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Minutes of the Monetary Policy Meeting

on August 9 and 10, 2004
(English translation prepared by the Bank's staff based on the Japanese original)

September 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 Monday, August 9, 2004, from 2:00 p.m. to 3:58 p.m., and on Tuesday, August 10, from 8:59 a.m. to 11:38 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 Finance2
Mr. M. Ishii, Deputy Vice Minister for Policy Planning and Coordination, Ministry of Finance3
Mr. J. Hamano, Director General for Economic and Fiscal Management, Cabinet Office2
Mr. H. Kato, Deputy Director General for Economic Assessment and Policy Analysis, Cabinet Office3
Reporting Staff Mr. E. Hirano, Executive Director (Assistant Governor)
Mr. M. Shirakawa, Executive Director
Mr. A. Yamamoto, Executive Director
Mr. H. Yamaguchi, Director-General, Monetary Affairs Department
Mr. Y. Maehara, Adviser to the Governor, Monetary Affairs Department
Mr. S. Uchida, Senior Economist, Monetary Affairs Department
Mr. H. Yamaoka, Senior Economist, Monetary Affairs Department
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, Director, Secretariat of the Policy Board
Mr. Y. Saito, Senior Economist, Monetary Affairs Department
Mr. K. Masaki, Senior Economist, Monetary Affairs Department

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on September 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.
  2. Messrs. K. Ishii and J. Hamano were present on August 10.
  3. Messrs. M. Ishii and H. Kato were present on August 9.

I. Summary of Staff Reports on Economic and Financial Developments4

A. Money Market Operations in the Intermeeting Period

The Bank conducted market operations in accordance with the guideline decided at the previous meeting on July 12 and 13, 2004.5 The outstanding balance of current accounts at the Bank moved at the 31-34 trillion yen level.

B. Recent Developments in Financial Markets

Against the background of the Bank's provision of ample liquidity, the weighted average of the uncollateralized overnight call rate generally moved in the 0.001-0.002 percent range, except on July 14 and 21 when the rate fell slightly below zero. Interest rates on term instruments had been steady at low levels.

Japanese stock prices had been weak on the whole, reflecting the decline in U.S. stock prices particularly in IT-related industries. The Nikkei 225 Stock Average had recently declined to below 11,000 yen.

Long-term interest rates had increased somewhat in July reflecting expectations for further economic recovery, despite the weakness in stock prices. From the beginning of August, they had fallen considerably, partly reflecting the further decline in stock prices. The yield differentials between Japanese government bonds (JGBs) and corporate bonds in the secondary market continued to be essentially unchanged.

In foreign exchange markets, buybacks of the U.S. dollar were observed temporarily in late July, against the background of market perception of a stronger U.S. economic outlook. The U.S. dollar then started to depreciate, reflecting weaker-than-expected GDP and employment statistics in the United States, and the yen appreciated to around the 110.0-110.5 yen level against the dollar.

C. Overseas Economic and Financial Developments

The U.S. economy continued to expand supported by a virtuous cycle. Business fixed investment and household spending had been increasing, and corporate profits had risen considerably. However, according to advance estimates of GDP statistics, the growth rate of real GDP for the April-June quarter of 2004 decelerated to 3.0 percent on an annualized quarter-on-quarter basis from 4.5 percent in the January-March quarter due mainly to the slowdown of growth in private consumption. In addition, economic indicators that showed slight weakness were increasing recently: for example, real private consumption for June and employment statistics for July turned out to be weaker than market expectations. Developments in the U.S. economy, including the effects of the rise in crude oil prices, therefore required close monitoring.

In the euro area, economic recovery had been strengthening slightly. Positive signs had been observed in the corporate sector, particularly in manufacturers, for example in exports and industrial production, and household spending was recovering somewhat as a whole. However, there was no sign of improvement in firms' investment stance and the employment situation. The momentum for economic recovery therefore remained weak.

East Asian economies had continued to expand steadily although the pace of growth decelerated slightly. In China, both domestic and external demand continued to be on a strong expanding trend, but the pace of growth in fixed asset investment was slowing, although it was still at a high level, due to further measures taken by public authorities to contain overheating of investment. The year-on-year rate of increase in the consumer price index (CPI) was accelerating due to the rise in food prices. In many NIEs and ASEAN countries, exports continued to be on an uptrend. Production was also on an increasing trend, especially for IT-related goods, reflecting firm demand from industrial countries and from countries within the Asian region. The year-on-year rate of increase in the CPI was rising steadily in most of the NIEs and ASEAN countries, partly reflecting their economic expansion and the rise in crude oil and food prices.

As for U.S. and European financial markets, U.S. stock prices had been weak since the middle of July. This seemed to be due partly to increased uncertainty associated with the raising of the target for the federal funds rate by the Federal Open Market Committee (FOMC) and to changes in market perception of the U.S. economic outlook. Market participants had mostly factored in the raising of the target at the August FOMC meeting, but there was a growing market perception that from September onward the pace at which the FOMC raised the target for the federal funds rate would not be as fast as previously expected. Against this backdrop, long-term interest rates had declined recently.

In financial markets in emerging economies, stock prices and the yield differentials between their sovereign bonds and U.S. Treasuries remained essentially unchanged, except for some countries such as Argentina and Russia. Financial markets, however, remained susceptible to factors peculiar to each economy and could fluctuate considerably.

D. Economic and Financial Developments in Japan

1. Economic developments

Exports continued to increase steadily with a quarter-on-quarter increase of 3.3 percent in the April-June quarter after the significant increase of 4.1 percent in the January-March quarter. The increase reflected the expansion of overseas economies, particularly the U.S. and East Asian economies. Exports to the United States continued to increase at a moderate pace, while those to East Asia were almost flat compared with the January-March quarter, partly in reaction to the upsurge that had continued into that quarter. Among exports to East Asia, the pace of increase in those to China decelerated, possibly because measures taken by public authorities to contain the overheating of the Chinese economy were having some sort of effect on exports.

Business fixed investment continued to increase. Shipments of capital goods (excluding transport equipment) posted high growth again in the April-June quarter, 5.6 percent on a quarter-on-quarter basis, after a slight deceleration in the January-March quarter. Machinery orders (private demand, excluding shipbuilding and orders from electric power companies), a leading indicator of business fixed investment, surged, by 10.3 percent in the April-June quarter on a quarter-on-quarter basis, particularly those from manufacturers, after a drop of 5.6 percent in the January-March quarter.

The survey conducted by the Development Bank of Japan (DBJ) in June showed that business fixed investment plans for fiscal 2004 made by manufacturers marked a double-digit increase from the actual investment in the previous fiscal year, and those made by nonmanufacturers marked a slight increase. The results of this survey as well as the June Tankan (Short-Term Economic Survey of Enterprises in Japan) released recently confirmed the strength in business fixed investment.

As for the employment and income situation, indicators related to job offers had been on an uptrend. The number of employees in the Labour Force Survey had also been on an uptrend, and the number of regular employees in the Monthly Labour Survey had started to increase. The unemployment rate had been on a downtrend. With regard to wages, regular payments were still on a downtrend in terms of the average per person, mainly due to the rise in the proportion of part-time workers, but the rate of decline had been diminishing gradually. The drop on a year-on-year basis in special cash earnings paid in June was mainly in reaction to the upsurge in the previous year. Therefore, special cash earnings in July and August needed to be taken into consideration when evaluating this year's summer bonuses.

Regarding private consumption, sales statistics for goods were generally sluggish, except sales of electrical appliances and at convenience stores. On the other hand, services spending as seen in outlays for travel and sales in the food services industry remained steady. The index of living expenditure in the Family Income and Expenditure Survey marked high growth in the April-June quarter, although it might have been somewhat overestimated due to sampling factors.

The quarter-on-quarter growth rate in production accelerated again in the April-June quarter to 2.6 percent, after decelerating to 0.5 percent in the January-March quarter. Inventories had been nearly flat as a whole, but the intended accumulation of inventories of electronic parts had become clear. For these products, adjustment pressures on inventories were unlikely to intensify immediately, judging from strong domestic and external demand. However, sales of some products, for example cellular phones, had fallen below the strong forecasts, while their production capacity had been increasing further. Therefore, developments in supply-demand conditions of electronic parts and related goods required close monitoring for the time being.

As for prices, domestic corporate goods prices had been rising, and the year-on-year rate of decline in the CPI (excluding fresh food, on a nationwide basis) diminished to 0.1 percent in June from 0.3 percent in May. This was mainly due to the rise in prices of petroleum-related products, for example gasoline. There seemed to be no significant change in the environment surrounding prices, except for the effects of high crude oil prices. Consumer prices were projected to basically continue falling slightly on a year-on-year basis, although the rise in crude oil prices might push them further upward.

2. Financial environment

While firms continued to reduce their debts, the pace of decline in credit demand in the private sector was becoming somewhat moderate, since corporate activity had been recovering, as seen in the ongoing increase in business fixed investment. The lending attitude of private banks was becoming more accommodative, and that of financial institutions as perceived by firms, including small firms, had been improving noticeably. The year-on-year rate of decline in lending by private banks had basically been diminishing.

With regard to financing through capital markets, the issuing environment for CP and corporate bonds remained favorable, as credit spreads were stable at low levels. The amount outstanding of CP and corporate bonds issued continued to be above the previous year's level.

The year-on-year growth rate of the monetary base had been at the 4.0-5.0 percent level, with a downtrend in the growth of banknotes in circulation due mainly to decreasing anxieties about the financial system. That of the money stock (M2+CDs) was 1.9 percent in July.

  1. 4Reports were made based on information available at the time of the meeting.
  2. 5The guideline was as follows:
    The Bank of Japan will conduct money market operations, aiming at the outstanding balance of current accounts held at the Bank at around 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

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 continued to recover, judging from economic indicators released since the previous meeting.

Regarding the outlook, members agreed that Japan's economy would continue to recover, gathering stronger momentum.

Many members commented on the continued rise in crude oil prices. These members said that attention should be paid to developments in crude oil prices and possible effects on both the domestic and overseas economies.

Many members said that overseas economies overall continued to expand, particularly the U.S. and Chinese economies.

Members generally agreed that the U.S. economy continued to recover supported by a virtuous cycle, as was apparent in the fact that business fixed investment and housing investment had been increasing steadily and corporate profits had risen considerably.

Many members discussed the possible effects of the surge in crude oil prices on private consumption and eventually the overall economy, and the slowdown in the pace of increase in employment observed in the recent U.S. employment statistics, in view of the following development. The U.S. real GDP growth rate for the April-June quarter decelerated to 3.0 percent on an annualized quarter-on-quarter basis from 4.5 percent in the January-March quarter, due mainly to the slowdown of growth in private consumption against the background of the falling off of the effects of tax cuts and the rise in gasoline prices. With regard to the employment situation, some members noted the following. First, the number of employees in the household survey showed a clear increase. Second, the number of initial claims for unemployment insurance was on a downtrend and the unemployment rate was falling. And third, indicators of business hiring intentions were generally strong. As for the outlook for private consumption, a few members said that there was no need to be overly pessimistic, referring to the fact that automobile sales, which had declined temporarily, recovered in July. Some members said that some degree of slowdown had been expected of the U.S. economy, given that its growth had been relatively high so far and that the FOMC had started to raise its target for the federal funds rate. These members expressed the view that it was important to ascertain whether the U.S. economy could get back on a steady and sustainable growth track in the near future.

With regard to the Chinese economy, members generally agreed that investment activity seemed to have been slowing and the risk of the economy overheating was subsiding somewhat, due partly to the measures taken by public authorities so far to contain the overheating of the economy. One member expressed the view that the delay in improvement of the infrastructure such as electricity supply and transportation facilities for goods could cause a bottleneck and the Chinese economy might be forced to slow down due to supply-side constraints.

With regard to European economies, members agreed that economic recovery had been strengthening slightly. One member pointed out an agreement reached between employers and employees of a large German manufacturer to extend working hours without a raise in wages, and said that it was an epoch-making development that such efforts had started to be observed in Europe, where structural adjustments had been slow to occur.

Members concurred that, with the expansion of overseas economies as described above, Japan's exports were likely to continue to increase. One member said that exports of materials, in particular, were expected to remain firm. This was because demand for materials produced by Japanese firms, which had a large capacity to increase their production, was becoming stronger with the increase in worldwide demand, particularly in China.

With regard to domestic demand, a few members said that the fairly strong business fixed investment plans for fiscal 2004 in the survey conducted by the DBJ confirmed the increase in business fixed investment. One of these members said that, according to the survey, about 40 percent of the planned investment of manufacturers was for "product development and upgrading," "rationalization and labor saving," or "research and development." This member added that this showed that the increase in proactive business fixed investment was spreading to a wider range of manufacturing firms. A different member said that a recovery could also be expected in business fixed investment of small firms, judging from the fact that the proportion of small firms with "insufficient" production capacity had exceeded that with "excessive" capacity in the diffusion index in the Monthly Survey of Small Businesses in Japan conducted by the Japan Finance Corporation for Small and Medium Enterprise.

Members concurred that corporate profits remained strong so far, due to the quantitative effects of the increase in sales and the decline in unit labor cost, despite the deterioration in the terms of trade reflecting the rise in crude oil prices and upstream prices. However, some members said that developments in corporate profits required close monitoring because a further rise in crude oil prices might have negative effects on them. One of these members pointed out that many firms were keeping their profit forecasts for fiscal 2004 unchanged, despite strong business performance to date. This member expressed the view that these firms were probably taking into account a risk of performance weakening in the second half of the fiscal year.

Some members said that the growth rate in production accelerated again in the April-June quarter after decelerating in the January-March quarter, and that production would continue to increase reflecting the recovery in both domestic and external demand.

Many members commented on developments in inventories of electronic parts, particularly IT-related parts. Some members said that while inventories of digital appliances, such as digital cameras, and goods related to liquid crystal displays were increasing markedly, those of semiconductors were not increasing much. One member said that it was unlikely that an unintended accumulation of inventories had already started, for the following reasons. First, final demand for IT-related goods continued to be firm, and was unlikely to weaken in the near future. And second, manufacturers of these goods were paying due attention to production and inventory management, based on lessons learned from the experience during the economic slowdown in 2000. A different member said that the recent increase in inventories of electronic parts was a cause for concern for the following reasons. First, it was strongly expected that the cycle of global IT-related demand, the "silicon cycle," would peak this year, and the growth in demand would decelerate in and after 2005. And second, manufacturers of IT-related goods continued to make business fixed investment both in Japan and abroad in order to expand production capacity. This member added that it was, however, too early to make an overall assessment of inventories of electronic parts. Another member said that developments in IT-related electronic parts required particular attention, as they were closely linked to developments in overseas economies and exports, and their effects on business sentiment were greater than expected from the industry's share of all industries.

With regard to the household sector, a few members said that there were no clear signs of an increase in wages, including summer bonuses, although indicators related to labor market conditions, such as the number of new job offers, had been improving and an uptrend in the number of employees was becoming clear. A different member said that the share of labor in income distribution was at a historically low level, and this meant that there was more room for wages to increase in the future.

Some members expressed the view that private consumption continued to show somewhat positive movements on the whole. These members said that, although sales statistics were generally sluggish except for some goods such as electrical appliances, services spending such as outlays for travel remained steady, and the index of living expenditure had been at a high level according to the Family Income and Expenditure Survey. One of these members said that the extremely hot weather was expected to have positive effects on private consumption.

Some members commented on the spread of the economic recovery to regional economies. A few members said that the recent reports on regional economies made at the meeting of general managers of the Bank's branches confirmed that the recovery was spreading to regional economies on the whole, although some areas still depended heavily on public investment and lacked momentum for recovery due to their economic structure. One member said that the Economy Watchers Survey also confirmed that the recovery was spreading to regional economies.

With regard to prices, many members commented on the rise in crude oil prices. Some members said that the recent rise in crude oil prices stemmed from both the supply and the demand side, and its effects on economic activity and prices should be analyzed from various aspects. A few members expressed the view that concerns about the supply of crude oil in the near future, such as those related to geopolitical risks, were contributing to the rise in crude oil prices in the current situation where the actual production capacity was uncertain. One member noted that it had to be borne in mind that the rise in crude oil prices could in fact exert downward pressure on prices overall if it had negative effects on economic activity.

Members agreed in projecting that consumer prices would basically continue falling slightly on a year-on-year basis for the time being, as unit labor cost continued to decline with the increase in firms' productivity. One member commented on the fact that the year-on-year rate of decline in the CPI (excluding fresh food, on a nationwide basis) diminished slightly in June from May. The member said that this was mainly due to the rise in prices of petroleum-related products, for example gasoline, and that the effects of high crude oil prices were working their way through to the level of consumer prices. The member added that future developments in prices required close monitoring, since the year-on-year rate of change in the CPI might register zero percent or above temporarily in early autumn depending on developments in crude oil prices. A different member said that many manufacturers in the materials industry were planning to start intensive negotiations about raising prices, and a rise in upstream prices might be gradually passed on.

B. Financial Developments

On the financial front, many members commented on the recent weakness in stock prices and the downtrend of long-term interest rates at home and abroad.

Some members expressed the view that U.S. stock prices had already factored in the possibility that the U.S. economy might slow down somewhat, particularly in IT-related industries. A few of these members said that market participants were aware of downside risks to the economy, while the Federal Reserve was maintaining the stance of further raising the target for the federal funds rate based on a relatively positive outlook for the economy. These members said that the gap between the two perceptions of the economic and price situation was one factor behind the increased uncertainty about the U.S. economic outlook.

Some members expressed the view that the recent decline in Japanese stock prices was in part a direct reflection of the decline in U.S. stock prices. One of these members said that Japanese stock prices seemed to have started to factor in possible deceleration in the growth of corporate profits resulting from an economic slowdown in the near future. A few members, however, said that Japanese stock prices had been fairly firm relative to the decline in U.S. stock prices, and stock prices in Japan and the United States could move in different directions depending on economic developments in each country.

One member pointed out that long-term interest rates were declining worldwide recently, and said that market participants were aware of the risk that high crude oil prices might cause an economic slowdown, leading to downward pressure on prices overall.

One member said that, in U.S. financial markets, despite the fall in stock prices, implied volatility and credit spreads had been at low levels, and this showed that market participants might not have fully factored in the increased uncertainty about the economic outlook. A different member said that the risk premium on stocks in industrial countries had been at high levels in the past seven to eight years, and market prices seemed to have appropriately reflected uncertainties about the economic outlook. One member said that developments in financial markets should be examined over a longer time frame since the markets could become volatile in the short term due to various speculations. The member continued that future developments in financial markets, however, would require careful analysis, as developments in stock prices and long-term interest rates might be a sign of changes in the economic and price situation.

One member remarked in relation to developments in the monetary base that it was necessary to explain thoroughly to the public that the recent deceleration in the growth of banknotes in circulation was due mainly to decreasing anxieties about the financial system, and did not imply a tightening of monetary policy. This member added that particular care was needed when explaining to the public, since banknotes in circulation might decrease temporarily due to hoarded banknotes returning to the Bank with the introduction of the new banknote series.

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 had been monitoring closely how market participants had taken the Bank's interim assessment released in July that the economy was expected to deviate above the forecasts for fiscal 2004 made in April 2004 and consumer prices were projected to be broadly in line with the forecasts. This member expressed the view that market developments since the release seemed to suggest that the assessment had been digested relatively smoothly by the market.

In relation to how the Bank should communicate to the public in the immediate future, members agreed that it was important to establish an environment to promote smooth formation of prices in financial markets, by thoroughly explaining as necessary both the Bank's stance of continuing the quantitative easing policy in accordance with the current commitment based on the CPI and its assessment of economic activity and prices.

One member said that, in order to stabilize market expectations, the Bank should present to market participants its stance on how it would change the framework of monetary policy from quantitative easing in the future, as well as explain its current policy of continuing quantitative easing in accordance with the commitment.

One member said that the Federal Reserve seemed to be experiencing difficulty in communicating its thinking to market participants in the situation where it had raised the target for the federal funds rate while the U.S. economy had been decelerating slightly. This member expressed the view that the Bank might face the same challenge in the future given that its current commitment was based on the CPI, which tended to lag behind economic activity. A different member said that, given that the Bank was conducting monetary policy in accordance with the current commitment, the phase of the economic cycle at which the Bank started to raise interest rates could differ considerably depending on the momentum of economic activity and prices.

IV. Remarks by Government Representatives

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

  1. (1) The Cabinet had approved the guidelines for budget requests for fiscal 2005 on July 30. These guidelines were aimed at maintaining and strengthening the government's commitment to its fiscal restructuring policy. For example, the government would introduce a system to promote policy and institutional reforms by ministries and agencies, so that a more thorough review of all the expenditure items was conducted at the budget request stage.
  2. (2) In the process of formulating the budget, the government intended to rationalize it further by adopting a strict approach in examining budget requests and to maintain and strengthen its commitment to its fiscal restructuring policy by continuing to tighten the reins and making further efforts to secure fiscal discipline.
  3. (3) The Japanese economy was recovering at a solid pace. However, deflation, albeit moderate, persisted, and the government considered that the role of monetary policy remained vital.
  4. (4) The Bank had clarified its commitment to continuing the quantitative easing policy and was determined to firmly maintain it. The government would like the Bank to conduct monetary policy flexibly, as prescribed in the current guideline for money market operations, should there be a risk of financial market instability, giving due consideration to developments in the economy and financial markets.
  5. (5) Market speculation about the duration of the accommodative financial environment had not yet been completely dispelled. The government would therefore like the Bank to dispel such market speculation by, for example, continuing to state clearly that the conditions for termination of the quantitative easing policy had not been fulfilled yet. The government would also like the Bank to deliberate what kind of new measures the Bank could take to ensure the sustainability of the economic recovery, giving due consideration to market expectations regarding future monetary policy.

The representative from the Cabinet Office made the following remarks.

  1. (1) The Japanese economy was recovering at a solid pace as improvements in the corporate sector were extending into the household sector. On the other hand, attention should be paid to the effects on the economy of factors such as developments in crude oil prices and interest rates around the world. On the price front, the overall situation could be assessed as being still only halfway to overcoming deflation.
  2. (2) The government would accelerate and expand structural reforms by pursuing early implementation of "Basic Policies for Economic and Fiscal Management and Structural Reform 2004." With regard to formulation of the budget for fiscal 2005, the first year of the concentrated consolidation period, the Council on Economic and Fiscal Policy had decided an overall picture of the budget for fiscal 2005. This overall picture of the budget indicated that the government would further advance structural reforms, attaching importance to clarification of its attitude of securing strict fiscal discipline, an emphasis on priorities in the budget allocation, and the fulfillment of its accountability to the nation. The need to take into consideration developments in the macroeconomy when discussing the overall picture of the budget was recognized, and in this regard the following economic outlook was presented at the meeting of the council. The year-on-year growth rates of real and nominal GDP for fiscal 2004 were projected to be 3.5 percent and 1.8 percent, respectively, as stated in A Forecast of Economic Situation for FY 2004, released by the Cabinet Office. Those of real and nominal GDP for fiscal 2005, given certain conditions, were projected to be slightly above 2 percent and around 1.5 percent, respectively, as indicated in "An Assumptive Projection of Economic Situation for FY 2005."
  3. (3) The Bank was determined to firmly maintain the quantitative easing policy. In this regard, the government would like the Bank to implement more effective monetary policy, including measures that would lead to more effective provision of liquidity, continuing to communicate closely with the government. Public attention was focused on developments in interest rates as the Japanese economy had been recovering steadily. The government would therefore like the Bank, through deliberations based on its expertise, to make further efforts to enhance the transparency of the conduct of monetary policy by, for example, presenting a path toward overcoming deflation.

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 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 decided, by unanimous vote, the text of "The Bank's View." It was confirmed that "The Bank's View" would be published on August 10, 2004 and the whole report on August 11, 2004.6

  1. 6The English version of the whole report was published on August 12, 2004.

VII. Approval of the Minutes of the Monetary Policy Meeting

The Policy Board approved unanimously the minutes of the Monetary Policy Meetings of June 25, 2004, and July 12 and 13 for release on August 13, 2004.


Attachment
August 10, 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.