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Minutes of the Monetary Policy Meeting

on March 25, 2003
(English translation prepared by the Bank's staff based on the Japanese original)

May 6, 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 25, 2003, from 8:03 a.m. to 11:41 a.m.1

Policy Board Members Present
Mr. T. Fukui, Chairman, Governor of the Bank of Japan
Mr. T. Muto, Deputy Governor of the Bank of Japan
Mr. K. Iwata, Deputy Governor of the Bank of Japan
Mr. K. Ueda
Mr. T. Taya
Ms. M. Suda
Mr. S. Nakahara
Mr. H. Haru
Mr. T. Fukuma

Government Representatives Present
Mr. T. Taniguchi, Senior Vice Minister of Finance, Ministry of Finance
Mr. Y. Kobayashi, Vice Minister for Economic and Fiscal Policy, Cabinet Office

Reporting Staff
Mr. T. Mitani, 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, Deputy Director-General, Policy Planning Office
Mr. S. Kushida, Director, Head of Planning Division I, Policy Planning Office
Mr. K. Yamamoto, Director-General, Financial Markets Department
Mr. H. Hayakawa, Director-General, Research and Statistics Department
Mr. K. Momma, Director, Research and Statistics Department
Mr. A. Horii, Director-General, International Department

Secretariat of the Monetary Policy Meeting
Mr. Y. Hashimoto, Director-General, Secretariat of the Policy Board
Mr. Y. Nakayama, Adviser to the Governor, Secretariat of the Policy Board
Mr. N. Yoshioka, Director, Head of Planning Division II, Policy Planning Office
Mr. H. Onobuchi, Deputy Director, Secretariat of the Policy Board
Mr. K. Etoh, Senior Economist, Policy Planning Office
Mr. S. Shimizu, Senior Economist, Policy Planning Office

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on April 30, 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. English translation of some titles has been revised.

I. Remarks on the Purpose of the Ad Hoc Monetary Policy Meeting

The chairman first explained the reason for calling the ad hoc Monetary Policy Meeting. His basic understanding of the current situation was as follows. First, Japan's economy was vulnerable to external shocks due to the lack of momentum for a self-sustained recovery in domestic demand, weak stock prices, and the persistence of the nonperforming-loan (NPL) problem. And second, the situation in Iraq was creating significant uncertainties for Japan's economy. Thus, it was necessary to discuss contingency measures for the immediate future at a Monetary Policy Meeting. In addition, the Bank should promptly examine the policy framework of monetary easing for the longer term, taking into account downside risks stemming from the situation in Iraq, considering the fact that new members had joined the Policy Board.

Some members expressed concern that the transparency of the Bank's conduct of monetary policy might be impaired if ad hoc meetings were held frequently. In response to this, the chairman said that this meeting was very exceptional, held with the intention of promptly dispelling markets' uncertainty about the Bank's future conduct of monetary policy following the appointment of three new members of the Policy Board, in addition to the need to deal with the effects of the situation in Iraq. The chairman made it clear that the Bank would firmly maintain the principle of holding Monetary Policy Meetings according to the schedules released in advance, and would explain this clearly to the public.

II. Summary of Staff Reports on Financial Market Developments2

A. Money Market Operations in the Intermeeting Period

The Bank conducted market operations in accordance with the guideline decided at the previous meeting on March 4 and 5, 2003.3 Since March 11, it had increased the outstanding balance of current accounts at the Bank to a level exceeding 20 trillion yen (the ceiling of the current target range) in accordance with the contingency clause of the guideline for money market operations by conducting, for example, same-day-start funds-supplying operations. The Bank's intention was to prevent anxiety prompted by geopolitical tension from spreading throughout the financial markets. The Bank provided more ample funds to the market after the United States and other nations started taking military action against Iraq. The outstanding balance of current accounts at the Bank recently increased to around 24 trillion yen.

As a result of the above operations, participants in the money market continued to feel strongly that there was excess liquidity.

  1. 2Reports were made based on information available at the time of the meeting.
  2. 3The guideline was as follows:
    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.

B. Recent Developments in Financial Markets

Short-term interest rates were stable compared with the same period in the previous year, partly due to the Bank's early provision of funds that would mature beyond the fiscal year-end. Yields on financing bills and treasury bills, however, had been rising slightly since the beginning of March reflecting a substantial increase in their issuance, but these movements had not spread to interest rates in other financial markets.

In capital and foreign exchange markets worldwide, stock prices had been falling, the U.S. dollar had been depreciating, and bond prices had been rising from mid-December 2002, reflecting concern about geopolitical risks. However, from the second half of the week starting March 17, there had been reverse movements in all three markets due to expectations that the military action against Iraq would be short. This optimistic view in overseas markets, however, subsided slightly on March 24. There remained a risk of financial market instability against the background of factors such as uncertainty about the outlook for the world economy and concern about the federal budget deficit in the United States.

III. Summary of Discussions by the Policy Board on Economic and Financial Developments and on Monetary Policy for the Immediate Future

A. Economic and Financial Developments

Members agreed that there were no significant changes in the state of Japan's economy since the previous meeting. Some members said that there were slightly positive signs in some indicators of private demand such as machinery orders. As for the outlook, however, there was considerable uncertainty about how future developments in Iraq would affect Japan's economy.

With regard to the U.S. economy, some members said that the impact of the start of the military action against Iraq on consumer sentiment, indicators relating to employment, and developments in the federal budget deficit required careful monitoring.

Members commented on developments in Japanese financial markets since the United States and other nations started taking military action against Iraq. They agreed that the financial markets were generally stable recently partly reflecting expectations that the military action would be short, but there was a risk that they might become unstable depending on future developments in Iraq. Some members said that the effects of stock price falls on the financial system required particular attention.

B. 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 target for the outstanding balance of current accounts at the Bank, given that there were no major changes in the Bank's assessment of economic and financial developments since the previous meeting.

Members agreed to change the contingency clause of the guideline for money market operations so that the Bank could provide ample liquidity beyond the fiscal year-end based on the clause, in order to secure financial market stability in the current situation where there was significant uncertainty such as geopolitical risks. Moreover, members concurred on the use of the complementary lending facility (the Lombard-type lending facility) as follows: it was appropriate, for the time being, to suspend the current restriction limiting the maximum number of days for which the official discount rate could be applied in one reserve maintenance period to five business days.

Some members said that a reduction in banks' exposure to risks arising from stock price volatility would be effective in preventing stock price falls from negatively affecting the financial system and then the economy as a whole. These members continued that they would like to discuss at a regular Policy Board meeting whether the Bank should increase its purchase limits for stocks held by banks.

IV. Summary of Discussions by the Policy Board on the Current Framework for Monetary Policy

The chairman raised the following points at the outset. First, it was necessary for the Bank to examine whether there was room for improvement in the current framework for the conduct of monetary policy, given the prevailing severe economic conditions and the effects of the military action against Iraq. And second, enhancing monetary policy transparency and strengthening the monetary policy transmission mechanism were particularly important points for consideration. Other members agreed with the chairman, saying that it would be meaningful to review the basic thinking behind the conduct of monetary policy based on the experience of quantitative easing so far. One of these members added that it would be important to discuss this thoroughly and also to examine whether the points to be discussed were in line with those in previous meetings.

Members discussed the effects of quantitative easing measures taken so far. Many members said that the measures had been effective in securing the stability of financial markets and preventing the economy from falling into a deflationary spiral. However, they had not had sufficient stimulative effects on the economy due to the zero bound constraint on interest rates and the NPL problem. A few members added that, specifically, few clear effects of the measures had been observed in risk premiums on corporate bonds with low credit ratings, stock prices, or the foreign exchange market. A different member said that the functioning of financial markets had been weakened to some extent as a result of the Bank's ample provision of funds.

Based on the above discussion, members agreed that it was important to strengthen the transmission mechanism of monetary easing. Some members stressed that progress in structural reform, in particular the disposal of NPLs, was a prerequisite for enhancing the effectiveness of liquidity provision. One of these members expressed the view that the Bank should continue to do its utmost within its domain to advance structural reform in coordination with the relevant authorities.

Some members commented on the effect of the Bank's commitment in terms of policy duration in relation to strengthening the transmission mechanism of monetary easing. One member expressed the view that the Bank's current commitment to maintain its quantitative easing policy might have been causing economic entities to have deflationary expectations. A different member said that it was a problem that, although the commitment effect had lowered nominal long-term interest rates, persistence of deflationary expectations had raised real interest rates. This member continued that, from the viewpoint of enhancing the effectiveness of monetary easing, it was therefore important to influence economic entities' expectations and to cause real interest rates to decline. In response to this, a few members expressed the view that, as a prerequisite for affecting economic entities' expectations, there had to be an identifiable route for transmission of the effects of monetary policy.

Members exchanged views on whether it was appropriate to diversify the range of assets the Bank purchased as a measure to increase the effectiveness of the quantitative easing policy. Many members said that, in addition to the question of whether such purchases would lead to strengthening of the monetary policy transmission mechanism, a key point was what effects the Bank's purchases of high-risk assets would have on its profits and financial condition. Some members stressed the importance of ensuring that the financial condition of the Bank remained sound from the viewpoint of maintaining the credibility of the Bank's independence and public confidence in the currency. A few members said that purchases of risk assets by the Bank might reduce its payment to the national treasury, and in this respect, they were within the area of fiscal policy. This should be borne in mind when discussing such purchases. In relation to this, one member commented that diversifying the range of assets the Bank purchased might be effective in reducing the Bank's risk exposure to market fluctuations stemming from purchasing mostly Japanese government bonds (JGBs). In response to this, one member commented that it was not always appropriate to diversify the range of assets the Bank purchased solely in order to maintain the soundness of its financial condition. The member also expressed the view that it was necessary to examine carefully whether the Bank's purchases of a diversified range of assets would impair the price mechanism of the markets concerned.

Some members said that, in addition to the above discussion, it was worth discussing how the Bank could contribute to facilitating smooth corporate financing through, for example, its market operations.

Several issues were taken up in the discussion about enhancing the transparency of the conduct of monetary policy. A few members said that it was necessary to discuss this from a wide range of perspectives, including how to explain monetary policy to the public, in addition to improving its predictability.

Members discussed inflation targeting in relation to enhancing the transparency of monetary policy. One member stressed the importance of setting a goal for policy rather than the target for money market operations, the outstanding balance of current accounts at the Bank. This member said that it would be meaningful to define the notion of price stability in detail as a standard for assessing monetary policy, and this would make the conduct of monetary policy clearer to the public including market participants. This member explained that presenting a target for price stability with a commitment to achieve it within a certain time frame could raise the expected inflation rate. Furthermore, a rise in the expected inflation rate combined with stabilization of nominal long-term interest rates could make real interest rates decline. In response to this, one member remarked that the Bank's current commitment in terms of the duration of quantitative easing already incorporated many elements of inflation targeting, as it indicated clearly the Bank's policy stance for the foreseeable future. Many members including this member expressed the view that, even if the Bank presented a target for price stability, it would not be easy to affect the expected inflation rate in the current situation where the transmission mechanism of monetary policy was not functioning fully. A few members expressed concern that there was a risk that nominal long-term interest rates might increase before the expected inflation rate rose.

In the course of the above discussion, some members said that they understood the importance of defining the notion of price stability in detail as the ultimate target for monetary policy. A few of these members said that it was worth discussing whether there was room for enhancing the transparency of the conduct of monetary policy by, for example, improving the content of the semiannual report "Outlook and Risk Assessment of the Economy and Prices."

Based on the above discussion, members agreed to further examine the basic framework for the conduct of monetary policy, in particular, to discuss measures to improve the transparency of the conduct of monetary policy and the monetary policy transmission mechanism. The chairman then instructed the Bank's staff to examine a wide range of issues related to the enhancement of monetary policy transparency and the strengthening of the monetary policy transmission mechanism based on the experience of quantitative easing so far and report back to the next Monetary Policy Meeting. The chairman particularly instructed the Bank's staff to explore possible measures to strengthen the transmission mechanism of monetary easing in the areas of corporate finance and money market operations and report back as soon as possible.

V. Remarks by Government Representatives

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

(1) Prices continued to fall despite various measures taken by the Bank to overcome deflation. The role of the Bank remained vital. The Government hoped that the Policy Board, to which the Governor and Deputy Governors were newly appointed, would commit itself to maintaining price stability and an orderly financial system, and to the sound development of the economy through the pursuit of these two objectives.

(2) Regarding the military action against Iraq by the United States, the United Kingdom, and other nations that began on March 20, the general view in the market was that it would end within a short period. The Government would make every effort, in close coordination with other countries, to prevent disruption in economies at home and abroad from materializing as a result of it and thereby causing public concern.

(3) The Government would like to express its appreciation of the Bank's decision to hold this ad hoc Monetary Policy Meeting as it was very timely. As for the future conduct of monetary policy, 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, as the representative had said in the previous meetings. The Government would also like to ask the Bank to take every necessary step, including the provision of ample liquidity, so that emergency situations did not materialize in the market.

(4) The ruling parties were examining various measures in a situation where there was uncertainty about developments in Japanese stock prices through the end of March and about the future course of events in Iraq. In view of this uncertainty, the Government would like the Bank to deal with the situation by swiftly devising policy measures.

(5) In relation to the Bank's outright purchases of JGBs, it was worth considering, for example, increasing the purchases to 2 trillion yen per month and temporarily removing the current ceiling on its JGB holdings of the outstanding amount of banknotes until the end of March 2004, with a view to promoting rebalancing of financial institutions' portfolios.

The representative from the Cabinet Office made the following remarks.

(1) The Government considered that it was timely to hold this ad hoc Monetary Policy Meeting as the current situation was unpredictable. Moreover, the Government hoped that the Bank, headed by the new Governor and Deputy Governors, would conduct monetary policy to overcome deflation in closer coordination with the Government.

(2) The economy had become roughly flat recently. The economic outlook had become less clear due to growing uncertainties following the military action against Iraq and to the worldwide weakness in stock prices. The Government had established an "Emergency Measures Headquarters for the Situation in Iraq" immediately after the action began. For the time being, the Government would monitor closely financial markets and the crude oil market as well as the situation in Iraq in cooperation with other countries. In addition, the Government would take necessary measures to prevent people's lives from being disrupted by, for example, ensuring financial system stability and securing the availability of crude oil. The Government had been informed that the Bank had also set up an internal committee headed by the Governor to deal with the situation.

(3) The most important task for the Japanese economy in the medium term was to overcome deflation. The fiscal 2002 version of "Structural Reform and Medium-Term Economic and Fiscal Perspectives" stated that the situation would improve reflecting measures taken by the Government and the Bank, and deflation would be overcome after the intensive adjustment period through fiscal 2004. The Government had been taking every possible measure to overcome deflation in fiscal 2005 while accelerating structural reforms. To this end, the Government strongly hoped that the Bank would take further effective monetary policy measures, including ones that might not be based on conventional frameworks, in close communication with the Government. Furthermore, the Government would like the Bank to conduct monetary policy appropriately and flexibly taking into account developments in financial markets, including foreign exchange markets, at home and abroad.

VI. Votes

Based on the above discussions, members agreed that at this meeting the Bank should (1) change the contingency clause of the guideline for money market operations to accommodate to recent developments, while maintaining the current stance in the guideline; and (2) apply the official discount rate to the complementary lending facility (the Lombard-type lending facility) on any business day for the time being as a temporary measure.

To reflect this view, the chairman formulated the following two proposals.

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

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

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, given that significant uncertainty including geopolitical risks is likely to persist, the Bank will provide more liquidity irrespective of the above target when necessary to secure financial market stability.

2. A public statement will be decided separately.

Votes for the proposal: Mr. T. Fukui, Mr. T. Muto, Mr. K. Iwata, Mr. K. Ueda, Mr. T. Taya, Ms. M. Suda, Mr. S. Nakahara, Mr. H. Haru, and Mr. T. Fukuma.

Votes against the proposal: None.

The Chairman's Policy Proposal on the Complementary Lending Facility:

1. For the time being, starting March 26, 2003, when the Bank conducts lending based on the "Principal Terms and Conditions for the Complementary Lending Facility" (Policy Board Decision on February 28, 2001), it will apply the official discount rate on any business day, as a temporary measure, irrespective of the current restriction on the maximum number of days for such use prescribed in item 5 of the above.

2. A public statement will be decided separately.

Votes for the proposal: Mr. T. Fukui, Mr. T. Muto, Mr. K. Iwata, Mr. K. Ueda, Mr. T. Taya, Ms. M. Suda, Mr. S. Nakahara, Mr. H. Haru, and Mr. T. Fukuma.

Votes against the proposal: None.

VII. Discussion on the Public Statement

Members discussed the draft of the public statement prepared by the staff regarding the above decisions of the Board, and put it to the vote. The Board approved, by unanimous vote, "On Today's Monetary Policy Meeting" and decided to release it immediately after the meeting (see attachments 1 and 2).

A press conference regarding the decisions of the Board would be held by the chairman on the same day after the meeting.

VIII. Approval of the Scheduled Date of Release of the Minutes of the Monetary Policy Meeting of March 25, 2003

At the end of the meeting, members agreed to release the minutes of this Monetary Policy Meeting on Tuesday, May 6, 2003, following approval at the Monetary Policy Meeting on Wednesday, April 30, and decided to make this public immediately after the meeting (see Attachment 3).


Attachment 1

For immediate release

March 25, 2003
Bank of Japan

On Today's Monetary Policy Meeting

1. Economic activity in Japan remains stagnant without clear signs of recovery in final domestic demand. At the same time, there exists substantial uncertainty about the economic outlook including prospects for overseas economies, stock market developments and progress in dealing with nonperforming loans.

2. Military action against Iraq started against this background. The Bank of Japan is closely monitoring how the military action will affect the economy, especially through stock and foreign exchange markets, and stands ready to make every effort, including the additional provision of liquidity, to ensure financial market stability (see Attachment 2). For this purpose, for the time being, the Bank will apply the official discount rate to the Lombard-type lending facility on any business day, suspending the current restriction on the maximum number of days for such use.

3. Given the prevailing severe economic and financial conditions including the effects of military action against Iraq, the Bank decided to further examine the basic framework for the conduct of monetary policy.

4. As input to the process of discussing the basic framework, the Chairman instructed Bank staff to examine a wide range of issues related to the enhancement of monetary policy transparency and the strengthening of the monetary policy transmission mechanism based on the experience of quantitative easing so far and report back to the next MPM.

With respect to specific measures, the Chairman particularly instructed Bank staff to explore possible measures to strengthen the transmission mechanism of monetary easing in the areas of corporate finance and money market operations and report back to the MPM as soon as possible.


Attachment 2

For immediate release

March 25, 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:

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, given that significant uncertainty including geopolitical risks is likely to persist, the Bank will provide more liquidity irrespective of the above target when necessary to secure financial market stability.


Attachment 3

For immediate release

March 25, 2003
Bank of Japan

Scheduled Date of Release: Minutes of Today's Monetary Policy Meeting

The Bank of Japan will release the minutes of today's Monetary Policy Meeting on Tuesday, May 6, following the approval at the Monetary Policy Meeting on Wednesday, April 30.