's View." The English version of "The Background" was published on March 7, 2003.

VIII. Approval of the Minutes of the Monetary Policy Meeting

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of February 13 and 14, 2003 for release on March 10, 2003.

IX. Approval of the Scheduled Dates of the Monetary Policy Meetings in April-September 2003

At the end of the meeting, members approved the dates of Monetary Policy Meetings to be held in the period April-September 2003, for immediate release (see Attachment 2).

Attachment 1

For immediate release

March 5, 2003
Bank of Japan

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