Skip to main content

Minutes of the Monetary Policy Meeting

on April 28, 2005
(English translation prepared by the Bank's staff based on the Japanese original)

June 20, 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 Thursday, April 28, 2005, from 8:59 a.m. to 1:04 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
Ms. M. Suda
Mr. S. Nakahara
Mr. H. Haru
Mr. T. Fukuma
Mr. A. Mizuno
Mr. K. G. Nishimura

Government Representatives Present Mr. I. Ueda, Senior Vice Minister of Finance, Ministry of Finance
Mr. J. Hamano, Director General for Economic and Fiscal Management, Cabinet Office
Reporting Staff 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 Department2
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. Kamiyama, Senior Economist, Monetary Affairs Department

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on June 14 and 15, 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. K. Momma was present from 9:09 a.m. to 1:04 p.m.

I. Summary of Staff Reports on Economic and Financial Developments3

A. Money Market Operations in the Intermeeting Period

The Bank conducted market operations in accordance with the guideline decided at the previous meeting on April 5 and 6, 2005.4 The outstanding balance of current accounts at the Bank moved in the 30-35 trillion yen range.

  1. 3Reports were made based on information available at the time of the meeting.
  2. 4The 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. Interest rates on term instruments remained stable at low levels.

Japanese stock prices had fallen reflecting factors such as weak U.S. stock prices. Recently, they were recovering slightly and the Nikkei 225 Stock Average was moving at around 11,000 yen. Long-term interest rates had declined partly reflecting the fall in stock prices, and were recently moving in the range of 1.25-1.30 percent.

The yen had appreciated somewhat against the U.S. dollar, partly reflecting declining expectations that the pace of rate increases by the Federal Reserve would accelerate and increasing expectations for an early revaluation of the renminbi. Recently, the yen was being traded at around 106 yen against the dollar.

C. Overseas Economic and Financial Developments

The U.S. economy continued to expand. Household spending 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. As for East Asian economies, in China both domestic and external demand continued to expand strongly, and the NIEs and ASEAN economies continued to expand at a moderate pace. Economies in the euro area continued to be sluggish.

In U.S. and European financial markets, uncertainty about factors such as future economic developments increased: market concern about a possible U.S. economic slowdown rose temporarily anticipating, for example, the effects of high crude oil prices. Given this situation, stock prices and long-term interest rates declined. In financial markets in many emerging economies, stock prices fell and the yield differentials between their sovereign bonds and U.S. Treasuries expanded.

D. Economic and Financial Developments in Japan

1. Economic developments

Exports of IT-related goods, especially to the NIEs, were picking up, reflecting the fact that global adjustments in IT-related sectors had been proceeding gradually. However, exports as a whole increased slightly, rising by 0.7 percent in the January-March quarter on a quarter-on-quarter basis, partly reflecting sluggish growth in exports to China.

Business fixed investment had been on a rising trend, mainly in manufacturing. Machinery orders (private demand, excluding shipbuilding and orders from electric power companies), a leading indicator of machinery investment, remained on a gradual rising trend on the whole. After increasing by 6.0 percent in the October-December quarter of 2004 on a quarter-on-quarter basis, they inched down in January, but increased by 4.9 percent in February from the previous month. Shipments of capital goods (excluding transport equipment), a coincident indicator of machinery investment, showed high growth in the first half of 2004 and were more or less flat from the latter half after the annual revision of the Indices of Industrial Production.

According to the March survey conducted by the Japan Finance Corporation for Small and Medium Enterprise, the proportion of small firms that made business fixed investment remained at high levels.

As for the employment and income situation, indicators related to job offers and the unemployment rate had been improving, and the number of employees was on an uptrend. With regard to wages, the year-on-year rate of decline of regular payments had been diminishing gradually and special payments had been increasing on a year-on-year basis.

Regarding private consumption, many indicators in the January-March quarter were relatively strong, including sales at department stores and supermarkets, sales of electrical appliances, and sales in the food services industry, partly in reaction to the weakness in the October-December quarter.

Production increased by 1.7 percent in the January-March quarter on a quarter-on-quarter basis, after decreasing by 0.9 percent in the October-December quarter. Production of transport equipment increased, and inventories of electronic parts and devices declined to around the previous year's level. Indices of Tertiary Industry Activity, an indicator of the level of activity in nonmanufacturing industries, rose by 2.1 percent in terms of the monthly average for the January-February period compared to that for the October-December quarter, mainly due to the increase in indices of the wholesale, retail trade, and services industries.

On the price front, although domestic corporate goods prices had been somewhat weak because crude oil prices fell back temporarily toward the end of 2004, they started to increase slightly in March, reflecting the rise in commodity prices, including crude oil prices, at home and abroad, and the improvement in supply and demand conditions. Meanwhile, consumer prices (excluding fresh food) continued to decline slightly on a year-on-year basis, with a decrease of 0.3 percent in March.

According to reports at the meeting of general managers of the Bank's branches and the Regional Economic Report released on April 21, 2005, the economy was on a gradual recovery trend in most regions, although there seemed to be some weak movements.

2. Financial environment

The environment for corporate finance was becoming more accommodative on the whole. The rate of decline in lending by private banks had been diminishing at a moderate pace, although the improvement in credit demand in the private sector seemed to have stopped temporarily while firms continued to reduce their debts. 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 on the whole, and the amount issued remained above the previous year's level.

The year-on-year growth rate of the monetary base increased somewhat to around 3.0 percent in April, 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, given the indicators released since the previous meeting, it was not necessary to change the assessment decided at the previous meeting that the economy continued a recovery trend, albeit with adjustments in IT-related sectors.

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

On the U.S. economy, a few members noted that concerns over a possible economic slowdown and inflation caused by high crude oil prices were emerging, particularly in financial markets, as evidenced by a fall in stock prices. Some members expressed the view, however, that the U.S. economy continued to expand on the whole. For example, household spending and business fixed investment were increasing and the employment situation was improving steadily.

With regard to the Chinese economy, a few members expressed the view that both domestic and external demand continued to expand, as evidenced for example in fixed asset investment, which continued to increase at a relatively fast pace. One member added that, in view of the situation, the Chinese economy should be watched carefully for overheating and a heightening of inflationary pressure.

On European economies, one member pointed out that there was concern over the sustainability of the economic recovery, given factors such as a deterioration in corporate sentiment and sluggishness in production.

Against this background in overseas economies, one member pointed out that Japan's exports continued to increase slightly on a quarter-on-quarter basis.

With regard to domestic demand, a few members expressed the view that business fixed investment remained on a rising trend, as evidenced by the fact that the monthly average of machinery orders for the January-February period had increased from that of the October-December quarter. These members also said that private consumption continued to be steady. Indicators, for example, various sales statistics, had been relatively strong in the January-March quarter, although this was partly due to reaction to the weakness in the October-December quarter caused by factors such as adverse weather.

With regard to production, some members noted that industrial production for the January-March quarter had recorded a relatively high increase of 1.7 percent on a quarter-on-quarter basis, and it was projected to continue to be relatively strong. These members expressed the view that adjustments in IT-related sectors had been progressing gradually, as was evident from the fact that inventories had decreased steadily and the decline in production was coming to a halt, and therefore adjustment pressures seemed to have eased substantially.

On prices, members concurred that there had been no significant change to the underlying trend.

Some members said that domestic corporate goods prices had started to increase slightly due to factors such as a rise in commodity prices at home and abroad, particularly in crude oil prices, and the further increase in the prices of materials, including steel, for which demand had been firm. These members said that consumer prices (on a nationwide basis, excluding fresh food) continued to decline slightly in March on a year-on-year basis, partly due to the effects of the reduction in electricity and telephone charges. These developments indicated that the underlying trend in prices continued: a rise in upstream prices was not passed on to downstream prices. One member expressed the view, however, that, in the current situation where crude oil and materials prices remained at high levels and the economy continued to be on a recovery trend, it was becoming possible for some firms to pass through higher costs.

One member said that the meeting of general managers of the Bank's branches and the Regional Economic Report had provided anecdotal information confirming, for example, the degree of progress in adjustments in IT-related sectors. A different member added that it was important to monitor developments in regional economies in various ways, including use of the report.

B. Financial Developments

On the financial front, some members pointed out that stock prices had fallen and long-term interest rates had been declining in Japan, reflecting factors such as a decline in U.S. stock prices which was due partly to some U.S. firms' weaker-than-expected earnings reports. They also noted that the U.S. dollar was depreciating slightly in the foreign exchange markets. They continued that these market developments seemed to reflect concerns over downside risks to overseas economies, particularly the U.S. economy, and these developments as well as their effects on corporate sentiment should be watched carefully.

One member said that the domestic financial environment remained extremely accommodative.

C. Outlook for Economic Activity and Prices

With regard to the outlook for economic activity and prices, members agreed on the assessment as follows: Japan's economic recovery was likely to gradually gather momentum from the middle of 2005, and growth in fiscal 2005 was expected slightly to exceed the economy's potential growth rate; and in fiscal 2006, the economy was expected to follow a sustainable growth path, albeit at a moderate pace.

One member commented that the above assessment was in line with the basic mechanism of economic recovery which the Bank had expected to operate. A different member said that the economy was likely to remain sensitive to external demand.

Many members said that the pace of growth in overseas economies, particularly the United States and East Asia, was likely to decelerate gradually and they were likely to continue growing at around their potential growth rates. In the case of the U.S. economy, they noted that it had been pointed out that there were concerns about the effects of the rise in crude oil prices and a subsequent increase in inflationary pressures, and that uncertainty regarding financial market developments was increasing because there were large firms in the United States whose credit ratings had been downgraded. These members expressed the view, however, that the momentum for economic recovery continued to be maintained as evident from the fact that household spending and business fixed investment continued to increase.

Against this background in overseas economies, members agreed that Japan's economy was likely to experience a relatively long period of growth, albeit at a moderate pace.

Many members pointed out factors behind the projection that the economy was likely to experience a relatively long period of growth.

First, although at present there was some uncertainty with regard to inventory adjustments in IT-related sectors as they were difficult to predict, adjustments were likely to be completed in or after the middle of 2005 and they were unlikely to be as severe as in 2000-01. This was partly because firms had started inventory adjustments at an early stage while there was a wider range of demand for IT-related goods, such as digital appliances. Second, many members noted that the environment for economic recovery had become firm because there had been considerable progress in the resolution of structural factors, such as excessive investment, debt, and holdings of labor in the corporate sector and also the fragility of the financial system, all of which had delayed the recovery of Japan's economy. And third, some members added that, partly underpinned by the progress in structural adjustments, corporate profits would continue to be high and business fixed investment would remain on an increasing trend, and the positive effects stemming from the performance of the corporate sector would spread to other sectors of the economy, for example, to the household sector through an increase in household income.

Meanwhile, many members referred to firms' business stance, which continued to be cautious, as evidenced in the fact that business fixed investment was kept within the level of cash flow and firms persisted with labor cost restraint. They expressed the view that as a result the pace of recovery of the economy, which was reflected particularly in business fixed investment and private consumption, was likely to remain moderate. These members added that, at the same time, firms' cautious business stance allowed excesses in, for example, business fixed investment or inventory investment to be avoided, and this in turn was likely to lead to a relatively long period of economic growth.

In relation to adjustments in IT-related sectors, one member said that it had been pointed out that there was a possibility that the rate of decline in prices such as those of electronic parts might be accelerating and that worldwide growth in business fixed investment in semiconductor-related sectors was projected to fall in the future. Due attention should be paid to whether this situation suggested slower-than-expected progress in inventory adjustments and weak recovery after they were completed. A different member pointed out that, since ongoing adjustments in IT-related sectors had been achieved mainly by price reductions, attention should be paid to whether production would increase as soon as adjustments were completed. One member said that, since the pace and timing of completion of adjustments differed among IT-related sectors, they were unlikely to recover markedly in the near future.

On prices, members agreed that, in fiscal 2005 and 2006, although domestic corporate goods prices would be sensitive to developments in commodity prices at home and abroad, such as crude oil prices, they were likely to continue increasing, albeit at a slower pace than in the first half of 2004.

Many members expressed the view that the year-on-year change in consumer prices was likely to become positive in fiscal 2006, after remaining around zero percent in fiscal 2005 due partly to the continued effects of the decline in rice prices and the reduction in electricity and telephone charges. This was against the background that the disparity between developments in economic activity and prices was basically likely to continue given that the rise in energy and materials prices was expected to be substantially offset by increases in productivity of producers of goods downstream and persistent constraints on labor costs.

One member said that, since their capacity to absorb the rise in energy and materials prices by reducing unit labor cost was declining, firms might pass the rise in energy and materials prices on if they were increasingly perceived as likely to remain high. A different member attached importance to the fact that there were movements in people's inflation expectations in various surveys in a situation where the underlying trend in gasoline and other prices could be increasing.

One member referred to developments in housing expenses, particularly housing rents, which had a relatively large weight in the consumer price index (CPI) and showed large regional differences, as a key to assessing developments in consumer prices. The member continued that, since housing rents employed in the statistics were revised gradually, it should be noted that developments in the CPI could diverge from those in economic activity.

Many members raised the following as factors that could cause economic activity to deviate either above or below the projections given in the above outlook: developments in energy and materials prices; developments in the U.S. and Chinese economies; and developments in domestic private demand.

With regard to developments in energy and materials prices, a few members said that they might stay at high levels for some time, as producers were cautious about making investment to expand production capacity. Some members commented on the effects of the rise in crude oil and other prices on economic activity and on overall price developments. They said that, if crude oil prices remained at high levels, they could cause economic activity in Japan, as well as in the United States and China, to deviate below the projections of the outlook via declines in corporate profits and households' real purchasing power, although Japan's high energy efficiency gave the country an advantage. They added that the effects of a rise in inflationary expectations on international financial markets required close monitoring.

Some members commented on the U.S. economy that, if inflationary pressures were to build in the economy, there would be concern that the subsequent changes in monetary policy might have negative effects on economic activity via, for example, a slowdown in housing investment as well as on the global economy, particularly emerging economies, via developments in financial markets. A different member pointed out that the rise in inventories could dampen imports from Japan and other Asian economies.

As for the Chinese economy, many members said that the sustainability of economic growth was the focus of attention, as there was a risk that fixed asset investment might overheat and there were also structural problems, such as an infrastructural bottleneck arising, for example, from the paucity of electricity supply, and the large income gap between metropolitan and rural areas. They added that the effects of the situation in China, such as demonstrations, on Japan's exports and direct investment to China also required close monitoring. One member noted that attention should be paid to the risk that the increasing competitiveness of Chinese firms might make it difficult for Japanese firms to increase exports to China. A few other members commented that the effects of future developments regarding China's currency system on the Chinese economy and on international financial markets should also be closely monitored.

One member said that, since at present there was considerable uncertainty with regard to the projected outlook for fiscal 2006, it would be appropriate to provide in the Outlook for Economic Activity and Prices (hereafter the Outlook Report) a scenario for the case where the assumed risk factors in fact materialized. Against this view, a different member said that it would be difficult to provide a common scenario because individual members' evaluations of risks diverged more than their projections of the outlook.

Regarding the conduct of monetary policy, some members said that, in a situation where it provided a projection in the April Outlook Report that consumer prices were likely to remain around zero percent on a year-on-year basis in fiscal 2005 and were expected to increase slightly on a year-on-year basis in fiscal 2006, the Bank should explain its thinking on the future conduct of monetary policy.

These members expressed the view that it would be appropriate to mention in the Outlook Report that economic activity could deviate either above or below the projections of the outlook and it was not certain whether or not there would be occasion to change the present framework of the quantitative easing policy during the projection period for the April Outlook Report. It should also be stated that, however, assuming that the outlook's projections regarding economic activity and prices would in fact materialize, it was likely that this possibility would gradually increase over the course of fiscal 2006. In addition, as in the October 2004 Outlook Report, it would be appropriate to clearly restate the Bank's basic stance that, if upward pressure on prices continued to be to a large extent contained, this would likely give the Bank latitude in changing the policy framework and in conducting monetary policy thereafter.

With regard to the above points, one member said that, in explaining its thinking regarding the future conduct of monetary policy, the Bank should give a clearer definition of the conditions under which the Bank would terminate the quantitative easing policy as well as explicitly explain its stance on the conduct of monetary policy in the period leading up to the termination and after it. A different member expressed the opinion that it would be difficult to indicate the Bank's conduct of monetary policy through fiscal 2006 in the Outlook Report because the economy was projected to recover only at a moderate pace and there was also a risk that economic activity might deviate below the projections.

Some members presented their views on the effects of the quantitative easing policy. One member said that it was effective not only in securing financial system stability but also for overcoming deflation. In response to this, a different member admitted that the policy had indeed been effective in preventing the economy from falling into a deflationary spiral, but added that this had been achieved by the provision of ample liquidity contributing to the prevention of a credit crunch stemming from anxiety about financial system stability. A few other members said that the effects of the quantitative easing policy differed according to the economic and price situation. For example, in a situation where anxiety about financial system stability had subsided, the policy effects stemming from the Bank's commitment in terms of policy duration were playing a larger role than those stemming from the ample liquidity provision. They expressed the view that it was important to provide a clear explanation that there was no relationship between the effect of the Bank's policy commitment and the amount of liquidity provided by the Bank.

One member said that the Bank should explain thoroughly that the primary emphasis in the Outlook Report was on the basic mechanism of future developments in economic activity and prices and the specific figures in the Policy Board members' forecasts were merely supplements.

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" and at the same time maintain the current framework of quantitative easing policy aimed at overcoming deflation, giving reasons such as that liquidity demand among financial institutions was decreasing and the disadvantages of maintaining a huge outstanding balance of current accounts were becoming relatively significant. A different member said that it would be appropriate to lower the target range partly because the stimulative effects on the economy of the Bank's ample provision of liquidity were small in a situation where liquidity demand was falling.

Against these views, many members said that it was appropriate to keep the current target range, partly because the current account balance could still be maintained within the target range and in the present situation the Bank should continue to carefully examine economic and price developments.

Many members commented on how the Bank should conduct money market operations in the future in a situation where market participants were feeling strongly that there was an abundance of liquidity.

One member noted that the effects of the quantitative easing policy were becoming stronger in financial markets in terms of influencing the behavior of financial institutions through the Bank's provision of an amount of liquidity far exceeding demand. The member expressed the view that maintaining the current target range had positive significance particularly since Japan's economy was at a temporary pause.

Some members said that liquidity demand among financial institutions had been declining significantly, and the possibility could not be ruled out that it might become difficult to maintain the current account balance within the current target range depending on future developments. One member commented that, although the Bank had been maintaining the current account balance within the target range by devising ways to enhance its conduct of money market operations, the conduct of the operations was under great strain, as evident in the extended maturity of market operations. On this basis, these members expressed the view that further discussion would be required concerning whether it was necessary to respond technically to the situation in financial markets, based on assessment of the level of stability of the financial system, developments in liquidity demand, and developments in economic activity and prices.

These members added that, even in a situation where such a response was needed, the Bank should continue the current framework of the quantitative easing policy, which was based on firmly maintaining the three conditions based on the CPI in the Bank's commitment to continue the policy and accordingly continuing to provide ample liquidity significantly exceeding the amount of required reserves.

IV. 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. Meanwhile, deflation persisted. The effects on the economy of crude oil prices, which remained at high levels, and developments in the stock market should be monitored closely.
  2. (2) Under these circumstances, the utmost efforts continued to be necessary to overcome deflation and ensure the sustainability of the economic recovery led by private demand. The government would like the Bank to firmly maintain the current quantitative easing policy.
  3. (3) In the April Outlook Report to be released after the meeting, there was mention of the possible timing of changing the current framework of the quantitative easing policy. The government, however, had not yet determined a concrete plan for the conduct of economic policy for fiscal 2006, and there were various uncertainties regarding the outlook for economic activity and prices, such as developments in overseas economies. Given these factors, the government understood the timing of changing the policy framework described in the Outlook Report as merely indicating a possibility based on the assumption that the outlook's projections regarding economic activity and prices would materialize. The government would therefore like the Bank to appropriately conduct monetary policy aimed at overcoming deflation and ensuring sustainable economic recovery led by private demand, carefully taking into account developments in the domestic and overseas economies as well as in financial markets. Since there was a risk that the release of the April Outlook Report might create a situation where market speculation about the Bank's policy stance could easily arise, the government would like the Bank to 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 further 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) It was appropriate, from the viewpoint of enhancing the transparency of conduct of monetary policy, that the Bank had extended the projection period of the April Outlook Report by one year to include the next fiscal year as well as this fiscal year. Regarding the outlook for economic activity and prices, the economy was expected to follow a sustainable growth path, albeit at a moderate pace. At the same time, there were various factors which could cause downward deviation of the economy, including price developments, and therefore the government considered that it was important to continue policy efforts together with the Bank, including firm continuation by the Bank of the quantitative easing policy, until deflation was overcome. The government understood that, as the Bank had explained on occasion, the raising of the target of the outstanding balance of current accounts and the maintenance of it were aimed mainly at overcoming deflation as soon as possible, while also dealing with concerns about financial system stability. 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 for effective provision of liquidity.

V. 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." A different member said that it was appropriate to lower the target, although the member would not submit a proposal.

As a result, the following proposal was 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 by majority vote.

Votes for the proposal: Mr. T. Fukuma and Mr. A. Mizuno.

Votes against the proposal: Mr. T. Fukui, Mr. T. Muto, Mr. K. Iwata, Ms. M. Suda, Mr. S. Nakahara, Mr. H. Haru, and Mr. K. G. Nishimura.

To reflect the majority 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, Ms. M. Suda, Mr. S. Nakahara, Mr. H. Haru, and Mr. K. G. Nishimura.

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

Mr. T. Fukuma dissented from the above proposal for the following reasons. First, liquidity demand stemming from concern about financial system stability, which had been a significant factor in decisions to raise the target range for the outstanding balance of current accounts, was declining. Second, given this situation, the disadvantages of maintaining a huge outstanding balance of current accounts at the Bank outweighed the advantages: for example, the process of restoring the proper functioning of financial markets would be hindered, and inflation risk would increase in the future through erosion of financial market discipline. Third, since considerable time was required to restore the proper functioning of financial markets, the target range should be lowered slowly and carefully, giving due consideration to liquidity demand among financial institutions. And fourth, it was possible to support the ongoing economic recovery, and thereby overcome deflation, by maintaining the zero interest rate environment based on the Bank's commitment in terms of policy duration.

Mr. A. Mizuno dissented from the proposal for the following reasons. First, since the stimulative effects on the economy of the Bank's ample provision of liquidity were small in a situation where lending was not increasing, a lowering of the target range by a certain amount that was consistent with the decline in liquidity demand would not cause negative effects on the economy. Second, a lowering of the target range would not cause large disruptions in financial markets because market participants were already expecting it. And third, the Bank needed to make efforts to normalize its monetary policy because the current quantitative easing policy lacked flexibility.

VI. Discussion on the Outlook for Economic Activity and Prices

Members discussed the draft of the Outlook for Economic Activity and Prices (consisting of "The Bank's View" and "The Background"), and put "The Bank's View" 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 immediately after the meeting and the whole report on May 2, 2005.

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

Votes against the proposal: None.

VII. Approval of the Minutes of the Monetary Policy Meeting

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of March 15 and 16, 2005 for release on May 9, 2005.

Attachment
April 28, 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.