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Minutes of the Monetary Policy Meeting

on May 19 and 20, 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, May 19, 2005, from 2:00 p.m. to 4:27 p.m., and on Friday, May 20, from 9:00 a.m. to 12:42 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 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. T. Sakamoto, Director, Financial Markets Department4
Mr. H. Hayakawa, Director-General, Research and Statistics Department
Mr. K. Momma, Deputy Director-General, Research and Statistics Department
Mr. A. Horii, Director-General, International Department
Secretariat of the Monetary Policy Meeting Mr. K. Akiyama, Director-General, Secretariat of the Policy Board
Mr. T. Takei, Adviser to the Governor, Secretariat of the Policy Board
Mr. K. Murakami, Director, Secretariat of the Policy Board
Mr. K. Kamiyama, Senior Economist, Monetary Affairs Department
Mr. K. Masaki, Senior Economist, Monetary Affairs Department

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on 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. I. Ueda was present on May 20.
  3. Mr. M. Ishii was present on May 19.
  4. Mr. T. Sakamoto was present on May 20 from 12:22 p.m. to 12:40 p.m.

I. Summary of Staff Reports on Economic and Financial Developments5

A. Money Market Operations in the Intermeeting Period

The Bank conducted market operations in accordance with the guideline decided at the previous meeting on April 28, 2005.6 The outstanding balance of current accounts at the Bank moved in the 31-35 trillion yen range.

The Bank had been achieving the target range for the outstanding balance of current accounts at the Bank by devising ways to enhance its conduct of money market operations, for example, by extending and diversifying the maturities of funds-supplying operations and by choosing instruments in a flexible manner to attract bidders. However, the Bank might have difficulty in achieving the target range, depending on the results of financial institutions' bidding in the Bank's funds-supplying operations, since a shortage of funds in current accounts at the Bank was expected to occur through early June due to the issuance of Japanese government securities (JGSs), tax payments, and other factors.

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

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 generally remained at low levels.

Japanese stock prices had risen slightly, partly reflecting the rise in U.S. stock prices, but they did not gather momentum thereafter. Recently, the Nikkei 225 Stock Average was moving at around 11,000 yen.

Long-term interest rates had declined to the 1.20-1.25 percent level reflecting concern about the possibility of a slowdown in U.S. economic growth, but increased slightly thereafter, in part reflecting stronger-than-expected U.S. economic indicators. Recently, they were moving in the range of 1.25-1.30 percent.

The yen had appreciated 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, and then declined through mid-May reflecting the stronger-than-expected U.S. economic indicators. Recently, the yen was at the 107-108 yen level against the dollar.

C. Overseas Economic and Financial Developments

The U.S. economy continued to expand steadily. With regard to final demand, while net exports made a substantial negative contribution, domestic private demand continued to grow solidly, although at a somewhat slower pace. The economy could be assessed as moving toward a soft landing with economic growth at around its potential growth rate. The year-on-year rate of increase in the core consumer price index (CPI) had been rising recently, albeit at a moderate pace, and the CPI was unchanged in April from March.

The euro area economy continued to recover at a moderate pace, but sluggishness in production and employment persisted.

As for East Asian economies, in China both domestic and external demand continued to expand strongly. The increase in imports had been slowing, apparently due to such factors as inventory adjustments in some industries and a decline in the pace of increase in new investment brought about by the government's measures to contain the overheating of the economy. The NIEs and ASEAN economies continued to expand at a moderate pace. The South Korean economy was sluggish, but some positive movements had been observed recently reflecting the government's measures to boost the economy.

In U.S. and European financial markets, investors were taking a somewhat cautious view of firms' creditworthiness, as seen in the fact that credit risk premiums had increased partly in response to the downgrading of the credit ratings of a few automobile manufacturers and rumors of significant losses at hedge funds. Stock prices had rebounded somewhat in the United States and Europe, in part due to the stronger-than-expected U.S. economic indicators, but increases were generally small. Long-term interest rates had been on a downward trend in both the United States and Europe.

In financial markets in many emerging economies, stock prices rose and the yield differentials between their sovereign bonds and U.S. Treasuries narrowed, partly because uncertainty about future developments in the U.S. economy had weakened to some extent.

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. However, with sluggish growth in exports to China, overall exports increased only marginally in the January-March quarter. As for the outlook, exports were expected to be on a rising trend, albeit moderate, in a situation where adjustment pressures in IT-related sectors would ease further.

In the corporate sector, business fixed investment had been on a rising trend reflecting high corporate profits. Shipments of capital goods (excluding transport equipment) exhibited high growth during the first half of 2004, but had been more or less flat from the latter half. Machinery orders (private demand, excluding shipbuilding and orders from electric power companies), a leading indicator of machinery investment, were virtually flat in the January-March quarter. Construction investment was on an uptrend, and construction starts (floor area), a leading indicator of construction investment, continued to increase, albeit with some fluctuations. As for the outlook, the increase in business fixed investment was expected to continue, since increases in both domestic and external demand, as well as high corporate profits, were projected to continue.

Production was starting to increase gradually as inventory adjustments were progressing in IT-related sectors. Industrial production showed a relatively large increase in the January-March quarter on a quarter-on-quarter basis after being somewhat weak for the July-September and the October-December quarters of 2004. On the other hand, shipments rose only marginally and inventories increased somewhat. One of the factors behind this was a temporary accumulation of inventories of automobiles awaiting shipment overseas due to the low availability of ships and dock space. As for the outlook, production was expected to continue its uptrend, but the pace of increase was likely to be only moderate for some time judging from developments in final demand for IT-related goods.

As for the employment and income situation, indicators related to job offers and the unemployment rate had been improving and the number of regular employees in the Monthly Labour Survey continued to increase on a year-on-year basis. The fall in wages was gradually coming to a halt in terms of the average per person, with special payments starting to increase reflecting high corporate profits and with the rate of decline in regular payments on a diminishing trend. Judging from these developments and the increase in the number of employees, household income had clearly stopped declining. As for the outlook, household income was expected to increase gradually, as firms' perception that they had excess labor had almost dissipated and corporate profits continued to be high, although firms were likely to continue restraining labor costs.

Private consumption had been steady. It was generally weak in the October-December quarter, affected by adverse weather and natural disasters, but in the January-March quarter many indicators showed improvement partly in reaction to the weakness in the previous quarter. The number of new passenger-car registrations, sales at department stores in Tokyo, and some other indicators had been steady in April. Private consumption was likely to continue recovering steadily with the gradual increase in household income.

On the price front, international commodity prices remained at high levels, although they had declined slightly. Domestic corporate goods prices had recently increased substantially, mainly due to the effects of the rise in crude oil prices. They were likely to continue increasing, although at a slower pace. 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. They were projected to continue falling slightly on a year-on-year basis for some time.

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. 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 3.0 percent, and that of the money stock (M2+CDs) continued to be around 2.0 percent.

II. Acceptance of Financial Institutions Entrusting the Operations Involved in Settlement of Securities to Other Financial Institutions as Eligible Counterparties in the Bank's Money Market Operations

A. Staff Proposal

Given the moves among financial institutions to entrust the operations involved in settlement of securities to other financial institutions, and among other financial institutions to take on those operations as clearing banks, the staff proposed that the Bank amend the Selection Procedure for Counterparties in Outright Purchase/Sale of Short-Term Japanese Government Securities and Purchase/Sale of Japanese Government Securities with Repurchase Agreements, as well as the Selection Procedure for Counterparties in Outright Purchase/Sale of Japanese Government Bonds, to accept financial institutions that entrusted other financial institutions with settlement of JGSs and funds accompanying money market operations conducted by the Bank such as purchase/sale of JGSs with repurchase agreements as eligible counterparties in the Bank's operations.

B. Discussion by the Policy Board and Vote

Members voted unanimously to approve the proposal and agreed that the decision should be made public.

III. 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 had been steadily improving toward emerging from a temporary pause, it was still too early to judge that the economy had definitely moved out of it. Many members mentioned the following as the basis for this view. First, although steady progress in inventory adjustments had been confirmed in IT-related sectors, exports and capital goods shipments in those sectors had not shown any marked improvement yet. And second, high growth in GDP for the January-March quarter was to a certain extent due to an increase in inventories and a rebound following temporary weakness in private consumption in the October-December quarter reflecting such factors as typhoons and the unusually warm winter. A few members pointed out that some leading indicators still suggested a possibility that the economy might enter a recession, and that stock prices and long-term interest rates had been somewhat weak recently reflecting a cautious view of future developments in the economy.

As for the outlook, members agreed that with the progress in adjustments in IT-related sectors, recovery in the economy as a whole would gradually become clear. A few members said that particular attention should be paid to the extent to which the pace of growth in private consumption would increase with a recovery in household income. One member expressed the view that with high corporate profits being maintained, the economy was likely to continue recovering at a moderate pace led by domestic demand, driven by both business fixed investment and private consumption. A different member said that given the fluctuations in the statistics and other factors, it would be premature at present to say that the main driving force of the economic recovery was shifting from exports and business fixed investment to private consumption. Nevertheless, if private consumption increased in a situation where it was gradually becoming clear that the increase in income was spreading from the corporate sector to the household sector, the projection in the Outlook for Economic Activity and Prices (hereafter the Outlook Report) that the economy would gradually move to a sustainable growth path would be more likely to materialize.

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

On the U.S. economy, members concurred that it continued to expand steadily, with the pace slowing to a level around its potential growth rate. Members generally agreed that judging from the core CPI in April and other indicators, the risk of inflation had not increased significantly, although inflationary pressures persisted. With regard to developments in U.S. financial markets after the downgrading of the credit ratings of a few automobile manufacturers, members agreed that so far the downgrading had been perceived as a matter specific to these firms, and investors had not become excessively cautious about the creditworthiness of firms in general. As for the outlook, a few members said that although the economy was still likely to continue expanding, attention should be paid to such downside risks as the possibility that the risk-taking stance of investors would become more cautious and that business and consumer confidence would deteriorate. A few other members commented that the risk of the U.S. economy entering a recession was still not negligible, given that leading indicators were weak and long-term interest rates were on a downward trend.

With regard to the Chinese economy, members agreed that both domestic and external demand continued to expand strongly. Some members pointed out that the pace of growth in China's imports was slowing reflecting such factors as temporary inventory adjustments, an increase in local production capacity, and the government's measures to contain the overheating of investment. A few members said that the effects of the government's measures were gradually spreading, as evidenced by the recent deceleration in growth of direct investment, for example, and that future developments in the Chinese economy would continue to require careful attention, as it had various structural problems.

Members generally agreed that in a situation where overseas economies continued to expand, Japan's exports were starting to pick up and would continue to increase. One member commented that if domestic demand started to recover steadily, growth in exports might be sluggish regardless of developments in overseas economies, since there was only limited spare production capacity in some industries.

With regard to production and inventories, members concurred that production was increasing gradually, as inventory adjustments were progressing steadily in IT-related sectors. One member said that the pace of increase in production was likely to be only moderate for some time, given that high growth in production for the January-March quarter was partly due to an increase in shipbuilding, which was subject to substantial fluctuations, and that shipbuilding might decline in the near future in reaction to the increase.

Many members commented that inventory adjustments in IT-related sectors were progressing steadily, as seen in the fact that inventories of electronic parts and devices were declining consistently year on year in a situation where shipments had not declined further. With regard to the recent increase in inventories in non-IT-related sectors, one member expressed the view that this was due to factors such as an increase in inventories of automobiles awaiting shipment overseas, and that adjustment pressure was basically small. A few other members commented that adjustment pressure on inventories in both IT-related and non-IT-related sectors might increase, judging from developments, for example, in final demand and in inventories in the United States and China, and the situation should therefore be followed closely.

Members agreed that business fixed investment remained on a rising trend, reflecting high corporate profits. A few members expressed the view that although some indicators, for example, shipments of capital goods, were not strong, the Financial Statements Statistics of Corporations by Industry, Quarterly and some indicators to be released in the near future could confirm that the rising trend in business fixed investment was firm.

One member commented that corporate profits could be expected to remain on an uptrend, although the pace of increase would slow, given that increases in various costs, such as the surge in energy and materials prices, could be offset by streamlining efforts by firms, and firms' ability to produce new goods and services was increasing. A different member said that as some firms, particularly in nonmanufacturing sectors, had projected that their earnings for fiscal 2005 ending in March 2006 would decrease, the sustainability of the uptrend in corporate profits should be viewed with reservations.

As for the employment and income situation, members concurred that household income had clearly stopped declining, because the number of employees had been on an increasing trend and wages had almost stopped declining. One member expressed the view that the improving trend in the employment and income situation would continue for some time, citing such sources as the Annual Survey of Corporate Behavior (Fiscal 2004) released in late April 2005, which indicated that firms' projections for the change in the number of employees in next three years were positive for the first time since fiscal 1992.

Members agreed that private consumption had been steady against the background of the employment and income situation. A few members said that it was worth noting that recently released indicators relating to private consumption were relatively strong, and factors behind this were not only a reaction to the decline in the October-December quarter but also a pickup in household income and an improvement in consumer confidence. One of these members expressed the view that if the cycle of replacement demand for automobiles, which had been lengthening, started to shorten, private consumption and eventually domestic demand might become stronger than was expected at present.

On prices, members agreed that domestic corporate goods prices were likely to continue increasing for the time being reflecting the rise in commodity prices at home and abroad, although it depended on future developments in the commodity prices. Members also agreed that consumer prices had been declining slightly on a year-on-year basis, and this would continue for some time partly due to the continuing effects from the reduction in electricity and telephone charges.

A few members expressed the view that since deflationary expectations were definitely dissipating in a situation where wages had stopped declining, it was reasonable to expect that the situation of rising domestic corporate goods prices and declining consumer prices would change in the near future. One member commented that attention should be paid to price revisions from April 2005. A different member pointed out that the rate of decline in consumer prices had been diminishing significantly while that in the private consumption deflator, which was calculated by the chain-linking method, had not diminished much, commenting that the possible effects of the upcoming revision in August 2006 of the base year for calculating the CPI should not be underestimated.

As for land prices, one member said that, although an upsurge in land prices in commercial areas tended to attract attention, those in residential areas were more important in relation to inflationary expectations. This member added that fundamental conditions in residential land were improving, as seen in the fact that condominium rents were gradually picking up recently, and that developments in land prices in residential areas were in line with developments in fundamental values.

B. Financial Developments

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

A few members said that short- and long-term interest rates remained stable after the release of the April Outlook Report, and this indicated that the explanation in the report of the Bank's thinking on the future conduct of monetary policy had basically been digested smoothly by the market. Nevertheless, these members added that given that some market participants took a more cautious view of the economic outlook than the Bank, there was a possibility that they did not regard the Bank's recent discussions in relation to the monetary policy framework as applying to the near future. Some members said that stock prices had not reacted much to the fact that GDP statistics for the January-March quarter were substantially stronger than market expectations, and this might be an indication that market participants were noting fluctuations in the GDP statistics and remained very cautious about the economic outlook. One member commented that developments in financial markets required close monitoring, as they could fluctuate significantly reflecting such factors as economic indicators and speculation about the Bank's conduct of monetary policy.

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

On the monetary policy stance for the immediate future, members agreed that, in the current situation where consumer prices had been declining slightly on a year-on-year basis, the Bank should firmly maintain the current framework of the quantitative easing policy-providing ample liquidity significantly exceeding the amount of required reserves and maintaining the policy with the commitment in terms of policy duration based on the CPI.

Members discussed whether it was necessary to change the current guideline for money market operations to reflect the situation in financial markets as seen, for example, in the results of financial institutions' bidding in the Bank's operations. They concurred that as concern about financial system stability was abating, liquidity demand among financial institutions was declining and they were feeling more strongly that there was an abundance of liquidity in financial markets.

Given this situation, a few members expressed the view that it would be appropriate to lower the target range for the outstanding balance of current accounts. One of these members said that it would be appropriate to lower it to "around 27 to 32 trillion yen," mainly for the following reasons. First, maintaining a huge outstanding balance of current accounts at the Bank regardless of the change in the financial environment would entail significant disadvantages: for example, the process of restoring the proper functioning of financial markets would be hindered and there would be a risk of causing an erosion of financial market discipline. And second, 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. Another member said that it would be appropriate to lower the target range, mainly for the following reasons. First, the Bank's ample provision of liquidity could not be expected to stimulate the economy in a situation where concern about financial system stability had abated. And second, the Bank needed to take plenty of time before raising short-term interest rates to a neutral level, and should therefore start lowering the target range at this time. Against these views, some members said that if the Bank made a change in the guideline for money market operations when Japan's economy was at a temporary pause, there was a risk that the Bank's stance of maintaining the current monetary easing would be misinterpreted and this would cause financial markets to overreact to the change.

Based on the above discussions, many members said that it was appropriate to maintain the current guideline for money market operations and add a new sentence to the proviso that there might be cases where the outstanding balance of current accounts temporarily fell short of the target range. Some members said that it was generally feasible to maintain the outstanding balance within the current target range of "around 30 to 35 trillion yen" by conducting money market operations in a deliberate manner based on a careful examination of market conditions. However, when a considerable shortage of funds in current accounts at the Bank was expected due to the flow of treasury funds resulting from, for example, tax payments, it was not certain that the outstanding balance of current accounts at the Bank could be maintained within the current target range at all times. One member expressed the view that given the degree of fluctuations in the flow of treasury funds due to seasonal and institutional factors, the current target range for the outstanding balance was not wide enough. A different member commented that since a shortage of funds in current accounts at the Bank was expected to occur for a certain period in early June, it might be hard to consider a fall in the outstanding balance below the target range as consistent with the current guideline describing its target range as "at around" 30 to 35 trillion yen. Therefore, it was necessary to add a new sentence to the proviso in the guideline for money market operations, stating that there might be cases where the outstanding balance of current accounts fell short of the target. On this point, one member commented that in order to avoid the meaning of the target range becoming unclear, the Bank should clearly state in what situation the new proviso would apply because, with the addition of a new sentence to the proviso, the guideline would allow the outstanding balance to go beyond and below the target range. A different member said that if the Bank did its utmost to achieve the target range, the member would not be opposed to allowing a temporary fall of the outstanding balance below the target range.

Some members expressed the view that amendment of the proviso would not mean a decrease in the degree of monetary easing; rather, it was a necessary measure to maintain the current policy for a further period while reducing the side effects. A few members noted that if the Bank continued to maintain the current target range for the outstanding balance when liquidity demand was extremely weak, the Bank's balance sheet would become less liquid due to the extended maturities of funds-supplying operations, thereby hindering the conduct of money market operations in a timely manner. They added that this would also have further negative effects on the functioning of financial markets, causing, for example, an excessive decline in risk premiums. Against this view, one member expressed the opinion that the negative effects should not be overemphasized, noting that the effects of lowering interest rates to a level that hindered the functioning of financial markets were contributing to reducing the time necessary for overcoming deflation.

Some members expressed views on the conduct of money market operations for the future. These members pointed out that there was a possibility that financial institutions' liquidity demand would further decrease. A few of these members said that, when it became difficult to maintain the outstanding balance within the current target range after the economy had emerged from the temporary pause and clearly resumed its recovery, one option could be to lower the target range while ensuring that this would not negatively affect the Bank's stance on overcoming deflation. Based on the above discussions, one member said that amendment of the proviso in the guideline should be treated as a separate matter from the direction for future conduct of monetary policy, such as a possible lowering of the target range. The member added that it was difficult to project at this point future developments in financial institutions' liquidity demand, and therefore the feasibility of achieving the current target range of "around 30 to 35 trillion yen" without impairing the functioning of financial markets should be reviewed at each Monetary Policy Meeting (MPM).

In relation to active discussions at the MPMs since the end of 2004 on the target range for the outstanding balance of current accounts at the Bank, one member noted that it was significant that there had been discussions in and outside the market on the subject from various perspectives, including the meaning of the quantitative easing policy. The member added that these discussions had basically focused on technical aspects, namely, measures to respond to a decrease in financial institutions' liquidity demand reflecting the improvement of financial system stability, and discussion of such wider aspects as the following points might have been overlooked. First, what effects the Bank's persistence in maintaining the current target range would have on the functioning of financial markets. Second, how those effects would influence the achievement of sustainable economic growth with price stability. And third, what measures the Bank needed to take to smoothly maintain the quantitative easing policy in the future. A different member said that a series of discussions on whether the target range should be lowered or not, which were made public through such channels as the minutes of MPMs, might not have been sufficient for market participants to fully understand the Bank's thinking. Members agreed that if the Bank decided to amend the proviso at this meeting, it should thoroughly explain in its communication with the public that this did not mean the Bank would change the current framework of the quantitative easing policy-providing ample liquidity significantly exceeding the amount of required reserves and maintaining the policy with the commitment in terms of policy duration based on the CPI.

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. Meanwhile, deflation persisted, as evidenced, for example, by the continued year-on-year decline in the GDP deflator in the first preliminary estimate of GDP statistics for the January-March quarter of 2005, which had been released recently. The effects on the economy of the high crude oil prices and developments in the stock market should be monitored closely.
  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 therefore considered that the current policy should be maintained in the present economic situation where deflation persisted. However, the government understood that if it was extremely difficult for the Bank to maintain the outstanding balance within the target range at all times due to the supply and demand conditions for funds in the money market, there could be a situation where the Bank's decision from a technical viewpoint to add a new sentence to the proviso in the guideline, while maintaining the current target range, could be regarded as an inevitable measure to respond to that situation. In such a case, the government would like the Bank to explain clearly to market participants and the public that it was introduced only from a technical viewpoint, and that the Bank's stance of firmly maintaining the current quantitative easing policy remained unchanged.

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. Deflation persisted as seen, for example, in the continued year-on-year decline in the GDP deflator in the first preliminary estimate of GDP statistics for the January-March quarter released recently. 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 would further 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) While structural reforms were steadily bearing fruit and the economy was recovering, the growth rate of the money stock (M2+CDs) remained sluggish. In overcoming deflation, it was essential that the money stock increase in the end, and the government would therefore like the Bank to implement effective monetary policy, including effective provision of liquidity. If the outstanding balance of current accounts at the Bank temporarily fell below the target range due to, for example, the flow of treasury funds, the government would like the Bank to clearly convey that it was a technical emergency measure while firmly maintaining the quantitative easing policy. Moreover, should such a situation occur, the government would like the Bank to correct it as swiftly as possible.

VI. Votes

Based on the above discussions, the majority of members agreed 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 and add a new sentence to the current proviso, stating that when it was judged that liquidity demand was exceptionally weak, there might be cases where the balance of current accounts temporarily fell short of the target.

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. 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 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 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.

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. When it is judged that liquidity demand is exceptionally weak considering such factors as responses of financial institutions to the Bank's funds-supplying operations, there may be cases where the balance of current accounts falls short of the 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: even the process of lowering the target range for the outstanding balance of current accounts at the Bank might require several months to complete; through the Bank's communication of its thinking to the public to date, it was already fully understood that lowering the target range would be merely a response to the decline in liquidity demand among financial institutions; and lowering it would in fact make the guideline for money market operations clearer.

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 May 20, 2005 and the whole report on May 23, 2005.7

  1. 7The English version of the whole report was published on May 24, 2005.

Attachment
May 20, 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. When it is judged that liquidity demand is exceptionally weak considering such factors as responses of financial institutions to the Bank's funds-supplying operations, there may be cases where the balance of current accounts falls short of the target.