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Minutes of the Monetary Policy Meeting

on August 8 and 9, 2005
(English translation prepared by the Bank's staff based on the Japanese original)

September 13, 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 Monday, August 8, 2005, from 2:00 p.m. to 3:31 p.m., and on Tuesday, August 9, from 9:00 a.m. to 11:43 a.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. K. Sugimoto, Deputy Vice Minister for Policy Planning and Coordination, Ministry of Finance
Mr. J. Hamano, Director General for Economic and Fiscal Management, Cabinet Office2
Mr. B. Fujioka, Deputy Director General for Economic and Fiscal Management, Cabinet Office3
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. 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. W. Takahashi, Deputy Director-General, International Department
Secretariat of the Monetary Policy Meeting Mr. Y. Nakayama, Director-General, Secretariat of the Policy Board
Mr. T. Kozu, Adviser to the Governor, Secretariat of the Policy Board
Mr. K. Murakami, Director, Secretariat of the Policy Board
Mr. S. Shiratsuka, Senior Economist, Monetary Affairs Department
Mr. N. Takeda, Senior Economist, Monetary Affairs Department

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on September 7 and 8, 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. J. Hamano was present on August 8.
  3. Mr. B. Fujioka was present on August 9.

I. Summary of Staff Reports on Economic and Financial Developments4

A. Money Market Operations in the Intermeeting Period

The Bank conducted market operations in accordance with the guideline decided at the previous meeting on July 27, 2005.5 The outstanding balance of current accounts at the Bank moved in the 30-32 trillion yen range, except on July 29 and August 3, 4, and 5 when it fell short of the target range.

  1. 4Reports were made based on information available at the time of the meeting.
  2. 5The guideline was as follows:
    The Bank of Japan will conduct money market operations, aiming at the outstanding balance of current accounts held at the Bank at around 30 to 35 trillion yen.
    Should there be a risk of financial market instability, such as a surge in liquidity demand, the Bank will provide more liquidity irrespective of the above target. 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

The weighted average of the uncollateralized overnight call rate was at around zero percent. Interest rates on term instruments remained at low levels. Meanwhile, interest rates on Euroyen futures rose slightly.

Japanese stock prices rose partly reflecting stronger-than-expected economic indicators at home and abroad and firm U.S. stock prices. Thereafter, they fell against the background of such factors as growing uncertainty about political developments in Japan. Recently, the Nikkei 225 Stock Average was moving in the range of 11,500-12,000 yen.

Long-term interest rates rose partly in response to an improved perception of the economy in view of domestic and overseas economic indicators. Recently, they were moving in the range of 1.35-1.40 percent.

The yen fluctuated somewhat against the U.S. dollar against the background of the prospect of a wider interest rate differential between Japan and the United States and speculations about a further revaluation of the renminbi. Recently, the yen was being traded in the range of 111-113 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, led mainly by household spending and business fixed investment. Although the pace of increase in the inflation rate seemed to have slowed somewhat in recent months, the rate continued to be on a moderate but steady rising trend.

Sluggishness persisted in the euro area economy. While exports were picking up, the pace of increase in household spending was slowing.

With regard to East Asian economies, in China both domestic and external demand continued to expand strongly. The pace of increase in China's imports had decelerated significantly owing to such factors as inventory adjustments in some industries and a decline in the pace of increase in new investment due to the permeation of the government's measures to contain the overheating of the economy. Recently, however, China's imports showed signs of picking up. The NIEs and ASEAN economies continued to expand at a moderate pace.

In U.S. and European financial markets, long-term interest rates rose slightly and stock prices increased somewhat, reflecting stronger-than-expected economic indicators and corporate results. In financial markets in many emerging economies, their currencies and stock prices were generally firm although they stayed within a narrow range.

D. Economic and Financial Developments in Japan

1. Economic developments

Exports were increasing, albeit moderately, against the background of the continued expanding trend of overseas economies, although the momentum of growth in exports to China remained weak. Growth in exports was projected to accelerate gradually, since it was expected that overseas economies would continue to expand, particularly those of the United States and East Asia, and also that adjustment pressure in the IT-related sectors would wane.

In the corporate sector, business fixed investment had continued to increase, reflecting high corporate profits. Business fixed investment was expected to continue increasing, since increases in both domestic and external demand, as well as high corporate profits, were projected to continue.

Production was on an uptrend with some fluctuations, as inventory adjustments in the IT-related sectors were progressing. Industrial production in the April-June quarter declined marginally, but this seemed to reflect some statistical fluctuations with regard to steel ships and drugs, and thus, on average, production was on a moderate uptrend. In light of the increases in demand both at home and abroad, as well as the progress of adjustments in the IT-related sectors, production was likely to increase moderately in the July-September quarter.

pInventories had recently been flat, although they remained low from a long-term perspective. Inventory adjustments in electronic parts and devices were basically considered to be making steady progress, although they advanced only marginally in the April-June quarter, after having made significant progress in the January-March quarter.

As for the employment and income situation, indicators reflecting labor market conditions, such as those related to job offers and the unemployment rate, had been improving, and the number of employees had been increasing. Regarding wages, special payments had increased and regular payments had recently picked up, albeit marginally, mainly because of the decrease in the ratio of part-time workers. As a result, nominal wages per worker had been picking up. Under these circumstances, household income had been rising moderately, and it was expected to continue increasing gradually.

Private consumption had been steady. Sales of electrical appliances and sales at department stores had been increasing, and indicators for services consumption had been on an uptrend. Private consumption was projected to continue recovering steadily, against the background of a gradual increase in household income.

Domestic corporate goods prices had increased, mainly reflecting the effects of the rise in crude oil prices. They were likely to continue on an increasing trend, but the rate of growth was expected to slow for the time being. Consumer prices (excluding fresh food, on a nationwide basis) had been declining slightly on a year-on-year basis. They were projected to continue falling slightly on a year-on-year basis for the time being, partly reflecting the effects from the reduction in electricity and telephone charges, although supply and demand conditions were likely to continue improving gradually.

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.

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 had been around or slightly above the previous year's level.

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

II. Summary of Discussions by the Policy Board on Economic and Financial Developments

A. Economic Developments

On the state of Japan's economy, members agreed that it continued to recover with the progress of adjustments in IT-related sectors, and that the recovery was expected to continue.

Members agreed that overseas economies, particularly those of the United States and East Asia, continued to expand, and were expected to continue expanding at a pace around their potential growth rates. Some of these members added that factors such as the effects of the rise in crude oil prices on world economic growth continued to require close monitoring.

Many members expressed the view that the U.S. economy was likely to continue expanding at a pace around its potential growth rate. This was because household spending and business fixed investment continued to increase steadily, the employment situation remained favorable, and business sentiment in the manufacturing sector seemed to be improving. Some of these members said that future developments in long-term interest rates and in housing prices, partly reflecting the movements of those rates, should be watched closely, and also their effects on private consumption.

With regard to East Asian economies, many members commented that both domestic and external demand continued to expand strongly in China, and the NIEs and ASEAN economies continued to expand at a moderate pace. One of these members pointed out that attention should be paid to the risk of large economic fluctuations in China caused by excessive investment and a serious adjustment in reaction to it in a situation where restructuring of state-owned enterprises was progressing only slowly. A few members said that, although the effects of the reform of the renminbi exchange rate regime on the world economy had been marginal so far, this might change depending on the government's foreign exchange policy management under the new exchange rate regime, and they therefore continued to require close monitoring.

Members agreed that, although the momentum of growth in Japan's exports to China remained weak, exports were increasing, especially to the United States and the NIEs and ASEAN economies, and were likely to remain on an uptrend in a situation where overseas economies overall were expected to continue to expand. One member pointed out that one of the factors behind the growth in exports was the high rate of increase in exports to countries, mainly in the Middle East, whose real purchasing power was increasing as a result of the rise in crude oil prices. A different member commented that the rise in crude oil prices had to some extent the effect of increasing Japan's share in world exports owing to its competitive advantage in energy-efficient products.

With regard to domestic private demand, members agreed that developments in both business fixed investment and private consumption continued to be somewhat stronger than expected.

As for the corporate sector, members agreed that business fixed investment had continued to increase and this was expected to continue, since increases in both domestic and external demand, as well as high corporate profits, were projected to persist. Some members said that the "DBJ Capital Spending Survey for FY 2005," released by the Development Bank of Japan, confirmed that the momentum of increase in business fixed investment was strong for a wide range of industries. In relation to this, a few members added that firms' business fixed investment plans were likely to be realized and the momentum of fixed investment was likely to be maintained, since firms had increased the weight of planned investment for business rationalization and maintenance and repair of existing facilities rather than for expanding production capacity, which was susceptible to developments in demand.

Members agreed that positive effects of the favorable performance of the corporate sector were steadily spreading to the household sector.

As for the employment and income situation, many members commented that household income had been rising moderately, as evidenced, for example, by the year-on-year increase of special payments in June, which comprised more than 50 percent of summer bonus payments, and by the pickup, albeit marginal, in regular payments which was mainly due to the decrease in the ratio of part-time workers.

Regarding private consumption, many members commented that indicators relating to sales of electrical appliances, sales at department stores, and consumption of services had been steady. Private consumption was projected to continue recovering steadily supported by the increase in household income.

With regard to production, many members expressed the view that, although the index of industrial production for the April-June quarter had shown a marginal decline, this seemed to reflect some statistical fluctuations with regard to steel ships and drugs and, as a trend, production continued to increase moderately.

As for adjustments in IT-related sectors, many members commented that, although it was not clear from statistics for the April-June quarter whether inventory adjustments were progressing, judging from sources such as anecdotal information from firms there seemed to be steady progress, albeit at a moderate pace. One member pointed out that recently IT-related electronic parts used in products for which demand had been expanding, such as automobiles, were being produced at full capacity. A few members said that the inventory ratio for electronic parts and devices, which currently remained high, should be monitored, and expressed the view that inventory adjustments in IT-related sectors could not be judged to have been completed yet.

Based on these discussions, many members expressed the view that Japan's economy had emerged from its temporary pause, for the following reasons. First, domestic demand such as private consumption and business fixed investment continued to be firm, and growth in exports was recovering. And second, inventory adjustments in IT-related sectors seemed to be progressing steadily. One member commented that it was no longer appropriate to describe the economy as being at a temporary pause, although its emergence from it was not clearly apparent as it was recovering gradually led by domestic demand. Some members said that the main factor behind the temporary pause in economic activity had been inventory adjustments in the manufacturing sector worldwide. They continued that, since it was still not clear whether inventory adjustments had been completed in Japan although they seemed to have been in the United States, the strength of Japan's final demand still needed to be examined based on forthcoming statistics, for example, GDP statistics and Indices of Industrial Production. One of these members pointed out that attention should be paid to uncertain factors such as crude oil prices, which remained at high levels.

On prices, members agreed that domestic corporate goods prices had increased mainly reflecting the effects of the rise in crude oil prices, and they were likely to continue on an increasing trend, but the rate of growth was likely to slow for the time being. They also agreed that consumer prices (excluding fresh food, on a nationwide basis) had been declining slightly on a year-on-year basis in June, and that they were expected to continue falling slightly on a year-on-year basis for the time being, partly reflecting the effects from the reduction in electricity and telephone charges. In relation to this, a few members noted that the year-on-year change in consumer prices, excluding the effects of special factors such as the decline in rice prices and electricity and telephone charges, had recently been at around zero percent. In addition, some members expressed the view that the year-on-year change in consumer prices (excluding fresh food, on a nationwide basis) was likely to become positive at some point during late 2005 or early 2006, reflecting a falling off of the effects of these special factors.

Some members said that the decline in land prices was coming to a halt. According to data on the appraised value of land facing a thoroughfare for 2005 released recently, average land prices in Tokyo rose for the first time in 13 years, and on a nationwide basis the rate of decline was the smallest since 1993 when they started to decline.

B. Financial Developments

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

Some members commented on financial market developments that long-term interest rates were rising and the yield curve in the money market was steepening slightly, as market participants' outlook for economic activity and prices became more positive. A few members said that the rise in long-term interest rates seemed to reflect improvements in economic fundamentals worldwide, judging from the fact that long-term interest rates were also rising in U.S and European financial markets. One member commented that Japanese stock prices had recently been volatile reflecting uncertainty about political developments, and therefore their future movements required close monitoring. A different member expressed the view that, as a trend, stock prices remained firm, taking into account factors such as high corporate profits.

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

On the monetary policy stance for the immediate future, members agreed that, in a situation where the consumer price index had been declining slightly on a year-on-year basis, the Bank should continue to firmly maintain the current framework of the quantitative easing policy in accordance with the conditions in the Bank's commitment.

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 more smoothly, given that as concern about financial system stability was abating, liquidity demand among financial institutions was on a declining trend and they were feeling more strongly that there was an abundance of liquidity.

Against this view, the majority of members said that it was appropriate to maintain the current guideline for money market operations, including the proviso. Regarding policy responses to a possible further decline in liquidity demand among financial institutions, one member said that it could not be denied that a lowering of the target range for the outstanding balance of current accounts might become necessary. However, the Bank should carefully examine issues relating to lowering the target range based on the economic situation, since it could be interpreted as a tightening of monetary policy. A different member said that, although carefully lowering the target range would be one of the options in the future, it was appropriate to maintain the current guideline for money market operations in the current economic and price situation.

With regard to the fact that the outstanding balance of current accounts at the Bank fell short of the target range on July 29 and during August 3-5 in a situation where the issuance of Japanese government securities, tax payments, and other factors pushed the current account balance down further, a few members noted that this was a case where the proviso had been applied appropriately, and market participants had responded calmly. A few members commented on future developments in the outstanding balance of current accounts that, while on one hand financial institutions' liquidity demand was on a declining trend reflecting financial system stability, on the other they had become more active in bidding in the Bank's funds-supplying operations reflecting a change in their outlook for economic activity and prices. They continued that attention should be paid to the balance between these factors and the resulting developments in financial institutions' liquidity demand as a whole. One member pointed out that there were two types of incentives for financial institutions to bid in the Bank's funds-supplying operations, namely, that arising from liquidity demand and that arising from demand to secure relatively long-term funds based on their interest rate expectations. This member expressed the view that it was possible to shorten maturities of funds-supplying operations to a reasonable extent while maintaining the outstanding balance of current accounts, because, even though the first type of incentive was declining, the second type would remain to some extent if the Bank did not force interest rates down excessively through funds-supplying operations with relatively long maturities. A different member said that, since there was a limit to financial institutions' precautionary demand for liquidity, the second type of incentive for financial institutions to bid in funds-supplying operations would eventually peak out, and thus demand for funds for current accounts at the Bank was likely to decline further.

IV. Remarks by Government Representatives

The representative from the Ministry of Finance 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. However, crude oil prices continued to rise substantially and their effects on the domestic and overseas economies required close monitoring, and deflation persisted.
  2. (2) Under these circumstances, ensuring the sustainability of the economic recovery led by private demand and overcoming deflation continued to be the most important policy tasks the government should tackle together with the Bank. Therefore, the government would like the Bank to continue to explain clearly to the public and market participants 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 with the corporate sector as well as the household sector improving. On the financial front, the year-on-year growth rate of the money stock (M2+CDs) remained at the 1.0-2.0 percent level, and taking into account the overall price situation, deflation persisted.
  2. (2) The government, keeping in mind its expectation of a nominal economic growth rate of around 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.
  3. (3) While the economy was recovering gradually, 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 to overcome deflation and with its outlook for the economy, while giving due consideration to market developments and expectations. With regard to the fact that the outstanding balance of current accounts at the Bank fell short of the target range at the end of July and at the beginning of August, the government would like the Bank to correct such shortfalls as swiftly as possible, as it had done to date.

V. 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." 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."

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 for 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, as financial institutions' demand for funds for current accounts at the Bank had been further declining recently, lowering the target range for the outstanding balance of current accounts at the Bank carefully to respond to the situation would contribute to smoother conduct of the quantitative easing policy. Second, there was a possibility 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 excessive risk taking based on unrealistic expectations that the current extremely accommodative conditions would continue for a very long time. This could hamper the fostering of the foundations of sustainable economic growth under price stability. And third, it was possible to support the ongoing economic recovery and thereby emergence from the current situation of slight price declines 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, there had been no change from the downtrend in financial institutions' precautionary demand for liquidity. Second, it would be appropriate to start lowering the outstanding balance of current accounts at the Bank at an early stage to ensure financial market stability in the period around the termination of the quantitative easing policy.

VI. Discussion on the Bank's View of Recent Economic and Financial Developments

Members discussed "The Bank's View" in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background"), and put it to the vote

The Policy Board decided, by unanimous vote, the text of "The Bank's View." It was confirmed that "The Bank's View" would be published on August 9, 2005 and the whole report on August 10, 2005.6

  1. 6The English version of the whole report was published on August 11, 2005.

VII. Approval of the Minutes of the Monetary Policy Meeting

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of July 12 and 13, 2005 for release on August 12, 2005.


Attachment
August 9, 2005
Bank of Japan

At the Monetary Policy Meeting held today, the Bank of Japan decided, by 7-2 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.