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Minutes of the Monetary Policy Meeting

on February 26, 2004
(English translation prepared by the Bank's staff based on the Japanese original)

April 14, 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 Thursday, February 26, 2004, from 8:59 a.m. to 11:59 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. K. Ishii, Senior Vice Minister of Finance, Ministry of Finance
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. 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. H. Yamaoka, Senior Economist, Policy Planning Office
Mr. S. Shimizu, Senior Economist, Policy Planning Office

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on April 8 and 9, 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.

I. Summary of Staff Reports on Economic and Financial Developments2

A. Money Market Operations in the Intermeeting Period

The Bank conducted market operations in accordance with the guideline decided at the previous meeting on February 4 and 5, 2004,3 allowing some degree of fluctuation in the outstanding balance of current accounts at the Bank due to the supply and demand conditions for funds in the money market. As a result, the outstanding balance moved at the 31-35 trillion yen level.

B. Recent Developments in Financial Markets

The weighted average of the uncollateralized overnight call rate was mostly at 0.001 percent, and interest rates on term instruments remained stable at low levels against the background of the Bank's provision of ample liquidity.

In the Japanese government bond (JGB) market, the yield on newly issued ten-year JGBs in the secondary market had declined to around 1.2 percent, reflecting the prevalence among market participants of the view that the current quantitative easing policy would continue for a long time. The volatility of long-term interest rates, which had increased with their rise in the summer of 2003, had recently returned to a low level. Liquidity in government securities markets might decline occasionally, as in Japan in the spring and summer of 2003, when market participants experienced difficulties in securing specific issues. The staff considered it important that the Bank take appropriate measures as the central bank to maintain liquidity in the Japanese government securities (JGS) markets and to contribute to smooth market transactions and formation of interest rates. In many industrialized countries, central banks and other public authorities offered securities lending facilities as a secondary source of government securities to the markets. The staff considered that it would be meaningful for the Bank, with the prerequisite that market participants had striven to maintain market liquidity, to introduce a facility to temporarily provide the markets with JGSs held by the Bank (the so-called securities lending) while the JGS markets were relatively stable.

The Nikkei 225 Stock Average had declined slightly in early February, but had increased from mid-February, reflecting the preliminary estimates of GDP statistics for the October-December quarter of 2003 and the depreciation of the yen against the U.S. dollar. It was recently moving at slightly below 11,000 yen.

In the foreign exchange market, the yen depreciated to the 108-110 yen range against the U.S. dollar due to buybacks of the dollar by market participants to adjust their positions amid both selling pressure on the dollar, partly reflecting weaker-than-expected U.S. economic indicators, and market participants' concern about possible intervention by the Japanese authority. As for the outlook, market participants remained concerned about the risk that the U.S. dollar might depreciate in the medium to long term, although their expectation of depreciation in the immediate future had abated.

C. Overseas Economic and Financial Developments

The U.S. economy was recovering steadily. Private consumption was on a moderate upward trend and housing investment remained at a high level. Production was increasing moderately and the recovery in firms' activities was spreading. As for the employment situation, positive developments were being observed: for example, the number of employees remained on a moderate upward trend and the unemployment rate had improved slightly. On the price front, the consumer price index (CPI) for January 2004 showed a fairly large increase of 0.5 percent from the previous month, due mainly to the rise in energy prices reflecting high crude oil prices and the severe winter weather. The CPI for all items less food and energy for January showed an increase of only 0.2 percent from the previous month. The U.S. trade deficit widened in December 2003, but the trade balance was virtually unchanged in the October-December quarter taken as a whole.

In the euro area, the economy seemed to have bottomed out, as corporate activity was recovering at a moderate pace. However, the momentum for recovery was still weak since household spending remained sluggish and the appreciation of the euro was having negative effects on corporate activity.

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

In U.S. and European financial markets, stock prices were moving at around the recent high levels. Long-term interest rates were virtually level after having declined slightly. As for future developments in interest rates, market expectations that the Federal Open Market Committee (FOMC) would raise its target for the federal funds rate around the summer of 2004 subsided further in the United States. In the euro area, market expectations that the European Central Bank (ECB) would raise its key interest rates also subsided. As for financial markets in emerging economies, the inflow of funds was continuing, and in many of them stock prices rose and yield differentials between their sovereign bonds and U.S. Treasuries became stable.

D. Economic and Financial Developments in Japan

1. Economic developments

Regarding economic indicators released in the intermeeting period, real GDP for the October-December quarter of 2003 increased by 1.7 percent on a quarter-on-quarter basis, 7.0 percent on an annualized quarter-on-quarter basis. This was the highest growth since the April-June quarter of 1990 and confirmed that Japan's economy was recovering led primarily by exports and business fixed investment. However, it was not considered necessary to change the Bank's assessment that the pace of recovery was basically moderate and that the functioning of the mechanism for self-sustained economic recovery was weak for the following reasons. First, exports and private consumption seemed to have been pushed up partly by the temporary factor of seasonal demand for digital appliances. And second, the effects of the improvement in corporate profits on household income had been limited, as seen in the year-on-year decline of 0.2 percent in compensation of employees.

Real exports continued to increase substantially, rising by 4.8 percent in January 2004 from the monthly average of the October-December quarter of 2003. By region, although exports to the United States decreased after a surge in the October-December quarter which was due to factors such as seasonal demand for digital appliances, the pace of growth in exports to East Asia rose further due partly to the effects of the lowering of tariffs by China. Exports to the European Union (EU) also showed high growth. Imports continued to increase steadily, particularly those of IT-related goods and capital goods and parts, partly reflecting the increase in domestic production.

Business fixed investment was likely to continue increasing for the time being, especially in the manufacturing sector. Machinery orders (private demand, excluding shipbuilding and orders from electric power companies), a leading indicator of business fixed investment, rose a substantial 11.3 percent in the October-December quarter of 2003 from the previous quarter, and the forecast figure for the January-March quarter of 2004 was virtually unchanged from the actual figure for the previous quarter. Therefore, machinery orders were on an upward trend on average.

As for indicators related to private consumption, sales at department stores in Tokyo improved slightly in January 2004 due partly to clearance discounts, and sales at retail stores and sales of electrical appliances were relatively strong in the same month.

With regard to price indicators, international commodity prices continued to rise on the whole as crude oil prices remained at high levels and prices of nonferrous metals rose further. Import prices (on a yen basis) compared to the level of three months earlier started to increase in January, as the effects of the appreciation of the yen in the early autumn of 2003 had waned. Domestic commodity prices continued to rise, particularly in nonferrous metals and steel products. Given these developments, the pace of increase in domestic corporate goods prices compared to the level of three months earlier rose to 0.4 percent in January. The rise in domestic corporate goods prices overall was attributable to the slowdown in the pace of decline in machinery prices, as well as to the rise in the pace of increase in prices of materials reflecting the strengthening of international and domestic commodity prices, although the pace of increase in rice prices was slowing. Domestic corporate goods prices were likely to continue rising for the time being, given that domestic prices of nonferrous metals and steel products continued rising in February.

2. Financial environment

The year-on-year rate of decline in lending by private banks (after adjustment for extraordinary factors) was 1.9 percent in January, virtually unchanged from previous months, although it remained on a slightly diminishing trend. The lending attitude of private banks had been slightly more accommodative, but this was not yet visible in the figures. The amount outstanding of CP and corporate bonds issued continued to be above the previous year's level, and the issuing environment for CP and corporate bonds remained favorable.

The year-on-year growth rate of the monetary base was expected to rise to some extent in February following the Bank's decision to raise the target range for the outstanding balance of current accounts at the Bank on January 20, 2004. Growth of banknotes in circulation was moving in the range of 2.5-3.0 percent year on year.

The year-on-year growth rate of the money stock had been almost level at around 1.5 percent since the autumn of 2003. A close examination of recent developments showed that the following factors were exerting downward pressure on the growth of the money stock: payments to the government by corporate pension funds returning funds entrusted to them in order to discontinue acting on behalf of public pension funds; and payments to the government for the purchase of JGBs specifically designed for individual investors.

The number of corporate bankruptcies continued on a downtrend, declining by 18.2 percent from the previous year in January.

  1. 2Reports were made based on information available at the time of the meeting.
  2. 3The 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. Summary of Discussions by the Policy Board on Economic and Financial Developments

On the state of Japan's economy, members referred to the GDP statistics for the October-December quarter of 2003 and agreed that it was recovering gradually, led primarily by exports and business fixed investment, and that it was likely to continue recovering at a moderate pace. Some members said that, since the growth rate for the October-December quarter seemed to have been pushed up partly by the temporary factor of seasonal demand for digital appliances, the economy should be assessed based on the average growth rate for the quarter and the January-March quarter of 2004. These members expressed the view that many economic indicators for January, for example those related to exports, were relatively strong, although they expected the economic growth rate to decrease to some extent in the January-March quarter after the large increase in the previous quarter. A few members remarked that, in order to realize a self-sustained recovery of the economy led by domestic demand, it was important to achieve a full-fledged recovery in the employment and income situation of households.

Many members said that real exports for January 2004 showed a further increase from the monthly average of the October-December quarter of 2003 and remained on an upward trend, particularly those to East Asia.

Some members pointed out that these developments in exports reflected the steady recovery in overseas economies, particularly the U.S. and East Asian economies. One of these members commented that in the United States the foundation was being laid for the increase in final demand to lead to an increase in employment. This was because, although the increase in the number of employees remained limited, growth in labor productivity had slowed to a moderate pace. Another member remarked that, despite the high economic growth, the inflation rate remained extremely low due to an increase in productivity. However, deflationary risks in the United States had subsided because the natural rate of interest was increasing relative to market interest rates.

Some members expressed the view that business fixed investment was likely to continue increasing steadily for the time being against the following background. First, an upward trend in corporate profits was spreading in the nonmanufacturing sector, for example in the information and communications, and transportation industries, as well as in the automobile and electronics industries. And second, machinery orders were on an upward trend on average according to the actual figures for December 2003 and the forecast figures for the January-March quarter of 2004. One of these members pointed out that, according to the machinery orders statistics, firms in a wider range of industries were increasing orders, and orders received through agencies, regarded as representing trends in fixed investment by small firms, were also increasing. The member continued that whether the increase in business fixed investment would spread further amid the improvement in corporate profits warranted attention.

Some members noted that indicators related to private consumption were relatively firm recently, although there was no clear increase in household income. One of these members said that a virtuous circle might have started to operate: technological innovation, particularly in the area of digital appliances, might have started to stimulate consumption, and this might lead to increases in production and business fixed investment. This member added that whether the propensity to consume would continue to rise required close monitoring. A different member said that the wealth effect resulting from the rise in stock prices was also having some positive influence on private consumption. In response to this, a few members emphasized that private consumption should be assessed as remaining flat on the whole for the following reasons. First, the income situation had not improved significantly, given the decline in the share of labor in income distribution. And second, the burden of social security costs on households was expected to increase. Based on these discussions, one member expressed the view that it was necessary to examine indicators related to private consumption carefully to judge whether an improvement in private consumption would be supported by increases in household income and/or development of new products would stimulate household spending.

With regard to prices, most members noted that the year-on-year change in domestic corporate goods prices rose to zero percent in January, partly reflecting the rise in international and domestic commodity prices such as those of crude oil, nonferrous metals, and steel products. These members expressed the view that changes in firms' price-setting strategies and whether the rise in prices of materials and intermediate goods would lead to a rise in final goods prices and consumer prices downstream required close monitoring. One member commented that the recent rise in international and domestic commodity prices reflected the increase in demand related to China and the speculative inflow of funds to commodity markets against the background of global monetary easing. This member added that it was necessary to watch this speculative flow of funds closely.

One member expressed the view that the likelihood that consumer prices would be higher than forecasted was low for the following reasons. First, it was not easy to pass on the price rise of materials in product prices. And second, even if the economic growth rate increased, the output gap was not expected to narrow significantly, as the economy's potential growth rate seemed to be rising reflecting the increase in productivity. A different member said that consumer prices would continue to follow a decreasing trend for some time due to the remaining output gap. This member commented that some firms, having difficulty in dealing with the rise in prices of materials by passing it on in their product prices or offsetting it through cost reduction, were starting to reduce or cease production to avoid making a loss or suffering a decrease in their profits, and it was therefore necessary to monitor carefully the effects of the increase in prices of materials on business performance. Meanwhile, one member said that the year-on-year change in consumer prices would be more likely to be positive in fiscal 2004, because the output gap was expected to narrow through continued economic growth in fiscal 2004, as in fiscal 2003, and this would contribute to pushing up prices.

As for financial developments, many members noted that the money market was extremely stable despite the approach of the fiscal year-end at the end of March. One member said that the fact that bid-to-cover ratios in the Bank's funds-absorbing operations were somewhat high showed that market participants felt there was an abundance of liquidity in the money market. A few members added that it was necessary to monitor closely whether an increase in the issuance of financing bills (FBs) and/or an inflow of funds supplied through foreign exchange intervention would destabilize the money market.

Some members noted that long-term interest rates were declining slightly, despite some economic indicators, such as the GDP statistics, which further confirmed that the economy was recovering. These members said that the view that the current quantitative easing policy would continue for a long time had been spreading since the Bank's decision to implement an additional monetary easing measure in January, and this was contributing to the decline in long-term interest rates in a situation where financial institutions remained inclined to invest in JGBs due partly to their need to secure liquidity and partly to borrower firms' stance of reducing their debts. A few of these members commented that attention should be paid to the possibility that long-term interest rates might decline to an unreasonably low level relative to developments in the economy. Another member expressed the view that in a situation where the sustainability of the positive nominal economic growth rate was gradually being confirmed, it was natural for the yield curve to steepen in line with developments in the economy.

Many members commented that the foreign exchange market was volatile recently, due partly to position adjustment by speculative market participants, while there was a persistent view among market participants that the U.S. dollar would depreciate in the medium to long term. A different member said that the depreciation of the U.S. dollar might come to a halt if market participants expected nominal interest rates in the United States to rise to a level commensurate with the natural rate of interest. These members agreed that developments in the foreign exchange market continued to require careful monitoring.

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

On the monetary policy stance for the immediate future, all members agreed that, based on the assessment of the current economic and financial situation, it was appropriate to maintain the current guideline for money market operations. A few members added that, although the money market was extremely stable currently, it would be appropriate to provide funds in accordance with the contingency clause of the guideline for money market operations should there be a risk of financial market instability, such as a surge in liquidity demand, toward the fiscal year-end. A different member said that the Bank should continue to conduct money market operations appropriately, taking full account of changes in liquidity demand in the market.

Members also discussed the possibility of introducing a facility to temporarily provide the markets with JGSs held by the Bank (the so-called securities lending), which had been reported on by the Bank staff. Many members expressed the view that it would be meaningful for the Bank to introduce such a facility from the viewpoint of enhancing liquidity and maintaining the smooth functioning of the JGS markets. These members continued that, when introducing such a facility, the Bank should make it clear that the purpose of the facility was to provide the markets with a temporary and secondary source of JGSs without hampering their functioning. Some members added that it was important to explain clearly to the public the purpose of this facility so as to avoid misunderstanding.

Based on the above discussions, the chairman instructed the staff to study the introduction of a facility to provide the markets with JGSs held by the Bank and report back to the Monetary Policy Meeting promptly. Members agreed unanimously to make public these instructions by issuing the attached statement (see Attachment 1).

IV. Remarks by Government Representatives

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

  1. (1) Japan's economy was recovering steadily. In addition to the increase in business fixed investment and exports, signs of an incipient recovery could be seen in the employment situation. The preliminary figure for the real GDP growth rate for the October-December quarter of 2003, released on February 18, 2004, was 1.7 percent on a quarter-on-quarter basis, a positive growth rate for the fourth consecutive quarter. In this situation, the largest issue that the economy faced was overcoming the continued deflation and the government considered that the role of monetary policy remained vital.
  2. (2) The Bank had been implementing monetary policy measures which put emphasis on actively influencing the expectations of market participants and the public by further clarifying its policy stance toward overcoming deflation. For example, after the Bank had clarified its commitment to continue the current quantitative easing policy in October 2003, it 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, even though the economy was recovering. The government welcomed such policy actions taken by the Bank as contributing greatly to financial market stability, which could be seen, for example, in low and stable medium- to long-term interest rates, and as enhancing the effectiveness of monetary policy. The government would like the Bank to deliberate further on the possibility of measures from the viewpoint of how the Bank could ensure the sustainability of the economic recovery.
  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) Real GDP for the October-December quarter of 2003 showed an increase of 1.7 percent on a quarter-on-quarter basis, according to the preliminary estimates released by the Cabinet Office on February 18, 2004. Given such developments in the economy, the government maintained its economic assessment unchanged in the February issue of the Monthly Economic Report released on February 20 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 most important task for Japan's economy was to overcome deflation swiftly and achieve a self-sustained economic recovery led by domestic demand. In order to overcome deflation while making policy efforts, such as acceleration and expansion of structural reforms, it was important to increase the supply of money through structural reforms by the government toward the creation of a more robust financial system and efforts by the Bank to strengthen the transmission mechanism of monetary policy. The government would like the Bank to continue to conduct money market operations appropriately and flexibly, including implementation of more effective policy measures, and at the same time take into account developments in financial markets.
  3. (3) The government would also like the Bank to examine the basic framework for the conduct of monetary policy, including price stability issues in the current economic situation, and to implement more effective monetary policy, in order to realize in the medium term the economic situation-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-described in "Structural Reform and the Medium-Term Economic and Fiscal Perspectives-FY 2003 Revision."

V. Votes

Based on the above discussions, members considered that it was appropriate to maintain the current guideline for money market operations.

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 2).

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.

VI. Approval of the Minutes of the Monetary Policy Meeting

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of January 19 and 20, 2004 for release on March 2, 2004.


Attachment 1
February 26, 2004
Bank of Japan

Study of the Introduction of a Facility to Enhance
Liquidity of Japanese Government Securities Markets

At the Monetary Policy Meeting (MPM) held today, Policy Board members discussed the possibility of introducing a facility which provides Japanese government securities held by the Bank to the markets (the so-called securities lending), with a view to enhancing liquidity and maintaining the smooth functioning of government securities markets.

In government securities markets, liquidity may decline and pricing may be hampered occasionally when market participants experience difficulties in securing specific issues or face uncertainties over their availability. In such cases, market participants should strive to maintain market liquidity and to avert a negative impact on the markets. Furthermore, in many industrialized countries, central banks and other public authorities offer securities lending facilities as a secondary source of government securities to the markets.

At the MPM today, views were expressed that the Bank could contribute to enhancing liquidity and maintaining the smooth functioning of government securities markets through introducing a facility which provides a temporary and secondary source of government securities to the markets.

The Chairman instructed the Bank staff to study the introduction of such a facility and report back to the MPM promptly.


Attachment 2
February 26, 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.