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Minutes of the Monetary Policy Meeting

on October 9 and 10, 2003
(English translation prepared by the Bank's staff based on the Japanese original)

November 27, 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 Thursday, October 9, 2003, from 1:59 p.m. to 3:55 p.m., and on Friday, October 10, from 9:00 a.m. to 1:54 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. K. Ishii, Senior Vice Minister of Finance, Ministry of Finance2
Mr. H. Tsuda, Deputy Vice Minister for Policy Planning and Coordination, Ministry of Finance3
Mr. Y. Nakajo, Director General for Economic and Fiscal Management, Cabinet Office

Reporting Staff
Mr. E. Hirano, Executive Director (Assistant Governor)
Mr. M. Shirakawa, Executive Director
Mr. A. Yamamoto, Executive Director
Mr. Y. Maehara, Adviser to the Governor, Policy Planning Office4
Mr. H. Yamaguchi, Adviser to the Governor, Policy Planning Office
Mr. S. Kushida, Deputy Director-General, Policy Planning Office
Mr. H. Nakaso, Director-General, Financial Markets Department
Mr. H. Hayakawa, Director-General, Research and Statistics Department
Mr. K. Momma, Deputy Director-General, Research and Statistics Department
Mr. A. Horii, Director-General, International Department

Secretariat of the Monetary Policy Meeting
Mr. K. Akiyama, Director-General, Secretariat of the Policy Board
Mr. T. Takei, Adviser to the Governor, Secretariat of the Policy Board
Mr. H. Onobuchi, Deputy Director, Secretariat of the Policy Board
Mr. N. Yoshioka, Director, Head of Planning Division II, Policy Planning Office5
Mr. T. Kato, Senior Economist, Policy Planning Office
Mr. S. Shimizu, Senior Economist, Policy Planning Office
Mr. T. Sakamoto, Deputy Director, Financial Markets Department5

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on November 20 and 21, 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. Ishii was present on October 10 from 9:00 a.m. to 12:21 p.m.
  3. Mr. Tsuda was present on October 9 for the whole of the session, and on October 10 from 12:27 p.m. to 1:54 p.m.
  4. Mr. Maehara was present on October 10.
  5. Messrs. Yoshioka and Sakamoto were present on October 10 from 9:00 a.m. to 9:13 a.m.

I. Summary of Staff Reports on Economic and Financial Developments6

A. Money Market Operations in the Intermeeting Period

The Bank conducted market operations in accordance with the guideline decided at the previous meeting on September 11 and 12, 2003.7 The Bank maintained the outstanding balance of current accounts at the Bank at the 28-30 trillion yen level, except for September 30 and October 1. On these two days, the Bank conducted market operations so that the outstanding balance was higher, in view of the increase in liquidity demand around the semiannual book closings.

B. Recent Developments in Financial Markets

Developments in the money market were as follows. The weighted average of the uncollateralized overnight call rate was moving in the 0.001-0.002 percent range, except on September 30 when it rose temporarily. Interest rates on term instruments remained generally stable. Interest rates on Euroyen futures were declining gradually recently, after moving at a relatively high level from late August.

There was somewhat greater fluctuation in domestic capital markets as the outlook for Japan's economy was improving. Stock prices rose substantially, with foreign investors continuing to invest in Japanese stocks, but fell thereafter due to a rapid appreciation of the yen. The Nikkei 225 Stock Average was recently at around the 10,500 yen level. Long-term interest rates had declined temporarily given that market participants' adjustment of their positions for the semiannual book closings had come to a halt. Recently, they were moving in the 1.3-1.5 percent range. The yield differentials between corporate bonds and Japanese government bonds (JGBs) in the secondary market were generally unchanged.

The yen appreciated significantly against the U.S. dollar because around the time of the G-7 meeting market participants had become less sensitive about the possibility of an intervention, while foreign investors continued to invest in Japanese stocks. Recently, it was being traded at around 110 yen against the U.S. dollar.

C. Overseas Economic and Financial Developments

The U.S. economy had stayed on a modest recovery trend supported by household spending. Positive developments had been observed in orders in the manufacturing sector and business fixed investment, particularly in IT-related goods. Production was also recovering, although it lacked momentum. With regard to the employment situation, indicators relating to employment for September showed an improvement, although pressure to adjust labor input remained strong. In U.S. financial markets, long-term interest rates and stock prices declined as market participants' expectations that the pace of economic recovery would accelerate steadily had subsided. However, long-term interest rates and stock prices rose in early October following the release of stronger-than-expected employment statistics.

In the euro area, corporate activity seemed to be close to bottoming out, and the economy had almost stopped deteriorating. In the United Kingdom, production was bottoming out, and economic growth, though modest, was becoming increasingly established. In European financial markets, long-term interest rates and stock prices declined temporarily in line with the developments in U.S. financial markets, but rose thereafter.

In East Asian economies, economic recovery was gradually gaining strength. In China, both domestic and external demand had regained their former strength after the containment of severe acute respiratory syndrome (SARS). In the NIEs and ASEAN economies, exports and production, particularly of IT-related goods, were generally increasing. In South Korea, although business fixed investment was decreasing, production was bottoming out.

D. Economic and Financial Developments in Japan

1. Economic developments

Real exports had been more or less flat until the April-June quarter, but the monthly average of July-August inched up by 2.1 percent from that of the April-June quarter. A breakdown showed that exports to the United States continued to be weak due to a decline mainly in automobile-related goods and consumer goods. With regard to East Asia, exports of IT-related goods and of capital goods and parts including semiconductor fabrication machines and equipment increased, assisted by the recovery in global IT-related demand. Exports of consumer goods to the region, which had decreased substantially in the April-June quarter, were starting to increase again. As for the outlook, exports were likely to continue increasing, reflecting the recovery in overseas economies, but careful monitoring was required of developments in the foreign exchange market.

The September Tankan (Short-Term Economic Survey of Enterprises in Japan) confirmed that corporate profits were following an upward trend. It was worth noting that the diffusion index of business sentiment of large manufacturing firms had turned positive for the first time since the December 2000 survey, and that of small firms had also improved moderately. Given these developments, business fixed investment was recovering gradually.

With regard to the employment situation, indicators related to the supply-demand balance in the labor market showed a gradual improving trend, and the number of employees had stopped falling on the whole. The pace of decline in wages was slowing. As a result, the decline in household income was gradually coming to a halt. However, the employment and income situation overall still remained severe, as the unemployment rate remained high and employment and wages were unlikely to start increasing immediately.

In private consumption, many indicators showed a decrease in July-August from the April-June quarter due partly to the cool summer. Although indicators for August recovered relatively strongly, there was no change in the basic assessment that private consumption continued to be weak. As for the outlook, private consumption overall was likely to remain weak, since the employment and income situation was unlikely to improve markedly for the time being.

Production continued to be basically flat. The monthly average for July-August increased by 0.3 percent from that for the April-June quarter, after decreasing by 0.7 percent on a quarter-on-quarter basis in the April-June quarter. Production declined by 0.5 percent in August from the previous month due to firms' production cuts following an increase in inventories against the background of the cool summer and also to other special factors. As for the outlook, production was projected to turn up gradually in the near future. This was because, although firms were basically maintaining their cautious stance on production, there had been some improvements in orders, mainly in IT-related goods, and hardly any adjustment pressure had built up on inventories.

On the price front, domestic corporate goods prices were more or less flat, partly due to the rise in tobacco tax. As for the outlook, they were likely to remain more or less flat for the time being, since the rate of decline in machinery prices was diminishing. The year-on-year rate of decline in consumer prices diminished to 0.1 percent in August due mainly to temporary factors, such as the increase in medical treatment costs in April and the rise in tobacco tax in July. Consumer prices were basically projected to continue falling gradually although it was possible that the year-on-year decline might stop temporarily depending on future temporary factors.

2. Financial environment

With regard to credit aggregates, private banks' lending continued to decline at around 2 percent on a year-on-year basis. In the corporate bond issuance market, some firms still seemed to be taking a wait-and-see attitude in view of the rise in long-term interest rates, but the yield differentials between corporate bonds and JGBs remained steady at low levels. The yield differentials between CP and treasury bills (TBs) or financing bills (FBs) were also stable at low levels. The favorable issuing environment in the corporate bond and CP markets was virtually unchanged on the whole, especially for firms with high credit ratings.

In corporate finance, credit demand in the private sector continued to follow a downtrend, as business fixed investment was still below the level of firms' cash flow although it was recovering moderately. Private banks remained cautious in extending loans to firms with high credit risk, while on the other hand they continued to be active in extending loans to blue-chip firms. However, their lending attitude seemed to be becoming slightly more accommodative in areas such as terms and conditions for loans. Reflecting these developments, the lending attitude of financial institutions as perceived by firms in general was improving somewhat, although small firms continued to perceive it as severe. The financial position of firms in general was also improving slightly, although that of small firms remained severe.

Growth rates of the money stock and the monetary base relative to economic activity remained high. The year-on-year growth rate of the money stock was around 2 percent, and was projected to remain around 2 percent for the October-December quarter of 2003. This was because the inflow of funds arising from sales of assets by corporate pension funds, which were returning funds entrusted to them in order to discontinue acting on behalf of public pension funds, was expected to come to a halt, while there seemed to be no substantial changes in credit demand of private firms.

Developments in the financial and capital markets, the behavior of financial institutions, and the situation of corporate finance continued to require close monitoring.

  1. 6Reports were made based on information available at the time of the meeting.
  2. 7The 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 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.

II. Decision concerning Amendment to Principal Terms and Conditions for the Purchase/Sale of Japanese Government Securities with Repurchase Agreements

A. Staff Report and Proposal

The staff presented a report and a proposal based on the instructions given by the chairman at the previous meeting to study the issue of extending the maturity of purchase/sale of Japanese government securities (JGSs) with repurchase agreements and report the result at this Monetary Policy Meeting (MPM).

The maximum maturity at present of purchase/sale of JGSs with repurchase agreements was six months as stipulated in Principal Terms and Conditions for the Purchase/Sale of Japanese Government Securities with Repurchase Agreements. The staff proposed that the Bank amend the principal terms and conditions to extend the maximum maturity of purchases of JGSs with repurchase agreements to one year from the present six months, in order to facilitate the Bank's money market operations.

B. Members' Discussion and Vote

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

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

A. Economic Developments

On the state of Japan's economy, members agreed that the foundation for a gradual recovery in Japan's economy was being laid, as the environment for exports and business sentiment had improved.

Members first discussed developments in overseas economies.

Many members said that the growth rate of the U.S. economy was expected to increase reflecting firm private consumption and a recovery in IT-related demand. Regarding the employment situation, which had been pointed out as cause for concern, many members said that recovery had been delayed. Some members, however, said that there might be signs of improvement in the employment situation on a basis that included self-employed workers, given the increase in the number of employed persons according to the household survey.

Many members said that East Asian economies continued to recover steadily, with the containment of SARS and developments in the U.S. economy. A few of these members said that the Chinese economy in particular continued to expand strongly and moreover there was even a risk that the economic boom might overheat. A few other members noted that exports of ASEAN economies were somewhat weak, and commented that, as this might be due to firms relocating their production facilities within Asia, future developments in these economies' exports were cause for concern.

Members agreed that Japan's exports, especially to East Asia, were starting to increase again reflecting these developments in overseas economies. One member said that it seemed that the effects of developments in the world economy particularly those stemming from IT-related demand were concentrated in Asia, as seen in the economic recovery there, and this could be one of the factors behind the increase in exports to East Asian economies.

With regard to the corporate sector, many members pointed out that an improvement in firms' business sentiment was confirmed by the September Tankan. Some of these members said that it was worth noting that signs of improvement in business sentiment were gradually spreading to small firms and nonmanufacturing firms in addition to large manufacturers, unlike during 1999-2000 when recovery was concentrated in IT-related sectors.

Many members agreed that there was a clear recovery trend in business fixed investment, as business sentiment had improved and corporate profits had been increasing, and this was confirmed by the September Tankan. One member, however, said that, given that the increase in corporate profits was mainly due to progress in corporate restructuring, the slower pace of decline in wages might negatively affect corporate profits if sales did not increase. The member therefore intended to monitor carefully developments in unit labor costs. A different member said that it should be noted that there was hardly any upward revision to business fixed investment plans for fiscal 2003 of large manufacturers in the September Tankan from the June Tankan and that machinery orders were somewhat sluggish recently. Another member said that the coverage of samples in the Tankan might have been affected by spinoffs, and this might have affected the survey results, given that surveys on business fixed investment conducted by other institutions indicated that business fixed investment plans of large manufacturers had been revised significantly upward recently.

With regard to the household sector, some members said that, although the employment and income situation overall remained severe, it seemed that the deterioration in the situation was generally coming to a halt, for the following reasons: the number of employees had stopped falling; the net percentage of respondents who reported "excessive employment" had decreased in the September Tankan; and the pace of decline in wages was slowing.

As for the outlook for Japan's economy, many members said that it was becoming increasingly likely that the standard scenario--exports and production would regain momentum and a virtuous circle would start working in the economy--would materialize. At the same time, some members cited developments in overseas economies, especially the sustainability of the U.S. economic recovery, and developments in financial markets as risk factors for the economy, and said that they required close monitoring in a situation where momentum for a self-sustained recovery remained weak due to persisting downward pressures from structural adjustments, such as firms' reduction of excess debt and restraint on labor costs.

A few members said that Japan's economy as a whole was not considered to be significantly affected by the current exchange rates of the yen, given that the yen had not appreciated to extreme levels in terms of its real effective exchange rate. These members, however, said that the effects that developments in the foreign exchange market had on economic activity through exports and business sentiment would require close monitoring. A different member added that appreciation of the yen could reduce the consolidated profits of Japanese firms operating globally.

As for prices, members agreed that although the year-on-year rate of decline in the consumer price index (CPI; excluding fresh food, on a nationwide basis) diminished to 0.2 percent in July and 0.1 percent in August, this was mainly due to temporary factors, and thus there was no change in the assessment that the CPI basically continued to decline moderately. One member said that the slower pace of decline in prices was largely attributable to the temporary factors but it was also due to some extent to the continuing high growth of real GDP. In response to this, a different member said that, if the high growth of real GDP was due partly to temporary factors and the downward bias of the GDP deflator, it was likely that the output gap might not have been contracting as much as the high growth of real GDP seemed to suggest. A few other members said that the year-on-year change in the CPI might temporarily register zero percent or an increase at some point before the end of 2003 due to temporary factors, and the Bank should communicate its thinking to market participants clearly and thoroughly so as not to cause concern among them that this might cause the Bank to terminate its quantitative easing policy.

B. Financial Developments

Many members said that developments in financial markets showed somewhat greater fluctuation as expectations for Japan's economic recovery were growing.

Some members expressed the view that stock prices were relatively firm. They rose substantially toward mid-September and then declined due to the rapid appreciation of the yen, but they recovered thereafter supported partly by strong corporate profits. With regard to the rise in bank stock prices, one member commented that this could be due to market participants starting to take a favorable view of the recovery in banks' profitability, which was a result of progress in disposal of their nonperforming loans.

A few members said that long-term interest rates were stabilizing recently, after fluctuating significantly due partly to technical factors with the semiannual book closings approaching. Some members, however, pointed out that their volatility remained high.

With regard to the foreign exchange rates, most members said that although the rapid appreciation of the yen was due to market expectations that had emerged from around the time of the G-7 meeting, careful monitoring was required of its effects on the economy and business sentiment as well as on developments in financial markets at home and abroad, such as those in stock prices and long-term interest rates.

One member expressed the view that developments in the money market required close monitoring, as interest rates on futures had remained at high levels and the forward rate curve remained steep, although it had become somewhat more moderate than before.

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

A. Staff Report concerning Issues related to the Enhancement of Monetary Policy Transparency

To enhance the transparency of monetary policy, it was important that the Bank explain in a more lucid and timely manner its evaluation of developments of the economy and prices and its conduct of monetary policy based on that evaluation.

With regard to the former, the staff considered that the Bank could improve the Monthly Report of Recent Economic and Financial Developments (hereafter the Monthly Report), Outlook and Risk Assessment of the Economy and Prices (hereafter the Outlook Report), and the Governor's press conferences.

As for explanation of the conduct of monetary policy, it was important to make the description "stably a zero percent or an increase year on year" concerning the CPI in the Bank's commitment to maintaining the quantitative easing policy more detailed. One way of clarifying the meaning of "stably" would be to indicate some kind of criteria in terms of both the most recent and expected developments in the CPI. With these criteria, the Bank could provide more detailed description of the commitment.

B. Discussions by the Policy Board

1. Enhancement of monetary policy transparency

With regard to the enhancement of monetary policy transparency, members agreed that it was important to enhance the transparency of the Bank's evaluation of developments of Japan's economy and prices and to make available more detailed description of its commitment to maintaining the quantitative easing policy, in order to ensure its accountability with respect to the conduct of monetary policy and to make the policy more effective.

Members basically agreed on the following measures for the enhancement of transparency of the evaluation of developments of the economy and prices. First, three months after the MPMs in April and October at which the Policy Board reviewed the standard scenario for Japan's economy and prices in the Outlook Report, it would make deliberations on the possible deviation from the standard scenario and report the outcome of its deliberations as an interim assessment in "The Bank's View" of the Monthly Report. Second, regarding the question of whether or not the Policy Board should indicate the overall balance of upside and downside risks, this would be examined at some time in the future, since there were many issues to be considered. Third, the Bank would make "The Bank's View" of the Monthly Report more concise and publish it on the same day of the MPM. Fourth, the Bank would publish the Outlook Report in two parts, the concise description of its basic judgment and the detailed background information. And fifth, the Governor would call a press conference after every MPM on the same day.

Members commented on each of the above measures as follows.

As for introducing the interim assessment, some members said that instituting some sort of system for checking at each MPM the possible deviation from the standard scenario and reporting the results in "The Bank's View" of the Monthly Report three months after the release of the Outlook Report would contribute to presenting the Bank's view of the outlook for the economy and prices in a more lucid and timely manner. In response to this, one member said that the Policy Board should decide conduct of monetary policy based on its discussion at each MPM regarding the possible deviation from the standard scenario as it had been doing to date, rather than based on an interim assessment made three months after the release of the Outlook Report.

With regard to improving the Monthly Report and the Outlook Report, a few members said that it was important to improve the quality of the information on the Bank's evaluation of developments of the economy and prices and make it clearer by making sections that contained large amounts of information more concise. A different member, however, said that it was necessary to make these reports clearer but it was important as far as possible not to reduce the amount of information.

As for changing the schedule of the Governor's press conference, some members said that it was desirable that a conference be called after every MPM on the same day in order to communicate the Bank's thinking in a more timely manner. In response to this, a few other members expressed the view that, unless there was a change in the Bank's policy, it was not necessary to call a press conference after the second MPM of the month. A different member commented that there was no need to limit Governor's press conferences to days of MPMs and they could be called whenever necessary, such as when financial markets were becoming unstable.

In relation to making available more detailed description of the commitment, members agreed as follows. First, it required not only that the most recently published CPI should register zero percent or above, but also that such tendency should be confirmed over a few months. Second, the Bank needed to be convinced that the prospective CPI was not expected to register below zero percent. This point would be described in such materials as the analysis and the forecasts of Policy Board members in the Outlook Report. Third, these two conditions were the necessary condition. There might be cases, however, that the Bank would judge it appropriate to continue with quantitative easing even if they were fulfilled.

Members discussed the specific meaning of the second condition that the Bank needed to be convinced that the prospective CPI was not expected to register below zero percent.

One member expressed the view that, to stabilize market expectations, the Bank should present a numerical value that was well above zero percent as the condition for the prospective CPI. A different member also said that the condition for the prospective CPI should be a numerical value that was well above zero percent to strengthen the Bank's commitment in terms of policy duration by conveying its strong determination to market participants. On the necessity of setting a specific numerical target for price stability, this member commented that a stronger commitment than in normal circumstances was needed when there was persistent deflationary concern.

In response to these views, most members commented as follows. First, it was important to maintain an appropriate balance between strengthening the Bank's commitment in terms of policy duration and maintaining flexibility in the conduct of monetary policy. This was because setting a high requirement would reduce flexibility in the future conduct of monetary policy, and could as a result destabilize the economy and financial markets. Second, the condition for the prospective CPI therefore needed some degree of flexibility, and in this regard, a condition such as one that the prospective CPI should register above zero percent was appropriate. Third, the conduct of monetary policy should be decided based on a comprehensive evaluation of the economy and price developments. And fourth, many Policy Board members needed to make the forecasts that the year-on-year increase in the prospective CPI would register above zero percent. One of these members said that, given that market participants had been forming expectations based on a year-on-year increase of zero percent in the CPI, presenting a positive numerical value as the condition for the prospective CPI would imply a shift in the policy regime, and might cause confusion in the markets. A different member expressed the view that a specific reference rate for price stability might become necessary in the future to stabilize expectations but it was not necessary in the present situation.

Based on these discussions, a few members, who advocated that a numerical value that was well above zero percent was necessary, said that it would be very meaningful if the Policy Board decided on a more detailed description of the commitment to maintaining the quantitative easing policy and released a public statement. One of these members said that, although the member still considered that a more specific numerical target was necessary, the condition for the prospective CPI that it should register above zero percent would contribute to strengthening the Bank's commitment.

Some members pointed out that, when the Bank released a public statement following these discussions on enhancing the transparency of monetary policy, it should explain its thinking to the public thoroughly to avoid emergence of skepticism among market participants about whether it would maintain the quantitative easing policy.

2. Monetary policy for the immediate future

On the monetary policy stance for the immediate future, members agreed that it was important that the Bank maintain the quantitative easing policy, as the foundation for a gradual recovery in Japan's economy was being laid.

On this basis, members exchanged views on whether it was necessary to take policy action that would make room for conducting monetary operations in a more flexible manner.

Many members said that it was appropriate to raise the upper limit of the target range for the outstanding balance of current accounts at the Bank because it was important to ensure further the recent movement toward an economic recovery by making room for conducting monetary operations in a more flexible manner. Specifically, these members said that the Bank should raise the upper limit of the target range by 2 trillion yen to "around 27 to 32 trillion yen," and conduct monetary operations aiming at an outstanding balance of around 30 trillion yen on average, while allowing some degree of fluctuation in daily balances.

A few of these members expressed the view that the aim of raising the upper limit of the target range was primarily to ensure further movement toward economic recovery by increasing the flexibility of money market operations, and thus it was different from that of past monetary easing, which was aimed at dealing with downside risks to the economy. One of these members added that if the Bank responded appropriately to liquidity demand in the market by providing liquidity more flexibly, this would contribute to stabilizing the formation of economic entities' expectations. A few members added the following reasons for advocating raising the upper limit of the target range. First, the Bank should take a preemptive policy stance because there was a risk that the financial markets might become unstable in the near future. Second, the Bank should clearly indicate its strong determination to continue the quantitative easing policy not only by communicating its thinking to market participants but also by actually raising the target range. And third, the ceiling of the current target range, which was 30 trillion yen, had reduced the flexibility of money market operations.

A few members, on the other hand, expressed the following view. First, if the Bank raised the upper limit of the target range at the same time as it upgraded its assessment of the economy, it would increase uncertainty about its conduct of monetary policy because this action would not be consistent with past policy actions, where the target had been raised as a measure to ease monetary policy further. In addition, it could be taken as intended to facilitate foreign exchange intervention since the intention behind increasing the flexibility of money market operations was not clear. And second, the money market was stable and thus further monetary easing was unnecessary. Moreover, excessive control of fluctuation in interest rates would result in a further decline in the functioning of the market mechanism. Furthermore, it would not be consistent with the quantitative easing framework, in which the Bank's main operating target was the outstanding balance of current accounts at the Bank, and not interest rates. With respect to the flexibility of the Bank's money market operations, a few members pointed out that the outstanding balance of current accounts had recently been moving within a range of around 1 trillion yen, and this afforded sufficient flexibility in the Bank's money market operations. These members continued that the Bank could use the contingency clause of the guideline for money market operations if the market became unstable temporarily. One of these members said that there was no particular problem in conducting funds-absorbing operations to maintain the outstanding balance of current accounts within the upper limit of 30 trillion yen. A different member said that when there were no concerns about the stability of the financial markets, raising the target range temporarily would not have much significance, nor would this convey the Bank's determination to strengthen its commitment in terms of policy duration. In addition, taking a policy action when the Bank's intention behind it was unclear could impair the transparency of the conduct of monetary policy.

In response to the opinion that the Bank should enhance the flexibility of money market operations by using the contingency clause, members who considered that it was necessary to raise the upper limit of the target range expressed the following view. First, the contingency clause should be used to deal with a temporary and unexpected surge in liquidity demand due to, for example, the approach of annual or semiannual book closings or external shocks. And second, flexibility in daily money market operations should be based on a consensus among Policy Board members, and therefore, it was necessary to raise the upper limit of the target range to enable such operations. A different member said that at times it was necessary to conduct money market operations in a flexible manner when there were various speculations due to market participants' growing anticipation of economic recovery. Therefore, if it was expected that it would be difficult to deal with such a situation using the contingency clause, it was acceptable to raise the upper limit of the target range.

Some members commented on whether policy action needed to be taken to deal with possible negative effects of the rapid appreciation of the yen on the economy. One of these members expressed the view that it was desirable to raise the target range preemptively to deal with possible negative effects on the economy. In response to this, most members, including those who advocated raising the upper limit of the target range to enhance the flexibility of the Bank's money market operations, expressed the following view. Although it was necessary to carefully monitor the effects of the appreciation of the yen on the economy, no particular negative effects had been observed so far and thus monetary policy action was not needed.

V. Remarks by Government Representatives

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

  1. (1) In Japan's economy, there had recently been positive developments in corporate activity, with business fixed investment increasing and corporate profits continuing to improve. Improvements were also seen in sentiment, as firms' perception of their business condition was recovering, as evidenced by the September Tankan released on October 1, 2003. The government considered that, in the situation where the economy was expected to show an incipient recovery, the role of the Bank's conduct of effective monetary policy continued to be vital in overcoming deflation and ensuring a full-fledged economic recovery.
  2. (2) Interest rates and exchange rates posed risks to the economy's movement toward recovery in the immediate future. Although interest rates were stabilizing recently, an excessive rise preceding improvements in the economy could have negative effects on economic recovery. A rapid appreciation of the yen that did not reflect economic developments could also have negative effects on exports, which were leading the recovery.
  3. (3) It was necessary that the Bank give due consideration to developments in the economy and financial markets, including the risk factors mentioned above, and continue to reaffirm that it would hold firmly to its stance of maintaining the quantitative monetary easing policy. To this end, the government would like the Bank not only to conduct monetary policy flexibly but also to deliberate on and implement measures that would dispel market participants' concern about whether the Bank would maintain the current policy.

The representative from the Cabinet Office made the following remarks.

  1. (1) The Monthly Economic Report was scheduled to be released on October 15, 2003. The economy was showing movements toward an incipient recovery recently. However, the deflationary trend continued. It was necessary to closely monitor developments in financial markets, as the yen was appreciating rapidly, although long-term interest rates were more stable than some time ago.
  2. (2) The two most important tasks for Japan's economy were to overcome deflation promptly and to achieve a self-sustained economic recovery led by domestic demand. To this end, the government was pursuing further strengthening of structural reform, which was beginning to bear fruit, through early implementation of "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2003" (hereafter the Basic Policies 2003). The Basic Policies 2003 stated that deflation would be overcome after an intensive adjustment period through measures taken by the government with the Bank.
  3. (3) As the deflationary trend continued, the government would like the Bank to conduct effective monetary policy in order to overcome deflation in fiscal 2005. The government considered that extension of the maturity of purchase of JGSs with repurchase agreements, which had been discussed at this meeting, would contribute to facilitating money market operations. The Bank had been stating clearly that it would maintain the monetary easing policy until the CPI registered stably zero percent or an increase year on year, regardless of any temporary year-on-year increase in the CPI. The government would like the Bank to continue to conduct money market operations appropriately and flexibly by, for example, utilizing operational tools that were more effective, and at the same time pay attention to developments in financial markets.

VI. Votes

Based on the above discussions, the chairman formulated the following two proposals and put them to the vote.

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 32 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. S. Nakahara, Mr. H. Haru, and Mr. T. Fukuma.

Votes against the proposal: Mr. K. Ueda, Mr. T. Taya, and Ms. M. Suda.

Mr. T. Taya dissented from the above proposal for the following reasons. First, in conducting money market operations, there was no particular problem with the current range within which the outstanding balance of current accounts at the Bank moved. And second, preemptive policy action to stabilize interest rates could impair the transparency of the Bank's conduct of monetary policy, and would also make it difficult for the Bank to explain it to the public.

Ms. M. Suda also dissented from the above proposal, and gave the following reasons. First, it was appropriate to maintain the current guideline for money market operations given the Bank's assessment of the economy and the stability of the money market. And second, given that it was difficult to explain clearly to the public the Bank's intention in changing the target range, it would impair the transparency of the conduct of monetary policy.

Mr. K. Ueda dissented from the above proposal for reasons similar to those of Mr. T. Taya and Ms. M. Suda.

The Chairman's Policy Proposal on the Release of a Public Statement on Enhancement of Monetary Policy Transparency:

The decision concerning enhancement of monetary policy transparency will be made public by the attached statement (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.

VII. 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. The Policy Board approved, by majority vote, "On Today's Decision at the Monetary Policy Meeting" and decided to release it immediately after the meeting (see attachments 3 and 4).

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.

VIII. 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 October 14, 2003 in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background").8

  1. 8The original full text, in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on October 14, 2003 together with the English version of "The Bank's View." The English version of "The Background" was published on October 15, 2003.

IX. Approval of the Minutes of the Monetary Policy Meeting

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of September 11 and 12, 2003 for release on October 16, 2003.


Attachment 1

For immediate release

October 10, 2003
Bank of Japan

Enhancement of Monetary Policy Transparency

At the Monetary Policy Meeting (MPM) held today, the Bank of Japan decided, by unanimous vote, to take the following measures to enhance the transparency of monetary policy.

1. New Measures

With the aim of presenting the basic thinking on the conduct of monetary policy and the evaluation of the developments of the economy and prices in a more timely and lucid manner, the Bank decided to take the following measures.

(1) Interim assessment

Currently, the Policy Board reviews the standard scenario in the "Outlook and Risk Assessment of the Economy and Prices" (the Outlook Report) at the MPMs in April and October.

It will make the deliberations on the possible deviation from the standard scenario three months after these MPMs (July in the case of April, and January of the following year in the case of October), and report the outcome in "The Bank's View" of the "Monthly Report of Recent Economic and Financial Developments" (the Monthly Report).

(2) Same-day publication of the Monthly Report

Currently, the Bank publishes the Monthly Report one day after the MPM. It will publish "The Bank's View" of the Monthly Report on the same day of the MPM1.

"The Bank's View" will be made more lucid and concise. In addition, the Outlook Report will be published in two parts. The first part is the concise description of the Bank's basic judgment, and the second part deals with the detailed background information.

  1. See Attachment 2 for the change in the dates of "Publication of Monthly Report."
(3) Governor's press conference on the same day

Currently, the Governor calls a press conference once a month, two days after the MPM, or two days after the first MPM in the case of two MPMs held in the same month.

The Governor will call a press conference after every MPM on the same day.

2. More Detailed Description of the Commitment to Maintaining the Quantitative Easing Policy

With the aim of laying the foundation for sustainable growth of Japan's economy, the Bank is currently committed to maintaining the quantitative easing policy until the consumer price index (excluding fresh food, on a nationwide basis, hereafter the core CPI) registers stably a zero percent or an increase year on year. Such commitment is underpinned by the following two conditions.

First, it requires not only that the most recently published core CPI should register a zero percent or above, but also that such tendency should be confirmed over a few months.

Second, the Bank needs to be convinced that the prospective core CPI will not be expected to register below a zero percent. This point will be described in such materials as the analysis and the forecasts of Policy Board members in the Outlook Report. To be more specific, many Policy Board members need to make the forecasts that the core CPI will register above a zero percent during the forecasting period.

The above conditions are the necessary condition. There may be cases, however, that the Bank will judge it appropriate to continue with quantitative easing even if these two conditions are fulfilled.


Attachment 2

For immediate release

October 10, 2003
Bank of Japan

Scheduled Dates of Monetary Policy Meetings in October 2003 - March 2004 Revised

The underlined dates and words are added (the corssed-out dates and words are initially announced on September 21, 2003).

table : Scheduled Dates of Monetary Policy Meetings in October 2003 - March 2004 Revised
  Date of MPM Publication of
Monthly Report
(The Bank's View)1,2,3
Publication of
MPM Minutes
Oct. 20039 (Thur.), 10 (Fri.)14 (Tue.)Nov. 27 (Thur.)
31 (Fri.)--Dec. 19 (Fri.)
Nov.20 (Thur.), 21 (Fri.)21 (Fri.)
25 (Tue.)
Dec. 19 (Fri.)
Dec.15 (Mon.), 16 (Tue.)16 (Tue.)
17 (Wed.)
Jan. 23 (Fri.)
Jan. 200419 (Mon.), 20 (Tue.)20 (Tue.)
21 (Wed.)
Mar. 2 (Tue.)
Feb. 5 (Thur.), 6 (Fri.)6 (Fri.)
9 (Mon.)
Mar. 19 (Fri.)
26 (Thur.)--To be announced
Mar.15 (Mon.), 16 (Tue.)16 (Tue.)
17 (Wed.)
To be announced
  • 1 "The Bank's View" is scheduled to be published at 3:00 p.m. (this schedule is subject to change on certain grounds such as late closing of the meeting).
    2 Full text of "Monthly Report" will be published at 2:00 p.m. on the next business day of the publication of "The Bank's View" (English translation will be published at 4:30 p.m. on the second business day of the publication of "The Bank's View").
    3 "Outlook and Risk Assessment of the Economy and Prices (October 2003)" will be published at 3:00 p.m. on Friday, October 31. (The whole report including the background will be published at 2:00 p.m. on Tuesday, November 4.)

Attachment 3

For immediate release

October 10, 2003
Bank of Japan

On Today's Decision at the Monetary Policy Meeting

  1. The foundation for a gradual recovery in Japan's economy is being laid, as the environment for exports and business sentiment have improved. Looking forward, exports and production will likely increase, which in turn will gradually gather momentum for an economic recovery in Japan. It is expected, however, to take some more time before a self-sustaining recovery in domestic demand gains momentum, given the existence of persisting structural problems, such as debt overhang and excess labor.
  2. The Bank of Japan is currently committed to maintaining the quantitative easing policy until the consumer price index (excluding fresh food, on a nationwide basis) registers stably a zero percent or an increase year on year. The Bank emphasizes that it is firmly committed to this policy at this juncture where there are signs of improvement in the Japanese economy. Today, the Bank decided to take the following measures at the Monetary Policy Meeting. These measures will contribute to further ensuring the recent movement toward an economic recovery from the monetary policy front.
    1. (1) Increase in the upper limit of the target balance of current accounts The Bank raised the upper limit of the target balance of current accounts from around 30 trillion yen to around 32 trillion yen. The new target balance is 'around 27 to 32 trillion yen.'(see Attachment 4) This action was taken in light of making room for conducting monetary operations in a more flexible manner.
    2. (2) Extension of the maturity of the purchase of Japanese government securities with repurchase agreements
      With the aim of enhancing the flexibility of monetary operations, the Bank extended the maximum maturity of the purchase of Japanese government securities with repurchase agreements from 6 months to 1 year.
    3. (3) Enhancement of monetary policy transparency
      With the aim of enhancing the transparency of monetary policy, the Bank will make available more detailed description of the commitment to maintaining the quantitative easing policy, and improving the way in which the Bank's evaluation of the developments of the economy and prices is communicated (see "Enhancement of Monetary Policy Transparency").

Attachment 4

For immediate release

October 10, 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 32 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.