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Minutes of the Monetary Policy Meeting

on April 28, 2004
(English translation prepared by the Bank's staff based on the Japanese original)

June 18, 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, April 28, 2004, from 9:00 a.m. to 12:53 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 Finance
Mr. T. Omori, Deputy Director General for Economic and Fiscal Management, Cabinet Office
Reporting Staff 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. S. Uchida, Senior Economist, Policy Planning Office
Mr. T. Kato, Senior Economist, Policy Planning Office

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on June 14 and 15, 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 April 8 and 9, 2004.3 As a result of the market operations, the weighted average of the uncollateralized overnight call rate was generally 0.001 percent.

  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.

B. Recent Developments in Financial Markets

Money market rates remained stable at low levels against the background of the Bank's provision of ample liquidity.

Japanese stock prices had been firm reflecting expectations for economic recovery. The Nikkei 225 Stock Average was currently at around 12,000 yen. Long-term interest rates had been rising in Japan in response to the continued firmness in stock prices, temporarily reaching 1.55-1.60 percent, while they had also been increasing in the United States. Recently, long-term interest rates in Japan were at around 1.50 percent. The yield differentials between Japanese government bonds (JGBs) and corporate bonds remained essentially unchanged on the whole, although that for one corporate bond with a low credit rating was expanding recently.

The yen had depreciated against the U.S. dollar due partly to increased expectation of a further rise in interest rates in the United States and partly to selling of the yen by Japanese institutional investors for outward portfolio investment after the start of the new fiscal year. It was recently in the range of 107-110 yen to the U.S. dollar.

C. Overseas Economic and Financial Developments

The U.S. economy continued to show balanced growth. Household spending and business fixed investment were increasing steadily, and the improvement in the employment situation was becoming clearer. In this situation, the decline in the inflation rate had come to a halt.

In the euro area, improvement in corporate activity was currently at a pause, reflecting the stagnant recovery in production and business confidence. Household spending remained sluggish, partly constrained by structural problems, and the appreciation of the euro was having negative effects. Therefore, the momentum for economic recovery was weak. The economy in the United Kingdom was showing steady growth.

Economic recovery remained strong in East Asian economies. In China, both domestic and external demand continued to be robust. In most of the NIEs and ASEAN countries, exports and production were on an upward trend, especially in IT-related goods.

In U.S. financial markets, long-term interest rates rose due to heightening of market expectations that the Federal Open Market Committee (FOMC) would raise its target for the federal funds rate given the release of strong economic indicators. Reflecting these developments, long-term interest rates also rose in European financial markets. U.S. and European stock prices showed mixed movements.

In many emerging economies, steady economic recovery contributed to the stability in their financial markets. However, the yield differentials between their sovereign bonds, particularly those of Latin American countries, and U.S. Treasuries were expected to remain susceptible to heightening of geopolitical risks and developments in U.S. interest rates.

D. Economic and Financial Developments in Japan

1. Economic developments

Exports, particularly to East Asia, grew substantially in the January-March quarter of 2004, as in the October-December quarter of 2003. Imports also continued to increase, reflecting the recovery in Japan's economy and the progress in international division of the production process.

Business fixed investment had been increasing. Machinery orders, a leading indicator of business fixed investment, continued to increase on average, especially for manufacturers, although they fell in the January-February period after having risen substantially in the October-December quarter. The survey by the Japan Finance Corporation for Small Business (JFS) showed that the business condition of small firms continued to improve steadily.

With regard to private consumption, sales at department stores in Tokyo for the January-March quarter fell slightly from the previous quarter, as sales for March had decreased due partly to adverse weather conditions. Indicators relating to consumer confidence were improving overall.

Reflecting these developments, production was increasing steadily on average.

With regard to prices, international commodity prices remained firm, although the pace of increase was slowing recently. As a result, import prices continued to increase. Domestic commodity prices also continued to rise, particularly for steel products. The pace of increase in domestic corporate goods prices compared to the level of three months earlier rose to 0.6 percent in March, reflecting firm overseas and domestic commodity prices.

2. Financial environment

The rate of year-on-year decline in banks' lending outstanding (after adjustment for factors such as loan write-offs) diminished in March, as in February, contracting to 1.6 percent. The Bank's Senior Loan Officer Opinion Survey on Bank Lending Practices at Large Japanese Banks showed that demand for loans from firms had deteriorated. This deterioration, however, was not considered to signify a change in the improving trend, given the rapid pace of improvement so far.

Issuance rates on CP and corporate bonds and credit spreads were stable at low levels, and the issuing environment was favorable on the whole.

The growth rate of banknotes in circulation was on a downtrend, due mainly to decreasing anxieties about the financial system, and was recently in the 1.0-2.0 percent range. The year-on-year growth rate of the monetary base was declining. The year-on-year growth rate of the money stock (M2+CDs) rose slightly to 1.9 percent in March.

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

A. Economic Developments

With regard to overseas economies, many members commented on developments in economic activity and prices in the United States. Members agreed that the U.S. economy was showing balanced recovery, as corporate profits and business fixed investment were increasing steadily and the improvement in the employment situation was becoming clearer. Many members noted the rise in the month-on-month growth rate of the consumer price index (CPI) for March, and said that it was likely that the disinflationary trend in the United States was changing. A few members commented that this change was slightly earlier and also stronger than expected. One of these members pointed out that it might be reflecting the fast pace of contraction of the output gap, whose level had seemed to be high judging from the slack in labor and capital stock. Another member expressed the view that it would be necessary to examine the indicators further, since the rise in prices of materials and energy seemed to have been mostly absorbed by the corporate sector, where productivity was improving conspicuously, and the rise in the CPI for March might have been a temporary fluctuation.

Many members expressed the view that the Chinese economy was overheating somewhat, particularly in investment activity, pointing out that the economic growth rate for the January-March quarter reached nearly 10 percent and fixed asset investment continued to grow significantly. These members said that it was necessary to carefully monitor the effects of the tightening of monetary policy by the People's Bank of China.

With regard to Japan's economy, one member pointed out that exports grew substantially in the January-March quarter, as in the October-December quarter. The member added that imports to Japan continued to increase. Japan's economy was recovering in line with the world economy, with the progress in international division of the production process, particularly in IT-related goods.

One member said that movements toward economic recovery were spreading to small firms and nonmanufacturers, and gradually to regional economies. A different member commented that there remained disparities between firms as well as between regions. This member said that the recent reports on regional economies made at the meeting of general managers of the Bank's branches suggested that the economy continued to recover as a whole with the disparities remaining.

Members agreed that improvement in the employment and income situation remained limited. One member pointed out that an increasing number of firms had recently resumed hiring or increased the number of new employees. This was because some firms were facing a labor shortage due partly to thorough restructuring in the past and because the baby boomers would retire in the near future. On this basis, the member said that the number of employees was expected to follow an upward trend, albeit gradually, for the time being. A different member commented that the recruitment of new employees for fiscal 2005 seemed to be proceeding well so far. Another member noted that the population was aging, and the increase in the number of non-regular employees in the younger age groups might not be fully reflected in the employment statistics. Therefore, the employment situation might seem weaker than it actually was.

One member expressed the view that private consumption continued to show some positive movements, given that the rate of decline in household income had been decreasing somewhat and that consumer sentiment was recovering, judging from the Consumer Confidence Index for March and the results of the Bank's Opinion Survey on the General Public's Mindset and Behavior. A different member noted that although data on consumer sentiment had been recovering, more time was required to examine the strength in private consumption, since it was difficult to evaluate the trend of sales indicators due to the effects of seasonal adjustments related to the leap day.

With regard to prices, a few members commented on the fact that the pace of increase in domestic corporate goods prices was accelerating somewhat. They pointed out that the rise in commodity prices, including primary commodity prices, was causing materials prices to continue rising, and the rise in these prices was spreading more clearly to prices of intermediate goods. One member commented that the rise in prices of intermediate goods was due partly to demand factors, in addition to the passing on of the rise in materials prices. A different member said that the increase in domestic corporate goods prices was affected by both cost and demand factors. Some members, however, expressed the view that the effects of this increase on consumer prices would be limited, given that wages remained sluggish and private consumption could not be expected to recover markedly. A few members said that it would be necessary to monitor whether the difference between upstream and downstream prices had a negative impact on corporate profits and household income.

B. Financial Developments

Many members agreed that the money market remained stable. One member said that there had not been anxieties about the financial system despite the approach of the release of financial institutions' financial results.

With regard to the recent developments in financial markets, one member pointed out that long-term interest rates in Japan had risen slightly and the yen had depreciated against the U.S. dollar, due partly to the rise in interest rates on futures and long-term interest rates in the United States. The member commented that these developments were consistent with the economic situation in Japan and the United States. A few other members said that financial markets in Japan had been showing stable movements in line with economic developments, with various shocks being absorbed. Some members expressed the view that it was necessary to pay close attention to the effects of the rise in U.S. interest rates on financial markets worldwide, including those in emerging economies, although the effects had been limited so far.

One member commented on the recent developments in world financial markets, particularly those in the United States. The member said that it would be necessary to carefully monitor the course of the worldwide price stability and of the associated worldwide monetary easing and low interest rates, since it would significantly affect Japan's economic activity, prices, and financial markets, although assessment of financial developments should not be made based on short-term developments.

One member remarked that corporate financing conditions continued to improve moderately in both the loan and capital markets. Referring to the slight increase in the growth rate of the money stock, a different member said that this reflected the fact that the lending attitude of financial institutions was becoming more active than before and the economy was showing positive momentum. One member said that the slightly unexpected deterioration in demand for loans from firms in the Bank's Senior Loan Officer Opinion Survey on Bank Lending Practices at Large Japanese Banks suggested that demand for loans remained basically weak.

C. Outlook for Economic Activity and Prices

With regard to the outlook for economic activity and prices for fiscal 2004, members agreed that the economy was likely to continue its recovery as momentum increased gradually.

One member said that the current economic recovery was likely to be sustainable for quite a while, unlike past recovery phases since the bursting of the bubble. This was because the recovery was based on the high growth of overseas economies, including East Asian economies, and was led by private demand partly due to the progress in structural adjustments in the corporate sector, and also because the accumulated expertise of Japanese manufacturers in producing goods such as digital appliances was being utilized. A few other members said that prices had not shown signs of overheating and there were very few factors obstructing the economic recovery. Another member expressed the view that the foundation for sustainable growth in domestic demand was gradually being laid. A different member said that the momentum for recovery in the economy might peak out in the latter half of fiscal 2004. This was because growth in the world economy in fiscal 2005 was unlikely to be as strong as in fiscal 2004, according to an international organization's forecast, and because the sustainability of the increase in business fixed investment, the extent of the spread of the recovery to the nonmanufacturing sector, and the likelihood of strong private consumption continuing were not yet fully confirmed.

With regard to the corporate sector, members concurred that exports and production were likely to increase and corporate profits would be on an uptrend, and business fixed investment was likely to increase mainly in the manufacturing sector.

One member said that improvement in the corporate sector was expected to continue, given the continued high growth in overseas economies. This member added that the improvement in business performance and its spread within the corporate sector had been confirmed in the March Tankan (Short-Term Economic Survey of Enterprises in Japan) and the recent survey by the JFS. Many members, however, said that the recovery of business fixed investment in the nonmanufacturing sector was expected to be weaker than that in the manufacturing sector, due to such persistent constraints as pressure to reduce interest-bearing debts. A few members said that firms were maintaining their cautious stance on increasing business fixed investment and inventory investment. In relation to this view, one member said that the introduction of impairment accounting might encourage scrapping and building of firms' equipment.

Members agreed that the increases in production and corporate profits were likely to exert positive effects gradually on the household sector through changes in employment and income as well as in asset prices.

One member said that it was natural to expect that the anticipated improvement in the corporate sector would spread to the household sector to a certain extent. This member added, however, that this spread would be moderate, as firms continued to restrain labor costs. A few other members said that there were also structural factors that were pushing wages down, such as the shift from regular employees to temporary workers. One member expressed the view that the recovery in private consumption would be moderate, as the growth in household income was sluggish and taxes and social security costs were increasing.

Members discussed whether the expression "moderate" used to describe the state of the economic recovery in the Outlook and Risk Assessment of the Economy and Prices released in October 2003 should be retained in the assessment of the overall economy in the Outlook for Economic Activity and Prices (hereafter the Outlook Report) to be released after the meeting. One member expressed the following view. First, the Bank had so far described the recovery as "moderate," focusing on its spread being slow. The assessment in the Outlook Report, however, factored in the spread of the recovery not only within the corporate sector but also, to some extent, to the household sector. And second, the majority of Policy Board members forecasted that the real GDP growth rate for fiscal 2004 would be 3.0-3.2 percent and this growth rate was at odds with a description of the economic recovery as being "moderate." Some members said, however, that the growth rate for fiscal 2004 would be pushed up by the fact that the growth rate in the latter half of fiscal 2003 diverged significantly above the average growth rate of fiscal 2003. One of these members said that it was necessary to explain the assessment carefully to the public, including this technical point.

Members concurred that the year-on-year rate of change in domestic corporate goods prices in fiscal 2004 was likely to be slightly above zero percent, reflecting the increase in commodity prices at home and abroad as well as the improvement in domestic supply and demand conditions.

Most members concurred that consumer prices would basically be on a slight downtrend on a year-on-year basis in fiscal 2004 for the following reasons. First, slight downward pressure on prices was expected to persist during fiscal 2004, although the output gap was likely to narrow as the economy continued to grow faster than its potential growth rate. Second, institutional factors and temporary factors, such as the rise in rice prices, that had been pushing up prices would dissipate. And third, most of the rise in upstream prices was being absorbed by the decline in unit labor cost and therefore upward pressure on final goods and services prices was expected to be limited. One member said that although the appreciation of the yen against the U.S. dollar since September 2003 had exerted downward pressure on consumer prices, the recent stability in the yen's exchange rate would make it easier for firms to pass on the rise in upstream prices and increase expectations that deflation would be overcome. This member was confident that it would be overcome in the sense that the year-on-year rate of change in the CPI would register zero percent or higher in fiscal 2004.

There was discussion regarding the relationship between forecasts of a high year-on-year growth rate for real GDP and those of a year-on-year decline in the CPI for fiscal 2004. One member pointed out that the main factor behind these forecasts was the fact that the output gap was still large. In other words, the output gap had not narrowed in proportion with the economic recovery, judging from the current unemployment rate and the capacity utilization ratio. A different member expressed the view that, in the past few years, consumer prices had been less sensitive than before to changes in the output gap. This member cited as an example the fact that the deflationary trend did not stop during the economic recovery phase experienced during 1999-2000 and said that one cause was considered to be the rise in the import penetration rate. This member continued that, at present, the rise in the import penetration rate was coming to a halt and the economic situation had changed to one where materials prices overseas were rising and the increase in domestic demand was spreading, and said that the member would monitor whether the sensitivity of consumer prices to the output gap changed.

Many members raised the following as factors that might cause positive or negative deviations of economic activity from the outlook for fiscal 2004: economic and price developments in the United States and the possibility of related change in world financial markets, including U.S. financial markets; the risk of the Chinese economy overheating; and persisting geopolitical risks, such as the situation in Iraq. One member said that, at present, the Japanese economy was not yet strong enough to continue the self-sustained recovery if these risk factors materialized and economic growth overseas slowed significantly. A different member said that the rise in materials, crude oil, and energy prices might cause a supply shock and be a downside risk to corporate profits, given that the rise in upstream prices had not been passed on.

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

On the monetary policy stance for the immediate future, 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 with the target range of "around 30 to 35 trillion yen" for the outstanding balance of current accounts at the Bank.

One member said that monetary easing effects would increase further in line with a rise in the expected inflation rate. Another member said that, when it rose, it would be appropriate to change the condition relating to the prospective CPI-the second condition of the Bank's commitment to continue the quantitative easing policy-and require that it should be 1 percent or above, to strengthen the effects of the commitment in terms of policy duration.

A different member said that it was natural for interest rates to rise gradually in line with the recovery of the economy. However, in order to avoid interest rates surging and diverging considerably from natural developments, it would become increasingly important that the Bank continue to explain its thinking clearly. Another member added that the Bank should be extremely careful in communicating its thinking because market participants were especially nervous against the background of developments in U.S. interest rates.

One member commented on the Workshop on Securitization. Market participants representing diverse viewpoints took part in the workshop, and it was meaningful to have active discussions on practical problems for the further development of the securitization market and their possible solutions. The Bank would continue its efforts to deal with issues related to development of the securitization market, for example, improvement of information disclosure.

IV. Remarks by Government Representatives

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

  1. (1) The Japanese economy continued recovering steadily with improvement in the corporate sector spreading. However, deflation persisted: the year-on-year rate of change in consumer prices basically continued to be negative, although that for domestic corporate goods prices became positive in March. Given this situation, the largest issue that the economy faced remained overcoming the continuing deflation, and the government considered that the role of monetary policy remained vital.
  2. (2) The Bank had clarified its commitment to continuing the quantitative easing policy and was determined to firmly maintain it. Some market participants, however, were recently expecting an early termination of the quantitative easing policy given the recent economic recovery and the release of a series of favorable economic indicators. The government would like the Bank to fully take into consideration the fact that public attention was therefore focused on the Bank's forecasts for economic activity and prices in the Outlook Report to be released after the meeting.
  3. (3) The government would like the Bank to deliberate on the possibility of new measures that would cause market participants to continue to expect that the accommodative financial environment would be maintained for the time being. The government would also 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) The Japanese economy continued recovering steadily with improvement in the corporate sector spreading. As for price developments, moderate deflation was continuing.
  2. (2) The government would compile "Basic Policies for Economic and Fiscal Management and Structural Reform 2004" by around early June and, based on this, it would further accelerate and expand structural reform measures. 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 Bank was determined to firmly maintain the quantitative easing policy. In this regard, the government would like the Bank to conduct money market operations appropriately and flexibly through, for example, the use of operational tools that were more effective, giving due consideration to the recent developments in the monetary base and the money stock, continuing to communicate closely with the government, and taking into account developments in financial markets.
  3. (3) The Bank projected in its Outlook Report that if various economic agents persisted in their initiatives, the output gap would narrow, which would lead to a higher probability of overcoming deflation. In "Structural Reform and Medium-Term Economic and Fiscal Perspectives--FY 2003 Revision," the government had indicated that it expected that the economy would achieve a growth path of around 2 percent or higher in nominal terms from fiscal 2006. Based on these projections, the government would like the Bank to examine the basic framework for the conduct of monetary policy and to implement more effective monetary policy, in order to overcome deflation after the intensive adjustment period.

V. Votes

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

VI. Discussion on the Outlook for Economic Activity and Prices

Members discussed the draft of the Outlook for Economic Activity and Prices, and put "The Bank's View" to the vote. By unanimous vote, the Policy Board approved "The Bank's View" for publication immediately after the meeting, and decided to publish the whole report including "The Background" on April 30, 2004.

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.


Attachment
April 28, 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.