Minutes of the Monetary Policy Meeting

on September 7 and 8, 2005
(English translation prepared by the Bank's staff based on the Japanese original)

October 17, 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 Wednesday, September 7, 2005, from 2:00 p.m. to 4:06 p.m., and on Thursday, September 8, from 9:00 a.m. to 12:26 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. K. Sugimoto, Deputy Vice Minister for Policy Planning and Coordination, Ministry of Finance
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. M. Ayuse, Deputy Director-General, Monetary Affairs Department²
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. A. Horii, 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. Y. Yamada, Director, Monetary Affairs Department³
Mr. T. Kato, Senior Economist, Monetary Affairs Department
Mr. K. Masaki, Senior Economist, Monetary Affairs Department
Mr. T. Sakamoto, Director, Financial Markets Department³

1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on October 11 and 12, 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. M. Ayuse was present on September 8 from 9:00 a.m. to 9:23 a.m.
3. Messrs. Y. Yamada and T. Sakamoto were present on September 8 from 9:00 a.m. to 9:23 a.m.

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 August 8 and 9, 2005.⁵ The outstanding balance of current accounts at the Bank moved in the 30-35 trillion yen range. Responses of financial institutions to the Bank's funds-supplying operations, particularly those with relatively long maturities, were improving. This was mainly because financial institutions had become active in raising funds with relatively long maturities against the background of an improvement in their outlook for economic activity and prices.

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 maturing beyond the fiscal year-end increased in response to an improved perception of the economy, and declined somewhat thereafter.

Japanese stock prices were rising substantially partly reflecting an improved perception of the economy and correction of stock prices, which had been undervalued from a medium-term perspective. The Nikkei 225 Stock Average was moving at around 12,500 yen for the first time since July 2001.

Long-term interest rates increased temporarily in response to the rise in stock prices, and fell thereafter due in part to declines in interest rates in the United States. Recently, they were moving in the range of 1.30-1.35 percent.

The yen fluctuated somewhat against the U.S. dollar, partly reflecting the prospect of a wider interest rate differential between Japan and the United States. It then appreciated against the dollar partly in response to weaker-than-expected U.S. economic indicators. Recently, the yen was being traded in the range of 109-110 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, led mainly by household spending and business fixed investment. The inflation rate continued to be on a moderate but steady rising trend from a longer-term perspective. The effects of the hurricane in late August on the U.S. economy were difficult to estimate at this point, but a possible prolonged period of high crude oil and gasoline prices and the potential negative effects on consumer and business confidence were cause for concern.

The euro area economy remained sluggish, although exports were picking up partly due to depreciation of the euro.

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 had started to pick up. The NIEs and ASEAN economies continued to expand at a moderate pace.

In U.S. and European financial markets, long-term interest rates declined and stock prices were weak, mainly reflecting increased uncertainty about the economic outlook due to the substantial rise in crude oil prices. In financial markets in many emerging economies, their currencies and stock prices were weak and yield differentials between their sovereign bonds and U.S. Treasuries widened.

D. Economic and Financial Developments in Japan

1. Economic developments

Exports had continued to increase, albeit moderately, against the background of the expansion of overseas economies. By region, exports to the United States declined in July, mainly due to the drop in automobiles as a reaction to the previous hike. On the other hand, exports to China posted high growth in July partly buoyed by semiconductor manufacturing equipment, which tended to fluctuate widely. 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 since adjustment pressure in the IT-related sectors seemed to have almost disappeared.

Production was on an uptrend with some fluctuations. Industrial production declined marginally in July, as in the April-June quarter, but was basically on a steady uptrend given that the decline was partly due to some statistical fluctuations with regard to steel ships and drugs. Production was likely to continue increasing at a moderate pace in the July-September quarter, based on the production forecast index and anecdotal information.

Inventories had recently been flat, although they remained low. Adjustments in the IT-related sectors seemed to have been almost completed, as shipments of electronic parts and devices increased in July and production of them was projected to start increasing in the July-September quarter. Inventories in materials industries, for example, the iron and steel and chemical industries, increased somewhat due to the looser supply and demand conditions both at home and abroad.

Business fixed investment had continued to increase against the background of high corporate profits. It was expected to continue increasing, since increases in both domestic and external demand, as well as high corporate profits, were projected to continue.

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 due to favorable summer bonus payments. Regular payments had been increasing extremely gradually, mainly because of the decrease in the ratio of part-time workers. Under these circumstances, household income had been rising moderately, and it was expected to continue increasing gradually.

Private consumption had been steady. Sales indicators such as sales at department stores were somewhat weak in July on the whole, but this was considered to be largely a reaction to the favorable sales in the April-June quarter. Private consumption was likely 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 expected to continue increasing mainly due to high crude oil prices. Consumer prices (excluding fresh food, on a nationwide basis) had been declining slightly on a year-on-year basis. The year-on-year rate of change in consumer prices was projected to be 0.0 percent or a slight increase toward the end of the year. This was mainly because the effects of the decline in rice prices and the reduction in electricity and telephone charges were expected to ease, in a situation where supply and demand conditions continued 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, lending by private banks was around the previous year's level.

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 above the previous year's level.

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

II. Amendment to Margin Tables for Eligible Collateral and Study to Revise the Current Bill Purchasing Scheme

A. Staff Proposal

The staff proposed that the Bank amend Guidelines on Eligible Collateral and principal terms and conditions for repo operations and securities lending to revise the margin tables. This was put forward with a view to maintaining the soundness of the Bank's assets and contributing to market participants' efficient use of collateral, taking into account recent developments in financial markets such as the volatility of market interest rates.

In addition, with a view to facilitating efficient money market operations, the staff proposed that the Bank conduct a study to revise the current bill purchasing scheme in order to make operation-related transactions paperless.

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 agreed that it continued to recover and this was expected to continue. They also concurred with the view that adjustments in IT-related sectors had been almost completed.

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.

Many members expressed views concerning the effects of the rise in crude oil prices on the world economy. Some members cited the following as the main reasons behind the steady expansion of the world economy despite the high crude oil prices. First, the recent rise in crude oil prices was basically due to increases in demand against the background of the continuing high growth in emerging economies where energy efficiency was relatively low, and was not due to significant constraints on the supply side. And second, aggressive tightening of monetary policy had not been implemented given the stability in inflation expectations worldwide. These members said that crude oil prices might increase further due to constraints on the supply side caused partly by the effects of the hurricane in the United States. In that case, the effects of high crude oil prices on economic activity and prices could differ from those observed so far. One member commented that the recent rise in crude oil prices should be understood as due mainly to a tightening of supply and demand conditions because of a faster pace of increase in demand worldwide than in the production capacity of crude oil.

On the U.S. economy, many members expressed the view that household spending and business fixed investment continued to increase steadily, and the economy was likely to continue expanding at a pace around its potential growth rate. Regarding the effects of the hurricane on the U.S. economy, many members commented that although they were difficult to estimate at this point, they might have a negative impact on economic activity through factors such as a possible prolonged period of high crude oil and gasoline prices and a potential deterioration in consumer and business confidence, and thus they would require close monitoring. One member said that the U.S. economy was likely to return to the previous path of economic expansion before long, given that substantial reconstruction-related demand was expected. A different member raised the hike in housing prices as a risk factor, commenting that the possibility could not be ruled out that an adjustment of housing prices might be triggered by, for example, a rise in long-term interest rates accompanying an increase in inflation expectations. Another member said that the upward trend in housing prices had started to change slightly recently, as evidenced by an increase in inventories of houses and a fall in the turnover rate, and thus there might be a decline in housing prices which might in turn cause an increase in the personal saving rate. The member continued that an increase in the saving rate would be a positive change from a longer-term perspective, but in the short term its negative effects on the economy would be cause for concern.

With regard to East Asian economies, many members expressed the view that both domestic and external demand continued to expand strongly in China. One member commented, however, that future developments in the Chinese economy should be watched closely, since there had been no clear signs of deceleration in the economy despite the measures to contain overheating that had been implemented to date. A different member said that, particularly in the ASEAN economies, negative effects of the rise in crude oil prices were cause for concern, but these economies were likely to remain on an expanding trend partly because there had also been positive effects such as an increase in their exports to the Middle East.

Members agreed that Japan's exports continued to increase at a moderate pace, and that growth in exports would accelerate gradually as adjustment pressure in IT-related sectors worldwide had almost disappeared and overseas economies were expected to continue expanding.

As for domestic private demand, members concurred that both business fixed investment and private consumption continued to be firm.

With regard to developments in the corporate sector, members agreed that business fixed investment continued to increase, and was expected to continue increasing against the background of high corporate profits. Some members expressed the view that the Financial Statements Statistics of Corporations by Industry, Quarterly showed that business fixed investment by large manufacturers continued to increase steadily and the uptrend in business fixed investment by small firms and by nonmanufacturers was becoming evident.

Members concurred that positive developments in the corporate sector were spreading steadily to the household sector.

As for the employment and income situation, members agreed that household income had been rising at a moderate pace in a situation where growth in special payments in June and July, when most summer bonus payments were made, was relatively high and regular payments had been increasing extremely gradually, mainly because of the decrease in the ratio of part-time workers.

Regarding private consumption, many members commented that although various sales indicators were somewhat weak in July on the whole, this was largely a reaction to the favorable sales in the April-June quarter. As for the outlook, they expressed the view that private consumption was likely to continue recovering steadily against the background of a gradual increase in household income. One member noted that factors such as wealth effects from the rising stock prices and an increase in dividends also were contributing to the steady growth in private consumption. A different member expressed the view that how demographic changes and the reform of the tax and social security system affected developments in private consumption would require close monitoring.

Many members said that although production was somewhat weak in July as in the April-June quarter, it was basically on a moderate uptrend, the weakness being largely due to statistical fluctuations and other temporary factors. One member, however, pointed out that the indices of inventory ratio, especially those of materials industries, were at relatively high levels. The member continued that there was adjustment pressure on inventories in non-IT-related sectors, and this could restrain production and shipments in the near future.

Members agreed that adjustments in IT-related sectors seemed to have been almost completed, as shipments of electronic parts and devices were increasing recently and production of them was projected to start increasing in the July-September quarter. Some members said, however, that the pace of recovery in IT-related demand was projected to be moderate for the time being mainly for the following reasons. First, growth in Japan's exports of IT-related goods had been sluggish. Second, prices of semiconductors, such as those of dynamic random access memories (DRAMs), had been relatively weak. And third, forecasts of global demand for semiconductors suggested that it lacked strong momentum.

Based on these discussions, many members commented that Japan's economy continued to recover steadily supported by both domestic and external demand and had emerged from its temporary pause. However, given factors such as the fact that the pace of increase in exports remained moderate and the momentum of growth in production lacked strength, the economy was more likely to experience a relatively long period of growth, albeit at a moderate pace, than to accelerate its pace of recovery. One member said that indices of shipments and other supply-side statistics were somewhat weak, and this could be interpreted as a sign that the economic recovery lacked strong momentum.

On prices, members agreed that domestic corporate goods prices had increased, mainly reflecting the surge in crude oil prices, and were expected to continue increasing. They also concurred that although consumer prices (excluding fresh food, on a nationwide basis) had recently been declining slightly on a year-on-year basis, the year-on-year rate of change in consumer prices was projected to be 0.0 percent or a slight increase toward the end of the year. This was because the effects of the decline in rice prices and the reduction in electricity and telephone charges were expected to ease, as supply and demand conditions continued to improve gradually in line with economic recovery.

B. Financial Developments

On the financial front, members concurred that the financial environment remained extremely accommodative. One member pointed out that the year-on-year rate of change in lending by private banks (after adjustment for special items) turned positive in August for the first time since the first release of this statistic in October 1998. The member expressed the view that this was partly attributable to a change in credit demand among firms, which had started to occur against the background of steady increases in business fixed investment, in addition to the fact that the lending attitude of financial institutions was becoming more active.

With regard to financial market developments, some members commented on the fact that Japanese stock prices were recently rising substantially and the Nikkei 225 Stock Average had reached its highest level in about four years. A few members expressed the view that this reflected market participants starting to correct their excessively cautious views about the economic outlook. A different member said that the recent hike in stock prices reflected the active investment stance of foreign investors against the background of the favorable performance of the corporate sector and the undervaluation of Japanese stocks. The member added that, given these developments, Japanese stock prices might move differently from, for example, U.S. stock prices. A few members commented on developments in Japanese long-term interest rates, which had recently been on a declining trend despite the firm stock prices. They expressed the view that this was mainly caused by market participants becoming gradually aware of uncertainty about the world economic outlook due to the prolonged period of high crude oil prices and a resultant decline in U.S. long-term interest rates. A different member said that sustainable non-inflationary growth in the economy and further progress in fiscal consolidation would contribute to stable developments in long-term interest rates.

IV. 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 (CPI) 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 at this point mainly for the following reasons. First, as concern about financial system stability was abating, financial institutions' demand for liquidity required for funds management was on a declining trend. And second, the Bank should encourage formation of interest rates based on the market mechanism as much as possible from an early stage to ensure smooth termination of the quantitative easing policy in the future.

Against this view, the majority of members said that it was appropriate to maintain the current guideline for money market operations, including the proviso. Some members pointed out that responses of financial institutions to the Bank's funds-supplying operations, particularly those with relatively long maturities, were improving, and undersubscription had occurred less frequently. These members expressed the view that this was mainly because financial institutions had become active in raising funds with relatively long maturities against the background of such factors as a strengthening of their outlook for the economy and expectations of a rise in prices. One of these members, however, said that given that there was no change in the declining trend in financial institutions' liquidity demand in a situation where the financial system was stable, it would be appropriate to maintain the current proviso to allow the Bank to respond flexibly to changes in their liquidity demand.

Some members expressed the view that as financial institutions' bidding in the Bank's funds-supplying operations with relatively long maturities was active and thus the Bank could smoothly achieve the target range for the outstanding balance of current accounts, it would be appropriate, from the viewpoint of encouraging smooth formation of interest rates in financial markets and enhancing the timeliness and flexibility of its conduct of monetary policy in the future, to shorten maturities of funds-supplying operations to the extent the market conditions allowed. One member added that, in shortening maturities of funds-supplying operations, the Bank should be careful not to cause excessive volatility in interest rates on term instruments. A different member, who had advocated a lowering of the target range, expressed the view that maturities of funds-supplying operations needed to be shortened to ensure the timeliness and flexibility of the conduct of monetary policy, but the extent to which they could be shortened was limited with the current target range being maintained.

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, considering how market participants would respond, the Bank should carefully examine issues relating to lowering the target range based on the economic situation. A different member commented 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.

Some members said that, as it was becoming likely that the year-on-year rate of change in the CPI would turn positive in the near future, market participants were paying more attention to the timing and process by which the quantitative easing policy would be terminated, and to the conduct of monetary policy after the termination. The Bank's communication of its thinking to the public would therefore become an increasingly important task. A few members commented that in communicating its thinking to the public, the Bank should be very careful not to reduce the timeliness of its conduct of monetary policy in responding to changes in the economic and financial situation. In regard to this, one member expressed the view that, with the effects in terms of policy duration decreasing, the quantitative easing policy would effectively become closer to maintaining zero interest rates not accompanied by commitment in terms of policy duration. The Bank should therefore bear the change in the effects of the current monetary easing policy in mind when it communicated its thinking to the public.

V. 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 with the corporate sector as well as the household sector improving. However, deflation persisted as evidenced, for example, by the year-on-year rate of decline in the CPI and the GDP deflator. As crude oil prices were continuing to rise further, their effects on the domestic and overseas economies, in addition to the effects of the hurricane which would become apparent later, would require close monitoring.
2. (2) 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, and the utmost efforts to achieve these aims continued to be necessary. Therefore, the government would like the Bank to continue to explain 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 other hand, 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) Regarding the formulation of the budget for fiscal 2006, the concluding year of the concentrated consolidation period of structural reforms, the government had decided the overall picture of the budget, which was aimed at further accelerating and expanding structural reforms, at the Council on Economic and Fiscal Policy on August 10, 2005. At the same time, the government released the Economic Forecast for FY 2005 and the projection of the macroeconomic situation for fiscal 2006 as a reference for economic developments. In these documents, the government projected that, given its policy efforts together with the Bank to overcome deflation, the year-on-year growth rates of real and nominal GDP for fiscal 2005 would be 1.6 percent and 1.0 percent, and for fiscal 2006 slightly below 2 percent and around 2 percent.
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.

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." 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 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, as market participants' views on the economy and interest rates were changing, provision of massive amounts of funds based on the current target range for the outstanding balance of current accounts at the Bank was hindering smooth formation of interest rates based on the market mechanism, and could also increase interest rate volatility risk. Therefore, the Bank should correct this situation as long as the maintenance of the current framework of the quantitative easing policy would not be hindered. Second, if the Bank continued to conduct market operations with relatively long maturities in order to maintain the outstanding balance of current accounts at the Bank within the target range, a longer period of time would be needed for the process of termination of the quantitative easing policy, thereby reducing the timeliness and flexibility of the Bank's conduct of monetary policy. Third, termination of the quantitative easing policy should be done gradually in a step-by-step manner, while carefully examining economic and financial developments. And fourth, 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, and thus lowering the outstanding balance of current accounts at the Bank as a response to this was reasonable policy conduct. And second, to ensure financial market stability in the period around the termination of the quantitative easing policy, it would be appropriate to start lowering the outstanding balance in line with developments in the market, rather than lowering it intensively over a short period of time.

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 September 8, 2005 and the whole report on September 9, 2005.⁶

1. 6The English version of the whole report was published on September 12, 2005.

VIII. Approval of the Minutes of the Monetary Policy Meetings

The Policy Board approved unanimously the minutes of the Monetary Policy Meetings of July 27, 2005 and August 8 and 9 for release on September 13, 2005.

IX. Approval of the Scheduled Dates of the Monetary Policy Meetings in October 2005-March 2006

At the end of the meeting, the Policy Board approved the dates of the Monetary Policy Meetings to be held in the period October 2005-March 2006, for immediate release (see Attachment 2).

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Attachment 1

September 8, 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.

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Attachment 2

September 8, 2005
Bank of Japan

Scheduled Dates of Monetary Policy Meetings in October 2005-March 2006

Table : Scheduled Dates of Monetary Policy Meetings in October 2005-March 2006

	Date of MPM	Publication of Monthly Report (The Bank's View)	Publication of MPM Minutes
Oct. 2005	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.)	Jan. 25 (Wed.)
Jan. 2006	19 (Thur.), 20 (Fri.)	20 (Fri.)	Mar. 14 (Tue.)
Feb.	8 (Wed.), 9 (Thur.)	9 (Thur.)	Mar. 14 (Tue.)
Mar.	8 (Wed.), 9 (Thur.)	9 (Thur.)	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).