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Minutes of the Monetary Policy Meeting

on January 19 and 20, 2004
(English translation prepared by the Bank's staff based on the Japanese original)

March 2, 2004
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, January 19, 2004, from 2:00 p.m. to 3:41 p.m., and on Tuesday, January 20, from 9:00 a.m. to 12:40 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. T. Ito, Senior Vice Minister for Economic and Fiscal Policy, Cabinet Office2
Mr. Y. Nakajo, Director General for Economic and Fiscal Management, Cabinet Office3
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 Board4
Mr. K. Murakami, Deputy Director, Secretariat of the Policy Board
Mr. N. Yoshioka, Director, Head of Planning Division II, Policy Planning Office5
Mr. S. Uchida, Senior Economist, Policy Planning Office
Mr. T. Kato, Senior Economist, Policy Planning Office
Mr. T. Kurihara, Director, Head of Money and Capital Markets Division, Financial Markets Department5

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on February 26, 2004 as "a document which contains an outline of the discussion at the meeting" stipulated in Article 20, Paragraph 1 of the Bank of Japan Law of 1997. Those present are referred to by their titles at the time of the meeting.
  2. Messrs. Ishii and Ito were present on January 20.
  3. Messrs. Tsuda and Nakajo were present on January 19.
  4. Mr. Takei was present on January 20.
  5. Messrs. Yoshioka and Kurihara were present on January 20 from 9:00 a.m. to 9:30 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 December 15 and 16, 2003.7 The outstanding balance of current accounts at the Bank moved at the 29-32 trillion yen level. As a result of the market operations, the weighted average of the uncollateralized overnight call rate was at around 0.001 percent, except for January 13 and 14, 2004 when it became negative.

Market participants felt strongly that there was an abundance of liquidity in the money market, and the market situation in late December 2003 to early January 2004 was the calmest for the period in recent years.

B. Recent Developments in Financial Markets

Money market rates were stable at low levels on the whole due to the Bank's provision of ample liquidity.

Long-term interest rates had been moving generally in a narrow range of 1.25-1.4 percent, reflecting market participants' purchasing of Japanese government bonds (JGBs) on dips and selling of them on rallies. The yield differentials between JGBs and corporate bonds in the secondary market were virtually unchanged.

Japanese stock prices rose across industries, reflecting the rise in U.S. stock prices and the improved outlook for Japan's economy. The Nikkei 225 Stock Average was recently moving at around 11,000 yen.

In the foreign exchange market, there were strong expectations that the U.S. dollar would depreciate, reflecting concerns about the "twin deficits" in the United States and geopolitical risks. The yen was, however, appreciating only slightly against the U.S. dollar partly due to market participants' concern about possible intervention. The euro had appreciated substantially against the U.S. dollar and reached the highest level since its introduction, and then depreciated due to comments by monetary authority officials signaling that they were against a further appreciation of the euro.

C. Overseas Economic and Financial Developments

The U.S. economy was recovering steadily and the momentum for recovery was strengthening. Private consumption, which was good in the July-September quarter due to tax-cut effects, remained firm in the October-December quarter, and holiday retail sales were generally satisfactory. Business fixed investment was increasing overall, particularly in IT-related equipment, despite some fluctuations. Production was increasing, although it lacked momentum. As for the employment situation, where improvement had been delayed, positive developments were being observed, especially in the nonmanufacturing sector.

In U.S. financial markets, stock prices were rising partly due to increased expectations for improvement in corporate profits. Long-term interest rates, on the other hand, were declining, reflecting the release of weaker-than-expected employment statistics in addition to the prevalent view that the current accommodative policy stance would continue for a long time.

In the euro area, the overall economy bottomed out. Exports and production had recovered although domestic demand components, such as private consumption and business fixed investment, remained sluggish. Regarding price developments in the area, the effects of the appreciation of the euro had not materialized so far, and the year-on-year rate of increase in the Harmonised Index of Consumer Prices (HICP) remained at around 2 percent. In European financial markets, stock prices were rising and long-term interest rates were declining, reflecting the developments in U.S. financial markets.

In East Asian economies, economic recovery continued to gain strength. In China, both domestic and external demand remained strong. In the NIEs and ASEAN countries, exports and production were increasing, especially in IT-related goods.

Judging from the above developments, downside risks to the world economy had been decreasing on the whole.

D. Economic and Financial Developments in Japan

1. Economic developments

Real exports increased significantly, with the monthly average for the October-November period 6.3 percent higher than that for the July-September quarter, as exports to East Asia continued to be firm and those to the United States started to increase. By type of goods, exports of consumer goods such as digital appliances increased substantially while those of IT-related goods and capital goods such as semiconductor fabrication machines and equipment continued to increase. Imports were increasing steadily, although the momentum was not as strong as that of exports, and this showed that further progress in international division of the production process was being made.

Business fixed investment continued a gradual recovery. Shipments of capital goods (excluding transport equipment) increased substantially, with the monthly average for the October-November period up by 7.0 percent from that for the July-September quarter. This was due to large spot shipments in addition to the rise in shipments of semiconductor fabrication machines and equipment and of computers.

Corporate profits of large firms were expected to continue increasing steadily. Those of small manufacturers were recovering, but the situation remained severe for small nonmanufacturers and very small firms.

Indicators related to private consumption for the October-November period were virtually flat on average, although they had been slightly weak in November due partly to the unusually warm weather.

Production, after starting to increase in the July-September quarter with a rise of 1.3 percent from the previous quarter, surged with the monthly average for the October-November period up by 3.7 percent from that for the July-September quarter. Meanwhile, inventories remained at low levels.

With regard to the employment and income situations, the decline in the number of employees and in wages was slowing. The unemployment rate remained high, although indicators related to job offers were improving.

On the price front, import prices continued to decline, with effects from the appreciation of the yen prevailing over those from rising international commodity prices. Domestic corporate goods prices had been firm compared to the levels of three months earlier, reflecting the rise in international and domestic commodity prices as well as in rice and meat prices. The year-on-year rate of change in consumer prices (excluding fresh food) had been close to zero percent, while temporary factors such as the rise in rice prices had exerted upward pressure on prices. As for the outlook, the year-on-year rate of change in consumer prices was likely to be around zero percent for the time being. However, they were basically projected to continue falling slightly, since the imbalance between supply and demand in the economy remained considerable despite its gradual improvement.

2. Financial environment

With regard to credit aggregates, the pace of year-on-year decline in private banks' lending was tending to diminish slightly. The lending attitudes of private banks had been slightly more accommodative on the whole, although they remained cautious in extending loans to firms with high credit risks. Credit demand in the private sector continued to follow a downtrend, mainly because firms' cash flow remained above the level of business fixed investment and firms were continuously reducing their debts. Reflecting these developments, the lending attitudes of financial institutions as perceived by firms were in general improving somewhat, although those perceived by small firms remained severe. The financial positions of firms in general were also improving slightly, although those of small firms remained severe.

The issuing environment for CP and corporate bonds was favorable on the whole, especially for firms with high credit ratings. Credit spreads at issuance on CP and corporate bonds remained steady at low levels, and the amount outstanding of CP and corporate bonds issued was above the previous year's level. Recently, firms were increasingly raising funds with equity financing, for example the issuance of convertible bonds and public offering of stocks, in view of the rise in stock prices.

The pace of year-on-year decline in funds raised by the private sector had become slightly slower on balance, reflecting the developments in lending by private banks and in financing through capital markets.

Growth of banknotes in circulation was on a downtrend due mainly to decreasing anxieties about the financial system. In this situation, the year-on-year growth rate of the monetary base had declined to around 15 percent. That of the money stock (M2+CDs) had been around 1.5 percent. The year-on-year growth rate of broadly-defined liquidity continued to be more or less flat.

  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 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. Amendment to Principal Terms and Conditions for the Outright Purchases of Asset-Backed Securities

A. Staff Report

The staff had reviewed the conditions regarding purchase of asset-backed securities (ABSs) by the Bank based on the instructions given by the chairman at the previous meeting. As a result of the review, the staff proposed that the Bank amend the conditions as follows. First, the criteria regarding the ratio of underlying assets related to small and medium-sized enterprises should be defined in more detail. Second, the criterion concerning debtors' creditworthiness with regard to underlying assets should be abolished. Third, asset-backed commercial paper (ABCP) rated a-1 by at least one eligible rating agency, instead of two, should be eligible for purchase by the Bank. And fourth, counterparties to this operation could be added once a month, besides the annual selection.

B. Discussion by the Policy Board and Vote

Members discussed possible effects that the abolition of the criterion concerning creditworthiness with regard to underlying assets might have on the financial soundness of the Bank. Members reaffirmed the following. The creditworthiness of ABSs should be assessed based on the securitization program as a whole, taking into account factors such as the effects of diversification of underlying assets. When the Bank started to purchase ABSs, however, it had set the criterion concerning creditworthiness with regard to underlying assets to secure its financial soundness because the purchase was an unprecedented measure for a central bank. Members then expressed the view that, given the progress in methods of risk evaluation, it was appropriate to determine the eligibility of ABSs for purchase by the Bank based on the creditworthiness of pooled assets as a whole, securitization structure, and rating, rather than on the quality of individual underlying assets. This would contribute to the development of the ABS market.

As for the criteria regarding the ratio of underlying assets related to small and medium-sized enterprises, the view was expressed that it was appropriate to revise them to reflect the situation in the ABS market, in order to foster its development. A few members said that even if the criteria were eased, issuance of ABSs in the market and purchase of them by the Bank might not increase as banks' capital constraints had been eased. They said, however, that the purpose of the revision was not to increase the amount of ABSs the Bank purchased, and it was important to foster the development of the ABS market by expanding the range of securities eligible for purchase by the Bank.

Based on the discussion, the Policy Board approved unanimously the amendment to Principal Terms and Conditions for the Outright Purchases of Asset-Backed Securities and decided to release the attached statement (see Attachment 1).

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 it was recovering gradually. As for the outlook, they agreed that the economy was anticipated to continue recovering, albeit at a moderate pace.

Many members expressed the view that economic indicators released in the intermeeting period confirmed that a recovery mechanism was at work. Specifically, a virtuous circle was operating from exports to production, and then leading via corporate profits to business fixed investment in Japan, reflecting the recovery in overseas economies.

As for overseas economies, many members said that growth in the U.S. economy was becoming better balanced. One member said that household spending remained firm, as seen in satisfactory holiday retail sales. Some members said that production and business fixed investment were recovering. Regarding the employment situation, one member said that the improvement might not continue, judging from employment statistics for December. A few members said that although there was weakness in some indicators, the improving trend in employment was becoming firmly rooted. A few other members said that the U.S. economy had been stronger than expected, and actual growth was likely to exceed the economy's potential growth rate. One of these members added that the disinflationary trend might weaken after the middle of 2004, as the output gap was expected to narrow and real interest rates seemed to be lower than the natural rate of interest.

Many members mentioned that the "twin deficits" in the United States were a risk factor for the U.S. and the world economy. One member said that there were risks difficult to factor in when making the standard economic assessment, such as flight from U.S. dollar-denominated assets stemming from concerns about the "twin deficits," and materialization of geopolitical risks. Some members said that the development of international capital markets had increased the sustainability of the U.S. external imbalance. One member raised the following as possible ways the imbalance might be reduced: an expansion of domestic demand in Asia and Europe, a contraction in domestic demand in the United States, or an adjustment in foreign exchange rates. This member added that an expansion of domestic demand in Asia and Europe and an adjustment in foreign exchange rates had occurred to some extent, and they were having some effect on the imbalance. In this situation, a few members said that foreign exchange intervention had been conducted by Asian countries, including Japan, and U.S. dollar funds obtained from the intervention were being invested in instruments such as U.S. Treasuries. One member said that U.S. financial markets were maintaining a precarious balance, with the U.S. dollar depreciating and low interest rates being maintained, and asset prices being supported by capital inflows to the United States.

A few members said that the recovery in global IT-related demand was having a positive effect on NIEs, due to international division of the production process. Many members noted that the Chinese economy continued its high growth. Some of these members, however, pointed out the risk of the economy overheating and the possibility of a bottleneck on the supply side, such as a shortage of electricity. Regarding this, a few members said that they were paying attention to the effects on the economy of the tightening of policy by the Chinese authority.

A few members expressed the view that economies in the euro area had bottomed out. Some members said that emerging economies, such as economies in Latin America, were also recovering, supported by the rise in prices of primary commodities such as crude oil.

Many members said that, in this situation, economies worldwide appeared to be recovering simultaneously. One member said that the world economy was recovering steadily, with stock prices rising and interest rates stable at low levels, and forecasts of economic growth rates continued to be revised upward. Another member remarked that there had been neither overheating in the world economy nor distortion in financial markets, despite the high economic growth. The member said that this was due to the progress in structural reforms and improvement in productivity in industrial countries, as well as to the progress in economic globalization.

Many members expressed the view that the effects of the recovery in overseas economies were materializing clearly in Japan's exports, production, and business fixed investment.

Members agreed that Japan's exports were increasing considerably, mainly due to increases in exports of IT-related goods and capital goods to East Asian economies and digital appliances to the United States.

Members also confirmed that production was increasing substantially. One member said that business performance of firms in IT-related industries, including small and medium-sized firms, was improving. Another member said that growth in production of digital appliances was promising, because Japanese manufacturers had considerable expertise in their production, and there was strong potential demand for digital appliances to replace analog ones. A different member expressed the view that production of digital appliances in the January-March quarter was likely to show an increase, but the pace of growth would be slower, as a reaction from the temporarily rapid growth due to factors such as strong holiday sales of expensive digital appliances in the October-November 2003 period in the United States. Another member said that production might peak out, given the increase in inventories in some industries.

Members agreed that business fixed investment was recovering, particularly in IT-related goods such as semiconductor fabrication machines and equipment. One member commented that the growth in business fixed investment was stronger and spreading to a wider range of industries than had been expected. A different member said that the index of production capacity was declining, and this suggested that adjustment of capital stock was progressing as part of firms' efforts to concentrate resources in key strategic areas. One member pointed out that shipments of capital goods increased significantly in the October-November period, but this was due in part to a concurrence of temporary favorable developments, including some large spot shipments. A different member said that machinery orders from nonmanufacturers were sluggish. One member commented that the number of openings of new supermarket stores was expected to increase in fiscal 2004, and that the member would pay attention to the effects on developments in nonmanufacturers' business fixed investment and commercial land prices.

Regarding corporate profits, one member said that listed firms' return on assets (ROA) and return on equity (ROE) had recovered to the highest level marked after the bursting of the economic bubble. This member added, however, that the recovery in profits of small and very small firms was weak. Furthermore, some members said that the disparity in business performance between firms was widening. One member pointed out that business performance of firms in regional economies in Japan and of some nonmanufacturers that had only limited direct links with overseas economies remained sluggish.

Members agreed that positive effects of the recovery in the corporate sector on the employment and income situations and private consumption were limited.

One member said that firms continued to make determined efforts in restructuring, and the recovery in business performance had not had much effect on the overall income situation. Another member expressed the view that, although the decline was coming to a halt on balance, an increase in wages was likely to be limited for a while, as regular payments continued to decrease marginally. A few members including this member said that disposable income of households would be reduced, due to factors such as a future increase in the social insurance premium.

Members agreed that, reflecting these developments, private consumption was likely to remain virtually flat. One member commented that consumer sentiment was improving due partly to the recovery in stock prices and easing of concerns about financial system stability, but household spending behavior seemed to have polarized. Another member said that the outlook for private consumption could not be regarded optimistically, citing the fact that the personal saving rate was declining as income continued to decrease.

With regard to prices, members agreed that consumer prices were projected to be on a slightly declining trend, as the output gap was not likely to narrow significantly. A few members said that the currently forecasted rate of economic growth was not strong enough to overcome deflation. One of these members expressed concern about the effects of the continued fall in import prices due to the appreciation of the yen.

A few members said that it was necessary to carefully monitor the effects of the rise in prices of international and domestic commodities and of rice and meat for the time being. A different member commented that the increase in international commodity prices and shipping charges was causing a rise in some product prices. In relation to this, one member summarized developments in prices from a global perspective as follows. Prices of final goods were falling, since the rise in prices of international commodities such as materials had been more than offset by the abundant reservoir of potential labor in China and high productivity in the United States. This member added that it was necessary to pay attention to the possible effects, although the probability was not high, of a situation where the above conditions changed due to a bottleneck on the supply side in China or a peaking out of the increase in productivity in the United States. A different member said that as the economy recovered, possible changes in the public's expectation of deflation needed to be watched.

B. Financial Developments

Many members expressed the view that the money market was stable. One member commented that the risk premium typical of the year-end did not emerge around the end of 2003. This showed the effectiveness of the Bank's preparations to take flexible measures by raising the upper limit of the target range for the outstanding balance of current accounts at the Bank in October 2003. A few members said that market participants were becoming wary of financing bills (FBs) that were being issued on a large scale to raise yen funds for foreign exchange intervention.

Many members said that stock prices were rising and long-term interest rates were declining worldwide. A few members explained the background to the decline in long-term interest rates in the United States as follows. First, the rate of increase in the core consumer price index continued to slow reflecting high productivity, and in this situation market participants were anticipating that the current accommodative policy stance would continue for a long time. And second, there were continued inflows of capital to the United States including funds supplied through foreign exchange intervention. The view was then put forward that there was a risk that the world economy would be negatively affected if long-term interest rates in the United States rose due to changes in the situation just described.

Many members expressed the view that developments in the foreign exchange market and their effects required monitoring, as there were still strong market expectations that the U.S. dollar would depreciate due partly to concerns about the "twin deficits."

Some members said that the yen was not appreciating against the euro and, in terms of its effective exchange rate, the rate of increase was not as fast as against the U.S. dollar. These members said that the direct effects of the appreciation of the yen on Japanese firms' business performance were not large so far, because of the recovery of the world economy, further improvement in firms' profitability, and the increase in overseas production. These members, however, expressed concern that further appreciation of the yen would have a stronger deflationary impact on Japan's economy. One of these members said that there was a risk that the yen might appreciate further, given that there were strong market expectations that the U.S. dollar would depreciate and the appreciation of the yen was moderate compared with that of the euro. A different member pointed out that business sentiment was becoming more cautious, as there was a risk that further appreciation of the yen might negatively affect the consolidated profits of firms and also, in a longer time frame, affect small firms by accelerating the shift in firms' production to overseas locations.

One member said that although lending attitudes of banks had been more accommodative, banks' lending was not increasing. This was because profitable firms' demand for loans was weak as they had ample on-hand liquidity and because they maintained their firm stance of repaying their debt. A different member said that the growth rate of the money stock had slowed, largely due to a shift of funds to assets with higher rates of return as the financial situation stabilized, and that the growth rate of broadly-defined liquidity was stable.

Some members explained the background to the slowdown in the growth rate of banknotes in circulation as follows. First, the effects of low interest rates on demand for banknotes were waning due to the extended period of extremely low interest rates. And second, anxieties about the financial system were decreasing. One of these members added that the Bank should provide an adequate explanation of the background to developments in banknote circulation and the implications of such developments, as they might not be easy to understand.

C. Interim Assessment

Given the above assessment of economic activity, prices, and financial developments in Japan, members agreed that the economy and prices were expected to be basically in line with the standard scenario presented in the Outlook and Risk Assessment of the Economy and Prices (hereafter the Outlook Report) released in October 2003.

Many members expressed the view that, since the release of the Outlook Report, the pace of economic recovery had been slightly faster than expected, especially in exports. However, they also said that this was due partly to temporary factors mentioned earlier such as the seasonal increase in sales of digital appliances and the effect of large spot shipments on business fixed investment, and under these circumstances, the recovery had not spread to employment and income, or private consumption. Members agreed that economic activity could not be assessed as deviating above the standard scenario, which included the outlook, solely on the basis of recent developments.

Members agreed that developments in the following continued to be risk factors that might cause the economy and prices to deviate either above or below the scenario: overseas economies, financial and foreign exchange markets, the disposal of nonperforming loans (NPLs) and the financial system, and domestic private demand. It could be assessed that downside risks to overseas economies had decreased since the Outlook Report was released, while developments in financial and foreign exchange markets and their impact warranted close monitoring.

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

On the monetary policy stance for the immediate future, members agreed that, as there was no clear prospect of the economy overcoming deflation, the Bank should take an additional policy measure as long as it was effective and the advantages exceeded the disadvantages.

A few members said that the current economic situation was not satisfactory since balanced growth of Japan's economy could not be expected at this point, even if economic and price developments turned out to have been basically in line with the standard scenario presented in the Outlook Report released in October 2003. A different member said that, in the interim assessment, members agreed that Japan's economy and prices were expected to be basically in line with the standard scenario presented in the Outlook Report, and this meant that the pace of economic recovery would remain moderate and the consumer price index (CPI) would be on a slightly declining trend. This member continued that the important tasks for Japan's economy and the Bank were to ensure economic recovery and overcome deflation.

Based on this understanding, many members expressed the view that it was appropriate to raise the target range for the outstanding balance of current accounts at the Bank in order to reaffirm the Bank's policy stance to overcome deflation and ensure a continued recovery.

One member said that the quantitative easing policy had contributed to ensuring financial market stability and maintaining the accommodative environment for corporate finance by dispelling liquidity concerns as well as reducing interest rates, including those on instruments with relatively long maturities, and credit spreads, thereby firmly supporting the real economy. The member continued that reaffirming the Bank's policy stance to overcome deflation by making a decision at this meeting to provide more ample funds would ease concern among market participants and the public and stimulate economic activity. A few other members expressed the view that, as there were now clear signs of economic recovery, reaffirming the Bank's stance by providing more ample funds could encourage the forward momentum. These members put forward the following view. The transmission mechanism of the effects of the quantitative easing policy was not as clear as that of conventional interest rate reduction, and thus close monitoring of possible positive and negative effects would be necessary in conducting monetary policy. They also said that it was hoped that a decision at this meeting to raise the target range for the outstanding balance of current accounts at the Bank would have positive effects on economic entities' sentiment.

Many members said that attention should be paid to developments in financial and foreign exchange markets and their impact. These members expressed the view that it was not appropriate to focus only on the effects of the yen's appreciation on Japan's exports and corporate profits. Rather, a wider perspective that took into account a risk of changes in the international flow of funds reflecting global imbalances and the possible effects of these changes on the world and Japan's economy was necessary. On this point, some members said that further appreciation of the yen against the U.S. dollar in this situation would cast uncertainties over the outlook for Japan's economy. A few members commented that given that the economy was in the process of recovering led primarily by exports, it would be important to prevent risks that could be triggered by the appreciation of the yen, and at the same time support economic activity. One of these members added, however, that there was a risk that raising the target range for the outstanding balance of current accounts at the Bank might be taken as a measure to deal directly with the appreciation of the yen.

Members also discussed the money market situation and effects of raising the target range for the outstanding balance of current accounts at the Bank in that situation. One member said that, although the money market was in fact stable, there would be demand for the Bank's money market operations considering, for example, financial institutions' need for funds to carry out asset-liability management (ALM). A different member expressed the view that it was appropriate to reaffirm the Bank's policy stance by raising the target range, given that there was market concern that the Bank might reduce its funds-supplying operations due to factors such as an increase in foreign exchange intervention. Another member said that it was appropriate to raise the target range from a technical market operations viewpoint, because funds-absorbing operations had been increasing and concentration of funds at certain financial institutions had been observed due to the inflow of yen funds stemming from foreign exchange intervention.

One member said that deflation could be overcome through a combination of an increase in nominal public debt outstanding, without any too rapid tightening of fiscal policy by the government, and an increase in the monetary base. A different member expressed the view that it would be worthwhile to take a monetary policy action as insurance at this stage, considering the fact that the time to comprehensively resolve the financial system problem was approaching in view of the removal of blanket deposit insurance.

In response to these views, one member said that the quantitative easing policy had been effective in ensuring financial market stability, and cited the decline in interest rates, including those on instruments with relatively long maturities, and the narrowing of credit spreads, and also in achieving financial system stability, for example by dispelling liquidity concerns. These effects, however, would not become stronger with an increase in the outstanding balance of current accounts at the Bank. The member added that the money market was stable and some financial institutions were reducing the outstanding balance of their current accounts. This member also expressed the view that in a situation where money market rates were virtually zero percent, the relationship between the monetary base and the economic growth rate, the inflation rate, or foreign exchange rates was not clear theoretically, and from the second half of the 1990s in particular, it was not clear empirically either. Therefore, it was appropriate to maintain the current target range because if the Bank raised it in the current situation, it could be misinterpreted as an action to address the decline in the monetary base, and this might make the Bank's communication with market participants difficult.

A different member said that, although the quantitative easing policy had contributed to maintaining financial system stability and supporting economic activity, it was not appropriate to raise the target range because the negative effects would be greater than the positive ones in the current situation. Currently, Japan's economy was basically in line with the standard scenario presented in the Outlook Report, and was, indeed, recently deviating marginally above the scenario. In addition, the money market was stable reflecting the abatement of concerns about financial system stability. The member added that market confidence in the Bank's commitment in terms of policy duration was already sufficiently strong. Moreover, as sufficient monetary base had been provided in terms of the amount outstanding, it was time for the Bank to examine whether there were signs that the monetary base was starting to stimulate economic activity.

The member raised as negative effects of the quantitative easing policy a delay in nonviable firms' exit from the market and in financial institutions addressing the NPL problem, and also noted that the functioning of the money market mechanism had been weakened. In response to this, a different member said that the Bank had maintained the quantitative easing policy, accepting a certain degree of decline in the functioning of the market mechanism. One member pointed out as a sign that the functioning of the market mechanism was starting to recover the fact that few financial institutions were conducting transactions in term instruments among themselves, and the Bank should also consider this development when conducting money market operations.

V. Remarks by Government Representatives

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

  1. (1) It was important to accelerate structural reforms and expand their extent as well as promote further permeation of the effects of the reforms that had been implemented so far. From this perspective, the government had improved its draft budget for fiscal 2004 by prioritizing areas that would stimulate economic activity in the private sector, while at the same time maintaining fiscal soundness in the budget allocation. The government would continue to promote structural reforms in various areas and work to realize sustainable growth led by private demand.
  2. (2) Japan's economy was recovering steadily, particularly in the corporate sector, with the increase in business fixed investment and exports. In this situation, the largest issue that the economy had been facing was overcoming the deflation that still continued. In order to overcome deflation, the Bank had decided to modify the conditions regarding purchases of ABSs at this meeting to strengthen the spillover mechanism of monetary policy. In addition, the government would like the Bank to deliberate further on the possibility of measures that would dispel deflationary concern, and conduct more effective monetary policy.
  3. (3) The government would also like the Bank to continue giving due consideration to developments in the economy and financial markets, including developments in interest rates and exchange rates, and conduct monetary policy flexibly.

The representative from the Cabinet Office made the following remarks.

  1. (1) At the meeting of the Ministerial Council on January 19, 2004, which discussed issues including the Monthly Economic Report, the government revised its economic assessment upward from the previous month as follows: "The economy is recovering steadily, supported by business investment and exports." The government considered that it was necessary to continue to monitor closely developments in financial markets, such as changes in exchange rates.
  2. (2) The two most important tasks for Japan's economy were to overcome deflation swiftly and achieve a self-sustained economic recovery led by domestic demand. To this end, the government approved "The Fiscal 2004 Economic Outlook and Basic Stance for Economic and Fiscal Management" and "Structural Reform and the Medium-Term Economic and Fiscal Perspectives-FY 2003 Revision" on January 19, 2004, and submitted the draft budget for fiscal 2004 to the Diet.
  3. (3) In order to overcome deflation while making policy efforts, such as acceleration and expansion of structural reforms, it was important to increase supply of money through structural reforms toward the creation of a more robust financial system by the government and efforts to strengthen the spillover mechanism of monetary policy by the Bank. "Structural Reform and the Medium-Term Economic and Fiscal Perspectives-FY 2003 Revision" also stated that deflation would be overcome after an intensive adjustment period through measures taken by the government with the Bank.
  4. (4) The Bank had clarified its commitment based on the CPI to continue the current quantitative easing policy. The government would like the Bank to conduct more effective monetary policy in order to overcome deflation and realize in the medium term the economic situation described in "Structural Reform and the Medium-Term Economic and Fiscal Perspectives-FY 2003 Revision," and at the same time take into account developments in financial markets.

VI. Votes

Based on the above discussions, many members considered that it was appropriate to raise the target in the guideline for money market operations, the outstanding balance of current accounts at the Bank, to around 30 to 35 trillion yen. These members agreed that, based on its current stance with regard to money market operations, the Bank should aim at an outstanding balance of around 33 trillion yen on average.

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:

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 30 to 35 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 for the following reasons. Positive effects could not be expected from raising the target range for the outstanding balance of current accounts at the Bank in the current situation, and there was a risk that it could lead to various misinterpretations.

Ms. M. Suda also dissented from the above proposal for the following reasons. First, Japan's economy was basically in line with the standard scenario, and was, indeed, recently deviating marginally above the scenario. Second, the money market was stable. Third, there had been a fair degree of abatement of concerns about financial system stability and there were some signs of a decrease in demand for funds for the current accounts. And fourth, there was no technical problem in conducting money market operations at present. She added that the Bank should shift the focus of its quantitative easing measures from raising the target range to strengthening their transmission mechanism.

VII. Discussion on the Public Statement

Members discussed the public statement and put it to the vote. The Policy Board approved it, by majority vote, and decided to release it immediately after the meeting (see Attachments 2 and 3).

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.

VIII. 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 January 20, 2004, and decided to publish the whole report on January 21, 2004. 8

  1. 8The English version of the whole report was published on January 22, 2004.

IX. Approval of the Minutes of the Monetary Policy Meeting

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of December 15 and 16, 2003 for release on January 23, 2004.

X. Approval of Changes in the Scheduled Dates related to the Monetary Policy Meeting

At the end of the meeting, the Policy Board approved changes in the dates related to the first Monetary Policy Meeting in February 2004, for immediate release (see Attachment 4).


Attachment 1

January 20, 2004
Bank of Japan

Modification of the Conditions regarding the Purchases of Asset-Backed Securities

  1. The Bank of Japan, based on the discussion at the Monetary Policy Meeting (MPM) last December, had reviewed the conditions regarding the purchase of asset-backed securities (ABSs). At the MPM held today, the Bank decided, by unanimous vote, to amend the terms and conditions for the outright purchases of ABSs1.
  2. To encourage the permeation of the effects of monetary easing through the economy, financial markets must function properly. With such recognition, the Bank has been supporting various efforts of market participants to improve the infrastructure of the ABS market. The Bank's purchase of ABSs is part of such support.
  3. This amendment was made in light of experiences of the actual purchase of ABSs as well as the opinions of market participants. The Bank hopes that it will contribute to the long-term development of the ABS market.
  1. Regarding the full detail of this amendment, see "Amendment to Principal Terms and Conditions for the Outright Purchases of Asset-Backed Securities."

Attachment 2

January 20, 2004
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 was raised from 'around 27 to 32 trillion yen' to 'around 30 to 35 trillion yen' (see Attachment 3).
  2. Japan's economy is recovering gradually, and is anticipated to continue recovering. Given persisting structural problems, such as debt overhang, the pace of recovery is expected to remain moderate. Consumer prices are projected to be on a slightly declining trend as the output gap continues to exist despite a gradual improvement. In the meantime, developments in financial and foreign exchange markets and their impact warrant close monitoring.
  3. Based on the above assessment of the economic and financial situation, the Bank judged it appropriate to raise the target balance of current accounts held at the Bank in order to reaffirm its policy stance to overcome deflation and ensure a continued recovery.

Attachment 3

January 20, 2004
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 30 to 35 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.


Attachment 4

Scheduled Dates of Monetary Policy Meetings
in January - June 2004
Revised

Dates underlined are revised dates (those crossed-out are initially announced dates on December 16, 2003).

table : Scheduled Dates of Monetary Policy Meetings in January - June 2004
  Date of MPM Publication of
Monthly Report
(The Bank's View)
Publication of
MPM Minutes
Jan. 200419 (Mon.), 20 (Tue.)20 (Tue.)Mar. 2 (Tue.)
Feb.4 (Wed.), 5 (Thur.)
5 (Thur.), 6 (Fri.)
5 (Thur.)
6 (Fri.)

Mar. 19 (Fri.)
26 (Thur.)--Apr. 14 (Wed.)
Mar.15 (Mon.), 16 (Tue.)16 (Tue.)Apr. 14 (Wed.)
Apr.8 (Thur.), 9 (Fri.)9 (Fri.)May 25 (Tue.)
28 (Wed.)--June 18 (Fri.)
May19 (Wed.), 20 (Thur.)20 (Thur.) June 30 (Wed.)
June14 (Mon.), 15 (Tue.)15 (Tue.)To be announced
25 (Fri.)--To be announced
  1. *1"The Bank's View" of "Monthly Report" 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. *2Full 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. *3"The Bank's View" of "Outlook and Risk Assessment of the Economy and Prices (April 2004)" will be published at 3:00 p.m. on Wednesday, April 28 (The whole report including the background will be published at 2:00 p.m. on Friday, April 30).