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Minutes of the Monetary Policy Meeting

on May 19 and 20, 2003
(English translation prepared by the Bank's staff based on the Japanese original)

June 30, 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 Monday, May 19, 2003, from 2:00 p.m. to 3:42 p.m., and on Tuesday, May 20, from 9:00 a.m. to 12:57 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 2
Mr. H. Tsuda, Deputy Vice Minister for Policy Planning and Coordination, Ministry of Finance 3
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. 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. N. Inaba, Director-General, Bank Examination and Surveillance 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. H. Onobuchi, Deputy Director, Secretariat of the Policy Board
Mr. S. Nagai, 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 25, 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. Mr. Taniguchi was present on May 20.
  3. Mr. Tsuda was present on May 19.

I. Summary of Staff Reports on Economic and Financial Developments 4

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 30, 2003, aiming at the upper half of the target range.5 As a result, the weighted average of the uncollateralized overnight call rate remained at 0.001-0.002 percent.

To secure the stability of the financial markets, taking into consideration the Prime Minister's decision of May 17, 2003 to inject public funds into Resona Bank, the Bank provided an additional 1 trillion yen to the money market on the morning of May 19, the first business day after the decision, by conducting a same-day-start bill purchasing operation. Following the above operation, the money market was stable on May 19, with the average of the call rate for the day remaining at 0.002 percent, the level before the decision.

  1. 4Reports were made based on information available at the time of the meeting.
  2. 5The guideline was as follows:
    The Bank of Japan will conduct money market operations, aiming at the outstanding balance of current accounts held at the Bank at around 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.

B. Recent Developments in Financial Markets

Money market rates overall continued to be stable, with a decline in interest rates on term instruments, due to the Bank's provision of more ample liquidity. Interest rates on term instruments, such as Euro-yen rates and treasury bill yields, remained virtually level even on May 19, the first business day following the emergence of the problem of Resona Bank.

In the bond market, the yield curve flattened further, led by a decline in yields on long-term Japanese government bonds (JGBs) with a maturity of up to ten years and super long-term JGBs with a maturity of over ten years. This was because financial institutions extended the duration of their bond portfolios toward the end of April in order to increase profit margins, as uncertainty about the outlook for the Japanese economy persisted. In response to this yield decline of JGBs, financial institutions increased purchases of medium-term JGBs from early May, and since then yields on the latter had been declining. As a result, yields on ten-year JGBs declined to 0.5-0.6 percent due to the increase in JGB investment of banks and institutional investors against the background of limited investment opportunities.

The yield differentials between JGBs and corporate bonds in the secondary market had narrowed to a level close to the record low. This was because institutional and other investors increased investment in corporate bonds against the background of the decline in yields on JGBs and the market view that the risk of default was decreasing for the time being.

Stock prices started to improve reflecting the recent firmness in stocks in the United States and Europe, despite the persistence of a cautious view of the Japanese economy, and the Nikkei 225 Stock Average recovered to the 8,000 yen level. On May 19, it fell below 8,000 yen during the day as bank stocks plunged affected by the problem of Resona Bank, but it closed above 8,000 yen.

The U.S. dollar continued to depreciate against other currencies even though the military action against Iraq had ended. This was mainly because of the growing concern about the widening of the U.S. fiscal and current account deficits, and speculation among some market participants, caused by comments by U.S. currency authority officials, that the U.S. government might have changed its foreign exchange policy stance. Thus, the yen had appreciated to the 115-116 level against the U.S. dollar recently. On the other hand, it had depreciated against the euro to the 135-136 yen level, the lowest level since the launch of the euro.

C. The Situation of Financial Institutions following the Prime Minister's Decision to Inject Public Funds into Resona Bank

On May 17, 2003, the Financial Services Agency took prompt corrective action against Resona Bank, and the Prime Minister decided to inject public funds as appropriate into Resona Bank pursuant to Article 102 of the Deposit Insurance Law. On the same day, the Bank decided in accordance with Article 38 of the Bank of Japan Law that it would provide liquidity to Resona Bank when necessary.

During the weekend of May 17 and 18 following the Prime Minister's decision, the situation at Resona Group was generally calm. The amount of cash withdrawn from automated teller machines of Resona Bank and Saitama Resona Bank was less than twice the amount withdrawn on a normal weekend, and that from banks of Resona Group overall was less than 1 percent of their total deposits.

There was no major shift of funds from deposits held with Resona Group banks, even on May 19, the first business day following the decision, and they also faced no major difficulties in financing through the markets. They completed funds settlement without using any kind of loan from the Bank, including special loans for the maintenance of an orderly financial system. They held large excess reserves with the Bank, and therefore they seemed not to have any funding problem for the time being. In the meantime, no unusual large-scale cash withdrawal occurred at other major banks or regional banks.

D. 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.

Regarding developments in U.S. final demand, private consumption remained on a moderate upward trend reflecting a slight improvement in consumer confidence as the geopolitical risks had decreased. However, the effects of the deterioration in the employment situation gave cause for concern about the outlook for private consumption. Business fixed investment was judged to have stopped declining, but there had been no sign that it was on a recovery trend due to the persistence of uncertainties about the economic outlook and corporate profits.

The Federal Open Market Committee (FOMC) decided to keep its target for the federal funds rate unchanged at its meeting held on May 6, 2003. The FOMC judged, however, that the balance of risks to achieving its goals was weighted toward weakness over the foreseeable future.

In U.S. financial markets, long-term interest rates trended downward, against the background of a cautious view regarding the prospects for economic recovery. Judging from developments in federal funds rate futures, the market had factored in, to some extent, a cut in the target for the federal funds rate by around the middle of 2003. Stock prices rose because some firms announced larger-than-expected profits.

In the euro area, the economy was decelerating, since domestic demand components, such as private consumption and business fixed investment, remained sluggish and exports were slowing. Production was also sluggish. The employment situation continued to deteriorate at a moderate pace, and consumer confidence continued to be weak.

NIEs and ASEAN economies had stayed on a recovery trend. This was because domestic demand had been firm to date, although the pace of increase in exports was slowing. 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 the large amount of direct investment from abroad. However, the spread of severe acute respiratory syndrome (SARS) could be negatively affecting economies such as China, Hong Kong, Taiwan, and Singapore, particularly through private consumption.

Developments in financial markets in emerging economies were as follows. In East Asian economies, stock prices had been declining and currencies had been depreciating due to concern about the effects of SARS. However, they were recovering slightly, as concern about a further spread of SARS had subsided except in China. In Latin America, developments in financial markets were generally firm as the economy started to improve.

E. Economic and Financial Developments in Japan

1. Economic developments

With regard to final demand, business fixed investment was recovering gradually, although one of the leading indicators suggested possible weakness ahead. Meanwhile, private consumption continued to be weak, housing investment also remained sluggish, and public investment was declining. While domestic demand had not shown clear signs of recovery, net exports remained virtually level.

Industrial production was basically level in response to the above developments in final demand. As for the employment situation, the number of employees appeared to be declining at a slower pace. However, firms were still maintaining their stance of reducing personnel expenses, and household income continued to decrease. The employment and income situation of households overall remained severe.

As for the outlook, a widely shared view of the prospect for overseas economies was that their growth rate would accelerate in the second half of 2003, led mainly by the U.S. economy, with diminishing uncertainty regarding Iraq-related developments. Based on the above view, exports would resume an uptrend at some stage. For the time being, however, the recovery in the U.S. and European economies was projected to remain very modest. Moreover, it was likely that the growth of East Asian economies, which had been well sustained so far, would slow at least temporarily, due to the effects of SARS. In this situation, Japan's exports and production were expected to remain virtually level for the time being.

With respect to domestic demand, corporate profits were recovering, and therefore, if exports and production resumed their upward trend, business fixed investment was likely to follow a clear uptrend, and household income was also likely to stop decreasing. However, on the fiscal policy side, the burden on households of essential expenditure resulting from changes in the social security system was increasing, and public investment was projected to follow a declining trend. Furthermore, there was persistent structural adjustment pressure on the economy stemming from excessive debts and personnel expenses of firms, the low expected growth rate, and the weakness on the financial side of the economy.

On the price front, domestic corporate goods prices had stopped declining on the whole with the rise in import prices and the improved supply-demand balance in materials industries, despite the continued fall in machinery prices. Consumer prices had been declining gradually, but the pace of year-on-year decline was slowing against the background of the rise in medical costs due to the reform of the medical care insurance system.

The GDP deflator for the January-March quarter of 2003 had declined at a faster pace, marking a fall of 3.5 percent. This was attributable to the following three temporary factors. First, the share of business fixed investment components in the overall domestic demand increased, particularly that of investment related to IT, an area in which prices tended to decline at a faster pace. Second, the government consumption deflator declined substantially due to the reduction in civil servants' salaries for fiscal 2002, mainly as a result of a reduction in fiscal year-end allowances. The cut in allowances reduced the GDP deflator, because the value added of services provided by civil servants was considered unchanged. And third, crude oil prices rose. A rise in such input prices was a factor contributing to the decline in the GDP deflator.

2. Financial environment

With regard to credit aggregates, private banks' lending continued to decline by about 2-3 percent on a year-on-year basis, but the pace of decline was slowing slightly. The amount outstanding of corporate bonds and CP issued was moving at around the previous year's level. Thus, 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 about 10 percent. This was because the outstanding balance of current accounts at the Bank continued to grow at the high rate of 30-40 percent, while the growth rate of banknotes continued to decline reflecting the large increase in the same month of the previous year. The year-on-year growth rate of the money stock was around 1.5 percent, and that of broadly-defined liquidity was about 1 percent. The pace of increase in the money stock slowed partly due to the following factors. First, some firms and other entities withdrew deposits to pay for shares of major banks newly issued for capital increase, which amounted to over 2 trillion yen in total. And second, JGBs specifically designed for individual investors were introduced and issued to a total of 600 billion yen in March and April 2003.

In corporate finance, credit demand in the private sector continued to follow a downtrend mainly because business fixed investment was at low levels and firms were continuously reducing their debts.

Private banks remained cautious in extending loans to firms with high credit risk, while on the other hand they continued to be more active in extending loans to blue-chip firms. Recently, their lending attitude seemed to be becoming slightly more accommodative in areas such as setting of interest margins. The lending attitude of financial institutions as perceived by firms, particularly small ones, remained severe. In the corporate bond and CP markets, the issuing environment for firms with high credit ratings continued to be accommodative, and the environment for firms with relatively low credit ratings seemed to be improving slightly.

Money market conditions continued to be extremely easy and long-term interest rates were declining further due partly to ample provision of funds by the Bank. The money stock and the monetary base continued to record high growth rates relative to that of economic activity as a whole, although the growth of both had slowed somewhat. In corporate financing, the fund-raising environment had not changed significantly, although slight improvements had been observed, such as in the issuing environment of corporate bonds and CP. The fund-raising environment overall for firms, particularly with high credit risk, remained severe. Developments in the financial and capital markets, the behavior of financial institutions, and the financing situation of firms, as well as the effects of the problem of Resona Bank on these, continued to require close monitoring.

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

On the current state of Japan's economy, members generally agreed that economic activity remained flat as a whole, but there was greater uncertainty recently due mainly to the effects of SARS on Asian economies, unstable movements in the foreign exchange market, and the effects of the problem of Resona Bank.

With respect to the economic outlook, most members said that the basic scenario--an increase in exports and production generating the momentum for a recovery based on a gradual recovery in overseas economies--remained valid. Some members expressed the view that it would take more time before Japan's economy began to recover in the current situation where the pace of recovery in overseas economies was unlikely to accelerate immediately.

Some members said that risk factors for the economic outlook pointed out in "Outlook and Risk Assessment of the Economy and Prices" released on April 30, 2003 continued to require close monitoring. They expressed the view that the Bank should continue paying due attention to risk factors such as the following in view of the possible effects of the Prime Minister's decision to inject public funds into Resona Bank: developments in overseas economies including the effects of SARS; the depreciation of the U.S. dollar; financial system developments; and the effects of stock price developments. On the other hand, one of these members mentioned the following as positive factors for the economic outlook: the ending of the military action against Iraq; the decline in crude oil prices; and the fact that a recovery in corporate profits had been confirmed in both Japan and the United States.

With regard to the U.S. economy, some members pointed out that, although the recovery in firms' business performance had been confirmed recently, the pace of economic recovery was not accelerating, as seen in the conspicuous weakness in economic indicators that tended to move in line with economic activity, such as those related to production and employment. A few of these members expressed the view that it was becoming clear that geopolitical risks were not the essential factors impeding the economic recovery.

On the other hand, these members said that some economic indicators that appeared to be closely related to future economic developments seemed to be on an improving trend: for example, stock prices rose, consumer confidence improved, and credit spreads on corporate bonds narrowed. One of these members pointed out the possibility that the decline in geopolitical risks, crude oil prices, and recently, in long-term interest rates, might positively affect future economic developments.

On this basis, these members expressed the view that the scenario that the growth rate of the U.S. economy would increase slightly in the second half of 2003 remained valid.

A few other members commented that it was possible that the decline in long-term interest rates and an acceleration of the depreciation of the U.S. dollar were being caused by market participants' view that the Federal Reserve had been cautious about deflation and thus had preemptively made a commitment to maintaining the accommodative stance of monetary policy.

Some members pointed out the risk that concerns about the "twin deficits" in the United States and market speculation that the U.S. currency authority might have changed its foreign exchange policy stance to accept the depreciation of the U.S. dollar, given the decline in the inflation rate, might lead to further depreciation of the dollar, and this might negatively affect Japan's exports. A few members said that there was a view among market participants that, even though the euro area would be affected by the depreciation of the dollar against the euro, it might be difficult for countries in the area to take concerted action to prevent its depreciation because there were many countries with different levels of inflation in the euro area.

Some members commented on East Asian economies that the effects of SARS had not yet been confirmed by data. However, attention should be paid to the effects of SARS, at least for the time being, as a downside risk factor mainly for consumption and production. One of these members said that the effects of SARS seemed to be already evident in a decline in prices of raw materials.

A different member expressed the view that there was a risk that Japan's exports and production might become weak. This was because the growth rate of the world economy was expected to be somewhat low in the April-June quarter of 2003, given that the economic growth rate in Asia might decelerate significantly in the quarter and that for the United States and Europe was likely to be somewhat low. Another member expressed the view that Japan's exports would decrease in the April-June quarter.

On the corporate sector in Japan, some members commented that a recovery trend in corporate profits had been confirmed.

These members said, however, that firms had not yet started to make forward-looking business fixed investment for the following reasons. First, there was substantial uncertainty about the economic outlook. And second, firms were not convinced yet that their business condition had improved because they considered that the recovery in their profits was due largely to their restructuring efforts, such as reduction of personnel expenses. One member said that a key to the realization of an economic recovery was to ensure that the improvement in individual firms' business performance stimulated overall economic activity. This member pointed out that, to this end, it was important to proceed with reforms of the tax system and the regulatory system and review the components of government expenditure taking into account the multiplier effect.

Some members commented on the weak forecast for machinery orders for the April-June quarter of 2003.

A few members said that this could have been due to various factors that increased uncertainty about the economic outlook at the time the forecast was made, such as weak stock prices, SARS, and the military action against Iraq. A different member said that the released forecast was calculated by multiplying raw data for the forecast by the average of the achievement ratios for the past three quarters, and therefore the forecast tended to be an underestimate when machinery orders were starting to recover.

As for the household sector, one member said that the employment and income situation was likely to remain severe. Private consumption was likely to remain weak, although it had been holding up well relative to the income situation.

With regard to price developments, some members commented on the faster pace of year-on-year decline in the GDP deflator for the January-March quarter of 2003. One member said that the deflation in prices of capital goods had been intensifying, and this was adversely affecting the environment for investment through a rise in the rental cost of capital. A different member said that the pace of decline in the GDP deflator was unlikely to accelerate as a trend. This was because it was mainly due to temporary factors such as a substantial decline in the government consumption deflator reflecting a reduction in civil servants' fiscal year-end allowances.

Some members commented on financial developments as follows.

Some members said that developments in the money market remained generally stable, even after the Prime Minister's decision to inject public funds into Resona Bank, with the Bank's provision of ample liquidity. They expressed the view that the problem of Resona Bank had not caused a funding problem for Japanese financial institutions.

As for developments in long-term interest rates, which had been on a declining trend, one member said that the rates for long-term JGBs as well as for bonds with a longer maturity, such as 20-year and 30-year JGBs, were at very low levels. The member pointed out that this was mainly due to the uncertainty about the economic outlook, but there was a view that they had become too low. A different member commented that the JGB market continued to gain strength due to the bullish stance of investors, and expressed the view that it required close monitoring because room for further decline in long-term interest rates was limited.

Regarding developments in stock prices, one member said that stock prices reflected the views of market participants of firms' future profitability, and therefore, the weakness in prices of bank stocks suggested that their views on Japanese banks' future profitability remained severe. On this basis, this member pointed out that the effects that the problem of Resona Bank would have on economic and financial developments depended largely on whether Japanese financial institutions, including Resona Bank, could present a convincing vision for improving their profitability.

As for developments in the foreign exchange market, one member said that the U.S. dollar was being sold against other currencies, including the yen. The yen, however, was depreciating against the euro, and thus the yen's effective exchange rate was not appreciating. The member continued that careful monitoring was required of whether the dollar's depreciation would affect the international flow of funds, because there were underlying causes of the depreciation such as concern about the U.S. current account deficit.

A different member said that the depreciation of the U.S. dollar would have positive effects on industries in the United States but could negatively affect the flow of funds and the stock and bond markets. The member continued that overall, the negative effects of the dollar's depreciation on the United States outweighed the positive ones, and thus the dollar was expected to stop depreciating when market participants began to see these negatives as outweighing the positives.

Regarding developments in corporate financing, one member said that close monitoring was required of whether the problem of Resona Bank would accelerate other banks' measures to reduce assets or affect the risk-taking stance of investors.

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

On the monetary policy stance for the immediate future, members agreed that the Bank should take necessary action to secure the stability of the financial markets by providing ample liquidity, with close monitoring of market developments, given the greater uncertainty about the economic outlook due to the problem of Resona Bank.

Members then put forward and discussed two options with regard to the guideline for money market operations in accordance with which the Bank provided liquidity.

The first option was that the Bank should provide more ample liquidity when necessary in line with the present contingency clause of the guideline, with close monitoring of developments in the financial markets.

Members who supported the first option explained as follows. First, if there were a surge in demand for liquidity, it would probably be a temporary phenomenon reflecting concern about the problem of Resona Bank. Second, the money market was generally stable at present, and there had been no particular surge in demand for liquidity. And third, even if liquidity demand were to surge in the future, it was difficult to predict the persistence and size of such demand at this stage. On this basis, these members said that the Bank should deal with a surge in liquidity demand by using the present contingency clause for the time being. The Bank should gather more information about the market situation including changes in liquidity demand and, if necessary, raise the target range for the outstanding balance of current accounts at the Bank at a future meeting.

The second option was that the Bank should raise the target range for the outstanding balance of current accounts at the Bank at this meeting, in order to deal with the greater uncertainty about the economic outlook mainly due to the problem of Resona Bank and unstable movements in the foreign exchange market. In addition, the Bank should reinstate the contingency clause in the guideline for money market operations that had been in force until the Monetary Policy Meeting on February 13 and 14, 2003, given that the fiscal year-end had passed and the military action against Iraq had ended.

Members who supported this option explained as follows. First, demand for liquidity had already increased due to the problem of Resona Bank and it was not expected to subside in the short term. And second, raising the target would contribute to soothing the public anxiety over the problem of Resona Bank by clearly indicating the Bank's firm stance of securing financial market stability and give the public confidence in Japan's economic and financial prospects. A few of these members said that a decision to raise the target range would be an appropriate policy action to deal with a moderate increase in downside risks to the economy against the background of the problem of Resona Bank, overseas economic developments, and unstable movements in the foreign exchange market.

Regarding the above discussions, one member said that, from the viewpoint of taking appropriate and immediate policy action in response to a downward revision of the assessment of the economy, the Bank should raise the target range by a larger amount than proposed in the second option when it became clear that the assessment would be revised downward. A different member said that, if it was difficult to predict the size of any increase in demand for liquidity at this stage, removal of the ceiling on the target range for the time being could be an option.

Another member said that the Bank should start examining introduction of a numerical target for the inflation rate. To achieve such a target, this member suggested the following as possible policy measures: an increase in outright purchases of JGBs with options, which enabled holders to convert their bonds into inflation-indexed JGBs, when the government started issuing such JGBs; or introduction of outright purchases of foreign bonds. A different member said that it would be worthwhile to examine issues related to a desirable rate of inflation consistent with sound economic growth, and how this rate should be employed as a tool in the conduct of monetary policy, although the Bank might not set a time frame for achieving it.

Summing up discussions at this meeting, one member said that members basically agreed on the assessment of economic and financial developments and on the view that the Bank should take necessary action to secure the stability of the financial markets in the current situation through provision of ample liquidity. This member continued that members differed in their opinions on the guideline that authorized further provision of liquidity, and it was desirable that a consensus be reached.

IV. Remarks by Government Representatives

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

(1) Japan's real GDP for fiscal 2002 changed to positive growth, increasing by 1.6 percent from the previous year, reflecting an improvement in corporate profits and an incipient recovery in business fixed investment. On the other hand, nominal GDP growth remained negative, declining by 0.7 percent from the previous year. The outlook for the economy did not warrant optimism and thus it continued to require close monitoring, given the recent weakness in Japanese stock prices and the spread of SARS in some Asian economies. The Bank had been examining the basic framework for the conduct of monetary policy from various perspectives with a view to enhancing the transparency of monetary policy and 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 to implement more effective monetary easing measures.

(2) As part of the process of devising measures for more effective liquidity provision, the Bank was examining possible purchases of asset-backed securities (ABSs), including asset-backed commercial paper, mainly backed by assets related to small and medium-sized firms. The government hoped that the details of the scheme, which would take into account market participants' views, would be decided and the scheme would be implemented as soon as possible, and that this would secure smooth corporate financing and stimulate the flow of funds in the economy.

(3) In order to ensure financial system stability, the government would like to ask the Bank to continue taking every necessary step, including the provision of ample liquidity, so that emergency situations did not materialize in the market.

(4) A meeting of the Financial System Management Council was held on May 17, 2003, and the Prime Minister decided that it was necessary to inject public funds into Resona Bank. The government would like to ask the Bank to do its utmost, including providing special loans for the maintenance of an orderly financial system.

(5) The representative commented on the Bank's examination of possible purchases of ABSs. If the objective were to provide liquidity as in the case of measures to date, the Bank would only purchase ABSs with high credit quality. However, the Bank had announced that the objective was to strengthen the effects of monetary easing by nurturing the development of the ABS market, which was not yet mature, thereby promoting smooth corporate financing. To pursue this objective, the Bank would need to take more flexible measures than before, including taking a certain degree of risk. Although there were a certain number of constraints on the Bank's purchasing of ABSs as part of monetary policy, the government would like the Bank to do its utmost within the range of those constraints.

The representative from the Cabinet Office made the following remarks.

(1) The preliminary figure for the real GDP growth rate for January-March 2003 was 0.0 percent on a quarter-on-quarter basis. As a result, the real GDP growth rate for fiscal 2002 was 1.6 percent, higher than the government's forecast of 0.9 percent. However, the GDP deflator had declined at a faster pace, marking a fall of 3.5 percent for the January-March quarter from the same period of the previous year. This confirmed that deflation continued. Economic activity remained flat, but there was uncertainty about the outlook. The government would watch the financial and economic situation carefully and implement the fiscal 2003 budget, tax reform bills, and other policy measures steadily in order to overcome deflation, the most important task for the Japanese economy in the medium to long term. The government had been actively promoting structural reform in the four main fields of the financial system, the tax system, government expenditure, and the regulatory system. Furthermore, it would take action based on "Measures to Reform and Vitalize Securities Market" released on May 14, 2003, promptly implementing feasible measures. The Prime Minister held a meeting of the Financial System Management Council on May 17, and the council acknowledged the need to inject public funds into Resona Bank. The government would continue taking every necessary step to ensure financial system stability.

(2) The government would like the Bank to stand ready to ensure smooth funding by Resona Bank and implement measures appropriately and flexibly taking into account developments in financial markets, including foreign exchange markets, at home and abroad. In order to overcome deflation in fiscal 2005, the government hoped that the Bank would further deliberate on tools for market operations, in addition to reviewing the basic framework for the conduct of monetary policy, and implement monetary policy measures that were effective in overcoming deflation.

V. Votes

Based on the above discussions, 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 27 to 30 trillion yen.

Should there be a risk of financial market instability, such as a surge in liquidity demand, the Bank will provide more liquidity irrespective of the above target.

2. A public statement will be decided separately.

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

Mr. T. Taya dissented from the above proposal and explained as follows. While he was aware that the Bank should provide more liquidity when necessary to secure financial market stability taking into consideration the problem of Resona Bank, he considered that the Bank should deal with instability in the money market by using the contingency clause. He then gave the following reasons for dissenting from the proposal. First, there was no sign of instability in the money market currently. Second, even if liquidity demand were to surge in the near future, it was difficult to judge the size of such demand at this stage. And third, there was a risk that the Bank's communication with the market might become difficult if the Bank raised the target preemptively when no increase in liquidity demand had occurred.

In addition, Mr. T. Taya said that raising the target was a measure to be taken at a future meeting, when demand for liquidity had become clear.

Ms. M. Suda also dissented from the above proposal for the same reasons as Mr. T. Taya. In addition, she commented that it would also be appropriate for the Bank to use the contingency clause to deal with instability in the money market from the viewpoint of conducting monetary policy in a manner that was easy for the public to understand.

VI. Discussion on the Public Statement

Members discussed the draft of the public statement prepared by the staff regarding the above decision, and put it to the vote. The Policy Board approved, by majority vote, "Change in the Guideline for Money Market Operations" and decided to release it 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. S. Nakahara, Mr. H. Haru, and Mr. T. Fukuma.
Votes against the proposal: Mr. T. Taya and Ms. M. Suda.

Mr. T. Taya and Ms. M. Suda voted against the draft of the public statement as they had voted against the proposal regarding the guideline for money market operations.

VII. Discussion on the Bank's View of Recent Economic and Financial Developments

Members discussed "The Bank's View" of recent economic and financial developments, and put it to the vote. By unanimous vote, the Policy Board decided to publish "The Bank's View" on May 21, 2003 in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background"). 6

  1. 6The original full text, in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on May 21, 2003 together with the English version of "The Bank's View." The English version of "The Background" was published on May 22, 2003.

VIII. Approval of the Minutes of the Monetary Policy Meeting

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of April 7 and 8, 2003 for release on May 23, 2003.


Attachment 1

For immediate release

May 20, 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 22 to 27 trillion yen' to 'around 27 to 30 trillion yen' (see Attachment 2).
  2. Economic activity in Japan remains flat but uncertainties about future prospects have recently been increasing. In addition to uncertainties arising from the prospect of a recovery in the US and European economies as well as the impact of SARS on East Asian economies, unstable stock and foreign exchange markets overshadow future prospects.
  3. Against this background, a meeting of the Financial System Management Council was held and it was decided that injection of capital into Resona Bank was necessary. With additional liquidity provision by the Bank of Japan, overall conditions in financial markets have remained calm so far. Given the significant uncertainties over economic prospects, however, careful attention is warranted because economic activity could be adversely affected if financial markets become more unstable.
  4. Based on the above assessment of the economic and financial situations, the Bank thought it appropriate to raise the target balance of current accounts held at the Bank in order to show its determination to ensure financial market stability.

Attachment 2

For immediate release

May 20, 2003
Bank of Japan

At the Monetary Policy Meeting held today, the Bank of Japan decided, by majority 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 27 to 30 trillion yen.

Should there be a risk of financial market instability, such as a surge in liquidity demand, the Bank will provide more liquidity irrespective of the above target.