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Minutes of the Monetary Policy Meeting

on November 17 and 18, 2004
(English translation prepared by the Bank's staff based on the Japanese original)

December 22, 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, November 17, 2004, from 2:00 p.m. to 3:51 p.m., and on Thursday, November 18, from 9:00 a.m. to 11:58 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. I. Ueda, 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 Office
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 Department4
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. K. Kamiyama, 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 December 16 and 17, 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. Mr. I. Ueda was present on November 18.
  3. Mr. M. Ishii was present on November 17.
  4. Mr. H. Yamaguchi was present on November 17 from 2:44 p.m. to 3:51 p.m., and on November 18 for the whole of the session.

I. Summary of Staff Reports on Economic and Financial Developments5

A. Money Market Operations in the Intermeeting Period

The Bank conducted market operations in accordance with the guideline decided at the previous meeting on October 29, 2004.6 The outstanding balance of current accounts at the Bank moved at around 30-33 trillion yen.

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 was generally at around zero percent. Interest rates on term instruments had been steady at low levels.

Japanese stock prices had risen slightly due to a fall in crude oil prices and a rise in U.S. stock prices. Recently, the Nikkei 225 Stock Average was moving at around 11,000 yen, slightly above the level at the time of the previous meeting.

Long-term interest rates had been more or less flat, moving at around 1.5 percent, as views about the outlook for Japan's economy continued to be cautious.

The yen was being traded in the range of 105.0-105.5 yen against the U.S. dollar recently, a slight appreciation compared to the time of the previous meeting, because selling pressure on the dollar had been strengthening reflecting concerns over the U.S. "twin deficits."

C. Overseas Economic and Financial Developments

The U.S. economy continued to expand supported by domestic private demand components such as household spending and business fixed investment. The growth rate of real GDP for the July-September quarter of 2004 increased to 3.7 percent on an annualized quarter-on-quarter basis from 3.3 percent in the April-June quarter, due mainly to the acceleration in the pace of growth in private consumption. Recent economic indicators showed that private consumption continued to be on an uptrend and that business fixed investment was increasing as high corporate profits continued. The pace of increase in the number of employees recovered in October after slowing temporarily in the summer of 2004. As for the economic outlook, the U.S. economy was likely to continue expanding for a while.

In the euro area, the economy seemed to be on a modest recovery trend, although many indicators were weak recently, for example those of household spending and production.

As for East Asian economies, in China both domestic and external demand continued to expand strongly and fixed asset investment was increasing at a fairly fast pace. The NIEs and ASEAN economies continued to expand, but the pace of expansion was slowing somewhat, and in particular there was a marked deceleration of the economy in South Korea. The year-on-year rate of increase in the consumer price index (CPI) in many NIEs and ASEAN countries remained high due mainly to their economic expansion and the rise in crude oil and food prices.

In U.S. and European financial markets, stock prices were increasing due to factors such as the rise in crude oil prices coming to a halt and the release of relatively strong U.S. economic indicators. Long-term interest rates rose in the United States, while they were declining slightly in Europe recently.

In financial markets in many emerging economies, stock prices had risen and the yield differentials between their sovereign bonds and U.S. Treasuries had narrowed, mainly because uncertainty about the U.S. economy had subsided. Their currencies had appreciated on the whole against the U.S. dollar, which was on a weakening trend.

D. Economic and Financial Developments in Japan

1. Economic developments

Exports had recently been more or less flat due to the deceleration of overseas economies. Exports to the United States dropped slightly in the July-September quarter, particularly those of automobile-related goods and consumer goods such as digital appliances, after growing steadily until the April-June quarter. Exports to East Asia inched up in the July-September quarter as in the April-June quarter. Among exports to East Asia, those to China had been affected to some extent by measures taken by public authorities to contain the overheating of the economy, as seen in a sharp decline in exports of construction machinery.

Business fixed investment had been increasing, albeit recently at a mild pace. Shipments of capital goods (excluding transport equipment) continued to increase in the July-September quarter as in the April-June quarter. However, the pace of increase was moderating due partly to a slowdown in shipments of IT-related goods such as semiconductor manufacturing equipment. Among leading indicators of business fixed investment, machinery orders (private demand, excluding shipbuilding and orders from electric power companies) dropped in the July-September quarter partly in reaction to the surge in the April-June quarter. Construction starts (floor area, private, nondwelling use) had been on an uptrend.

Business fixed investment in the first preliminary estimates of GDP for the July-September quarter declined slightly from the previous quarter. This decline might have been partly due to a delay in progress in investment related to construction as a result of a series of typhoons.

As for the employment and income situation, job offers and the unemployment rate had been on an improving trend. The number of employees was also on an uptrend. Wages had been declining 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, particularly in special payments. As a result, household income had stopped declining according to the Monthly Labour Survey.

Private consumption continued to be steady. Sales indicators, except sales of electrical appliances, were somewhat sluggish partly due to adverse weather conditions. However, services spending remained steady, and indicators of consumer sentiment continued to be on a recovery trend on the whole.

Production declined by 0.7 percent in the July-September quarter on a quarter-on-quarter basis, after increasing sharply by 2.6 percent in the April-June quarter. Inventories were more or less flat as a whole, although movements differed according to the type of goods, with electronic parts, for example, already in the inventory adjustment phase. It was likely that inventories of electronic parts would basically need to be adjusted only slightly, partly because manufacturers had slowed their pace of production at an earlier stage. Nevertheless, future developments required close monitoring.

On the price front, domestic corporate goods prices continued to rise due to the strengthening of commodity prices at home and abroad and to the improvement in supply and demand conditions. Consumer prices (excluding fresh food) had been on a slightly declining trend on a year-on-year basis. The year-on-year rate of change in consumer prices (on a nationwide basis) was 0.0 percent in September partly due to the rise in gasoline prices. However, consumer prices were projected to fall slightly on a year-on-year basis again from October given that rice prices were expected to start declining year on year.

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 was recovering, as seen in the ongoing increase in business fixed investment. The lending attitude of private banks was becoming more accommodative, and the year-on-year rate of decline in lending by private banks had basically been diminishing. The lending attitude of financial institutions as perceived by firms, including small firms, was also becoming more accommodative.

With regard to financing through capital markets, the issuing environment for CP and corporate bonds continued to be favorable, as seen in low and stable credit spreads. As a result, 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, and that of the money stock (M2+CDs) was around 2.0 percent. The growth of banknotes in circulation had remained low compared to some time ago, mainly due to decreasing anxieties about the financial system, but it had been increasing slightly since the beginning of November due to the introduction of the new series of banknotes.

  1. 5Reports were made based on information available at the time of the meeting.
  2. 6The guideline was as follows:
    The Bank of Japan will conduct money market operations, aiming at the outstanding balance of current accounts held at the Bank at around 30 to 35 trillion yen.
    Should there be a risk of financial market instability, such as a surge in liquidity demand, the Bank will provide more liquidity irrespective of the above target.

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

A. Economic Developments

On the current state of Japan's economy, members concurred that it continued to recover as a whole, although the increase in exports and production seemed to be coming to a pause. They also agreed that it was likely to continue to recover.

Members agreed that overseas economies, while decelerating slightly from their high growth so far, would continue to expand.

Many members said that the U.S. economy seemed to have moved out of the soft patch it experienced temporarily in the summer and was likely to continue to expand for a while, for the following reasons. First, the growth rate of real GDP for the July-September quarter increased compared to the previous quarter due mainly to a recovery in private consumption. Second, business fixed investment continued to increase as high corporate profits continued. And third, the pace of increase in the number of employees, which had slowed some time ago, was recovering recently. One member said that it should be noted that factors such as the falling off of the effects of tax cuts and the earlier rise in energy prices might negatively affect the economy. A different member commented that room for the U.S. government to implement additional measures to stimulate the economy was already limited, and given that medium- to long-term issues such as fiscal consolidation and problems related to the pension system needed to be dealt with, the government's conduct of economic policy might negatively affect the economy in the future.

With regard to the Chinese economy, many members said that both domestic and external demand continued to expand significantly. Some members said that it was necessary to continue monitoring carefully the effects of measures to contain the overheating of the economy, including the raising of the central bank benchmark deposit and lending rates by the People's Bank of China at the end of October. In relation to this point, a few members commented that although the economy as a whole seemed to be overheating persistently, the risk that this overheating might intensify was decreasing, noting that some steel products for construction were being exported due to a decrease in demand at home. A different member expressed the view that domestic private demand might increase further, pointing out that the pace of increase in the amount outstanding of loans denominated in the renminbi was accelerating again recently. A few members said that, in contrast to the high growth of the Chinese economy, the pace of increase in exports and production was slowing markedly in the NIEs, particularly South Korea and Taiwan. They explained that this could be because adjustment in global IT-related demand was having greater effects on these economies.

With regard to developments in crude oil prices, many members noted that the rise in crude oil prices seemed to have come to a halt recently. Some members, however, said that future developments in crude oil prices required careful monitoring since they were still at historically high levels.

Based on the above assessment of developments in overseas economies, members discussed the recent slight weakening of Japan's exports and production.

Members agreed that the fact that Japan's exports for the July-September quarter were more or less flat was partly attributable to the deceleration of overseas economies, which affected exports with a slight time lag. One member added that exports might also have been affected by temporary factors such as accumulation of inventories awaiting shipment overseas, which had been delayed by the typhoons. A different member said that in some industries with low spare production capacity, for example the steel and chemical industries, exports were declining because suppliers were giving priority to domestic firms over overseas markets. As for the outlook, members agreed that exports were likely to return to their uptrend as overseas economies, particularly those of the United States and China, continued to expand.

Members agreed that the slowdown in the pace of increase in production was caused to a large extent by inventory adjustment of IT-related goods, in addition to the deceleration of overseas economies. Many members expressed the view that it was likely that inventories of IT-related goods would basically need to be adjusted only slightly for the following reasons. First, IT-related goods were being used for more types of goods, such as digital appliances and electronic parts for automobiles, than before. And second, manufacturers had slowed their pace of production at an earlier stage. Some members commented that future developments in inventory adjustment of IT-related goods required close monitoring since the degree of adjustment depended largely on how year-end sales at home and abroad turned out. A few members said that although adjustment of IT-related goods seemed unlikely to become severe, the possibility that it might be prolonged should be noted.

Some members said that, in contrast to IT-related industries, the materials industry continued a high level of production reflecting strong demand, but since many firms were already operating at almost full capacity it would not be easy for production to increase further. One member expressed the view that, although industrial production as a whole was expected to remain on an uptrend, it was reasonable to expect that the pace of increase would be moderate for the time being.

Many members expressed the view that the pace of increase in business fixed investment had recently been moderating, citing the following developments. First, in the GDP statistics, business fixed investment slowed significantly in the July-September quarter from the previous quarter. And second, the pace of increase in shipments of capital goods was slowing due partly to a decrease in shipments of semiconductor manufacturing equipment. Members agreed that, although there had been some fluctuations, it was unlikely that any major change in the uptrend of business fixed investment was taking place, since firms had maintained fairly strong fixed investment plans reflecting high corporate profits, as seen in the results of various surveys. Some members noted that the slowdown in business fixed investment in the GDP statistics might have been caused by temporary factors such as a delay in progress in investment related to construction due to the typhoons. One member suggested the following reasons why business fixed investment was expected to remain firm. First, business fixed investment to expand production capacity could be expected in the materials industry, whose spare capacity for production was limited. And second, some firms were investing in production facilities in Japan rather than overseas with a view to protecting intellectual property. Some members pointed out that construction starts were rising substantially and expressed the view that it was gradually becoming clear that the increase in business fixed investment was spreading to nonmanufacturers.

Many members commented that, in assessing the underlying trend of business fixed investment, it was necessary to closely examine statistics such as the upcoming Financial Statements Statistics of Corporations by Industry, Quarterly, GDP figures revised based on those statistics, and the results of the December Tankan (Short-Term Economic Survey of Enterprises in Japan). One of these members said that it was necessary to continue to pay attention to developments in corporate profits, as many firms were concerned about the risk posed by the recent and possible further rise in the yen and in the prices of crude oil and materials and their effects.

Some members commented on the effect of the recent appreciation of the yen against the U.S. dollar on corporate profits. These members expressed the view that its effect on corporate profits would not be very significant because the current exchange rate did not deviate greatly from the average of exchange rate predictions by enterprises in the September Tankan, and the real effective exchange rate had not changed to any great extent. However, these members said that if the yen appreciated further, it might affect not only corporate profits but also business sentiment.

With regard to the employment and income situation, members generally concurred that household income had stopped declining, as the number of employees was on an uptrend and the year-on-year rate of decline in nominal wages in terms of the average per person was diminishing reflecting the increase in overtime payments. Members also agreed that household income was likely to start increasing gradually, although some members were slightly cautious about the pace. One of these members said that, in a situation where firms continued to restrain labor costs, there was still ample room for them to make use of non-regular employees, such as temporary workers. A different member expressed the view that even in the case where their profits were firm currently, firms were likely to be hesitant about raising wages unless they were very confident about their future performance.

Some members expressed the view that private consumption continued to be steady on the whole, although some sales statistics were somewhat weak due partly to adverse weather conditions. One of these members noted that in the GDP statistics private consumption continued to be relatively strong, and expressed the view that it was steadier than expected in a situation where household income was not increasing.

Members agreed that there was no significant change in the trend of prices. While domestic corporate goods prices continued to rise due to the strengthening of commodity prices at home and abroad and to the improvement in supply and demand conditions, consumer prices had been on a slightly declining trend. One member said that, although the year-on-year rate of change in consumer prices (excluding fresh food, on a nationwide basis) was 0.0 percent in September, it was projected to be negative again from October, because of downward pressure from the year-on-year change in rice prices. This member expressed the view that unless crude oil prices rose further they were unlikely to cause any large further increase in consumer prices, since the rise seemed to a great extent to have already been passed on in prices of some products such as gasoline.

B. Financial Developments

Members agreed that since the previous meeting both short- and long-term interest rates had generally been stable and stock prices had remained firm. One of these members expressed the view that stock prices were firm partly due to the recent upgrading of the credit ratings of many banks and firms. This member continued that, given the upgrading and the fact that the Japan premium was decreasing significantly, it was reasonable to say that the environment necessary for a recovery in the functioning of the money market was being created.

Many members commented on the fact that the U.S. dollar continued to depreciate against the yen. These members expressed the view that this was attributable to increasing concerns in financial markets about structural problems such as the U.S. "twin deficits," and that recent developments could be seen more as a depreciation of the dollar against major currencies in general than an appreciation of the yen alone against the dollar.

Based on the discussion, members agreed that developments in foreign exchange markets and their effects on the economy needed to be watched carefully.

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.

Members discussed the undersubscription that had been observed recently in the Bank's short-term funds-supplying operations, including those for providing funds maturing beyond the fiscal year-end. Many members said that market participants were feeling even more strongly that there was an abundance of liquidity, mainly because anxieties about the financial system had continued to decrease. Regarding the future conduct of market operations, members agreed that it would be necessary to maintain the outstanding balance of current accounts at the Bank within the target range by devising ways to enhance conduct of short-term funds-supplying operations. One member said that it was necessary to carefully monitor developments in financial markets and the financial system, at least until the point when blanket deposit insurance was removed fully in spring 2005. In relation to this point, some members said that if anxieties about the financial system continued to decrease, demand for liquidity might decline further.

One member expressed the view about the quantitative easing policy that it had facilitated firms' balance-sheet adjustments by ensuring financial market stability and maintaining the accommodative environment for corporate financing, and the results were steadily becoming apparent in the improvement in firms' return on capital.

Some members commented on the markets' reaction to the Outlook for Economic Activity and Prices (hereafter the Outlook Report) released in October 2004. These members pointed out that short- and long-term interest rates remained stable after the release of the Outlook Report, and this seemed to suggest that the explanation in it of the thinking behind the Bank's conduct of monetary policy had been digested relatively smoothly by the market. A few of these members said that interest rates had been stable recently partly because market participants did not think that discussion by the Bank about a possible change in the monetary policy framework was imminent, since many of them took a relatively cautious view of the economic outlook compared to the Bank. Given this situation, these members expressed the view that, as the economy continued to recover, the Bank should continue to make efforts to devise better ways of communicating its thinking to market participants.

Some members commented on discussions concerning a possible shift to the chain-linking method for the calculation of the GDP deflator. These members expressed the view that, since the shift was aimed at eliminating the bias in the present fixed-base year method, which tended to overestimate the rate of decline in the deflator more the longer the time that had elapsed since the base year, it would not affect the substance of the Bank's assessments of the economy. On this basis, one member said that the Bank should be very careful when communicating its thinking to market participants to avoid misunderstanding that revisions of the GDP data were related to the recent signs of possible slowdown in the economy.

IV. Remarks by Government Representatives

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

  1. (1) While some weak movements had been seen recently, for example in exports, Japan's economy continued to recover. The government considered that the GDP statistics for the July-September quarter released on November 12, 2004 supported the government's assessment that domestic private demand was firm, as seen in private consumption, which continued to be steady, although some developments warranted attention.
  2. (2) As deflation persisted, it was important to maintain a firm stance to overcome it. In this regard, the Bank had made clear in the Outlook Report released in October 2004 that it would firmly maintain the quantitative easing policy. The government would like the Bank to continue to make clear its firm stance on this.
  3. (3) In order to ensure the sustainability of the current economic recovery led by private demand, the government considered that the role of monetary policy remained vital. The government would therefore like the Bank to deliberate on new measures that would maintain for the foreseeable future market expectations that the accommodative financial environment would continue.

The representative from the Cabinet Office made the following remarks.

  1. (1) Overall, there seemed to be no significant change in the trend of the economy, which continued to recover. On the other hand, attention should be paid to the effects on both the domestic and overseas economies of developments in crude oil prices and to developments in the world economy, among other factors. The price situation overall could be assessed as being still only halfway to overcoming deflation. The most important task for Japan's economy was therefore to overcome deflation swiftly and achieve sustainable growth led by private demand.
  2. (2) To this end, the government had implemented "Basic Policies for Economic and Fiscal Management and Structural Reform 2004" and had been carrying out structural reforms comprehensively and swiftly.
  3. (3) The Bank was determined to firmly maintain the quantitative easing policy. In overcoming deflation, it was essential that the money stock increase in the end, and 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. The government would like the Bank to clearly present a path toward overcoming deflation, as part of further efforts to enhance the transparency of the conduct of monetary policy.

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 November 18, 2004 and the whole report on November 19, 2004.7

  1. 7The English version of the whole report was published on November 22, 2004.

VII. Approval of the Minutes of the Monetary Policy Meeting

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of October 12 and 13, 2004 for release on November 24, 2004.


Attachment
November 18, 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.