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Minutes of the Monetary Policy Meeting

on April 5 and 6, 2005
(English translation prepared by the Bank's staff based on the Japanese original)

May 25, 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, April 5, 2005, from 2:00 p.m. to 4:04 p.m., and on Wednesday, April 6, from 9:00 a.m. to 1:02 p.m.1

Policy Board Members Present Mr. T. Fukui, Chairman, Governor of the Bank of Japan
Mr. T. Muto, Deputy Governor of the Bank of Japan
Mr. K. Iwata, Deputy Governor of the Bank of Japan
Mr. K. Ueda
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. 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. 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 May 19 and 20, 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.
  2. Mr. I. Ueda was present on April 6.
  3. Mr. M. Ishii was present on April 5.

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 March 15 and 16, 2005.5 The outstanding balance of current accounts at the Bank moved in the 32-36 trillion yen range throughout the period, including March 31, the day of the fiscal year-end book closings.

  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.

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, except on the last business day of the fiscal year, March 31, when it rose temporarily to 0.022 percent. Interest rates on term instruments generally remained at low levels.

Japanese stock prices had fallen somewhat, as U.S. stock prices had weakened and Japanese economic indicators released for February were generally weaker than expected. The Nikkei 225 Stock Average was recently moving at around 11,500 yen.

Long-term interest rates had declined reflecting the release of weaker-than-expected economic indicators and the fall in stock prices. Recently, they were moving in the range of 1.30-1.35 percent.

The U.S. dollar had been appreciating against major currencies reflecting the view that the pace of rate increases by the Federal Reserve would accelerate. The yen had depreciated recently to the 107-108 yen level against the dollar.

C. Overseas Economic and Financial Developments

The U.S. economy continued to expand. Private consumption and business fixed investment continued to increase, and the number of employees was on an improving trend. The inflation rate was rising at a slow but steady pace.

In the euro area, there were some positive movements in exports, but the momentum for economic recovery was weak as sluggishness in production and employment persisted.

As for East Asian economies, in China both domestic and external demand continued to expand strongly. The NIEs and ASEAN economies continued to expand at a moderate pace. However, the South Korean economy was still sluggish.

In U.S. financial markets, against the background of the rise in energy prices and tightening of domestic supply and demand conditions, long-term interest rates rose and stock prices declined partly because concern about inflation had heightened somewhat among market participants with the release of the statement of the Federal Open Market Committee (FOMC). In Europe, both stock prices and long-term interest rates had been more or less flat on the whole.

In financial markets in many emerging economies, against the background of the changes in the U.S. financial environment, stock prices fell, currencies depreciated, and the yield differentials between their sovereign bonds and U.S. Treasuries expanded.

D. Economic and Financial Developments in Japan

1. Economic developments

Exports were starting to pick up because global adjustments in IT-related sectors had been proceeding gradually, and overseas economies had been on an expanding trend. Although exports had decreased in February in reaction to the increase in January, the monthly average for the January-February period showed an increase of 0.5 percent compared to that for the October-December quarter of 2004. A breakdown of exports by region and type of goods indicated that exports to East Asia and those of IT-related goods were beginning to pick up.

Regarding developments in the corporate sector, as indicated in the March Tankan (Short-Term Economic Survey of Enterprises in Japan), although business sentiment seemed somewhat cautious, estimated profits for fiscal 2004 recorded a sharp double-digit increase from the previous fiscal year in firms of all sizes in all industries, whether large or small and in manufacturing or nonmanufacturing, and those for fiscal 2005 were expected to show a continuation of the uptrend. Under these circumstances, business fixed investment plans for fiscal 2004 showed relatively high growth, particularly in manufacturing industries, in the March Tankan as in the December 2004 Tankan, and those for fiscal 2005, including the plans of small firms, were generally slightly above average for this time of year. Shipments of capital goods (excluding transport equipment), a coincident indicator of machinery investment, continued to increase steadily in the October-December quarter and the January-February period. Moreover, construction starts (floor area, private, nondwelling use), a leading indicator of construction investment, continued their uptrend, albeit with some large fluctuations recently.

Production had been more or less flat, as inventory adjustments continued in IT-related sectors. Industrial production showed a rise of 1.4 percent in the monthly average for the January-February period compared to that for the October-December quarter, after showing somewhat weak movements for two consecutive quarters. A breakdown showed that production of transport equipment increased and that of electronic parts and devices seemed more likely to have stopped declining.

As for the employment and income situation, job offers and the unemployment rate had been improving, and the number of employees was on an uptrend. The fall in wages was gradually coming to a halt in terms of the average per person, as special payments had been increasing recently while the rate of decline of regular payments had been diminishing. Judging from these developments and the increase in the number of employees, it was clear that household income had stopped declining. While firms were likely to continue restraining labor costs, household income was expected to increase gradually, as corporate profits continued to increase and firms' perception that they had excess labor dissipated.

Private consumption had been steady. Sales at department stores and supermarkets fell back in February partly in reaction to the surge in January. Averaged over the January-February period, they increased compared to the monthly average for the October-December quarter when they were affected by adverse weather and natural disasters. The number of new passenger-car registrations remained firm on the whole, and sales of electrical appliances, particularly digital appliances and personal computers, continued to trend steadily upward. Private consumption was projected to recover gradually, as household income was expected to show signs of a gradual increase.

On the price front, international commodity prices were rising. Against this background, domestic commodity prices, particularly those of petroleum products and nonferrous metals, were increasing somewhat. Domestic corporate goods prices had recently been somewhat weak because crude oil prices fell back temporarily toward the end of 2004. However, looking forward, domestic corporate goods prices were likely to start increasing again, reflecting the rise in commodity prices at home and abroad. Consumer prices (excluding fresh food) had been declining slightly on a year-on-year basis, partly due to the reduction in electricity and telephone charges. The year-on-year rate of decline increased slightly in February compared to January, with a decrease of 0.4 percent. As for the outlook, consumer prices were projected to continue falling slightly, partly because the effects of the reduction in electricity and telephone charges would continue.

2. Financial environment

The environment for corporate finance was becoming more accommodative on the whole. The lending attitude of private banks was becoming more accommodative, and that of financial institutions as perceived by firms, including small firms, had also 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, the yield differentials between Japanese government bonds (JGBs) and corporate bonds, including those with low credit ratings, had been at very low levels.

The year-on-year growth rate of the monetary base was 2.0 percent, and that of the money stock (M2+CDs) continued to be around 2.0 percent.

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 it was still at a pause, it continued a recovery trend. They also agreed that the economy would emerge from this pause before long and gradually move to a sustainable growth path, as the recovery mechanism had been operating. Many members mentioned the following as the basis for this view. First, adjustments in IT-related sectors had been making progress. Second, corporate profits and business fixed investment had been firm. And third, the recovery was spreading from the corporate sector to the household sector, as seen in the fact that household income had stopped declining.

Members agreed that overseas economies, particularly those of the United States and China, continued to expand.

Many members expressed the view that the U.S. economy continued to expand, supported by the increase in private consumption and business fixed investment. Some members noted that the year-on-year rate of increase in producer prices and consumer prices was rising steadily and inflationary expectations were growing slightly, reflecting such factors as an improvement in supply and demand conditions resulting from the economic expansion over a long period, the rise in prices of crude oil and materials, and a recovery in the pricing power of firms.

Some members said that the Chinese economy continued to expand strongly with fixed asset investment continuing to increase at a relatively fast pace. One of these members raised a heightening of inflationary pressure as a risk factor for the economy. A different member said that attention should be paid to the fact that it was difficult to discern what imbalances existed in the Chinese economy, because measures taken to contain the overheating of the economy had been focusing on directly controlling prices and on administrative guidance. This member also expressed the view that, while there were inflationary risks, a problem of excess capital stock might arise in the future as business fixed investment made over the past few years was gradually increasing production capacity.

With the continuing expansion of overseas economies, members agreed that, on average, Japan's exports were starting to pick up from being more or less flat, and would be on a rising trend. One member said that the reason why exports had declined in February after a large increase in January might have been that the seasonal effects of the Chinese New Year holidays had not been properly adjusted for, and noted that exports averaged over the January-February period had picked up. This member said that a breakdown of exports showed that those of IT-related goods to East Asia had been increasing, and this indicated that global adjustments in IT-related sectors had been making progress.

As for production and inventories, members agreed that production had been more or less flat, as inventory adjustments continued in IT-related sectors.

One member said that, although the degree of progress differed according to the type of product, adjustments in IT-related goods taken as a whole were likely to be completed by around June 2005. This member added that the momentum for recovery in IT-related demand might be only moderate even after the completion of the adjustments, given that the growth rate of shipments of personal computers in Japan had been decreasing, and the book-to-bill ratio--the ratio of orders to shipments--of semiconductor manufacturing equipment in North America, a leading indicator for IT-related sectors, had been declining. Another member noted that an increase in inventories was a negative factor for firms in industries whose product prices were constantly falling, such as firms in IT-related sectors, whereas in industries that were directly affected by a rise in materials prices it suggested a proactive business stance. This member said that this kind of microeconomic point of view was important when analyzing developments in inventories in the recent environment where product prices were decreasing while materials prices were increasing.

Many members expressed the view that business fixed investment had been on a rising trend, reflecting increased corporate profits. In relation to this, many members noticed a disparity in the results of the March Tankan between the strength in firms' business plans, such as profit estimates and business fixed investment plans, and the cautiousness in business sentiment. Some members said that the recent deterioration in business sentiment had simply reflected the fact that the economy was at a pause against the background of the adjustments in IT-related sectors. A few other members said that the deterioration in the diffusion index for business conditions in the March Tankan was particularly significant in the processing industry, and this seemed to reflect concern about downward pressure on corporate profits in a situation where materials prices continued to rise, but firms had difficulty in passing on the cost to the price of their products. One member noted that the deterioration in the diffusion index for business conditions should not be overlooked, as there was a strong correlation between industries whose diffusion index for business conditions had deteriorated from the December Tankan and those whose profit estimates and business fixed investment plans had been revised downward. A different member added that the importance of the deterioration in the diffusion index should not be underestimated, given the deterioration particularly in some materials industries and cautiousness in firms' estimates of sales and profits for fiscal 2005.

Meanwhile, one member commented on the longer-term outlook for business fixed investment in terms of the capital stock cycle. This member said that how far the ratio of capital stock to GDP would rise was an important factor affecting the outlook for business fixed investment, given that the expected economic growth rate was unlikely to increase for the time being and the rate of elimination of capital stock was on a downward trend. The member then expressed the view that developments in business fixed investment in and after fiscal 2006 were likely to be moderate. The member added, however, that business fixed investment might already have been in a recovery phase since bottoming out in around 2002, in terms of the medium- to long-term construction investment cycle. Another member said that business fixed investment plans were relatively strong in the March Tankan, and explained that this was because, given intensifying global competition and ample cash flow, firms were shifting to a stance of expanding their business through technological development and improvement of productivity, as it was becoming harder for them to improve their profitability further solely by restructuring. A different member noted that the momentum for recovery after the economy emerged from the pause depended on the strength of firms' forward-looking commitment, and firms' stance on business fixed investment, which indicated the strength of their commitment, was a significant factor in predicting future economic developments.

With regard to the employment and income situation, members concurred that it was clear that household income had stopped declining, since the number of employees was on an uptrend and wages had almost stopped falling. Some members noted that the diffusion index for employment conditions for firms of all sizes in all industries in the March Tankan indicated for the first time in twelve years that the number of firms that perceived their holdings of labor as "insufficient" slightly exceeded those that perceived them as "excessive," and said that firms' perception that they had excess labor was generally dissipating. One member pointed out, as a factor behind the fact that household income had stopped declining, that the increase in the proportion of part-time workers had been slowing. Given this development, this member also expressed the view that household income was likely to increase at a moderate pace. A different member said that a large increase in firms' dividend payments had contributed to a rise in income in the household sector, and the total of increases in dividends and wages was likely to more than offset an increase in the burden of income tax and social security costs to be paid by individuals in fiscal 2005. Another member said, however, that judging from the results of the Tankan and other indicators that showed an insufficiency of employees at firms, it seemed that household income had improved only slightly, and thus future improvement in household income would depend on developments in corporate profits.

Members concurred that private consumption had been steady in the employment and income situation described above. One member pointed out that according to the March Tankan, the diffusion index for business conditions in industries related to private consumption, such as retailing and also restaurants and accommodations, remained on an improving trend.

On prices, many members commented on the recent increase in prices of crude oil and materials, and its effects on domestic corporate goods prices and consumer prices. With regard to the recent rise in crude oil prices, some members noted that Dubai crude oil prices had been moving at around the historical high against the background of an increase in demand worldwide, particularly in China and India. One of these members said that prices of commodities, including crude oil, and materials had become inflated due to shortages on the supply side caused by limited spare production capacity, and were likely to continue rising for some time. Based on these discussions, members agreed that domestic corporate goods prices were likely to start increasing again in the immediate future.

Members concurred that, given the increase in productivity and the continuing tendency of firms to restrain labor costs, a rise in consumer prices remained unlikely. One member said that special factors, such as the reduction in electricity and telephone charges against the background of deregulation, had been exerting downward pressure on consumer prices. Excluding the effects of these factors, the year-on-year rate of decline in the consumer price index (CPI) had basically been diminishing. A different member commented that it was natural that the pace of decline in the CPI was diminishing more slowly because the output gap appeared to have expanded temporarily in a situation where Japan's economy was still at a pause. A few other members added that it was necessary to monitor carefully the environment surrounding prices for any change because recent developments-the tightening of labor markets, the halt in the fall in wages, and the depreciating trend of the yen against the U.S. dollar-could all contribute to a rise in prices.

Some members commented on developments in land prices, referring to published land prices data. These members noted that average land prices in central Tokyo had increased for the first time in 15 years, and said that land prices seemed to be bottoming out. One member pointed out that investment in land was steady and transactions in real estate investment trusts were active, and said that attention should be paid to the effects of land prices bottoming out on overall investment and consumption. A different member added that real estate investment by foreign investors had become active, and developments in asset prices should be carefully monitored.

B. Financial Developments

On the financial front, members agreed that the financial environment remained extremely accommodative.

Many members said that the money market had been stable before and after the full removal of blanket deposit insurance on April 1, 2005, including on March 31, and there had been no substantial shift of funds between deposits at different types of financial institutions. One member expressed the view that it was important to continue monitoring developments in financial markets and the behavior of depositors, because it was still only a few days after the full removal of blanket deposit insurance and there might be some effects on them.

Some members expressed views on the rise in U.S. long-term interest rates. One member pointed out that the recent rise in U.S. long-term interest rates, weak stock prices, and the appreciation of the U.S. dollar against major currencies were partly caused by the view that the pace of rate increases by the Federal Reserve would accelerate reflecting the statement of the FOMC released in March. This member added that these developments in U.S. financial markets were unlikely to immediately cause instability in international financial markets at present, but required close monitoring. A different member expressed the view that it was necessary to pay attention to the risk that the rise in U.S. long-term interest rates might negatively affect Japan's economy through the negative effects on the U.S. economy, emerging economies, and stock markets worldwide.

With regard to the recent developments in corporate finance, one member said that the extremely accommodative situation had continued, as seen in the fact that firms had ample on-hand liquidity and that the financial positions of firms in the March Tankan were recovering to close to the high level during the bubble period in the second half of the 1980s. This member added that how such ample on-hand liquidity should be used strategically was an important financial issue for firms.

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

On the monetary policy stance for the immediate future, the majority of 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.

Against this majority view, one member said that it would be appropriate to lower the target range for the outstanding balance of current accounts at the Bank to "around 27 to 32 trillion yen." This member explained the reasons as follows. First, the Bank had so far raised the target range as an emergency measure primarily aiming at ensuring the stability of financial markets, in response to financial institutions' heightened concern over liquidity risk. The fact that the full removal of blanket deposit insurance had been smoothly implemented indicated that banks' liquidity risk had decreased significantly and the soundness and stability of the financial system had been restored. Second, in this situation, it would be appropriate to lower the target range, which had been raised as an emergency measure, and clearly show a long-term direction toward normal monetary policy while the Bank was still continuing to take the stance of maintaining the quantitative easing policy framework in accordance with the commitment in order to overcome deflation. And third, if the Bank maintained the current target range of "around 30 to 35 trillion yen" even after the financial environment had improved substantially and the full removal of blanket deposit insurance had been implemented, the process of restoring the proper functioning of the money market might be hindered. There was also a potential risk that financial market discipline might be eroded in the future, and public confidence in the central bank might be impaired as a consequence.

Against this view, some members said that although there might have been some cases in the past where the Bank had raised the target range primarily because it was determined to secure the stability of financial markets and the financial system, the ultimate aims of the Bank's quantitative easing policy had always been to prevent prices from continuing to fall and prepare a basis for sustainable economic growth. These members concluded that it was not appropriate to consider a lowering of the target range as an immediate step after the full removal of blanket deposit insurance. On this basis, most members agreed that for the time being the Bank should maintain the current target range for the outstanding balance of current accounts at the Bank, and at the same time closely monitor the level of stability of the financial system and the resulting developments in liquidity demand, as well as the economic and price situation.

Some members explained their thinking with regard to the Bank's conduct of money market operations in the future. One member said that financial institutions' liquidity demand might decrease further, and in such a situation, the Bank should first examine whether it would be feasible to maintain the outstanding balance of current accounts within the current target range of "around 30 to 35 trillion yen" without damaging the functioning of the market mechanism, and then consider, if necessary, what policy measures to take, including a lowering of the target range. A different member expressed the view that, when it became difficult to maintain the outstanding balance within the current target range, one option could be to lower the target range while ensuring that this would not negatively affect the process of overcoming deflation.

Another member said that, now that the financial system had moved from a crisis management situation to a more normal state, a gradual reduction of the target range while maintaining the quantitative easing policy framework might be worth considering in the future, in order to restore the proper functioning of the money market and give the Bank room to take appropriate monetary policy measures. This member added that the bond market seemed to have started to factor in a lowering of the target range at some point.

One member said that, although the possibility of inflation or an excessive rise in asset prices in the future caused by maintaining the extremely easy monetary policy could not be ruled out, the risk was still outweighed at present by the negative effects that any acceleration of deflation could have. This member then expressed disapproval of the idea of lowering the target range for the following reason. It was true that financial institutions were having difficulty in investing their surplus funds as they were feeling more strongly that there was an abundance of liquidity, but this could be considered as a sign that the mechanism of the quantitative easing policy, through which the Bank had been working to influence the behavior of financial institutions by supplying more liquidity than they needed, had started to operate as intended. A different member expressed the view that, given the current situation where the economy was still at a pause and there was uncertainty about the momentum for economic recovery, the Bank should maintain the outstanding balance of current accounts within the current target range to underpin the recovery through monetary policy.

One member said that, although the three conditions in the Bank's commitment to continue the quantitative easing policy were an important intermediate target for the conduct of monetary policy, the possibility could not be ruled out that the Bank might review them in the future in order to achieve its ultimate goals of monetary policy, namely, price stability and sustainable economic growth. In response to this, a different member expressed the view that the three conditions were fully consistent with the ultimate goals and the Bank should firmly maintain them.

IV. Extension of the Projection Period in the Outlook for Economic Activity and Prices

Members discussed an extension of the projection period covered by the Bank's Outlook for Economic Activity and Prices (hereafter the Outlook Report), ahead of the next Monetary Policy Meeting on April 28, 2005 when the Policy Board would discuss the April Outlook Report and release it.

Many members expressed the view that it was appropriate to extend the projection period of the April Outlook Report, which currently covered only the fiscal year in which it was released, by one year to include the following fiscal year. These members gave the following reasons. First, given the time lag before the effects of monetary policy became apparent, the Bank's communication of its thinking based on the Policy Board members' projections of economic activity and prices for a period of about two years would enhance the transparency of its conduct of monetary policy. And second, many central banks released forecasts with a projection period of around two years. Some of these members said that the most important purpose of releasing the Outlook Report was to explain clearly to the public the Policy Board's assessment regarding the basic mechanism of future developments in economic activity and prices. They continued that, therefore, if the projection period was extended, the Bank should communicate its thinking with the greatest care in order to prevent market participants from giving undue attention only to specific figures in the Policy Board members' forecasts, because they merely supplemented the assessment.

In response to this, some members expressed disapproval of the idea of extending the projection period at present, although they agreed in principle that the transparency of the Bank's conduct of monetary policy required further enhancement. These members explained that in the present situation, where the Bank conducted monetary policy in accordance with the commitment to continue the quantitative easing policy based on the CPI, an extension of the projection period would inevitably cause market participants to focus undue attention on the forecasts of the CPI. They continued that, in such a situation, releasing forecasts for fiscal 2006 that were not sufficiently accurate could constitute inappropriate communication about the future conduct of monetary policy, including a possible termination of the quantitative easing policy, and therefore it would not necessarily enhance the transparency of the conduct of monetary policy.

V. Remarks by Government Representatives

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

  1. (1) Although the government considered that on the whole Japan's economy was in a recovery phase, there were still some movements that could be seen as minor adjustments in its recovery, for example, slightly weaker economic indicators released for February than for January. Meanwhile, deflation persisted. The effects of the recent surge in crude oil prices on the economy should also be closely monitored.
  2. (2) Under these circumstances, the government considered that ensuring the sustainability of the economic recovery led by private demand and overcoming deflation were the important tasks to be tackled through its policy efforts together with the Bank, and that the utmost efforts to achieve these aims continued to be necessary.
  3. (3) The government would like the Bank to maintain the current policy and continue to give market participants and the public a strong message that it would maintain the monetary easing policy to overcome deflation.

The representative from the Cabinet Office made the following remarks.

  1. (1) Japan's economy was recovering at a moderate pace, while some weak movements continued to be seen. The government expected that through its policy efforts together with the Bank the economy would make progress toward overcoming deflation in fiscal 2005. The government would accelerate and expand structural reforms in each sector, in order to realize a nominal economic growth rate of around 2 percent or higher in and after fiscal 2006.
  2. (2) 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 therefore like the Bank to implement more effective monetary policy through 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.

VI. Votes

Based on the above discussions, the majority of 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.

One member, however, said that the member would like to propose that the Bank should lower the target for the outstanding balance of current accounts at the Bank from "around 30 to 35 trillion yen" to "around 27 to 32 trillion yen" for the reasons the member had given earlier.

With regard to the projection period of the April Outlook Report, the majority of members agreed that the projection period should be extended by one year to cover the current fiscal year and the following fiscal year, and that this change should be made public.

As a result, the following proposals were submitted and put to the vote.

Mr. T. Fukuma proposed the following guideline for money market operations for the intermeeting period ahead:

The Bank of Japan will conduct money market operations, aiming at the outstanding balance of current accounts held at the Bank at around 27 to 32 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.

The proposal was defeated with one vote in favor, eight against.

To reflect the majority view, the chairman formulated the following two proposals.

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 1).

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, and Mr. A. Mizuno.
Votes against the proposal: Mr. T. Fukuma.

Mr. T. Fukuma dissented as he had submitted a different proposal as mentioned earlier.

The Chairman's Policy Proposal on the Release of a Public Statement on Extension of the Projection Period in the Outlook for Economic Activity and Prices:

The decision concerning extension of the projection period in the April Outlook Report will be made public by the attached statement (see Attachment 2).

Votes for the proposal: Mr. T. Fukui, Mr. T. Muto, Mr. K. Iwata, Mr. K. Ueda, Mr. H. Haru, and Mr. T. Fukuma.
Votes against the proposal: Ms. M. Suda, Mr. S. Nakahara, and Mr. A. Mizuno.

Ms. M. Suda dissented from the above proposal for the following reasons. In the present situation where the Bank conducted monetary policy in accordance with the commitment to continue the quantitative easing policy based on the CPI, an extension of the projection period would inevitably cause market participants to focus undue attention on specific figures in the Policy Board members' forecasts of prices in the April Outlook Report. In such a situation, releasing forecasts for fiscal 2006 that were not sufficiently accurate could constitute inappropriate communication about the future conduct of monetary policy, including a possible termination of the quantitative easing policy. She added that it was difficult to judge at this point whether extension of the projection period to two fiscal years without changing the way the Policy Board members' forecast figures were presented would enhance the transparency of the conduct of monetary policy. Therefore, the Bank should discuss thoroughly not only extension of the projection period but also a wide range of issues including the way the figures were presented.

Mr. S. Nakahara dissented from the proposal for the reasons Ms. M. Suda had explained and the following. He said that it was not appropriate to extend the projection period and release the forecast figures for two fiscal years at present, explaining as follows. First, extending the projection period of the April Outlook Report to two fiscal years because of the time lag before the effects of monetary policy became apparent might cause misunderstanding among the public that the forecast figures were the Bank's numerical target for monetary policy. And second, many uncertainties lay ahead regarding the GDP statistics and the CPI, such as technical problems associated with their compilation and revision of calculation methods in the future.

Mr. A. Mizuno dissented from the proposal for the following reasons. First, in the current situation where the Policy Board had not yet reached a consensus on a process for terminating the current quantitative easing policy, releasing the members' projections of economic activity and prices covering a period of two fiscal years in the April Outlook Report would not substantially enhance the transparency of the conduct of monetary policy. Second, in a situation where discussion on the reform of the tax system was expected to continue, releasing the projections for fiscal 2006 on the basis that macroeconomic policies would remain unchanged would not be very useful to market participants. And third, the practice of other central banks, such as the Federal Reserve and the European Central Bank (ECB), of releasing projections for a period of more than one year was not necessarily appropriate for the Bank while it was conducting its unconventional monetary policy.

VII. 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 April 6, 2005 and the whole report on April 7, 2005.6

  1. 6The English version of the whole report was published on April 8, 2005.

Attachment 1
April 6, 2005
Bank of Japan

At the Monetary Policy Meeting held today, the Bank of Japan decided, by majority 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.

Attachment 2
April 6, 2005
Bank of Japan

Extension of the Projection Period in the Outlook for Economic Activity and Prices

The Bank of Japan has decided to extend the projection period by one year in the April Outlook for Economic Activity and Prices. Accordingly, the Bank will release its outlook for the current fiscal year and the following fiscal year in the April as well as the October issues.