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Minutes of the Monetary Policy Meeting

on April 30, 2003
(English translation prepared by the Bank's staff based on the Japanese original)

June 16, 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 Wednesday, April 30, 2003, from 9:00 a.m. to 1:29 p.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. E. Hirano, Executive Director (Assistant Governor)
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, Head of Economic Research Division, 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 2
Mr. M. Ohsawa, Director, Head of Money and Capital Markets Division, Financial Markets Department 2
Mr. H. Onobuchi, Deputy Director, Secretariat of the Policy Board
Mr. K. Etoh, Senior Economist, Policy Planning Office
Mr. H. Yamaoka, Senior Economist, Policy Planning Office

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on June 10 and 11, 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.
  2. Messrs. Yoshioka and Ohsawa were present from 9:00 a.m. to 9:08 a.m.

I. Decision concerning an Amendment to the Guidelines on Eligible Collateral

A. Staff Proposal

The Industrial Revitalization Corporation of Japan (IRCJ), which was established on April 16, 2003, would finance its operation based on a government guarantee. The staff proposed that, to further facilitate money market operations, the Guidelines on Eligible Collateral be amended to allow the Bank to accept government-guaranteed loans on deeds to the IRCJ as collateral from April 30, 2003. The staff considered that this would also contribute to securing financial system stability by facilitating the IRCJ's financing.

B. Members' Discussion and Vote

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

II. Summary of Staff Reports on Economic and Financial Developments 3

A. Money Market Operations in the Intermeeting Period

The Bank conducted market operations in accordance with the guideline decided at the previous meeting on April 7 and 8, 2003.4 It continued to aim higher than the ceiling of the target range, given that financial institutions were holding a larger amount of reserves due to concern about the situation in Iraq and the sluggishness in stock prices. Since late April, however, it had been decreasing the outstanding balance of current accounts at the Bank gradually, carefully monitoring developments in the market, partly reflecting the fact that the situation in Iraq was starting to settle down.

As a result of the Bank's operations, the weighted average of the uncollateralized overnight call rate remained at 0.001-0.002 percent.

B. Recent Developments in Financial Markets

Money market rates overall continued to be stable due to the Bank's provision of ample liquidity. Yields on financing bills (FBs) and treasury bills (TBs) as well as repo rates were, however, rising slightly, since financial institutions had become cautious in investing in these securities reflecting the fall in bank stocks.

In domestic capital markets, stock prices continued to weaken and long-term interest rates remained on a downward trend, despite the fact that the situation in Iraq was starting to settle down. These developments were due to the persistent uncertainty about the economic outlook, including the impact of severe acute respiratory syndrome (SARS).

The Nikkei 225 Stock Average remained weak, moving in the 7,500-8,000 yen range, while stock prices overseas were recovering. The weakness was attributable to the following factors: the persistent uncertainty about the outlook for Japan's economy and firms' business performance; and market participants' view that the supply-demand balance of the market would deteriorate due to selling of stocks by corporate pension funds, which were returning funds entrusted to them in order to discontinue acting on behalf of public pension funds. Long-term interest rates had declined further, since banks and pension funds had become increasingly active in investing in bonds with a maturity of ten years or longer.

The yield differentials between Japanese government bonds (JGBs) and corporate bonds in the secondary market, including those with low credit ratings, had narrowed despite weak developments in the stock market, reflecting active investment in corporate bonds by regional banks and institutional investors. The yield differentials between JGBs and bank bonds as well as credit default swap rates for banks were also following a downward trend.

The yen had generally fluctuated in the range of 119-121 yen against the U.S. dollar. Against the euro, it had depreciated to the 132 yen level.

C. Overseas Economic and Financial Developments

The U.S. economy had stayed on a modest recovery trend, but the momentum for an increase in production, employment, and income was weakening. Private consumption remained on a moderate upward trend. However, the deterioration in the employment situation and a worsening of consumer confidence gave cause for concern. In addition, there had been no sign that business fixed investment was on a recovery trend.

The U.S. economic indicators released in the intermeeting period offered no grounds to significantly change the above assessment of the economy. Real GDP continued to mark low growth at an annual rate of 1.6 percent in the January-March quarter of 2003 from the previous quarter, following the 1.4 percent in the October-December quarter of 2002. The growth in private consumption was declining, and business fixed investment was decreasing.

With regard to economic indicators related to household spending in the United States, retail sales, automobile sales, and housing starts recovered slightly in March from the previous month. Weekly retail sales statistics declined temporarily after the start of the military action against Iraq, but they had been on a recovery trend since the beginning of April. As for economic indicators related to the U.S. corporate sector, industrial production for March declined by 0.5 percent from the previous month due to the decrease in production in the energy-related sector reflecting the decline in demand for electricity owing to the mild winter, and the decrease in production of automobiles.

Regarding price developments in the United States, both producer prices and consumer prices, particularly energy prices, increased significantly in March due to the rise in crude oil prices. Prices excluding food and energy, however, remained stable.

In U.S. financial markets, stock prices were rising gradually reflecting the expectation for a recovery in corporate profits, as concern about geopolitical risks was subsiding. However, the prevailing view was that the pace of economic recovery would remain moderate. Against this background, long-term interest rates remained level.

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. In the United Kingdom, the economy was on a recovery trend against the background of the firmness in private consumption. Economic indicators released in the intermeeting period, such as orders received from abroad in Germany and industrial production in the euro area and the United Kingdom, offered no grounds for changing the above assessment of the economy in these areas.

In European financial markets, although concern about geopolitical risks had subsided, market participants continued to take a cautious view of the economic outlook, as evidenced by the fact that long-term interest rates remained level. Judging from developments in EURIBOR futures, market participants seemed to continue to expect that the European Central Bank (ECB) would cut interest rates by the end of 2003. Stock prices rose partly due to some firms' announcement of larger-than-expected profits.

In China, economic growth remained high as evidenced by the 9.9 percent increase in real GDP for the January-March quarter of 2003 on a year-on-year basis. NIEs and ASEAN economies stayed on a recovery trend. Domestic demand remained generally firm, although the pace of increase in exports slowed. In South Korea, however, consumer confidence continued to deteriorate, partly due to the mounting tension in the Korean peninsula. In some East Asian economies, particularly China and Hong Kong, where SARS infection was spreading, a negative impact was starting to be observed in some industries, particularly tourism and the retail industry. If SARS were to spread further, East Asian economies could be damaged significantly. Future developments in its spread and the effects on the economy of the region were cause for concern.

Developments in financial markets in emerging economies were as follows: in some East Asian economies, such as China, Hong Kong, and Singapore, stock prices were declining due to concern about the spread of SARS; in Latin America, however, stock prices were rising and currencies were appreciating.

D. Economic and Financial Developments in Japan

1. Economic developments

The following indicators were released in the intermeeting period: machinery orders for February; and trade statistics, the preliminary report on the Indices of Industrial Production, and indicators relating to private consumption for March. The Indices of Industrial Production and real exports and imports were retroactively revised. These revised figures suggested that economic developments had been slightly firmer than had been thought, but the underlying trend of the economy remained basically unchanged in that clear signs of a recovery had not been observed.

Real exports for the January-March quarter decreased slightly by 0.8 percent on a quarter-on-quarter basis due to a considerable decline in exports, especially of automobiles, to the United States, which offset the substantial increase in exports to China. On balance, however, they remained on a modest uptrend, since the decrease came after the high growth of 4.5 percent on a quarter-on-quarter basis in the previous quarter. However, there was increasing uncertainty about the environment for exports: geopolitical risks to overseas economies persisted, although they had decreased; and there was concern about the impact of SARS on East Asian economies. It was, therefore, necessary to monitor future developments in overseas economies carefully.

With regard to private consumption, outlays for travel in February, sales at department stores in March, and indicators relating to consumer confidence were released in the intermeeting period. There had not been any marked developments to change the assessment that private consumption continued to be weak. However, a downward trend in consumer confidence was cause for concern considering the fact that private consumption had been holding up fairly well relative to the weakness in household income. There was no major change in employment statistics for March, but the unemployment rate rose slightly and the ratio of job offers to applicants decreased slightly.

As for indicators relating to business fixed investment, machinery orders decreased considerably in February, but the total for January and February converted to a quarterly basis showed relatively high growth compared with the October-December quarter for both manufacturers and nonmanufacturers. Shipments of capital goods were retroactively revised, and were on a gradual uptrend after hitting bottom in the April-June quarter of 2002. Both statistics confirmed that business fixed investment was starting to recover, but a strong recovery had not yet been observed.

Regarding industrial production, figures for the October-December quarter of 2002 increased slightly to a positive figure due to the retroactive revision of the statistics. Figures for the January-March quarter of 2003, however, remained virtually level. The forecasts for production for April and May also remained level on the whole. Given this, it was necessary to monitor developments in production for the near future together with exports.

With regard to price indicators for March, import prices rose compared with those of three months earlier, reflecting the sharp rise in crude oil prices prior to the military action against Iraq. Domestic corporate goods prices rose slightly compared with three months earlier with the rise in import prices and the improved supply-demand balance in materials industries such as steel. Corporate services prices continued to decline gradually, falling by slightly less than 1 percent year on year. Consumer prices declined by 0.6 percent year on year, a somewhat smaller fall than in February, due to the rise in gasoline and kerosene prices. The pace of the year-on-year decline was expected to continue to slow somewhat in April and thereafter, as medical costs were projected to rise due to public insurance reforms and the effects of the reduction in electricity charges since 2002 were expected to fall off. Consumer prices in the Tokyo metropolitan area decreased by 0.4 percent from the previous year in April, less than the 0.7 percent year-on-year decline in March.

2. Financial environment

Private banks' lending in March declined by 2.2 percent on a year-on-year basis, a slightly smaller fall than in February. This reflected the fact that banks that had received an injection of public funds seemed to have gradually become more willing to lend to small firms, in line with the "Business Improvement Administrative Order."

The year-on-year growth rate of the monetary base continued to be about 10 percent after the start of the new fiscal year in April 2003. A breakdown indicated that the growth rate of banknotes, which constituted a large part of the monetary base, continued to decline reflecting the significant increase 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 outstanding balance of current accounts at the Bank, on the other hand, increased slightly. The year-on-year growth rate of the money stock was around 2 percent. That of broadly-defined liquidity was 1-2 percent.

The Bank's Senior Loan Officer Opinion Survey on Bank Lending Practices at Large Japanese Banks showed that firms' demand for loans as perceived by banks continued to follow a downtrend, and the net percentage of respondents selecting "substantially weaker" or "slightly weaker" increased in the January-March quarter. On the other hand, the net percentage of respondents selecting "eased considerably" or "eased somewhat" for their lending attitude toward small firms increased slightly in the January-March quarter, although that for large and medium-sized firms decreased. With regard to terms and conditions of loans to small firms, banks slightly eased their stance on credit lines and interest rate margins. Against this background, the National Life Finance Corporation's survey and the Japan Finance Corporation for Small Business's survey showed that the lending attitude of financial institutions as perceived by firms had become slightly less severe.

Various indicators relating to corporate finance improved slightly, reflecting the fact that some financial institutions were becoming more willing to lend. There was also improvement in the conditions for financing through issuance of CP and corporate bonds, as seen in the contraction in credit spreads on CP and corporate bonds with low credit ratings. However, such improvements were marginal, and there were no significant changes in the severity of corporate financing conditions, especially for small firms. Stock prices remained weak after the start of the new fiscal year in April 2003. It was still necessary for banks to maintain their lending stance of increasing interest rate margins and maintaining adequate capital ratios. Therefore, developments in corporate financing conditions continued to require careful monitoring.

E. Improvement of the Content of the "Outlook and Risk Assessment of the Economy and Prices"

The staff considered that it would be appropriate to improve the content of the "Outlook and Risk Assessment of the Economy and Prices" (hereafter the Outlook Report) starting from the one to be released after the meeting. The main improvements suggested were as follows. First, adding new sections to the report describing monetary policy developments and the financial environment. And second, disclosing the median figures, the middle one of the nine forecasts of the Policy Board members, in addition to the ranges of forecasts of the majority members and all members.

The staff believed that adding new sections to the report would contribute to enhancing the transparency of the Bank's assessment of the economic and financial situation and its conduct of monetary policy. This was because they would provide an explanation of the extent of the effects of monetary easing measures, including the background of the effects, and the Bank's prospects for overcoming deflation. The staff also noted that disclosing the median figures of the forecasts of Policy Board members would give the public a clearer idea of the forecasts of the economy and prices of the Policy Board members.

  1. 3Reports were made based on information available at the time of the meeting.
  2. 4The 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 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.

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

A. Recent Economic and Financial Developments

Members agreed on the state of Japan's economy as follows. First, indicators released since the previous meeting offered no grounds for changing the assessment of the current situation that economic activity remained flat as a whole. Second, retroactive revision of some statistics suggested that economic developments since 2002 were slightly firmer than had been thought. And third, however, even though the military action against Iraq had virtually ended in a short period of time, downside risks to the economic outlook were increasing partly because other factors that would cause the outlook to become more uncertain were intensifying. Most members cited overseas economic developments and the fall in Japanese stock prices as factors making the economic outlook more uncertain.

Many members expressed the view that, although uncertainty regarding the situation in Iraq had subsided, momentum for recovery in overseas economies in the near future should be viewed with caution. In relation to this, a few members noted that, although stock prices were recovering somewhat in the United States and Europe, they lacked momentum. In addition, market confidence had recovered only to a limited extent.

Members explained the background to the cautious view of overseas economic recovery as follows. First, persisting geopolitical risks, such as the uncertain outcome of the postwar reconstruction in Iraq and a possible recurrence of terrorist attacks. Second, weakness of the economic fundamentals in the United States and Europe due to the following: the pressure to adjust firms' balance sheets and excessive capital stock, and the "twin deficits," the budget deficit and the current account deficit, in the United States; and the vulnerability of the financial system in European economies. And third, the potential impact of SARS on East Asian economies, which had so far maintained their robustness. In relation to this, some members pointed out that economic indicators released recently showed that overseas economic recovery was weak: in the United States, the growth of real GDP for the January-March quarter, especially in domestic demand, was low; in Europe, domestic demand, employment conditions, and various confidence indexes were weak; and in Asia, exports were decelerating. A few members referred to the effects of discussions regarding the expansion and the sustainability of the "twin deficits" in the United States on the exchange rate of the U.S. dollar. A few other members commented on Asian economies that the economic impact of SARS was becoming more evident and was spreading to a wider area than at the time of the previous meeting.

As for stock prices, members commented on the conspicuous weakness in Japanese stock prices, which contrasted with the slight recovery in U.S. and European stock prices. Many members said that this weakness was a reflection of market participants' quite pessimistic view of the outlook for firms' business performance and for Japan's economy. These members explained that this view probably stemmed from a reemergence of concern about the delay in the disposal of nonperforming loans (NPLs) and in structural reform in various areas. A few members said that, in addition to these weak fundamentals of Japan's economy, supply-demand factors indigenous to Japan, such as unwinding of cross-shareholdings and selling of stocks by corporate pension funds, which were returning funds entrusted to them in order to discontinue acting on behalf of public pension funds, were exerting downward pressure on stock prices. A few members expressed the view that the recent weakness in Japanese stock prices compared with U.S. and European stock prices might partly reflect the strong anxiety about the impact of SARS and the situation in the Korean peninsula.

Many members said that possible negative effects of the fall in stock prices on economic and financial developments were cause for concern. Members noted that financial markets in Japan remained basically stable due to ample provision of funds by the Bank, but there were developments suggesting a slight increase in liquidity demand, as seen in a rise in yields on FBs and TBs, repo rates, and bid rates in the Bank's market operations. In relation to this, a few members pointed out that financial institutions' financing situation was stable due to their improved net balance of deposits against loans, but this was mainly attributable to the inflow of liquid deposits. In this situation, there was persistent cautiousness about potential liquidity risk given the continuous fall in bank stock prices. Some members expressed the view that it was necessary to monitor future developments in stock prices carefully, citing the following risk factors. A further fall in stock prices could negatively affect financial institutions' financial strength and their financial intermediary function, and could reduce firms' profits through stock write-offs. Furthermore, it could worsen corporate and household sentiment.

In relation to developments in stock prices, some members commented on developments in long-term interest rates, which had recently been posting historic lows, and on the contraction in credit spreads, such as those on corporate bonds. One member said that these developments were largely attributable to the effects of the fall in stock prices, although they were also due in part to the effects of the quantitative easing and market participants' perception that they had more abundant liquidity than before. Many members expressed the view that the decline in long-term interest rates was basically a reflection of market participants' expectations that deflation would continue for a long time. Some members, however, referred to the possibility that the long-term securities markets might be slightly overheated. One member commented on the fact that various credit spreads on bank debt were contracting in spite of the fall in bank stock prices. This member said that it might be an unhealthy move if market participants, whose assessment of banks' profitability was severe, were preferring bank debt to bank stocks on the assumption that some protection by the government could be expected for bank liabilities.

With regard to price developments, some members expressed the view that, although the pace of year-on-year decline in consumer prices had become somewhat slower in March and was expected to continue slowing to some extent from April onward, this was due to temporary factors such as a rise in crude oil prices and medical costs. These members said that there was no significant change in the large output gap in the economy, and thus it was not necessary to change the assessment at the previous meeting that prices would continue to decline moderately.

B. Outlook and Risk Assessment of the Economy and Prices

Members discussed the standard scenario for Japan's economy and prices through the end of fiscal 2003 and risk factors that might cause the economy to diverge from this scenario, given that the final text of the Outlook Report was to be decided for release after the meeting.

Member agreed that the standard scenario for the economy in fiscal 2003 should be as follows. First, based on the assumption of a gradual recovery in overseas economies, exports and production would regain momentum and a virtuous circle would start working on the economy. Second, however, the pace of recovery in Japan's economy would be quite moderate, as the economy was under persistent structural adjustment pressure. And third, with these economic developments, prices would continue to decline moderately, as the output gap would not be reduced significantly.

Members raised the following as risk factors that might cause the economy to diverge from the standard scenario: developments in overseas economies; financial market developments including stock prices; developments in domestic private demand; and progress in the disposal of NPLs and financial system developments. Members were of the view that all of these factors could cause the economy to diverge upward or downward from the standard scenario, but they commented more on downside risk factors.

Most members acknowledged that the key to the realization of the standard scenario remained whether overseas economies would continue to recover at a gradual pace, as the standard scenario in the Outlook Report was still based on a recovery mainly led by external demand. In this connection, many members noted the possibility that the momentum for overseas economic recovery might be weaker than presently assumed, taking into account discussions earlier in the meeting on recent economic and financial developments in other countries. One of these members said that there was a risk that industrial production worldwide would weaken in the April-June quarter of 2003 and Japan's exports would decrease. With regard to financial market developments, members paid due attention to the possibility that the recent weakness in stock prices might negatively affect consumer and business sentiment and spending.

Regarding progress in the disposal of NPLs and financial system developments, some members expressed the view that the basic problem was that no route to overcoming the NPL problem or strengthening the earning power of financial institutions had been presented. There was also a view that the recent fall in bank stock prices was a reflection of the market's severe view of banks' business condition.

One member expressed the view that in this situation financial institutions' financial intermediary function and the transmission mechanism of monetary easing would be hampered. This member continued that the Bank should deal with the current situation in cooperation with the government to restore the soundness of the financial system as soon as possible.

Members agreed that the degree of momentum for a recovery in domestic private demand should be regarded as a risk factor that might cause the economy to diverge from the standard scenario, given the high level of uncertainty in the financial system and the outlook for overseas economies and financial markets. Private consumption had been relatively firm compared with the income situation. However, there was a risk that consumer sentiment would deteriorate due to the increase in the burden on households of pension and medical costs as well as the severer income situation, and that the firmness in private consumption would be impaired as a result. Business fixed investment was recovering recently. Some members said, however, that the effects of deterioration in firms' financial condition due to stock price falls and of a decrease in growth expectation required close monitoring.

In a discussion on the effects of monetary policy, members generally agreed as follows. First, the Bank's quantitative easing had secured financial market stability, despite various shocks to the economy such as stock price falls and the situation in Iraq, and this had contributed to preventing the economy from falling into a deflationary spiral. And second, however, the financial intermediary function in the financial system had not been revitalized as evidenced by a continuing decrease in banks' lending, and economic activity had not yet been stimulated fully.

With regard to the second point, a few members said that attention should be paid to the fact that the quantitative easing had encouraged financial institutions to take on risk and to rebalance their portfolios to some extent, as evident in a fall in interest rates including those of longer-term maturities and the contraction of credit spreads on corporate bonds. Many members including these members, however, agreed that no significant effects of the quantitative easing on prices of assets, such as stocks, and on banks' lending had been observed, suggesting that the overall effects of portfolio rebalancing were limited.

One member cited lack of improvement in growth expectation as the background to the above developments, and said that it was necessary to increase the fundamental strength of the economy and induce demand in order to enhance the effects of monetary easing. From this perspective, most members agreed that firms, the government, and financial institutions should address their own tasks, and that it was important for the Bank to continue securing financial market stability, while strengthening the transmission mechanism of monetary easing.

In relation to the outlook for the economy and prices in the Outlook Report, one member referred to the fact that stock prices had fallen back to the levels of the first half of the 1980s, and made the following comments. First, market participants' view of Japan's economic outlook was quite severe, although it was difficult to determine whether the current level of stock prices was a reflection of the economic situation or of the overly pessimistic outlook. And second, it was necessary to consider whether growth expectation would increase through continuation of the persistent efforts made so far, as envisaged in the Outlook Report, or it was necessary to adopt more drastic policies in various areas.

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

On the monetary policy stance for the immediate future, all members noted as follows: given the greater uncertainty about the outlook for the Japanese economy, it was necessary to secure the stability of the financial markets and strengthen support for economic recovery from the monetary side through additional monetary easing by raising the target range for the outstanding balance of current accounts at the Bank. One member, however, commented that considering the situation in the financial markets, leaving the current target range unchanged could also be an option. Furthermore, given that market participants were not anticipating a change in the target range at this meeting, the Bank should explain the reasons for raising it thoroughly. Regarding the amount by which it should be raised, members concurred that it would be appropriate to raise the target range by 5 trillion yen from around 17 to 22 trillion yen to around 22 to 27 trillion yen, so that it would cover by a wide margin the most recent outstanding balance of current accounts, which was 25-26 trillion yen. A few members commented that an increase of 5 trillion yen in the target range would be regarded as a significant easing given that the large balances in Japan Post's current account at the Bank would decrease gradually.

Regarding the contingency clause of the guideline for money market operations, members concurred that it would be appropriate to maintain the basic idea behind the clause given that there remained significant uncertainty about developments in the financial markets and demand for liquidity, although the situation in Iraq was stabilizing. For the same reason, members concurred that it would be appropriate to maintain, for the time being, the suspension of the restriction of five days on the maximum number of days for the use of the Lombard-type lending facility at the official discount rate during a reserve maintenance period.

In relation to raising the target range, many members said that it was not necessary to increase outright purchases of JGBs for smooth provision of liquidity given the situation in financial institutions' bidding in the Bank's operations to supply short-term funds.

One member commented that the Bank should indicate a level it would aim at within the new target range. In response to this, the chairman said that it would be appropriate for the Bank to aim for the upper half of the range for the time being, considering the most recent outstanding balance of current accounts at the Bank. Other members agreed with this view.

Members also exchanged views regarding measures for enhancing the transparency of monetary policy in relation to the Outlook Report.

One member said that in order to enhance the transparency of monetary policy, the Bank should indicate the following points clearly. First, what goal monetary policy aimed to achieve. Second, the Bank's assessment of the current and future economic and financial situation in relation to that goal. And third, by what method and measures the Bank would achieve it if there was a disparity between it and the assessment of the current and future situation. On this basis, many members expressed the view that evaluating the effect of monetary policy and indicating the outlook for overcoming deflation in the Outlook Report would be useful from the viewpoint of enhancing the transparency of monetary policy.

Many members said, however, that if there was currently a problem with the transparency of monetary policy, this was basically because method and measures to achieve the goal were not clear as the transmission mechanism of monetary easing was not functioning fully. In relation to this, one member said that the Bank was still not giving a sufficiently convincing explanation to the public, which was asking the following questions: in the present situation where prices continued to fall, why the Bank would not implement further monetary easing and whether there were not other measures the Bank could take. The member continued that this should be regarded as a problem of the policy framework itself rather than the transparency of monetary policy. Another member commented that the description of the prospects for overcoming deflation in the Outlook Report might be emphasizing the role of structural reforms too much.

Some members expressed the view that it would be useful to express price stability in terms of numerical values, as, for example, a reference rate of inflation, even if it was not a strict target. One of these members explained that a reference rate could serve to anchor the expected inflation rate and reduce time and costs required for price adjustments. This member continued that it would be desirable to clearly indicate in the Outlook Report what were the prerequisites for overcoming deflation and what monetary policy should do to this end, in addition to expressing the price stability the Bank was aiming for in terms of numerical values. Moreover, it was worth considering taking a dynamic approach in conducting monetary policy in the following way: the Bank would divide the process up to the point where the ultimate goal would be achieved into several phases, and set different goals and adopt different measures in each phase. In response to this, a different member said that it was not appropriate to indicate a desirable price level or an inflation rate in advance during the process of overcoming deflation. This was because an acceptable level of inflation would vary depending on the momentum for economic recovery and inflation, and on developments in asset prices and the financial system.

Some other members said that neither a target nor a reference rate of inflation would have much significance in the current situation, where there were no tools for achieving it. In addition, a reference rate of inflation might even make the Bank's conduct of monetary policy more difficult to understand. Therefore, it was important to first strengthen the transmission mechanism of monetary easing. In response to this, one member expressed the view that the Bank should show a stronger commitment because the more often the Bank said it did not have sufficiently effective policy tools to overcome deflation, the more difficult it would be to overcome as the market would factor this in.

Some members commented on the change to disclose the median figures of the forecasts of the Policy Board members in the Outlook Report to be released after the meeting, saying that the Bank should explain these figures carefully so that they would not be misinterpreted as being associated in some way with an inflation rate target or a reference rate of inflation.

V. Remarks by Government Representatives

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

(1) Prices continued to fall in Japan's economy. The prolonged deflation, though moderate, would become more difficult to overcome because deflationary concern would intensify and become more deeply rooted. The Bank had been conducting monetary policy to overcome deflation. However, in order to break the vicious circle stemming from deflationary concern, it was important that the Bank demonstrate again its firm resolution to prevent prices from continuing to fall and explain clearly the current conduct of monetary policy to the public. From this viewpoint, the Government would like the Bank to deliberate on enhancing the transparency of monetary policy.

(2) The Bank had been examining the basic framework for the conduct of monetary policy from various perspectives with a view to strengthening the transmission mechanism of monetary easing. The Government would like the Bank to devise measures for more effective liquidity provision, both in terms of quality and quantity, so that funds would flow smoothly into households and firms and throughout the economy, and implement more effective monetary easing measures.

(3) As part of the process of devising measures for more effective liquidity provision, the Bank decided to examine possible purchases of asset-backed securities at the previous meeting. The Government hoped that specific measures would be decided and implemented as soon as possible and that this would revitalize the flow of funds in the economy.

(4) The Bank was providing ample liquidity exceeding the target range of 17 to 22 trillion yen for the outstanding balance of current accounts at the Bank. The Government would like the Bank to continue taking every necessary step so that emergency situations did not materialize in the market.

(5) As the year-on-year decline in consumer prices in the Tokyo metropolitan area had contracted in April, the pace of decline in the consumer price index for Japan as a whole was expected to slow in the near future. The objective of monetary policy was not only to maintain price stability but also to contribute thereby to sound development of the economy. To this end, the Bank should take appropriate measures based on close monitoring of the situation in the economy. The Government therefore would like the Bank to examine the basic framework for the conduct of monetary policy from the viewpoint of its contribution to sound development of the economy. The monetary base had been maintaining growth of slightly over 10 percent year on year, partly due to an increase in liquidity provision by the Bank through the fiscal year-end. The growth in the money stock, however, declined to around 1.5-2.0 percent. The growth of the monetary base was undoubtedly the driving force for the increase in the money stock, although the relationship between the two had weakened recently. In examining measures to strengthen the transmission mechanism of monetary easing, the Government would like the Bank to also consider from the macroeconomic standpoint the reasons for the decline in the growth rate of the money stock and how the Bank should respond to the situation.

The representative from the Cabinet Office made the following remarks.

(1) The Government's assessment of the current state of the Japanese economy was as stated in the Monthly Economic Report released on April 14, 2003. Prices continued to fall and deflationary expectations persisted. Developments in financial markets reflected this situation. The most important task for the Japanese economy was to overcome deflation.

(2) The fiscal 2002 version of "Structural Reform and Medium-Term Economic and Fiscal Perspectives" stated that deflation would be overcome after the intensive adjustment period through fiscal 2004 through measures taken by the Government and the Bank. To this end, the Government would accelerate structural reforms in various areas. The Bank had evaluated its conduct of monetary policy to date and indicated the outlook for overcoming deflation in its Outlook Report to be released after the meeting. In order to overcome deflation in fiscal 2005, the Government hoped that the Bank would further deliberate on tools for market operations, including reviewing the basic framework for the conduct of monetary policy, and implement monetary policy measures that were effective in overcoming deflation.

VI. Votes

Based on the above discussions, members considered that it was appropriate for the Bank to raise the operating target, the outstanding balance of current accounts at the Bank, by 5 trillion yen.

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

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

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

The Bank of Japan will conduct money market operations, aiming at the outstanding balance of current accounts held at the Bank at around 22 to 27 trillion yen.

For the time being, given that significant uncertainty 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.

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

Members discussed the draft of the "Outlook and Risk Assessment of the Economy and Prices," and put it to the vote. By unanimous vote, the Policy Board decided to release it immediately after the meeting.

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.

VIII. Discussion on the Public Statement

Members discussed the draft of the public statement prepared by the staff regarding the above decisions, and put it to the vote. By unanimous vote, the Policy Board decided to release "Change in the Guideline for Money Market Operations" immediately after the meeting (see attachments 1 and 2).

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.

IX. Approval of the Minutes of the Monetary Policy Meeting

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of March 25, 2003 for release on May 6, 2003.


Attachment 1

For immediate release

April 30, 2003
Bank of Japan

Change in the Guideline for Money Market Operations

  1. At the Monetary Policy Meeting held today, the Bank of Japan decided to change the main operating target in the guideline for money market operations. The target balance of current accounts held at the Bank is raised from 'around 17 to 22 trillion yen' to 'around 22 to 27 trillion yen' (see Attachment 2). The Bank also decided to accept loans on deeds to the Industrial Revitalization Corporation of Japan with government guarantee as eligible collateral.
  2. Economic activity in Japan remains flat. With respect to overseas economies, the prospect of a recovery in the US and European economies still faces considerable uncertainty. The impact of SARS is becoming a matter of concern for Asian economies, which have maintained robustness as a whole.
  3. In financial markets, ample liquidity provided by the Bank has restrained financial institutions' concern over liquidity financing. At the same time, however, stock price developments, especially those of bank stocks, remain weak and volatile. Careful attention is warranted so that the stock price developments will not negatively affect financial markets and economic activity.
  4. Based on the above described uncertainty regarding the economic and financial situation, the Bank thought it appropriate to raise the target balance of current accounts held at the Bank to maintain financial market stability, thereby strengthening support for economic recovery.
  5. For the purpose of promoting the transparency of monetary policy, the Bank also decided to expand the contents of "Outlook and Risk Assessment of the Economy and Prices" released today by adding new sections describing the conduct of monetary policy and a financial environment.

Attachment 2

For immediate release

April 30, 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:

The Bank of Japan will conduct money market operations, aiming at the outstanding balance of current accounts held at the Bank at around 22 to 27 trillion yen.

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