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Minutes of the Monetary Policy Meeting

on June 14 and 15, 2005
(English translation prepared by the Bank's staff based on the Japanese original)

July 19, 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, June 14, 2005, from 2:01 p.m. to 4:12 p.m., and on Wednesday, June 15, from 9:00 a.m. to 12:58 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. B. Fujioka, Deputy 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. M. Ayuse, Deputy Director-General, Monetary Affairs Department4
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. Y. Yamada, Director, Monetary Affairs Department4
Mr. T. Kato, Senior Economist, Monetary Affairs Department
Mr. N. Takeda, Senior Economist, Monetary Affairs Department
Mr. T. Sakamoto, Director, Financial Markets Department4

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on July 12 and 13, 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 June 15.
  3. Mr. M. Ishii was present on June 14.
  4. Messrs. M. Ayuse, Y. Yamada, and T. Sakamoto were present on June 15 from 9:00 a.m. to 9:13 a.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 May 19 and 20, 2005.6 The outstanding balance of current accounts at the Bank moved in the 30-35 trillion yen range, except on June 2 and 3 when it fell to the 29-30 trillion yen level, which was below the lower limit of the target range.

  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. 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.

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 partly reflecting the rise in U.S. stock prices, but they did not gather momentum thereafter. Recently, the Nikkei 225 Stock Average was moving in the range of 11,000-11,500 yen.

Long-term interest rates declined to the 1.20-1.25 percent level in part reflecting a fall in U.S. long-term interest rates and institutional investors' steady demand for Japanese government bonds.

The yen had depreciated against the U.S. dollar, partly reflecting declining expectations for an early revaluation of the renminbi and the smaller-than-expected U.S. trade deficit. Recently, the yen was being traded in the range of 107-110 yen against the dollar.

C. Overseas Economic and Financial Developments

The U.S. economy continued to expand steadily at a pace around its potential growth rate. 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 year-on-year rate of increase in the core consumer price index (CPI) had been rising steadily, albeit at a moderate pace.

The euro area economy was on a modest recovery trend, but sluggishness, particularly in exports and production, was becoming somewhat more evident recently.

East Asian economies had been expanding on the whole. In China, both domestic and external demand continued to expand strongly. The pace of increase in China's imports decelerated significantly 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 as seen in the fact that exports and production were on an upward trend due to progress in adjustments in IT-related sectors.

In U.S. and European financial markets, long-term interest rates declined in both the United States and Europe partly due to the release of weaker-than-expected economic indicators. Stock prices rose slightly in both the United States and Europe. The yield differentials between corporate bonds and U.S. Treasuries had been widening on the whole through late May, but they narrowed slightly thereafter.

In financial markets in many emerging economies, stock prices rose and the yield differentials between their sovereign bonds and U.S. Treasuries narrowed, supported mainly by financial market stability in industrial countries, such as the United States, and the favorable economic fundamentals.

D. Economic and Financial Developments in Japan

1. Economic developments

Despite the expanding trend of overseas economies, the momentum of growth in exports remained weak mainly reflecting effects that appeared to stem from measures taken in China to cool the overheating economy. Growth in exports was projected to accelerate gradually, since it was expected that overseas economies would continue to expand on the whole, and also that adjustment pressures in IT-related sectors would continue to ease further.

In the corporate sector, business fixed investment had been increasing reflecting high corporate profits. The Financial Statements Statistics of Corporations by Industry, Quarterly showed that business fixed investment of manufacturers increased in the January-March quarter of 2005 for the third consecutive quarter and that of nonmanufacturers, which had been somewhat weak in the second half of 2004, recovered in the January-March quarter. Shipments of capital goods (excluding transport equipment) posted a substantial rise in April, after having remained more or less flat since the second half of 2004.

Production was increasing gradually, as inventory adjustments in IT-related sectors were progressing. Industrial production continued to increase in April, after showing a relatively large increase in the January-March quarter on a quarter-on-quarter basis. Inventories as a whole rose slightly due to temporary factors, such as a buildup of automobiles awaiting shipment overseas, although those of electronic parts and devices decreased for the fifth consecutive month. As for the outlook, production was expected to continue its uptrend. However, future developments required close monitoring, as final demand for IT-related goods and the timing of a clear rise in exports were highly uncertain.

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. It was becoming clear that the ratio of part-time workers had peaked out, as seen in the decrease in the number of part-time employees in April year on year. Regarding wages, regular payments had more or less stopped declining, mainly because the ratio of part-time workers had peaked out, and it was becoming clearer that nominal wages per worker had stopped declining. As a result, household income was rising at a moderate pace. It was expected to continue increasing gradually, as firms' perception that they had excess labor had almost dissipated and corporate profits continued to be high, although firms were likely to maintain a stance of restraining their labor costs.

Private consumption had been steady in April following the January-March quarter when many indicators showed improvement partly in reaction to the weakness in the October-December quarter due to adverse weather and natural disasters. Indicators of private consumption, such as the number of new passenger-car registrations (excluding small cars with engine sizes of 660 cc or less), sales of electrical appliances, and sales at department stores, continued to show steady developments in April. Private consumption was projected to continue recovering steadily with a gradual increase in household income.

On the price front, international commodity prices remained at high levels. Domestic corporate goods prices had increased substantially, mainly reflecting the effects of the rise in crude oil prices, and were likely to continue increasing for the time being. 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, and were projected to continue falling slightly on a year-on-year basis for the time being.

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. Under these circumstances, the year-on-year rate of decline in lending by private banks had been diminishing at a moderate pace.

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 was around the previous year's level.

The year-on-year growth rate of the monetary base was around 2.0 percent, and that of the money stock (M2+CDs) was at the 1.0-2.0 percent level.

II. Revision of Conditions for Including Bonds Whose Principal Balance May Decrease Due to Prepayments before the Final Maturity Date in the Range of Eligible Collateral

A. Staff Proposal

With regard to "bonds whose principal balance may decrease due to prepayments before the final maturity date," such as pass-through bonds, the staff proposed that the Bank amend Guidelines on Eligible Collateral, with the revision of the method for the calculation of collateral prices, to include in the range of eligible collateral those issued more than five years ago, whose amount was expected to increase.

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 the economy had been steadily improving toward emerging from a temporary pause, it would be a short while before it could be confirmed that the economy had definitely moved out of it. Many members mentioned the following as the basis for this view. First, domestic demand had been steady: business fixed investment continued to increase reflecting high corporate profits; and private consumption had been relatively strong. And second, however, the momentum of growth in exports, especially to China, remained weak and inventory adjustments in IT-related sectors still continued, although they were progressing steadily.

As for the outlook, members agreed that recovery in Japan's economy would gradually become clear in and after the second half of 2005 with the effects of adjustments in IT-related sectors weakening, and that the economy would experience a relatively long period of growth, albeit at a moderate pace.

Members agreed that overseas economies, particularly those of the United States and East Asia, continued to expand. One member said that attention should be paid to the rise in crude oil prices and the recent weakening trend worldwide in manufacturing.

On the U.S. economy, members concurred that it continued to expand steadily at a pace around its potential growth rate, with household spending--private consumption and housing investment--increasing and the employment situation improving. In relation to this, some members said, however, that it was cause for concern that recently released indicators such as the Institute for Supply Management (ISM) business sentiment index suggested that the U.S. manufacturing sector was losing momentum somewhat. A few members commented that close attention should be paid to the effects on future developments in private consumption and housing investment of the rate increases by the Federal Reserve.

With regard to East Asian economies, members agreed that both domestic and external demand continued to expand strongly in China, and that the NIEs and ASEAN economies continued to expand at a moderate pace. Many members said that the basic background to the slowdown in China's imports seemed to be pressures to adjust inventories for example, stemming from domestic factors such as the government's measures to contain the overheating of the economy. One member added that China's imports might have been replaced to some extent by local products as a result of increased production capacity. A few members said that there were still various structural problems in China, and thus attention should continue to be paid to how these problems were resolved.

Members generally agreed that the momentum of growth in Japan's exports, especially to China, remained weak, but exports were likely to be on an uptrend in a situation where overseas economies overall were expected to continue to expand, although it was unclear how long adjustments in the Chinese economy would last. Many members expressed the view, however, that exports were unlikely to exhibit the high growth observed during the first half of 2004, mainly because the pace of recovery in global IT-related demand was projected to be moderate. One member added that some industries were likely to have little scope for increasing production for the time being due to limited manufacturing facilities, and this could restrain growth in exports.

With regard to production and inventories, members concurred that production was increasing gradually, as inventory adjustments in IT-related sectors were progressing steadily. Some members said that production posted relatively high growth in the January-March quarter, boosted by temporary factors such as a rise in production of steel ships. However, the pace of increase for the April-June quarter was likely to be only marginal, partly due to an expected reaction to the high growth in the previous quarter. One member said that there was a risk that production for the April-June quarter would be virtually flat or show a slight decline.

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 relation to this, some members said that, judging from prices of IT-related goods and anecdotal information obtained mainly from firms, inventory adjustments seemed to be progressing as expected, although a recovery in terms of figures such as indicators for production and shipments was not yet in evidence. One of these members noted that anecdotal information suggested that semiconductor manufacturers in Taiwan seemed to have started recovering. A different member pointed out that the forecast for the world semiconductor market had been revised upward. A few members said that there were signs that prices of dynamic random access memories (DRAMs) and hard disk drives had stopped declining, and that close monitoring would be necessary to determine whether these developments would lead to a full-fledged recovery in IT-related sectors.

Many members commented that the increase in inventories in non-IT-related sectors seemed to be due to apparently temporary factors, such as accumulation of inventories of automobiles awaiting shipment overseas. However, attention should be paid to developments in demand overseas, for example, to detect any signs of a possible increase in pressures to adjust inventories.

Members agreed that business fixed investment had been increasing solidly reflecting high corporate profits, as confirmed by the Financial Statements Statistics of Corporations by Industry, Quarterly and other indicators released in the intermeeting period. One member noted that manufacturers in non-IT-related sectors had been operating at almost full production capacity, and that business fixed investment to expand production capacity was being made in a wide range of industries including these sectors. A few members commented that the fact that the increase in business fixed investment was spreading to nonmanufacturers, such as retailers and the electric and gas utility industries, was a positive development. A few other members said that firms might have begun using their high levels of cash flow for real investment, and that the extent to which firms were keen to make investment should be confirmed in the upcoming June Tankan (Short-Term Economic Survey of Enterprises in Japan). A different member said, however, that even with high levels of cash flow, firms' stance on investment could remain somewhat cautious, as a marked increase in the expected rate of return had not yet been observed. Another member expressed the view that firms were making decisions on investment carefully partly based on lessons learned from the bubble economy, and this would contribute to realization of a long-lasting increase in business fixed investment.

Members agreed that corporate profits were likely to remain on an uptrend, although the pace of increase might slow, judging from the results of various surveys, which suggested that they were likely to stay at high levels. Some members said that attention should be paid to the effects on corporate profits of crude oil prices, which had been surging again recently. One member pointed out that an increasing number of firms had resumed or increased dividend payments against the background of the increase in their corporate profits, and that this could have positive effects on, for example, the stock market.

As for the employment and income situation, members concurred that since the number of employees had been on an increasing trend and wages had stopped declining, household income was rising at a moderate pace, and that it was likely to continue increasing gradually.

Members agreed that developments in private consumption had been steady against the background of the employment and income situation. Many members raised the increase in household income and an improvement in consumer confidence as factors behind the relatively strong indicators for private consumption in April following the January-March quarter when it had increased partly in reaction to the weakness in the October-December quarter of 2004. One of these members said that an increase in outlays for services, such as travel and food services, had contributed to the increase in private consumption. A few members expressed the view that many firms had been increasing rewards to shareholders by resuming or increasing dividend payments, and this could also have positive effects on private consumption. A different member said that according to the Economy Watchers Survey and other sources, more signs of an increase in private consumption were observed in the Kinki, Chugoku, and other regions.

Members discussed whether domestic demand could become the driving force of economic recovery in the near future, given the current situation where domestic demand, specifically private consumption and business fixed investment, was relatively strong while the momentum of growth in exports remained weak. A few members said that further monitoring would be necessary before it could be judged whether full-fledged recovery in domestic demand, particularly in private consumption, could be achieved. One of these members expressed the view that domestic demand was unlikely to become the driving force of economic growth, since a continued expansion in business fixed investment could not be expected unless corporate profits were projected to grow due to a rise in exports. Against this view, a different member said that, with the prospect of growth in corporate profits due to a rise in private consumption given the recent increase in outlays for services, business fixed investment could be expected to continue increasing. Another member expressed the view that a mechanism of economic expansion where domestic demand increased autonomously led by the rise in private consumption might also start operating, in addition to the primary mechanism of economic expansion where growth in exports generated a rise in production and this in turn led to an increase in household income.

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 the pace of increase would slow. Members also concurred that consumer prices had been declining slightly on a year-on-year basis, and this would continue for some time due partly to the continuing effects from the reduction in electricity and telephone charges.

A few members noted that the year-on-year rate of change in consumer prices excluding the effects of special factors was already at around zero percent, reflecting the narrowing of the output gap and the halt in the decline in wages. A few other members said that given the change in the wage situation, attention should be paid to how it affected future developments in unit labor cost and other factors underlying prices. One member expressed the view that consumer prices seemed to be still on a moderate declining trend, judging from the fact that prices of durable consumer goods--which were facing fierce price competition and undergoing rapid technological innovation--had been falling.

As for land prices, one member said that, according to the urban land price index, commercial land prices in the six large city areas had posted positive growth compared to six months previously for the first time in 14 years, and that the way in which the effects of this development spread to private consumption and business fixed investment should be monitored.

B. Financial Developments

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

Some members said that financial markets had responded calmly to the Bank's decision at the previous meeting to add to the proviso in its guideline a new sentence stating that there might be cases where the outstanding balance of current accounts at the Bank temporarily fell short of the target range, as well as to the fact that the outstanding balance had actually fallen short of the target range on June 2 and 3. These members commented that this could be regarded as an indication that market participants fully understood the Bank's stance of firmly maintaining the current framework of the quantitative easing policy. One member said that, although financial markets had been more or less flat recently, they continued to require close monitoring given such risk factors as crude oil prices, which had been rising again, and developments in inflation in the United States. Another member expressed the view that a fall in long-term interest rates worldwide, including Japan, mainly reflected changes in fundamentals, such as a decline in inflationary expectations and firms' increased cautiousness in investment against the background of economic globalization.

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

On the monetary policy stance for the immediate future, members agreed as in the previous meeting 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.

A few members expressed the view that it would be appropriate to lower the target range for the outstanding balance of current accounts at the Bank in order to conduct the quantitative easing policy smoothly, given 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. One of these members said that it would be appropriate to lower it to "around 27 to 32 trillion yen" and change the proviso in the guideline back to the wording before it was amended at the previous meeting. This was mainly because the disadvantages of maintaining a huge outstanding balance of current accounts regardless of the change in the financial environment outweighed the advantages: for example, the process of restoring the proper functioning of the market would be hindered and there would be a risk of causing an erosion of financial market discipline. Another member said that it would be appropriate to lower the target range to "around 25 to 30 trillion yen," arguing that the functioning of the money market would not recover unless the target range was being lowered to some extent.

Against these views, the majority of members said that it was appropriate to maintain the current guideline for money market operations. Many members expressed the view 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 it would be misinterpreted as a weakening of the Bank's stance of maintaining the monetary easing. One member said that carefully lowering the target range, while ensuring that it was understood outside the Bank that this would not exert negative effects on the process of overcoming deflation, would be one of the options in the future. However, it was appropriate to maintain the current guideline for money market operations when Japan's economy was at a temporary pause. Another member expressed the view that the quantitative easing policy could have a positive effect on households' and firms' expectations and that the Bank should be very careful not to dampen that effect when it changed the guideline for money market operations. A different member commented that there was a risk that a lowering of the target range would weaken the positive effects of the quantitative easing policy based on the Bank's commitment in terms of policy duration, and that maintaining the current target range was the quickest way to ensure that deflation was overcome and restore the proper functioning of the market.

With regard to the proviso amended at the previous meeting, one member expressed the view that there was no fundamental change in the situation where financial institutions' liquidity demand had decreased and consequently undersubscription occurred frequently. Given this, it would be appropriate to keep the proviso unchanged, since if financial institutions' liquidity demand decreased significantly in the future due to various factors, there might be cases where the Bank would have difficulty in maintaining the outstanding balance of current accounts within the target range in spite of doing its utmost to provide funds while giving due consideration to the effects on the functioning of the market. Some members said that it was unnecessary to change the proviso given that market participants had almost fully understood the Bank's purpose in amending it. One member said that the member would not be opposed to keeping the proviso as amended at the previous meeting, but the Bank should continue to discuss the conditions under which the proviso would apply and specific aspects of the functioning of the market to which the Bank should give consideration, since these were not sufficiently clear. The member added that it was important for the Bank to consistently make efforts in its conduct of money market operations to achieve the target range for the outstanding balance of current accounts.

In relation to the above discussion, members said that, given the decrease in financial institutions' liquidity demand, the Bank had decided to amend the proviso at the previous meeting to allow the occurrence of cases where the outstanding balance of current accounts temporarily fell short of the target range when it was judged that financial institutions' liquidity demand was exceptionally weak. Members also emphasized again that the Bank had not amended the proviso with the intention of conducting any specific action in connection with monetary policy in the future. A few members added that the Bank should communicate its thinking accurately to the public to avoid possible misunderstanding that the amendment of the proviso was related to future monetary policy, for example, that it was a first step toward normalization of interest rates.

Members discussed the effects of funds provision on the functioning of the market under the quantitative easing policy. One member said that the extended maturities of funds-supplying operations had caused an anomaly in the formation of interest rates where there was no time value, as seen in the fact that, for example, yields on treasury bills (TBs) and financing bills (FBs) had been close to zero percent. Another member expressed the view that the Bank should avoid extending maturities of funds-supplying operations. This was because in a situation where it was expected that the possibility that the Bank would change the framework of the quantitative easing policy would gradually increase over the course of fiscal 2006, forcing interest rates down through funds-supplying operations with relatively long maturities would hinder the market's function of providing information through interest rates. A different member said that for the same reason the Bank should shorten maturities of funds-supplying operations. In response to these views, a few members expressed the view that although a central bank should give due consideration to ensuring the proper functioning of the market, ample provision of funds under the quantitative easing policy inevitably put downward pressure on the yield curve. A different member commented that since the introduction of the quantitative easing policy the Bank had maintained a balance between negative effects of the policy on the functioning of the market and the achievement of the objectives of the policy. However, as the economic and financial situation was changing, the Bank should do its utmost to avoid a situation where achieving the target range for the outstanding balance of current accounts became the sole objective of the policy, thereby causing excessive negative effects on the functioning of the market.

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 and some signs were seen of coming out of a weak situation, deflation persisted. In addition, the effects on the economy of developments in crude oil prices, which continued to rise substantially, required close monitoring.
  2. (2) Under these circumstances, the government considered that ensuring the sustainability of the economic recovery led by private demand and overcoming deflation were 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. The government would like the Bank to continue to explain clearly that the Bank's stance of firmly maintaining the current quantitative easing policy remained unchanged. In relation to the Bank's decision at the previous meeting from a technical viewpoint to add a new sentence to the proviso in the guideline for money market operations, the government hoped that the Bank would appropriately apply the new proviso in accordance with the reasons for which the Bank had amended it.

The representative from the Cabinet Office made the following remarks.

  1. (1) Japan's economy was recovering at a moderate pace, while some signs were seen of coming out of a weak situation. The Council on Economic and Fiscal Policy was currently putting together "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2005." The government, keeping in mind its expectation of a nominal economic growth rate of 2 percent or higher in and after fiscal 2006, would accelerate and expand structural reforms focusing on expansion of private demand and employment and ensure that deflation was overcome, at the same time realizing both economic vitalization and budget consolidation.
  2. (2) While the economy was recovering gradually on the whole, it was essential that the money stock increase in the end in overcoming deflation. The government therefore hoped that the Bank would implement effective monetary policy that would be consistent with the government's policy efforts and the outlook for the economy, while giving due consideration to market developments and expectations.

VI. Votes

Based on the above discussions, the majority of members agreed that it was appropriate to maintain the current guideline, including the proviso, 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. A different member 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 25 to 30 trillion yen" for the reasons the member had given earlier.

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.

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

Mr. A. Mizuno 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 25 to 30 trillion yen.

The proposal was defeated by majority vote.

Votes for the proposal: 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, Mr. T. Fukuma, 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 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. 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, there was a risk that maintaining a huge outstanding balance of current accounts at the Bank would hinder the process of restoring the proper functioning of the market and cause an erosion of financial market discipline. And third, 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, liquidity demand among financial institutions was declining markedly, as seen in the fact that undersubscription occurred in operations to supply funds even through outright purchases of TBs and FBs. Second, the functioning of the money market would not recover unless the target range for the outstanding balance of current accounts at the Bank was being lowered. And third, 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 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 June 15, 2005 and the whole report on June 16, 2005.7

  1. 7The English version of the whole report was published on June 17, 2005.

VIII. Approval of the Minutes of the Monetary Policy Meetings

The Policy Board approved unanimously the minutes of the Monetary Policy Meetings of April 28, 2005, and May 19 and 20 for release on June 20, 2005.

IX. Approval of the Scheduled Dates of the Monetary Policy Meetings in July-December 2005

At the end of the meeting, the Policy Board approved the dates of the Monetary Policy Meetings to be held in the period July-December 2005, for immediate release (see Attachment 2).


Attachment 1
June 15, 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.


Attachment 2
June 15, 2005
Bank of Japan

Scheduled Dates of Monetary Policy Meetings
in July-December 2005

table : Scheduled Dates of Monetary Policy Meetings in July-December 2005
Date of MPM Publication of
Monthly Report
(The Bank's View)
Publication of
MPM Minutes
July 2005 12 (Tue.), 13 (Wed.) 13 (Wed.) Aug. 12 (Fri.)
27 (Wed.) -- Sep. 13 (Tue.)
Aug. 8 (Mon.), 9 (Tue.) 9 (Tue.) Sep. 13 (Tue.)
Sep. 7 (Wed.), 8 (Thur.) 8 (Thur.) Oct. 17 (Mon.)
Oct. 11 (Tue.), 12 (Wed.) 12 (Wed.) Nov. 24 (Thur.)
31 (Mon.) -- Dec. 21 (Wed.)
Nov. 17 (Thur.),18 (Fri.) 18 (Fri.) Dec. 21 (Wed.)
Dec. 15 (Thur.), 16 (Fri.) 16 (Fri.) To be announced
  • Note:"The Bank's View" in the Monthly Report of Recent Economic and Financial Developments (Monthly Report) is scheduled to be published at 3:00 p.m. (this schedule is subject to change on certain grounds such as late closing of the meeting).
    Full text of the Monthly Report will be published at 2:00 p.m. on the next business day of the publication of "The Bank's View" (English translation will be published at 4:30 p.m. on the second business day of the publication of "The Bank's View").
    "The Bank's View" in the Outlook for Economic Activity and Prices (October 2005) will be published at 3:00 p.m. on Monday, October 31, 2005 (the whole report including the background will be published at 2:00 p.m. on Tuesday, November 1).