Minutes of the Monetary Policy Meeting

on November 20 and 21, 2003
(English translation prepared by the Bank's staff based on the Japanese original)

December 19, 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, November 20, 2003, from 1:59 p.m. to 3:37 p.m., and on Friday, November 21, from 9:00 a.m. to 12:07 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 Office
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. H. Yamaoka, Senior Economist, Policy Planning Office
Mr. K. Masaki, Senior Economist, Policy Planning Office

The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on December 15 and 16, 2003 as "a document which contains an outline of the discussion at the meeting" stipulated in Article 20, Paragraph 1 of the Bank of Japan Law of 1997. Those present are referred to by their titles at the time of the meeting.
Mr. Ishii was present on November 21.
Mr. Tsuda was present on November 20.

I. Summary of Staff Reports on Economic and Financial Developments⁴

A. Money Market Operations in the Intermeeting Period

The Bank conducted market operations in accordance with the guideline decided at the previous meeting on October 31, 2003.⁵ The outstanding balance of current accounts at the Bank was moving at the 28-32 trillion yen level. As a result of the market operations, the weighted average of the uncollateralized overnight call rate was moving in the 0.001-0.002 percent range, except for the middle of November when the rate occasionally fell below zero due to call loans at negative interest rates by some foreign banks. Market participants continued to feel strongly that there was an abundance of liquidity in the money market, in spite of the approach of the year-end when seasonal demand for liquidity increased.

B. Recent Developments in Financial Markets

Money market rates continued to be stable at low levels due to the Bank's provision of ample liquidity. Yields on short-term Japanese government securities (JGSs) with relatively long maturities, for example six months and one year, were on a downtrend. Interest rates on Euroyen futures were declining further.

Long-term interest rates had been moving generally within the 1.3-1.6 percent range in the intermeeting period. Recently, however they had declined to around 1.3 percent partly reflecting the fall in stock prices. As for the yield differentials between Japanese government bonds (JGBs) and corporate bonds in the secondary market, those for bonds with low credit ratings narrowed slightly.

Arrangement of syndicated loans had been growing steadily. The size of each loan was gradually becoming smaller. As the Bank's staff had reported at the Monetary Policy Meeting on September 11 and 12, 2003, the Bank had been making necessary preparations to accept syndicated loans arranged in the form of loans on deeds as eligible collateral. Recently, the Bank had completed its preparations and would start accepting them from November 21, 2003.

Japanese stock prices declined due partly to the temporary fall in U.S. stock prices and profit-taking sales by some foreign investment funds whose accounting period ended at the end of November. The Nikkei 225 Stock Average fell below 10,000 yen for the first time since August 2003.

The yen continued to be traded around the 108-110 yen range against the U.S. dollar. There were still market expectations that the U.S. dollar would depreciate.

C. Overseas Economic and Financial Developments

The U.S. economy was recovering steadily and the momentum for recovery was strengthening. Private consumption was on a moderate recovery trend, although the pace of growth was slower than before due partly to the recent waning of tax-cut effects. Housing investment remained at a high level. Positive developments were observed in orders in the manufacturing sector and business fixed investment, particularly in IT-related goods. Production was increasing on the whole. As for the employment situation, where recovery had been delayed, positive developments were beginning to be observed, especially in the nonmanufacturing sector.

In U.S. financial markets, stock prices had been more or less flat after rising temporarily through the beginning of November. However, they were declining somewhat very recently partly reflecting concerns about geopolitical risks. Long-term interest rates rose through early November, but had recently declined to the levels of around the end of October. Judging from developments in federal funds rate futures, market expectations that the Federal Open Market Committee (FOMC) would raise its target for the federal funds rate by early spring of 2004 temporarily heightened somewhat after the previous meeting due to an improvement in expectations for economic growth. Thereafter, these market expectations subsided to slightly below the levels of the previous meeting due partly to comments made by officials of the Federal Reserve.

In the euro area, the overall economy bottomed out. Exports had recovered and production had stopped declining although domestic demand remained sluggish. Real GDP for the July-September quarter increased by 0.4 percent from the previous quarter, after posting negative growth for two consecutive quarters.

In the United Kingdom, the economy had been growing more steadily, albeit gradually. Given this situation, the Bank of England decided on November 6 to raise its policy interest rate, the two-week repo rate, by 0.25 percentage points to 3.75 percent.

In European financial markets, stock prices increased from late October reflecting favorable financial results of firms. Long-term interest rates rose temporarily through early November reflecting an improvement in market participants' expectations for economic growth, but they were declining again recently.

In East Asian economies, economic recovery was gaining strength. In China, the year-on-year growth rate of real GDP for the July-September quarter increased significantly by 9.1 percent against the background of strong domestic and external demand. This was a considerable increase from the previous quarter's 6.7 percent which reflected the effects of severe acute respiratory syndrome (SARS). In many of the NIEs and ASEAN countries, exports were increasing reflecting favorable external demand. Production was also increasing in economies such as Taiwan and Singapore, especially in IT-related goods. Private consumption in East Asia had been basically firm except in South Korea.

Judging from the above developments, it was becoming increasingly likely that the growth rate of the world economy would increase led by the U.S. economy, as downside risks to the world economy had further decreased on the whole, although there were concerns among some market participants since the previous meeting that geopolitical risks might materialize.

D. Economic and Financial Developments in Japan

1. Economic developments

The real GDP growth rate for the July-September quarter was 0.6 percent on a quarter-on-quarter basis, increasing for the seventh consecutive quarter. Developments in demand components were mostly in line with the Bank's assessment of the economy to date: exports and business fixed investment were increasing; private consumption remained virtually flat; and public investment was declining. The tendency of the GDP deflator to have a large downward bias remained, particularly for the business fixed investment deflator.

Real exports for the July-September quarter increased by 3.8 percent on a quarter-on-quarter basis, reflecting the improvement in the U.S. and East Asian economies. In terms of destination, exports to East Asian economies, particularly IT-related goods, increased substantially, assisted by the recovery in global IT-related demand. Exports to the United States were also showing signs of movement toward recovery recently. Real exports for October showed high growth, increasing by 6.2 percent from the July-September quarter. As for the outlook, exports were expected to continue increasing, since overseas economies were projected to continue growing relatively fast, mainly in the United States and East Asia.

Business fixed investment continued a gradual recovery. Regarding the outlook, the recovery trend was expected to become clearer with the ongoing increase in exports and production. However, firms were likely to maintain their cautious investment stance relative to their cash flow, given persisting structural restraints such as balance-sheet adjustment pressures and the weakness in the financial system.

With regard to developments in the household sector, the overall employment and income situation remained severe, although the decline in the number of employees in the Labour Force Survey was gradually coming to a halt, the ratio of job offers to applicants was rising, and the pace of decline in wages was slowing. As for the outlook, the increase in production and recovery in corporate profits were expected to gradually have positive effects on employment and income. Firms were, however, likely to maintain their stance on restraining labor costs as they continued to perceive their employee numbers as excessive. Thus, household income was unlikely to improve markedly for the time being.

Regarding indicators related to private consumption, sales of durable consumer goods, particularly digital appliances, were relatively brisk. On the other hand, many indicators related to sales of nondurable consumer goods and transactions of services decreased for the July-September quarter, due partly to the cool summer. Overall, private consumption continued to be weak. As for the outlook, although there were favorable factors, such as improvement in some indicators related to consumer sentiment, private consumption was likely to remain weak or virtually flat, since the employment and income situation was unlikely to improve markedly.

The most noticeable development in recent economic indicators was that the increase in exports was leading to recovery in production, and a virtuous cycle was starting to operate in the economy. Production for the July-September quarter increased by 1.3 percent on a quarter-on-quarter basis, mainly due to an increase in production of IT-related goods. The production forecast index showed a substantial increase. As for the outlook, production was expected to continue increasing, due mainly to the rise in exports and also supported by the recovery in business fixed investment and favorable sales of durable consumer goods. In particular, it was becoming likely that production figures for the October-December quarter would show a rather solid increase against the background of the recovery in the U.S. and East Asian economies.

On the price front, international commodity prices were on an uptrend, especially crude oil prices. Import prices, on the other hand, were currently declining, with effects from the appreciation of the yen prevailing over those from rising international commodity prices. Domestic corporate goods prices continued to be more or less flat compared to levels three months before. The year-on-year rate of decline in consumer prices (excluding fresh food) diminished to 0.1 percent in August and September due partly to factors such as the increase in medical treatment costs in April, caused by the reform of the medical care insurance system, and the rise in tobacco tax in July. Regarding the outlook, the year-on-year rate of change in consumer prices would basically continue at slightly below zero percent, although it might temporarily rise to zero percent or slightly above due to the rise in rice prices caused by the cool summer.

2. Financial environment

With regard to credit aggregates, the pace of year-on-year decline in private banks' lending was slowing slightly. Private banks' lending attitude became slightly more accommodative in areas such as terms and conditions for loans, although they remained cautious in extending loans to firms with high credit risk. Credit demand in the private sector continued to follow a downtrend, since business fixed investment, although it was recovering moderately, was below the level of firms' cash flow.

The issuing environment for CP and corporate bonds was favorable on the whole, especially for firms with high credit ratings. As for the yield differentials between JGBs and corporate bonds in the secondary market, those for bonds with low credit ratings were on a narrowing trend. Under these circumstances, the amount outstanding of CP and corporate bonds issued was above the previous year's level.

The pace of year-on-year decline in funds raised by the private sector was slowing slightly, reflecting the above developments in lending by private banks and in financing through capital markets.

The financing environment for firms in general was improving somewhat, although it remained severe for firms with high credit risk, judging from the results of various surveys on the financial position of firms and the lending attitude of financial institutions as perceived by firms.

The year-on-year growth rate of the monetary base continued to be around 20 percent, mainly due to the increase in the outstanding balance of current accounts at the Bank. The year-on-year growth rate of the money stock (M2+CDs) slowed somewhat to around 1.5 percent. This slowing was mainly due to the shift of funds from time deposits and other assets categorized as M2 to assets excluded from M2 such as JGSs, given the rise in long-term interest rates. The year-on-year growth rate of broadly-defined liquidity continued to be more or less flat, excluding the effects of temporary factors.

The number of corporate bankruptcies continued on a downtrend.

The financial environment continued to require close monitoring, including developments in financial markets such as stock prices, the lending attitude of banks, and changes in the risk-taking stance of investors.

4Reports were made based on information available at the time of the meeting.
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 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.

II. 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 it was starting to recover gradually.

Many members referred to the fact that the increase in exports was leading to an increase in production as a feature of recent developments in economic indicators. They presented a positive assessment that a virtuous cycle had started to operate.

Many members said that recently the recovery in the U.S. economy was conspicuous.

One member said that U.S. economic indicators were generally favorable, showing signs that the recovery in corporate profits was leading to an improvement in the employment situation, although the pace of growth in private consumption had slowed temporarily due partly to the recent waning of tax-cut effects.

A different member also pointed out that signs of improvement were observed in the employment situation: for example, private nonfarm payroll employment increased for the third consecutive month in October and the number of initial claims for unemployment insurance was below 400,000 for the seventh consecutive week.

On the outlook for the U.S. economy, one member said that, although the effects of the economic stimulus from the fiscal policy side were expected to fade out around the middle of 2004, the U.S. economy would nevertheless be able to maintain a growth rate of around 4 percent in 2004 with the support of other demand. On the other hand, a few other members expressed the view that it was still uncertain whether the recovery of the U.S. economy would be sustainable and whether employment would continue to increase, as the effects of tax cuts were expected to fall off from the second half of 2004.

With regard to the Chinese economy, some members said that domestic demand was overheating somewhat, with the expansion of consumer credit and the significant rise in prices of some real estate in urban areas. In addition, production was increasing at a pace of nearly 20 percent year on year, mainly due to an increase in infrastructure investment and direct investment from abroad. These factors had caused a rise in international commodity prices and shipping charges. One of these members said that the Chinese economy had been viewed as a cause of deflation in the world economy, but this view was changing given its recent effects on international commodity and other prices.

One member commented on the recovery trend of the world economy. First, in East Asian economies other than the Chinese economy, the recovery in exports and production particularly of IT-related goods was becoming clearer. Second, countries in the euro area were starting to recover moderately, with signs of recovery emerging in production due to the recovery in exports. And third, the pace of growth in Central and Eastern European countries was increasing, reaching the high growth levels of East Asian economies due to the increase in exports to countries in the euro area. A different member expressed the view that the increase in U.S. final demand was contributing to the increase in exports of European and Asian economies as well as Japan's.

Many members referred to the fact that real exports posted high growth in October as in the July-September quarter reflecting the recovery trend of overseas economies, and expressed the view that it was clear that Japan's exports were increasing.

Many members said that production increased in September and was expected to increase considerably in the October-December quarter. They expressed the view that the growth in exports was leading to an increase in production.

One of these members said that, although exports had started to increase, the recovery in production had been delayed slightly due partly to the cool summer. Recently, however, production was increasing rapidly, at a pace fast enough to make up for the delay.

With regard to the corporate sector, many members pointed out that corporate profits and business fixed investment were following an uptrend.

One member pointed out that corporate profits had been on an increasing trend due to firms' restructuring efforts even when production had remained flat, and business fixed investment had started to increase ahead of production. This member added that the increase in production would ensure that corporate profits and business fixed investment would continue to increase.

A different member said that the current level of capacity utilization was likely to stimulate business fixed investment. Another member said that GDP statistics for the July-September quarter showed that the tendency of the business fixed investment deflator to have a large downward bias remained. Therefore, it was becoming likely that business fixed investment would post a double-digit increase in fiscal 2003 in real terms, although it seemed to be recovering only gradually in nominal terms.

Some members expressed the view that the momentum for recovery in the corporate sector was spreading.

One member pointed out that, according to the interim results of a survey conducted by the Nihon Keizai Shimbun, profits for fiscal 2003 for nonmanufacturers were expected to increase by over 20 percent, which was as high an increase as that for manufacturers, and business fixed investment was expected to register positive growth at nonmanufacturers as well as manufacturers.

Some other members said that the increase in business fixed investment was spreading to a wider range of industries, including those related to electrical appliances and materials, compared to the recovery phase in business fixed investment in fiscal 2000 when the increase had been concentrated in IT-related industries. A few of these members said that the current recovery in business fixed investment was more sustainable than in fiscal 2000, partly because demand was arising from firms replacing old equipment.

Another member commented on the recent progress in corporate restructuring that, while firms continued restructuring focusing on reducing expenses and employee numbers, some had started to seek new business opportunities.

With regard to the household sector, some members pointed out that the decline in household income was gradually coming to a halt reflecting the recovery in corporate profits.

One member expressed the view that private consumption was likely to remain virtually flat for the time being and explained as follows. First, a clear increase in household income could not be expected amid the ongoing corporate restructuring. And second, a further rise in the propensity to consume was unlikely since it had been higher than expected until 2002. A different member said that household sentiment was unlikely to improve, given that the details of the reform of the pension system and the medical care insurance system would be discussed further.

As for price developments, a few members commented on changes in the environment that commodity prices were rising on the whole reflecting partly the recovery in overseas economies, and firms in some industries such as materials were regaining their pricing power by downsizing their production capacity as a result of restructuring of the industry. One of these members said that, even excluding the effect of the downward bias of the GDP deflator due to its being a Paasche index, the current economic growth was higher than the potential growth rate. The member continued that the output gap would narrow if the economy continued to grow at the current pace, thereby increasing the chance of overcoming deflation.

A different member commented that it was necessary to monitor how the expected inflation rate was affected by the increase in land prices in limited parts of urban areas, the rise in some asset prices, and the recovery in overseas economies.

Many members agreed that the above assessment of the overall economy was mostly in line with the standard scenario in the Outlook and Risk Assessment of the Economy and Prices released on October 31, 2003.

B. Financial Developments

Members discussed Japanese stock prices, which were declining somewhat recently.

Some members said that the fall in Japanese stock prices reflected the following factors. In a situation where Japanese stocks were sensitive to developments in stock markets overseas and the behavior of foreign investors, stock prices overseas were falling due to the heightening of geopolitical risks and, furthermore, some foreign investors were selling to take profits. A few of these members' assessment was that these factors could have triggered sales of stocks by some Japanese investors who had been purchasing stocks based on expectations of a rise, and thus caused the adjustment in stock prices, which had been surging.

Many members including these members, however, expressed the view that the risk of stock prices falling substantially was small since the fundamentals of the economy were improving and firms' profits continued to follow an uptrend, and this trend was highly likely to continue with the increase in production.

Some members said that the yen's exchange rate against the U.S. dollar was in the 108-110 yen range, its highest range in 2003 to date, while the depreciating trend of the U.S. dollar against other major currencies continued.

One member said that it was unlikely that the U.S. dollar would depreciate substantially judging from the strength of the U.S. economic recovery. On the other hand, there was a possibility that market participants' views on the "twin deficits" in the United States would cause fluctuations in foreign exchange markets. Another member said that the depreciation of the U.S. dollar seemed to be due in part to the heightening of geopolitical risks, and thus the situation in the Middle East continued to require close monitoring. A few other members commented that a further depreciation of the U.S. dollar would negatively affect the recovery of the world economy by, for example, causing a decline in the inflow of funds to U.S. capital markets.

Some members commented that developments in stock prices and the yen's exchange rate against the U.S. dollar did not seem to have affected the fundamentals of Japan's economy so far, but nevertheless continued to require close monitoring.

Many members said that the overall financial environment remained easy.

One member pointed out that one of the factors causing the recent sluggishness in firms' demand for funds was that the recovery in profits of firms, including small and medium-sized firms, had improved their cash flow. A different member commented that firms' funds demand remained sluggish, but banks' lending attitude was becoming somewhat more accommodative, and they were also diversifying the ways in which they participated in funds intermediation. These positive aspects of corporate financing were also contributing to making the foundation for an economic recovery more solid.

One member said that attention should be paid to the fact that demand for funds with longer maturities continued to be strong in the market, and some market participants were still concerned that there might be a resurgence of concerns about the stability of the financial system. Some members including this member said that how market participants would receive banks' upcoming financial statements and how this would affect the financial environment would require close monitoring.

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

On the monetary policy stance for the immediate future, members agreed that it was appropriate to maintain the current guideline for money market operations with the target range of "around 27 to 32 trillion yen" for the outstanding balance of current accounts at the Bank, given the assessment that the economy was starting to recover gradually.

One member said that, in the present situation where there was strong demand for funds with longer maturities in the market, the Bank should continue to conduct money market operations taking market needs into account.

A different member said that Japan's economy faced a number of challenges after the bursting of the bubble such as the nonperforming-loan problem and intensified global competition, and in this situation the private sector had steadily reduced excess debt, labor, and capital stock, although it had taken a considerable time.

On this basis, the member expressed the following views. It would take some more time before such adjustments led to an increase in demand that would significantly narrow the output gap. Therefore, persistent efforts in terms of macroeconomic policies should be made to support the economic recovery, while making the most of the autonomous adjustment mechanism of the economy, which was being led by the private sector. To this end, the Bank should maintain the quantitative easing policy in line with the current commitment and steadily take measures to nurture the development of various financial intermediary channels.

A few other members said that the measures for enhancing the transparency of monetary policy decided at the Monetary Policy Meeting on October 9 and 10, 2003 seemed to have been effective in showing clearly the Bank's stance of maintaining the quantitative easing policy based on the current commitment.

With respect to the effects of the Bank's commitment in terms of policy duration, one of these members said that the commitment enabled market participants to have a common understanding with the Bank about the duration of the quantitative easing policy and would thereby contribute to reducing the risk premium on interest rates for the duration of the policy. The member added that the risk premium on short-term interest rates had decreased since the Monetary Policy Meeting on October 9 and 10, as evident in short-term bond yields, which had become stable. This member continued that, however, the expected duration of the current policy had not become longer, and pointed out that any attempt by the Bank to force market participants to extend their expected policy duration would involve a substantial risk of increasing the risk premium on longer-term maturities due to concern that the Bank's policy response might come too late.

One member expressed the following view regarding the intention behind the Bank's decision to raise the upper limit of the target range for the outstanding balance of current accounts at the Monetary Policy Meeting on October 9 and 10. The Bank needed to reiterate that, even when the economy was starting to recover, it would maintain the quantitative easing policy as long as prices continued to fall. In addition, the Bank should continue to conduct money market operations in a flexible manner to deal with a possible surge in liquidity demand.

One member expressed views on nurturing the development of financial intermediary channels. The acceptance of syndicated loans as eligible collateral, on which the Bank's staff had reported, was one of the Bank's measures to promote market-based indirect financing. The member also hoped that there would be fruitful discussions at a workshop on securitization hosted by the Bank, which had its first meeting in November.

IV. Remarks by Government Representatives

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

(1) Japan's economy was showing an incipient recovery, particularly in the corporate sector, with business fixed investment increasing and corporate profits continuing to improve. Real GDP for the July-September quarter increased by 0.6 percent on a quarter-on-quarter basis, registering a positive growth rate for the seventh consecutive quarter, and this showed that the economy was recovering moderately.

(2) The government considered that, in this situation, 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.

(3) Interest rates and exchange rates posed risks to economic recovery in the immediate future. An excessive rise in interest rates that preceded improvements in the economy and a rapid appreciation of the yen that did not reflect economic developments could have negative effects on economic recovery.

(4) The government would like the Bank to give due consideration to developments in the economy and financial markets, including the factors mentioned above, and conduct monetary policy flexibly. The government would also like the Bank to continue to reaffirm that it would hold firmly to its stance of maintaining the quantitative monetary easing policy.

(5) The corporate financing environment was projected to become more severe toward the year-end. The government would therefore like the Bank to conduct monetary policy in a flexible manner should there be a surge in liquidity demand.

The representative from the Cabinet Office made the following remarks.

(1) Real GDP for the July-September quarter increased by 0.6 percent on a quarter-on-quarter basis, and 2.2 percent on an annualized quarter-on-quarter basis, registering a positive growth rate for the seventh consecutive quarter. The deflationary trend continued, however, as seen in the fact that the nominal GDP growth rate remained more or less unchanged at minus 0.0 percent on a quarter-on-quarter basis and minus 0.1 percent on an annualized quarter-on-quarter basis. In the November issue of the Monthly Economic Report, the government revised its economic assessment upward as follows: "The economy is showing an incipient recovery." The government considered that it was necessary to continue to closely monitor developments in financial markets, such as changes in stock prices and exchange rates.

(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 early implementation of "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2003," which stated that deflation would be overcome after an intensive adjustment period through measures taken by the government with the Bank. The government was having intensive discussions at the meetings of the Council on Economic and Fiscal Policy to promote reforms of institutional frameworks and economic policies.

(3) The Bank had clarified its commitment based on the consumer price index to keep the current quantitative easing policy. 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. The government would also like the Bank to conduct effective monetary policy in order to overcome deflation in fiscal 2005.

V. Votes

Based on the above discussions, members considered that it was appropriate to maintain the current guideline for money market operations with the target for the outstanding balance of current accounts at the Bank at around 27 to 32 trillion yen.

To reflect this view, the chairman formulated the following proposal and put it to the vote.

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

The guideline for money market operations in the intermeeting period ahead will be as follows, and will be made public by the attached statement (see Attachment).

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.

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.

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

Members discussed "The Bank's View" in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background"), and put it to the vote.

The Policy Board approved, by unanimous vote, "The Bank's View" for publication on November 21, 2003, and decided to publish the whole report on November 25, 2003.⁶

6The English version of the whole report was published on November 26, 2003.

VII. Approval of the Minutes of the Monetary Policy Meetings

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of October 9 and 10, 2003 for release on November 27, 2003.

Attachment

For immediate release

November 21, 2003
Bank of Japan

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