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Minutes of the Monetary Policy Meeting

on February 4 and 5, 2004
(English translation prepared by the Bank's staff based on the Japanese original)

March 19, 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 Wednesday, February 4, 2004, from 2:00 p.m. to 3:42 p.m., and on Thursday, February 5, from 9:00 a.m. to 11:52 a.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. Y. Yamamoto, 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 Office3
Mr. M. Taniuchi, Director General for Economic Assessment and Policy Analysis, Cabinet Office2
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. K. Murakami, Deputy Director, Secretariat of the Policy Board
Mr. N. Yoshioka, Director, Head of Planning Division II, Policy Planning Office4
Mr. T. Kato, Senior Economist, Policy Planning Office
Mr. S. Shimizu, Senior Economist, Policy Planning Office
Mr. T. Kurihara, Director, Head of Money and Capital Markets Division, Financial Markets Department4

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on March 15 and 16, 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. Yamamoto and Taniuchi were present on February 5.
  3. Messrs. Tsuda and Nakajo were present on February 4.
  4. Messrs. Yoshioka and Kurihara were present on February 5 from 9:00 a.m. to 9:25 a.m.

I. Summary of Staff Reports on Economic and Financial Developments5

A. Money Market Operations in the Intermeeting Period

The Bank conducted market operations in accordance with the guideline decided at the previous meeting on January 19 and 20, 2004.6 The outstanding balance of current accounts at the Bank moved at around 30-34 trillion yen. As a result of the market operations, the weighted average of the uncollateralized overnight call rate was 0.001 percent.

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 continued to move in a narrow range around 1.3 percent. The yield differentials between Japanese government bonds (JGBs) and corporate bonds in the secondary market were virtually unchanged. However, those between JGBs and corporate bonds with low credit ratings were narrowing as investors increased their demand for such corporate bonds.

Japanese stock prices had been on an upward trend reflecting the rise in U.S. stock prices and the improved outlook for Japan's economy. Recently, however, they had declined somewhat reflecting a weakening in the bank sector and concerns over the appreciation of the yen against the U.S. dollar. The Nikkei 225 Stock Average was moving at slightly below 11,000 yen.

In the foreign exchange market, the yen had been appreciating slightly against the U.S. dollar as the market continued to be sensitive about the G-7 meeting. The yen was being traded in the range of 105-107 yen against the U.S. dollar, the highest range since 2003.

C. Overseas Economic and Financial Developments

The U.S. economy was recovering steadily and the momentum for recovery was strengthening. According to the advance estimate, real GDP continued to increase steadily at an annual rate of 4.0 percent during the October-December quarter of 2003. By type of demand components, housing investment rose, private consumption increased due to tax-cut effects, and business fixed investment increased markedly, particularly in equipment. In addition, exports were increasing. Reflecting these developments in demand, production was increasing moderately. As for the employment situation, positive developments were being observed.

In the euro area, the overall economy seemed to have bottomed out, as corporate activity was recovering led by exports although household spending 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 due to a moderate increase in wages and the continuing high level of food prices.

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.

In U.S. and European financial markets, stock prices moved generally at a high level partly due to favorable corporate profits. U.S. long-term interest rates, on the other hand, fluctuated within a fairly wide range around 4.0 percent. U.S. interest rates temporarily rose to some extent, reflecting market participants' perception that the change in the Federal Open Market Committee (FOMC) statement released on January 28 implied an earlier-than-expected raising of the target for the federal funds rate. They then stabilized, and declined thereafter. Long-term interest rates in Europe moved mostly in line with those in the United States.

Yield differentials between sovereign bonds of emerging economies and U.S. Treasuries were expanding, particularly for Latin American economies, reflecting the change in the FOMC statement.

D. Economic and Financial Developments in Japan

1. Economic developments

Real exports showed a substantial increase of 7.9 percent in the October-December quarter of 2003 on a quarter-on-quarter basis after starting to increase in the July-September quarter reflecting the recovery in overseas economies, mainly in the United States and East Asia. By region, exports exhibited high growth for all regions. In particular, exports to East Asia jumped, especially to the NIEs. By type of goods, exports of IT-related goods and capital goods, such as semiconductor fabrication machines and equipment, continued to increase. In addition, exports of automobile-related goods and consumer goods such as digital appliances surged, assisted by temporary factors such as heightening of seasonal demand.

Business fixed investment continued a gradual recovery. Shipments of capital goods (excluding transport equipment), which had lagged behind machinery orders in their improvement, increased substantially in the October-December quarter.

Corporate profits of large firms in manufacturing and nonmanufacturing were expected to continue increasing. As for manufacturers, the appreciation of the yen had not caused downward revision of their profit forecasts.

With regard to developments in the household sector, improvement in indicators related to the supply-demand balance in the labor market, such as the unemployment rate and the ratio of job offers to applicants, was becoming conspicuous, and the decline in the number of employees was slowing. 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.

Given this situation, production surged by 3.6 percent in the October-December quarter on a quarter-on-quarter basis, after starting to increase in the July-September quarter. 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 by favorable sales of durable consumer goods. However, the pace of increase in production was expected to slow compared to the October-December quarter.

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

As for credit demand in the private sector, the pace of decline was becoming somewhat moderate, since corporate activity had started to recover, as seen in the increase in business fixed investment, while firms were continuously reducing their debts. 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. 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. Corporate bond issuance rates were virtually flat, as credit spreads remained steady. CP issuance rates continued to be stable at low levels. The amount outstanding of CP and corporate bonds issued was above the previous year's level.

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 was moving around 15 percent.

  1. 5Reports were made based on information available at the time of the meeting.
  2. 6The 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 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.

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

A. Staff Proposal

Currently, collateral used to meet margin calls in purchase/sale of Japanese government securities (JGSs) with repurchase agreements by the Bank was limited to JGSs. The staff proposed that, in order to facilitate its money market operations, the Bank amend Principal Terms and Conditions for the Purchase/Sale of Japanese Government Securities with Repurchase Agreements to accept cash as collateral used to meet margin calls in the operations.

B. Discussion by the Policy Board and Vote

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

III. Amendment to Guidelines on Eligible Collateral

A. Staff Proposal

The staff proposed that, in order to facilitate its money market operations, the Bank amend Guidelines on Eligible Collateral to accept inflation-indexed JGBs, scheduled to be issued from March 2004, as eligible collateral for the Bank's provision of credit.

B. Discussion by the Policy Board and Vote

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

IV. 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 underlying trend remained basically unchanged from the previous meeting, and that the economy was recovering gradually.

Many members expressed the view that the economy was generally following a steady recovery path. Economic indicators released in the intermeeting period showed that exports and production were continuing to increase and business fixed investment continued to recover moderately, reflecting the recovery in overseas economies. Some members said that figures for exports and production for the October-December quarter of 2003 were very strong partly due to temporary factors such as the surge in seasonal demand for digital appliances, but the growth rate was expected to slow in the January-March quarter of 2004. Therefore, the basic assessment of the economy did not need to be changed.

Members agreed that overseas economies were on a recovering trend overall, particularly the U.S. and East Asian economies.

Many members said that the recovery of the U.S. economy was becoming well balanced, as there was a clear increase in business fixed investment, particularly for IT-related equipment, as well as in private consumption and housing investment. A few members said that the real GDP growth rate for the October-December quarter was an annual rate of 4.0 percent, which was the lower end of the range of market participants' forecasts. They added, however, that a breakdown showed that domestic private demand was in line with the forecast while fiscal expenditure was weak, and this confirmed a steady recovery led by private demand. A few members expressed the view that the current account deficit would start decreasing in the future, as the world economy recovered and the effect of past adjustments in foreign exchange rates materialized. A few members said that there were positive signs in the employment situation, but the slow pace of improvement continued to be a cause for concern. Many members said that the "twin deficits" in the United States, increasing concerns about geopolitical risks, and resulting changes in international capital flows continued to be major risk factors for the U.S. as well as the world economy.

Many members said that, in addition to the high growth in China, the pace of recovery was increasing in most Asian economies, namely the NIEs and ASEAN countries. Regarding the Chinese economy, some of these members pointed out the risk of the economy overheating and the imminence of a bottleneck in production caused by constraints in the physical infrastructure. Many members raised the problem of bird flu, and said that its effects so far on economic activity in Asia were unclear but required close monitoring because the recovery of Japan's economy was mainly underpinned by exports to the region.

A few members expressed the view that economies in the euro area were bottoming out. One member, however, said that domestic demand, particularly private consumption, was weaker than expected, and the effects of the appreciation of the euro warranted attention.

Many members said that, reflecting these overseas economic developments, Japan's exports, including those of IT-related goods, consumer goods, and automobile-related goods, were increasing substantially. By region, exports exhibited high growth for all regions. One member said that a notable feature of the recent increase was that an increase in exports to mainland China and Hong Kong contributed significantly. A different member was concerned about a possible slowdown in the pace of increase of exports to China due to a possible bottleneck in production and the impact of the bird flu.

The recovery in business fixed investment was reconfirmed, particularly in IT-related equipment such as semiconductor fabrication machines and equipment. One member pointed out that the recovery in business fixed investment continued to be strong and widespread, as evident in the increase in the building of plants for the manufacture of capital goods and machinery.

Many members said that production and shipments were increasing substantially, particularly for producer goods, capital goods, and consumer durables such as digital appliances, reflecting the above developments in demand. One member added that the indices of all industrial activity confirmed that the corporate sector was recovering.

Regarding the household sector, many members agreed that private consumption was virtually flat, although some indicators were recovering slightly. On the employment and income situation, however, views differed slightly among members. A few members expressed the view that the employment situation might be improving slightly since indicators related to the supply-demand balance in the labor market were improving. Some other members, however, said that, although the improvement in indicators such as the ratio of job offers to applicants and the unemployment rate was a positive sign, in assessing the overall employment situation it should be taken into account that employment statistics tended to fluctuate and that firms continued their basic stance of reducing personnel expenses. Some members referred to the slow recovery in wages. These members agreed that it was necessary to pay more attention to developments in the employment and income situation, especially to whether recovery was spreading from the corporate sector to the household sector.

A few members said that, in order to achieve a sustainable economic recovery, it was important that the recovery spread from large manufacturing firms to nonmanufacturing firms and small firms, thereby stimulating a recovery in rural areas, so that the tendency to polarization in the economy would be reduced.

With regard to prices, many members agreed that consumer prices were projected to continue a slightly declining trend, as the output gap was not likely to narrow significantly. Some members said that it was necessary to continue careful monitoring of the environment surrounding prices, for example the continuing rise in international and domestic commodity prices and firms' price-setting strategies, in addition to the developments in prices of rice and meat.

A few members said that corporate goods prices were firm reflecting the rise in international and domestic commodity prices and shipping charges. They said that the key issue was whether the strengthening of corporate goods prices would be offset by increases in productivity, squeeze corporate profits, or be passed on as higher final goods prices as demand recovered. One member said that it was worth noting that the rate of increase in the prices of intermediate goods was virtually zero percent.

B. Financial Developments

A few members commented on the money market that interest rates were stable at low levels on the whole due to the Bank's provision of more ample liquidity. Some members said that developments in bond and stock markets generally stayed in a narrow range, although stock prices fell slightly. A few members said that yields on ten-year JGBs moved at around 1.3 percent and the yield curve flattened slightly in the short- to medium-term zone since medium-term interest rates including swap rates and futures rates declined somewhat. One member commented that stock prices lacked buoyancy despite the recovery in firms' business performance. A different member said that developments in bond and stock markets slightly lacked momentum, and this could be reflecting market participants' difficulty in forecasting the economic outlook from the middle of 2004.

Regarding the foreign exchange market, some members said that the yen was recently being traded in the 105-107 range against the U.S. dollar as the market continued to be sensitive about the G-7 meeting. They expressed the view that there were still strong market expectations that the U.S. dollar would depreciate due partly to concerns about the "twin deficits" in the United States and geopolitical risks.

Some members added that financial markets were stable recently, but there were nervous developments, mainly in the foreign exchange market. Therefore, the outlook and the effects on corporate sentiment and economic activity, especially exports, continued to require close monitoring.

A few members said that, although lending attitudes of banks had been more accommodative, banks' lending was unlikely to increase. This was because firms' demand for loans was weak as they had ample on-hand liquidity and because they maintained their firm stance of repaying their debt.

V. 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 30 to 35 trillion yen" for the outstanding balance of current accounts at the Bank, based on the assessment of the current economic and financial situation.

Some members said that the Bank should monitor closely the effects of raising the target range for the outstanding balance of current accounts at the Bank, which was decided at the previous Monetary Policy Meeting in January 2004.

Members exchanged views about the effects of the additional monetary easing measure decided in January.

Many members expressed the view that, due to the monetary easing measure decided at the previous Monetary Policy Meeting, interest rates on instruments with relatively long maturities had further stabilized, and corporate sentiment seemed to have improved to some extent as the Bank's strong determination to overcome deflation had become widely understood. One member said that the measure had contributed to securing a steady increase in the monetary base in a situation where the growth rate of banknotes had been declining. Another member pointed out that two views were possible about the relationship between the increase in the outstanding balance of current accounts at the Bank and short-term interest rates. One view was that it was possible that the increase in the outstanding balance of current accounts at the Bank had contained possible fluctuations in short-term interest rates caused by a decline in the functioning of the money market. The other view was that an increase in the Bank's funds-supplying operations using term instruments had possibly contributed to stabilizing interest rates on term instruments. A different member added that there remained market concern that the Bank might reduce its funds-supplying operations due to factors such as a further increase in foreign exchange intervention and this required monitoring.

In response to this member's view, one member said that market participants were feeling more strongly that there was an abundance of liquidity, and added that the expected duration of the current quantitative easing policy could have become shorter if they had considered that the monetary easing measure was effective to counter deflation, but this was not observed at present.

A few members said that there was a criticism by market participants that the purpose and aim of the monetary easing measure decided in January was unclear. They pointed out that the unclearness had allowed various interpretations, and this was not desirable from the viewpoint of transparency of monetary policy.

In response to this view, a few other members said that market participants did not seem to have been taken by surprise by the Bank's policy action in the stock and foreign exchange markets. Some members expressed the view that the quantitative easing policy was an unprecedented policy and its effects and transmission mechanism differed from those of conventional monetary policy, whose operating target was interest rates, and this might have caused difficulty in understanding the purpose and the aim of the policy action. Some members said that, since the standard scenarios in the Bank's Outlook and Risk Assessment of the Economy and Prices were the most likely path for the economy at the time and not a desirable scenario for the economy, it was possible for the Bank to take policy action even when the economy was moving in line with the standard scenario. The Bank should therefore continue to explain this point carefully.

One member expressed the view that if there were calls from market participants for the Bank to take monetary policy measures to deal directly with an appreciation of the yen or to directly influence long-term interest rates, this might hamper its conduct of monetary policy in the future. Therefore, the Bank should avoid conveying messages in a manner that might create such expectations.

VI. Remarks by Government Representatives

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

  1. (1) Japan's economy was recovering steadily, particularly in the corporate sector, with the increase in business fixed investment and exports. The government would continue to steadily promote structural reforms in various areas and work to realize sustainable growth led by private demand.
  2. (2) In this situation where the economy was recovering steadily, the largest issue that the economy faced was overcoming the continued deflation. The Bank had decided to raise the target range for the outstanding balance of current accounts at the Bank at the Monetary Policy Meeting on January 20, 2004 contrary to most market participants' expectations, taking particular note of the continued deflation, although the Bank's assessment of the economy was that it was recovering gradually. The government welcomed the Bank's decision as indicating its strong determination to overcome deflation when the economy was recovering, since the policy action would contribute to dispelling deflationary concern and stabilizing medium- to long-term interest rates at low levels. In order to dispel deflationary concern, the government would like the Bank to deliberate further on the possibility of measures with a view to further clarifying the Bank's policy stance and enhancing the effectiveness of monetary policy.
  3. (3) The government would like the Bank to conduct monetary policy flexibly, continuing to communicate closely with the government and giving due consideration to developments in the economy and financial markets, including developments in interest rates and exchange rates.

The representative from the Cabinet Office made the following remarks.

  1. (1) As for the assessment of Japan's economy, it was recovering steadily supported by business fixed investment and exports, as explained by the representative from the Ministry of Finance. The government considered that it was necessary to continue to monitor closely developments in financial markets, such as changes in exchange rates.
  2. (2) With regard to the conduct of economic policy, the most important task for Japan's economy was to overcome deflation swiftly and achieve a self-sustained economic recovery led by domestic demand. To this end, the government would hold intensive discussions on the desirable economic structure for Japan at the meetings of the Council on Economic and Fiscal Policy in February and March, and proceed to discuss policy measures for prioritized areas at the meetings in April and May. Based on these discussions, the government would compile "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2004" by around the beginning of June. The government would also prepare by around March the "Reform Schedule," a timetable for practical procedures to implement structural reforms to achieve economic growth led by the private sector. In order to overcome deflation, it was important to increase the supply of money by creating a more robust financial system, which was part of the government's structural reform policy, and through the Bank's efforts to strengthen the transmission mechanism of monetary policy. "Structural Reform and the Medium-Term Economic and Fiscal Perspectives-FY 2003 Revision" recently approved by the Cabinet also stated that deflationary pressure would gradually decline as a result of measures taken by the government with the Bank and deflation would be overcome after an intensive adjustment period that would continue through fiscal 2004.
  3. (3) As for monetary policy, the Bank decided at the previous Monetary Policy Meeting to raise the target range for the outstanding balance of current accounts at the Bank. The government would like the Bank to continue to conduct monetary policy appropriately and flexibly, including implementation of more effective policy measures, in response to changes in financial and economic developments. The government would also like the Bank to examine the basic framework for the conduct of monetary policy with a view to realization in the medium term of the economic situation, including maintenance of price stability, described in "Structural Reform and the Medium-Term Economic and Fiscal Perspectives-FY 2003 Revision," and to implement more effective monetary policy to overcome deflation in fiscal 2005.

VII. 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 30 to 35 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 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.

Votes for the proposal: Mr. T. Fukui, Mr. T. Muto, Mr. K. Iwata, Mr. K. Ueda, Mr. T. Taya, Ms. M. Suda, Mr. S. Nakahara, Mr. H. Haru, and Mr. T. Fukuma.
Votes against the proposal: None.

VIII. Discussion on the 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 February 5, 2004, and decided to publish the whole report on February 6, 2004. 7

  1. 7The English version of the whole report was published on February 9, 2004.

Attachment

February 5, 2004
Bank of Japan

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

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