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Minutes of the Monetary Policy Meeting

on January 18 and 19, 2005
(English translation prepared by the Bank's staff based on the Japanese original)

February 22, 2005
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 Tuesday, January 18, 2005, from 2:00 p.m. to 3:51 p.m., and on Wednesday, January 19, from 9:00 a.m. to 12:28 p.m1

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
Ms. M. Suda
Mr. S. Nakahara
Mr. H. Haru
Mr. T. Fukuma
Mr. A. Mizuno

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 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. T. Kato, Senior Economist, Monetary Affairs Department
Mr. N. Takeda, Senior Economist, Monetary Affairs Department

  • The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on February 16 and 17, 2005 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.
  • Mr. I. Ueda was present on January 19.
  • Mr. M. Ishii was present on January 18.

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 December 16 and 17, 2004.5 The outstanding balance of current accounts at the Bank moved in the 31-35 trillion yen range.

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

Long-term interest rates were moving at around 1.4 percent recently, as on the one hand Japanese stock prices had climbed toward the end of 2004, and on the other views about the outlook for Japan's economy continued to be cautious.

Japanese stock prices had risen due mainly to purchases by foreign investors reflecting steady developments in U.S. stock prices. Recently, the Nikkei 225 Stock Average was moving at around 11,500 yen.

The yen had appreciated against the U.S. dollar mainly because the U.S. trade deficit marked a record high. Recently, it was being traded in the range of 102-105 yen.

C. Overseas Economic and Financial Developments

The U.S. economy continued to expand. Domestic private demand components such as household spending and business fixed investment continued to increase and the number of employees was on an improving trend. In addition, Christmas sales seemed to have been rather solid. As for the outlook, the economy was expected to continue expanding.

In the euro area, the momentum for economic recovery was weak. This was because sluggishness in production and employment persisted due partly to the appreciation of the euro.

As for East Asian economies, in China both domestic and external demand continued to expand strongly. The year-on-year rate of increase in the year-to-date total of fixed asset investment remained at high levels. Production was also growing at a fast pace. The NIEs and ASEAN economies continued to expand, although the pace of expansion was slowing somewhat. The Indian Ocean tsunami on December 26, 2004 had had devastating effects on Indonesia and other countries, but the general view was that the direct damage to economic activity in those countries would be relatively small.

Turning to U.S. and European financial markets, long-term interest rates in the United States increased slightly due partly to the release of stronger-than-expected economic indicators, while in European countries they continued to move at almost the same level as at the time of the previous meeting. U.S. stock prices rose toward the end of 2004, but were weakening since the beginning of 2005. Stock prices edged up in European countries due partly to a halt in the appreciation of their currencies.

In financial markets in many emerging economies, stock prices and the yield differentials between their sovereign bonds and U.S. Treasuries were steady even after the Indian Ocean tsunami.

D. Economic and Financial Developments in Japan

1. Economic developments

Despite an increase in October and November, exports were judged to have continued to be more or less flat given that, among other things, temporary factors had contributed to an increase in exports of automobiles and iron and steel, and those of IT-related goods remained weak. Exports were projected to follow an uptrend, since it was expected that overseas economies would continue to expand, particularly those of the United States and East Asia, and that adjustment pressures in IT-related sectors would ease.

Business fixed investment had been on a rising trend. Machinery orders (private demand, excluding shipbuilding and orders from electric power companies), a leading indicator of business fixed investment, surged in November, after declining in October by 3.4 percent compared with the monthly average for the July-September quarter. With regard to construction investment, construction starts (floor area, private, nondwelling use) continued an uptrend on the whole. Business fixed investment seemed to be continuing its uptrend, albeit with some fluctuations, as evident, for example, in the results of the December Tankan (Short-Term Economic Survey of Enterprises in Japan), which indicated that firms were being aggressive in their business fixed investment plans. As for the outlook, business fixed investment was expected to continue to be on an increasing trend, since domestic and external demand, as well as corporate profits, were projected to increase.

Private consumption had been steady. The number of new passenger-car registrations increased in the July-September quarter, but was more or less flat in the October-December quarter, inching down 0.4 percent from the previous quarter. Demand for new passenger cars itself seemed to be firm, given that there was a delay in registrations in December due to production being delayed by a lack of steel products. Sales of electrical appliances continued to trend steadily upward. However, sales at department stores and supermarkets and indicators for services consumption were somewhat sluggish, partly due to adverse weather. Private consumption was projected to recover gradually, as household income was expected to show signs of a gradual increase.

With regard to production, the monthly average for the October-November period was somewhat weak compared with that for the July-September quarter. Production was under downward pressure from adjustments in IT-related sectors, as seen in a decrease in production of electronic parts and devices due to inventory adjustments. In the materials industry where demand was strong, it was difficult for firms to increase production due to their limited spare production capacity for many materials. In addition, a lack of steel products was constraining production of transport equipment. As for the outlook, production was expected to gradually return to an uptrend. This was based on the projection that, although the effects of inventory adjustments in IT-related sectors would remain for some time, overseas economies would continue to grow and the foundation for a recovery in domestic demand would be solid. There was, however, considerable uncertainty about the degree of progress in inventory adjustments in IT-related sectors and about final demand for IT-related goods. Developments in IT-related sectors therefore required close monitoring.

As for the employment and income situation, job offers and the unemployment rate had been improving, albeit with some fluctuations. The number of employees was also on an uptrend. Wages were still on a downtrend in terms of the average per person, but the rate of decline had been diminishing, particularly in special payments. Based on this and the increase in the number of employees, it was becoming clear that household income had stopped declining. While firms were likely to continue restraining labor costs, household income was expected to show signs of a gradual increase since corporate profits were increasing and the extent of excess labor as perceived by firms was continuing to fall.

On the price front, domestic corporate goods prices had been rising due to the strengthening of commodity prices at home and abroad and to the improvement in supply and demand conditions. On the other hand, consumer prices (excluding fresh food) declined by 0.2 percent year on year in November, a marginally larger decline than in October, mainly due to a reduction in public utility charges. Consumer prices were projected to continue falling slightly on a year-on-year basis, as supply and demand conditions were likely to remain loose for the time being, although they were improving, and also because of the reduction in public utility charges.

Based on the above developments, it was judged that Japan's economy continued a recovery trend, although there seemed to be somewhat weak movements, mainly in production.

2. Financial environment

The improvement in credit demand in the private sector seemed to have stopped temporarily, in an environment where firms continued to reduce their debts. Under these circumstances, the rate of decline in lending by private banks had not changed recently, although their lending was still on an improving trend. 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.

With regard to financing through capital markets, the issuing environment for CP and corporate bonds continued to be favorable and the amount outstanding of CP and corporate bonds issued continued to be above the previous year's level. In the secondary market, credit spreads on corporate bonds, including those with low credit ratings, had been at very low levels.

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 year-on-year growth rate of banknotes in circulation was at the 2.0-3.0 percent level, bolstered mainly by the introduction of the new series of banknotes in November 2004.

  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 current state of Japan's economy, members concurred that, although there seemed to be somewhat weak movements, mainly in production, the economy was just at a temporary pause and it continued a recovery trend. They also agreed that the economy would continue to recover. Some members said that the general view in the reports on regional economies at the meeting of general managers of the Bank's branches was in line with this assessment.

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

Many members expressed the view that the U.S. economy continued to expand after moving out of its temporary soft patch, on the basis of the following factors. First, the growth rate of real GDP for the July-September quarter had been revised upward. Second, Christmas sales seemed to have been rather solid. And third, corporate profits remained high and the number of employees was improving.

With regard to the Chinese economy, many members said that both domestic and external demand continued to expand strongly, as seen for example in fixed asset investment, which continued to show relatively high growth. One member noted that firms' incentive to increase exports of products, particularly steel products for construction, was strengthening in China, as growth of construction investment was slowing slightly as a result of measures taken by the Chinese government to contain the overheating of the economy.

Based on the projection that overseas economies would continue to expand, members agreed that Japan's exports were likely to trend upward. Some members, however, noted that supply-side constraints in materials-related sectors and the degree of recovery in global IT-related demand needed to be examined closely to assess the future pace of increase in exports. This was because the recent increase in exports of iron and steel and automobiles was partly due to temporary factors and developments in IT-related sectors had been weak.

Many members said that the increase in business fixed investment was expected to continue for the following reasons. First, machinery orders surged in November. Second, corporate profits were expected to remain high. And third, firms in IT-related sectors, which were currently undergoing adjustments, did not seem to be postponing implementation of their business fixed investment significantly. One member commented that construction investment might have entered a recovery phase that would last for a long time again, reflecting factors such as progress in adjustments of excess capital stock and debt, which had been taking place over a long period since the bursting of the bubble. A different member expressed the view that increases in business fixed investment were spreading to nonmanufacturers and small and medium-sized manufacturers. A few members, on the other hand, noted that, since the results of some surveys suggested that small firms' profits were deteriorating, attention should continue to be paid to whether the increase in business fixed investment, including that of small firms, would continue in and after fiscal 2005.

Members agreed that private consumption had been steady. Some members said that sales of electrical appliances, which included year-end sales, were on an uptrend and demand for automobiles was firm. As for the outlook, many members said that private consumption was projected to recover gradually, as household income was expected to show signs of a gradual increase with the extent of excess labor as perceived by firms falling. A few members said that attention should be paid to the fact that consumer confidence had stopped improving and to the effects on private consumption of factors such as the reform of the tax system.

Members agreed that production continued to show somewhat weak movements recently, because IT-related sectors were undergoing inventory adjustments and it was difficult for firms in materials-related sectors to increase production due to firms' limited spare capacity. Many members concurred that the current inventory adjustments in IT-related sectors would not be as severe as at the time of the bursting of the IT bubble in 2000-01 and were likely to be completed in or after spring 2005, since IT-related goods were being used in more types of goods and inventory adjustments of IT-related goods had started at a relatively early stage in terms of the levels of inventories accumulated. In relation to this, a few members added that it was difficult at this stage to judge when the inventory adjustments in IT-related sectors would be completed because the degree of progress differed according to the type of goods. One member commented that even though the effects of inventory adjustments in IT-related sectors were unlikely to be severe, IT-related sectors could not be the driving force of the economy even after the adjustments had been completed. This was because there was a projection that global demand for mobile phones and semiconductors would be level through fiscal 2005 and price competition was intensifying in the digital appliance sector.

With regard to the employment and income situation, many members concurred that it was becoming clear that household income had stopped declining, since the number of employees was on an uptrend and wages had almost stopped falling while various indicators reflecting labor market conditions, such as job offers and the unemployment rate, continued to improve.

On prices, members agreed that, although domestic corporate goods prices had so far been rising, due to the strengthening of commodity prices at home and abroad and the improvement in supply and demand conditions, the pace of increase would become moderate mainly because crude oil prices had stopped rising. As for consumer prices, members said that they had been declining slightly on a year-on-year basis, and agreed that the rate of decline would basically diminish gradually. However, these members also commented that it might accelerate temporarily due mainly to the effects of the reduction in fixed telephone charges. In relation to this, one member expressed the view that consumer prices might be pushed down by about 0.3 percent by the reduction in fixed telephone charges and in electricity charges in view of the liberalization of the electricity market. A different member said that there was a possibility that the amount by which the output gap had narrowed might be less than expected due to the weaker-than-expected economy and a possible increase in the potential growth rate as a result of an improvement in resource allocation following the progress in the disposal of nonperforming loans. The member expressed the view that the strength of the future economic recovery would therefore be an important factor affecting consumer prices.

B. Financial Developments

Members concurred that the financial environment remained extremely accommodative. Regarding the fact that stock prices were showing some positive movements while long-term interest rates had been flat since the end of 2004, one member expressed the view that the recent developments in stock prices seemed to reflect market participants' perception of the economy whereas long-term interest rates were moving in accordance with supply-demand factors rather than factors related to economic developments. Another member commented on lending by financial institutions that, as financial institutions were increasing their risk-taking capacity, they were becoming active in extending loans, for example, loans to small firms and real estate loans.

Some members said that despite the upcoming full removal of blanket deposit insurance in April, anxieties about the financial system were subsiding and there seemed to be no substantial shift of funds, for example between deposits at different financial institutions. In this regard, one member said that smooth implementation of the full removal of blanket deposit insurance would be a positive factor for the sustainability of the economic recovery.

With regard to the narrowing of credit spreads in, for example, the corporate bond market, one member said that the Bank's continuation of its low interest rate policy caused the yield curve to flatten and credit spreads to narrow, and thus investors and financial institutions might be exposed to significant interest rate and credit risks. A different member said that with ample liquidity in the market, some global investors were fairly optimistic about risks.

As for recent developments in land prices, a few members said that attention should be paid to the fact that land prices in Tokyo metropolitan wards were starting to rise recently.

C. Interim Assessment

Given the above assessment of economic activity, prices, and financial developments in Japan, members agreed on the following interim assessment in relation to the Outlook presented in the Outlook for Economic Activity and Prices released in October 2004. First, Japan's economy had deviated slightly below the Outlook recently, but was expected to be broadly in line with it. And second, with regard to prices, domestic corporate goods prices were expected to be in line with the Outlook. Consumer prices were also expected to be basically in line with the Outlook, although they might deviate slightly below it depending on the effects of the reduction in fixed telephone charges.

As risk factors to which attention should be paid for some time, many members raised developments in the foreign exchange market and crude oil prices, and the progress of adjustments in IT-related sectors. One member said that developments in prices of steel products also warranted attention. Regarding the foreign exchange market, some members said that cyclical factors such as economic activity and interest rate differentials had exerted upward pressure on the U.S. dollar, whereas the market's view regarding the U.S. "twin deficits" had exerted downward pressure. A few members expressed the view that the possibility that inflation could accelerate globally should be borne in mind as a risk factor.

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.

With regard to money market operations for the immediate future, members agreed that, although undersubscription had been observed more frequently in the Bank's market operations recently as market participants were feeling more strongly that there was an abundance of liquidity due mainly to the further decrease in anxieties about the financial system, it would be appropriate to maintain the outstanding balance of current accounts at the Bank within the current target range by devising ways to enhance its money market operations. One member said that in the present situation where the economy was at a temporary pause maintaining the current target range had great significance.

In relation to the conduct of monetary policy in the future, one member noted that financial institutions' incentive to maintain large current account balances at the Bank had been decreasing due to the decline in liquidity risk as a result of the enhanced soundness of the financial system. The member said that, given that the primary reason given by the Bank for raising the target range for the outstanding balance of current accounts at the Bank had been to support the economic recovery through maintenance of the stability of financial markets, it would be appropriate to carefully lower, within the quantitative easing policy framework, the target range by the amount signaled as surplus to their needs by market participants as shown in the undersubscription in the Bank's funds-supplying operations. A different member expressed the view that the balance between the positive and negative effects of maintaining the current target range might change if liquidity risk in financial markets further decreased after the full removal of blanket deposit insurance scheduled for April 2005. Another member noted that attention should be paid to the effects of the flow of treasury funds between banks and the government on money market operations. Some members, however, expressed the view that it would be difficult to give a convincing explanation for a lowering of the target range based solely on the fact that concern about the financial system stability had decreased, since the current quantitative easing policy had been adopted with the aim of overcoming deflation including dealing with concern over financial system stability. One member said that with regard to adjustment of the target range, there were points that needed to be carefully examined, such as the risk that a lowering of the target range might be perceived as a tightening of monetary policy at a time when the economy was at a temporary pause. A different member said that the target range should be lowered only when the economy was strong, and therefore the Bank should examine ways to allow current account balances to move in line with temporary changes in the supply and demand for funds without lowering the target range. One member said that, regarding the monetary policy stance for the immediate future, there seemed to be a consensus among members that the Bank should firmly maintain the quantitative easing policy. The member continued that further discussions were necessary, with thorough consideration of the economic situation and market participants' reaction, regarding whether it was appropriate to adjust the target range according to changes in liquidity demand in the market and whether such adjustment would be understood by market participants and the public.

IV. Remarks by Government Representatives

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

  1. (1) With regard to the budget for fiscal 2005, the government had indicated its stance of firmly maintaining fiscal discipline by reviewing both revenue and expenditure. Despite pressures to increase expenditures, particularly in the area of social security, it had contained general expenditures below the level of the previous fiscal year's budget for the first time in three years, reduced planned issuance of new financial resource bonds to below the level of the previous fiscal year for the first time in four years, and improved the primary balance of the general account as in fiscal 2004. This was achieved by implementing the reform package relating to three issues (reform of state subsidies, transfer of tax resources from the central to local governments, and reform of local allocation tax) and cutting expenditures without making any exceptions. In terms of revenue, the government was planning to reduce the across-the-board income tax credit, which had been in place since 1999, by half.
  2. (2) Japan's economy continued to recover on the whole, although some weak movements were seen. Meanwhile, deflation persisted. The government would therefore like the Bank to continue to make clear its stance that it would firmly maintain the quantitative easing policy. Moreover, 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. Therefore, the government would also 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) Japan's economy was recovering at a moderate pace recently, while some weak movements were seen. As for recent price developments, moderate deflation was continuing, as seen in the fact that consumer prices remained on a slightly declining trend and the GDP deflator continued to decline by 1.0-2.0 percent, while on the other hand domestic corporate goods prices had been rising.
  2. (2) The government was planning to make Cabinet decisions on "Economic Outlook for FY 2005 and Basic Economic and Fiscal Management Measures" and "Structural Reform and Medium-Term Economic and Fiscal Perspectives--FY 2004 Revision" on January 21, 2005. In "Economic Outlook for FY 2005 and Basic Economic and Fiscal Management Measures," the government indicated that it expected that in fiscal 2005 the economy would make progress toward overcoming deflation, through the moderate economic recovery led mainly by private demand and through policy efforts together with the Bank. In "Structural Reform and Medium-Term Economic and Fiscal Perspectives--FY 2004 Revision," the government indicated that it would accelerate and expand structural reforms in each sector, in order to realize an economic growth path with a nominal growth rate of around 2 percent or higher, as expected after the intensive adjustment period.
  3. (3) The government would like the Bank to continue with its decisive monetary easing in order to ensure that deflation was overcome, communicating closely with the government. 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. The government would also 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, Ms. M. Suda, Mr. S. Nakahara, Mr. H. Haru, Mr. T. Fukuma, and Mr. A. Mizuno.
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 January 19, 2005 and the whole report on January 20, 2005.6

  1. 6The English version of the whole report was published on January 21, 2005.

VII. Approval of the Minutes of the Monetary Policy Meeting

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of December 16 and 17, 2004 for release on January 24, 2005.

Attactthment

January 19, 2005
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.