Minutes of the Monetary Policy Meeting
on March 8 and 9, 2006
(English translation prepared by the Bank's staff based on the Japanese original)
April 14, 2006
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, March 8, 2006, from 2:00 p.m. to 3:50 p.m., and on Thursday, March 9, from 9:00 a.m. to 2:07 p.m.1
Policy Board Members Present2 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. A. Mizuno
Mr. K. G. Nishimura
Government Representatives Present Mr. K. Akaba, Senior Vice Minister of Finance, Ministry of Finance3
Mr. K. Sugimoto, Deputy Vice Minister for Policy Planning and Coordination, Ministry of Finance4
Mr. Y. Nakajo, Vice Minister for Policy Coordination, Cabinet Office
Reporting Staff Mr. E. Hirano, Executive Director (Assistant Governor)
Mr. M. Shirakawa, Executive Director
Mr. A. Yamamoto, Executive Director
Mr. H. Yamaguchi, Executive Director (Director-General, Monetary Affairs Department)
Mr. S. Uchida, Senior Economist, Monetary Affairs Department5
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. T. Kato, Senior Economist, Monetary Affairs Department6
Mr. N. Takeda, Senior Economist, Monetary Affairs Department
- The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on April 10 and 11, 2006 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.
- A member of the Policy Board, Mr. T. Fukuma, was absent and submitted his opinion in writing via the chairman with respect to matters on the agenda of the meeting, in accordance with Article 4, Paragraph 2 of the Rules concerning Policy Board Meetings.
- Mr. K. Akaba was present on March 9.
- Mr. K. Sugimoto was present on March 8.
- Mr. S. Uchida was present on March 8 for the whole of the session, and on March 9 from 9:00 a.m. to 11:50 a.m. and from 12:00 p.m. to 2:07 p.m.
- Mr. T. Kato was present on March 8 for the whole of the session, and on March 9 from 9:00 a.m. to 11:50 a.m. and from 12:09 p.m. to 2:07 p.m.
I. Summary of Staff Reports on Economic and Financial Developments7
A. Money Market Operations in the Intermeeting Period
The Bank conducted money market operations in accordance with the guideline decided at the previous meeting on February 8 and 9, 2006.8 The outstanding balance of current accounts at the Bank moved in the 30-35 trillion yen range.
- 7Reports were made based on information available at the time of the meeting.
- 8The 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 increased.
Japanese stock prices fell, reflecting market participants' speculation about the future conduct of monetary policy. The Nikkei 225 Stock Average was recently moving in the range of 15,500-16,000 yen.
Long-term interest rates had basically been more or less flat, and were moving in the range of 1.60-1.65 percent recently.
The yen appreciated against the U.S. dollar, as it was purchased against the background of market participants' speculation about the future conduct of monetary policy. It depreciated thereafter as the dollar was purchased by foreign investors, and was recently being traded in the range of 116-118 yen to 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.
In the euro area, although the economy remained somewhat sluggish, the momentum for recovery had been gradually increasing as evidenced by the pickup in exports and production 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 NIEs and ASEAN economies continued to expand at a moderate pace on the whole, although negative effects of high energy prices could be seen in some economic activity.
In U.S. and European financial markets, long-term interest rates had been more or less flat. Stock prices in the United States and Europe had generally been firm. In financial markets in many emerging economies, their currencies and stock prices rose and yield differentials between their sovereign bonds and U.S. Treasuries narrowed on the whole.
D. Economic and Financial Developments in Japan
1. Economic developments
Exports had continued to increase against the background of the expansion of overseas economies. Exports to the United States had continued to increase steadily, and had posted a sizable gain recently led by automobile-related goods. Exports to the European Union and the NIEs had also been on a moderate increasing trend. Against the background of the further expansion of overseas economies, especially in the United States and East Asia, exports were expected to continue rising.
In the corporate sector, business fixed investment had continued to increase, and was expected to keep increasing because the expansion in domestic and external demand and the high level of corporate profits were likely to be maintained.
As for the employment and income situation in the household sector, household income had continued rising moderately, reflecting improvements in employment and wages, as various indicators for labor market conditions had been improving. The gradual increase in household income was likely to continue, given that firms had begun to perceive their holdings of labor as insufficient and corporate profits were expected to remain high.
Private consumption had become solid. The number of new passenger-car registrations had been picking up since the beginning of 2006, after showing weak developments in the second half of 2005. Sales of electrical appliances had continued their steady increase, and sales at department stores had remained firm. As for the outlook, private consumption was likely to continue increasing steadily, partly against the background of a gradual increase in household income.
Production had continued to increase against the background of the growth in domestic and external demand. Industrial production rose for the sixth consecutive month in January. Production was expected to continue its uptrend. Inventories had been more or less in balance with shipments.
Domestic corporate goods prices had continued to increase, mainly reflecting the rise in international commodity prices. They were expected to continue increasing for the time being, mainly due to the effects of rising international commodity prices. The year-on-year rate of change in the consumer price index (CPI; excluding fresh food, on a nationwide basis), which had been slightly positive in November and December at 0.1 percent in both months, recorded a larger increase of 0.5 percent in January. As for the outlook, the year-on-year rate of change in the CPI was projected to follow a positive trend, albeit with some fluctuations, as supply-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 had also been improving. The decline in credit demand in the private sector was coming to a halt. Under these circumstances, the rate of increase in the amount outstanding of lending by private banks was accelerating, 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 2.0 percent, and that of the money stock (M2+CDs) had been 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 current state of Japan's economy, members agreed that it continued to recover steadily. Many members said that the economy was likely to experience a sustained recovery in an environment in which a virtuous cycle of production, income, and expenditure could operate, reflecting the recovery in both domestic and external demand and also in the corporate and household sectors.
Members agreed that overseas economies, particularly those of the United States and East Asia, continued to expand, and were likely to keep expanding.
On the U.S. economy, many members expressed the view that it continued to expand steadily, led mainly by household spending and business fixed investment, and was likely to keep expanding at a pace around its potential growth rate. A few members noted that housing sales were beginning to decelerate.
With regard to East Asian economies, members agreed 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 on the whole.
Some members commented on risk factors for the global economy that attention should be paid, among other factors, to the rise in international commodity prices, particularly crude oil prices, and a possible concomitant heightening of inflation expectations, and to a possible rise in U.S. long-term interest rates. One member added that possible effects of global imbalances on international financial markets continued to warrant careful attention as a medium- to long-term risk.
Regarding Japan's economy, members agreed that exports had continued to increase, reflecting the expansion of overseas economies, and were likely to continue to rise.
As for domestic private demand, members concurred that business fixed investment had continued to increase against the background of the high level of corporate profits, and private consumption had become solid as positive developments in the corporate sector had been spreading to the household sector.
With regard to developments in the corporate sector, members agreed that business fixed investment had continued to increase, and was likely to keep increasing because the perception among firms of having excess production capacity had dissipated and corporate profits remained high. Some members said that, although business fixed investment, especially by small and medium-sized firms, decreased in the October-December quarter based on the Financial Statements Statistics of Corporations by Industry, Quarterly, this was thought to be largely due to temporary fluctuations. They continued that, judging from leading indicators such as machinery orders, business fixed investment could be considered to remain on an uptrend. One member said that future developments in corporate profits should be watched carefully, as there were signs of the break-even point for firms and the share of labor in income distribution starting to rise.
As for the employment and income situation, members agreed that the number of employees and wages had been increasing, and household income had continued to rise moderately, in a situation where labor market conditions had continued to improve and firms had started to perceive their holdings of labor as insufficient, as evidenced by, for example, the ratio of job offers to applicants exceeding 1.00 for the second consecutive month.
Members concurred that private consumption had become solid, and was likely to continue to recover steadily because the employment and income situation had continued to improve and indicators for consumer sentiment had been on an improving trend. Some members pointed out that the number of new passenger-car registrations had been picking up since the beginning of 2006, supported by the introduction of new models, after showing weak developments in the second half of 2005. One member noted that private consumption on a GDP basis had been increasing for the fourth consecutive quarter. A few members said that sales of luxury goods had been favorable, and this might be due to wealth effects mainly stemming from the rise in stock prices.
Members expressed the view that production had continued to increase against the background of the growth in domestic and external demand, and was likely to increase further, judging from the production forecast index and anecdotal information.
A few members said that future developments in production of IT-related goods warranted attention.
With regard to prices, members agreed that domestic corporate goods prices had continued to increase, mainly reflecting the rise in international commodity prices, and said that they were expected to continue increasing. A few members commented that crude oil prices remained at high levels due mainly to geopolitical risks, and said that developments in international commodity prices continued to require vigilant monitoring.
Members commented that the year-on-year rate of change in the CPI (excluding fresh food, on a nationwide basis), which had been slightly positive in November and December 2005 at 0.1 percent in both months after recording 0.0 percent in October, registered a relatively clear increase of 0.5 percent in January 2006. Many members said that the year-on-year rate of change in the CPI, excluding special factors such as petroleum product prices and electricity and telephone charges, also turned positive in January at 0.2 percent. One member pointed out that the year-on-year rate of increase in the CPI (excluding fresh food) in the Tokyo metropolitan area rose in February from January. Another member noted that the trimmed mean of the year-on-year rate of change in the CPI was also positive. A different member added that, in terms of the trimmed mean of the year-on-year rate of change in the CPI by category, an increase in that for services was expanding and a decline in that for goods was narrowing. A few members said that the year-on-year rate of change in many items included in the CPI had begun to show steady upward movement since November 2005.
In relation to future developments in consumer prices, many members said that, against the background of the continuing steady recovery in the economy, the output gap was gradually narrowing and unit labor costs were facing weakening downward pressures as wages had begun to rise amid productivity gains. One member noted that households and firms were shifting up their expectations for inflation. A different member pointed out that the rise in imputed rent included in housing expenses, which had a large weight in the CPI, was becoming more evident, and there were signs of a rise in prices for various goods and services reflecting a tightening of the labor market. The member continued that the rate of decline in the price index for personal computers, which had been considerable due to quality adjustment, was decreasing. Most members agreed that, on the premise that the environment for prices continued to improve, the year-on-year change in the CPI was expected to remain positive, although some fluctuations might be observed in monthly data.
B. Financial Developments
On the financial front, members concurred that the financial environment remained extremely accommodative.
One member said that signs of economic recovery were also becoming more evident on the financial side, noting the following factors. First, the rate of increase in the amount outstanding of lending by private banks (after adjustment for special items) had been accelerating since it turned positive in the summer of 2005. And second, the decline in credit demand in the private sector was coming to a halt as banks' lending attitude became more active.
Some members commented that, although stock prices were recently showing nervous developments in the 15,500-16,000 yen range, the fundamental environment surrounding stock prices, namely, high corporate profits and steady economic recovery, remained unchanged.
Some members noted that long-term interest rates were more or less flat at around 1.6 percent, but interest rates on instruments with short- and medium-term maturities were increasing due partly to market participants' speculation regarding monetary policy. A few members added that market participants had already been factoring in to a great extent the termination of the quantitative easing policy.
III. Summary of Discussions on Monetary Policy for the Immediate Future
A. Guideline for Money Market Operations
Members then discussed the conduct of monetary policy for the immediate future.
Most members' view was that, based on the assessment of economic activity and prices described earlier, it could be judged that the condition laid out in the commitment -- the Bank would maintain the quantitative easing policy until the year-on-year change in the CPI (excluding fresh food, on a nationwide basis) registered zero percent or higher on a sustainable basis -- which was set when the policy was introduced in March 2001, was fulfilled. Most members agreed that it would therefore be appropriate to terminate the quantitative easing policy and shift the operating target of money market operations to an interest rate, and state in the guideline for money market operations for the intermeeting period that the Bank would encourage the uncollateralized overnight call rate to remain at effectively zero percent. In relation to this, a few members commented that the uncollateralized overnight call rate was likely to move at close to zero percent in general, as the outstanding balance of current accounts at the Bank was exceeding required reserves. However, until the functioning of the money market was fully restored, the rate might temporarily rise somewhat due to remaining frictions in the money market in cases where, for example, the supply-demand balance of funds tightened reflecting concentration of funds settlement or some other factor. They continued that the wording "at effectively zero percent" would therefore be appropriate for the guideline for money market operations for the intermeeting period.
One member said that the Bank should not decide to terminate the quantitative easing policy at this meeting, but should postpone the decision, preferably until the meeting on April 28, when the next Outlook for Economic Activity and Prices (hereafter the Outlook Report) would be published, or at least until the meeting on April 10 and 11, mainly for the following reasons. First, judgment of whether the year-on-year change in the CPI would remain positive should be based on more extended and detailed analysis. And second, termination of the quantitative easing policy in the period leading up to the fiscal year-end might pose a risk to the stability of the financial markets.
Against this view, a few members expressed the view that, even if the Bank postponed the decision for a month or two, additional factors relevant to the judgment of fulfillment of the condition laid out in the commitment were unlikely to emerge. A few other members said that the quantitative easing policy was an unprecedented monetary policy, which undermined the flexibility of the conduct of monetary policy and the proper functioning of the market. Therefore, since the condition laid out in the commitment was judged to have been fulfilled, it would be appropriate to shift the operating target of money market operations swiftly to an interest rate.
B. Measures concerning Money Market Operations
Members discussed measures concerning money market operations when the Bank terminated the quantitative easing policy. Many members said that, in the process of reducing the outstanding balance of current accounts at the Bank toward a level in line with required reserves, the Bank should carry out money market operations with due consideration, given that financial institutions had managed liquidity against the backdrop of large amounts of current account balances and extensive funds-supplying operations by the Bank for a prolonged period under the quantitative easing policy. From this viewpoint, many members commented that reduction of the current account balance should be carried out over a period of a few months, based on full consideration of conditions in the short-term money market. Concerning the complementary lending facility, they expressed the view that the loan rate should remain at the current level of 0.1 percent and the temporary waiver of add-on rates for frequent users of the facility, in effect since March 2003, should be maintained. Many members said that the process of reduction of the outstanding balance of current accounts at the Bank should be managed through short-term money market operations, and the outright purchases of long-term interest-bearing Japanese government bonds should be continued at the current amounts and frequency for some time, with due regard for the future condition of the Bank's balance sheet.
C. The Bank's Communication regarding the Conduct of Monetary Policy
Members discussed the Bank's communication regarding its conduct of monetary policy after it terminated the quantitative easing policy.
Many members expressed the view that, after shifting the operating target of money market operations to an interest rate, the Bank would need to introduce a new framework to conduct monetary policy and explain it to the public, while ensuring transparency as well as flexibility of monetary policy.
Many members said that it was therefore important that, as the first step, the Bank review and make public its thinking on price stability, which was an objective of monetary policy. The view was expressed by many members that, in order to improve the predictability of monetary policy, the Bank should present more clearly its basic perspectives in examining economic activity and prices, and prepare an outline of its current view on monetary policy based on examination from those perspectives and disclose it.
Many members said that, as stated in "On Price Stability" in October 2000, the Bank considered that price stability was a state where various economic agents including households and firms could make decisions regarding such economic activities as consumption and investments without being concerned about fluctuations in the general price level. They emphasized that the Bank should aim to realize price stability over the medium to long term and should be forward-looking in its conduct of monetary policy, given the time lag before the effects of monetary policy became apparent. Many members commented that the basic indicator for the evaluation of price developments should be the CPI, which covered goods and services consumed by households, the public at large was accustomed to, and also had an advantage in terms of its timeliness. One member expressed the opinion that the Bank should clarify whether it would base its evaluation of price developments on the core CPI or the headline CPI. Against this view, some members said that from a medium- to long-term perspective there would be basically no point in differentiating between the two types of index because, although the core CPI was designed to exclude factors causing temporary fluctuations, such fluctuations would be averaged out in the medium to long term.
Many members commented that it could be considered that price stability was, conceptually, a state where the change in a price index without measurement bias was zero percent. They continued that, from the viewpoint of preventing a deflationary spiral, allowing a slight year-on-year increase in the CPI as a "safety margin" could be deemed consistent with the conceptual understanding of price stability. Some members said that there seemed to be no significant bias in the Japanese CPI mainly due to the efforts made by Japan's Statistics Bureau. Regarding the "safety margin" which acted as a buffer against the risk of declining prices, one member expressed the view that the necessary margin was not large given the following points. First, downward rigidity of nominal wages seemed to have been decreasing. Second, the potential growth rate was likely to increase. And third, the Japanese financial system had regained stability. A different member said that, although neither measurement bias nor the "safety margin" could be expressed by a single numerical value, it was still important for the Bank to discuss price stability in numerical terms taking such factors into account.
Many members said that the conduct of monetary policy must take account of the possibility that the rate of inflation at which the public perceived price stability might be very low, because Japan's average rate of inflation over the last few decades had been lower than in major overseas economies and the economy had experienced a prolonged period of low inflation since the 1990s.
Based on these discussions, members concurred that the level of inflation rate that the Bank currently understood as price stability from a medium- to long-term viewpoint for its conduct of monetary policy was somewhat lower than in major overseas economies.
Members then discussed whether the Bank should express its understanding of medium- to long-term price stability in the form of a numerical value and release it. One member said that the member would object to releasing such a numerical value unless members shared an understanding that the announced figure represented individual members' numerically expressed understanding of price stability, which they would bear in mind in making decisions regarding the conduct of monetary policy, and was not authorized by the Bank as a target rate of inflation, a reference rate for price stability, or a numerical definition of price stability. The member added that, if the meaning of an announced figure was not properly understood, it could even have an adverse effect on the transparency of the conduct of monetary policy. Some members said that, given that price stability in terms of a numerical value would change with changes in the price formation mechanism, it would be difficult to indicate a single numerical figure representing the consolidated view of the members as a target rate of inflation, a reference rate for price stability, or a numerical definition of price stability in the current situation where the structure of the economy was at a turning point. They continued that, from the viewpoint of ensuring the transparency of the conduct of monetary policy, it was worth disclosing the result of discussions in which individual members expressed their understanding of price stability in numerical terms. Members emphasized that when disclosing a numerical value the Bank should clarify that it would not conduct monetary policy in an automatic manner based on the numerical value. Rather, the Bank would assess economic activity and prices and make decisions regarding the conduct of monetary policy with individual members taking into account the Bank's basic thinking on price stability and their individual understanding of price stability in numerical terms.
Members then exchanged views concerning the level of inflation, including specific numerical levels, that each member currently understood as representing "price stability from a medium- to long-term viewpoint."
A few members said that, taking into consideration the measurement bias and the "safety margin" necessary to prevent a sustained decline in prices, the level of inflation that represented their views on "price stability from a medium- to long-term viewpoint" would be higher than 1 percent but lower than 2 percent. Some members commented that, taking into account the possibility that the rate of inflation at which the public perceived price stability might be very low as well as the measurement bias and the necessary "safety margin," the level should be in a range on both sides of about 1 percent. Some other members said that it was important to bear in mind the fact that Japan's average rate of inflation over the last few decades had been low and consequently the inflation level at which the public perceived price stability seemed to be low. The level should therefore be considered to be below 1 percent but with a certain range of variation. One of these members said that, given the measurement bias of the CPI and the distribution of the public's consumption patterns, the rate of increase in the CPI at which the general public perceived price stability would be in a range centering on slightly below 1 percent. A different member commented that the necessary "safety margin" had been diminishing due, for example, to a decrease in downward rigidity of nominal wages, and the median figure was thought to be positive and close to zero percent.
Based on these discussions, one member said that, in the current situation where the structure of the economy was changing dramatically, there was a range of views among the members in their "understanding of medium- to long-term price stability," reflecting differences in their perception of the measurement bias, the "safety margin," and the inflation rate at which the public perceived price stability, and also in the weight they attached to each factor. However, in terms of the year-on-year change in the CPI, an approximate range between zero and 2 percent would cover the distribution of each member's understanding of medium- to long-term price stability, and seemed to be generally consistent with the members' views. With regard to median figures, the member noted that, except for a part of members having a lower figure, most members' median figures seemed to fall on both sides of 1 percent. The member added that it would be meaningful to disclose an outline of the discussions. A different member agreed that this summing up was appropriate. Some members commented that, as the price formation mechanism would change with structural changes in the economy, price stability in terms of a numerical value might also change accordingly. Therefore, the understanding of medium- to long-term price stability that each member bore in mind in making decisions regarding the conduct of monetary policy should be reviewed annually as a rule.
Many members commented that, as it was vital to examine economic activity and prices in making monetary policy decisions, it would be appropriate for the Bank to clarify its "perspectives" or viewpoints that would be a basis for such examination. A few members said that the Bank would be forward-looking in its future conduct of monetary policy based on comprehensive analysis of economic activity and prices. Given this, it should present the basic points of its comprehensive analysis more systematically.
Many members said that, with regard to the assessment of economic activity and prices one to two years in the future as described in the Outlook Report, it was important for the Bank to examine whether, in the outlook deemed most likely by the Bank, economic activity and prices would follow a path of sustainable growth under price stability.
Many members said that, since the economic projection deemed most likely by the Bank, which was described in the Outlook Report, covered a period of about one to two years, the Bank would need to examine various risks that were most relevant to the conduct of monetary policy, namely, those that might affect economic activity and price developments in the long term, beyond the Outlook Report's projection period, and the risk that developments in economic activity and prices might deviate from the scenario deemed most likely by the Bank. A few members raised the following two specific types of risk as examples. The first was risk factors that might significantly impact economic activity and prices if they materialized, such as high inflation, a speculative bubble, or a deflationary spiral, although the probability of these risks materializing was low. The second was risk factors that might affect economic activity and prices in the medium to long term, for example, the financial environment, asset prices, and the public's expectations of inflation.
Many members said that the Bank should outline its current view on monetary policy, in the light of its deliberations on economic activity and prices from the two perspectives described above, and disclose it periodically in the Outlook Report as a rule.
A few members said that the framework of clarifying the Bank's thinking on price stability, examining economic activity and prices from the two perspectives, and outlining its current view on monetary policy was an innovative and transparent policy scheme which reflected the current situation of Japan's economy.
D. The Bank's Current View on Monetary Policy
Members discussed their current view on monetary policy for the immediate future. One member said that, from the first perspective of examining the price situation one to two years in the future, there was a high probability of realizing sustainable growth with price stability. The member continued that, from the second perspective of examining risks in the longer term, it should be noted that over the medium to long term there was a risk of swings in economic activity as the stimulus from monetary policy was amplified against the backdrop of improving corporate profitability and a turnaround in price developments. Other members agreed with this examination from the two perspectives.
In the light of deliberations from the two perspectives described earlier, a few members commented on the future path of monetary policy that there would be a period in which the overnight call rate was at effectively zero percent, followed by a gradual adjustment in the light of developments in economic activity and prices. In this process, if it was judged that inflationary pressures were restrained as the economy followed a balanced and sustainable growth path, an accommodative monetary environment ensuing from very low interest rates would be maintained for some time. Other members agreed with these members.
IV. Submission of Policy Proposals
Based on the above discussions, the chairman formulated the following three policy proposals to reflect the majority view.
The Chairman's Policy Proposal on the Guideline for Money Market Operations:
1. The operating target of money market operations will be changed from the outstanding balance of current accounts at the Bank to the uncollateralized overnight call rate.
2. The guideline for money market operations for the intermeeting period ahead will be as follows.
The Bank of Japan will encourage the uncollateralized overnight call rate to remain at effectively zero percent.
3. A public statement will be decided separately.
The Chairman's Policy Proposal on the Release of a Public Statement concerning a Change in the Guideline for Money Market Operations:
The decision concerning a change in the guideline for money market operations will be made public by the attached statement (see Attachment 1).
The Chairman's Policy Proposal on the Release of a Public Statement concerning the Introduction of a New Framework for the Conduct of Monetary Policy:
The decision concerning the introduction of a new framework for the conduct of monetary policy will be made public by the attached statement (see Attachment 2).
V. Remarks by Government Representatives
Following the chairman's proposal to change the guideline for money market operations and to introduce a new framework for the conduct of monetary policy, the representatives from the Ministry of Finance (MOF) and the Cabinet Office requested the chairman to adjourn the meeting because they needed to discuss the government's stance on the proposal and might need to contact the Minister of Finance and the Minister of State for Economic and Fiscal Policy. The chairman approved the request. (The meeting adjourned at 1:17 p.m. and reconvened at 1:46 p.m.)
After the meeting reconvened, the representative from the MOF made the following remarks.
- Japan's economy was recovering, as seen in the fact that the first preliminary estimate of real GDP for the October-December quarter of 2005 indicated quarter-on-quarter growth of 1.4 percent. Although moderate deflation persisted, a comprehensive review of the underlying trend of prices suggested that the price situation was improving gradually: for example, the year-on-year rate of change in the CPI (excluding fresh food, on a nationwide basis) was 0.5 percent in January 2006, registering zero percent or higher for the fourth consecutive month. The government considered that it was necessary to ensure that this improvement continued.
- The chairman had submitted proposals to terminate the quantitative easing policy and to introduce a new framework for the conduct of monetary policy.
- The government would like the Bank to make a decision concerning termination of the quantitative easing policy based on careful consideration of the following points. First, it was necessary for the government together with the Bank to firmly continue policy efforts to overcome deflation. And second, the current situation required that due consideration be given to the stability of the financial markets.
- The government considered that, if the Bank decided to terminate the quantitative easing policy at this meeting, it should firmly support the economy from the financial side by maintaining a zero interest rate environment in order to ensure the overcoming of deflation in a situation where there remained disparities in economic conditions among regions in terms of the real economy. Moreover, the government considered it necessary that the Bank conduct monetary policy that would ensure market stability. Specifically, first, after termination of the quantitative easing policy, the Bank should carry out money market operations appropriately to prevent the financial markets from becoming unstable by, for example, carefully lowering the outstanding balance of current accounts at the Bank taking into account developments in the market. Second, the Bank should enhance the transparency of its communication concerning its thinking and the future course of its monetary policy, given that the financial markets could become unstable due to speculation. And third, the Bank should make it clear that it would closely monitor developments in overall interest rates including long-term interest rates, and should continue its outright purchases of long-term Japanese government bonds at the current amounts.
- The government would respect the Bank's decision concerning termination of the quantitative easing policy, since the discussions and the policy proposals at this meeting showed that the Bank shared the government's views. The government would like the Bank to support the economy from the financial side responsibly to prevent the economy from weakening again, bearing in mind that ensuring the sustainability of the economic recovery and overcoming deflation were important policy tasks. The government hoped that the Bank would continue to implement appropriate monetary policy consistent with the government's economic policy.
The representative from the Cabinet Office made the following remarks.
- The government considered that Japan's economy was recovering as stated in the Monthly Economic Report of February 2006, in which it made an upward revision of the assessment of the current state of the economy. However, deflation, albeit moderate, persisted, based on a comprehensive review of the underlying trend of prices. It was therefore vital to achieve the government's goal of overcoming deflation in fiscal 2006, as it had reiterated in such Cabinet statements as "Basic Policies for Economic and Fiscal Management and Structural Reform," "Structural Reform and Medium-Term Economic and Fiscal Perspectives," and "Economic Outlook and Basic Stance for Economic and Fiscal Management."
- The government would like to strongly request at this time that the Bank continue its policy efforts to overcome deflation together with the government, taking fully into consideration consistency with the government's basic policy for the economy when it examined termination of the quantitative easing policy. Termination of the quantitative easing policy would mean that the commitment in terms of policy duration would be lost. The government therefore hoped that the Bank would present a transparent framework of monetary policy that would ensure accountability to the public, making it easier for market participants and the public to form an economic outlook and stabilizing their expectations.
VI. Votes
The following three policy proposals submitted by the chairman were put to the vote: (1) the guideline for money market operations; (2) the release of a public statement concerning a change in the guideline for money market operations; and (3) the release of a public statement concerning the introduction of a new framework for the conduct of monetary policy.
The chairman's policy proposal on the guideline for money market operations was approved by 7-1 majority vote.
Votes for the proposal: Mr. T. Fukui, Mr. T. Muto, Mr. K. Iwata, Ms. M. Suda, Mr. H. Haru, Mr. A. Mizuno, and Mr. K. G. Nishimura.
Votes against the proposal: Mr. S. Nakahara.
Mr. S. Nakahara dissented from the proposal for the following reasons, although his view of the economic situation did not differ fundamentally from that of the other members. First, judgment of whether the year-on-year change in the CPI remained positive on a sustainable basis from monthly data of the CPI should be based on more extended analysis. Second, judgment that the year-on-year change in the CPI would not become negative again should be based on a careful analysis and examination as it was in the Outlook Report. Third, it was important to take into consideration the March Tankan (Short-Term Economic Survey of Enterprises in Japan) and other indicators that would be released through April in making a decision on termination of the quantitative easing policy. And fourth, termination of the quantitative easing policy in the period leading up to the fiscal year-end, which was a critical time for the financial markets, might pose a risk, while the cost of postponing it until April would be negligible.
The chairman's policy proposal on the release of a public statement concerning a change in the guideline for money market operations was approved, by unanimous vote.
Votes for 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.
Votes against the proposal: None.
The chairman's policy proposal on the release of a public statement concerning the introduction of a new framework for the conduct of monetary policy was approved, by unanimous vote.
Votes for 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.
Votes against the proposal: None.
The Policy Board approved preparation of the background notes for "The Bank's Thinking on Price Stability" expressed in "The Introduction of a New Framework for the Conduct of Monetary Policy" and their release on March 10, 2006.
Government representatives made the following points in comments after the votes: the government would like the Bank to support the economy from the financial side responsibly, bearing in mind that ensuring the sustainability of the economic recovery and overcoming deflation were important policy tasks; and it would also like the Bank to carefully explain its view on economic activity and prices and its outlook, as well as the relationship between these and the overcoming of deflation, in order to ensure financial market stability. The representatives added that they planned to announce the government's response to the Bank's decision at this meeting later in the day.
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 March 9, 2006 and the whole report on March 10, 2006.9
- 9The English version of the whole report was published on March 13, 2006.
VIII. Approval of the Minutes of the Monetary Policy Meetings
The Policy Board approved unanimously the minutes of the Monetary Policy Meetings of January 19 and 20, 2006 and February 8 and 9 for release on March 14, 2006.
IX. Approval of the Scheduled Dates of the Monetary Policy Meetings in April-September 2006
At the end of the meeting, the Policy Board approved the dates of the Monetary Policy Meetings to be held in the period April-September 2006, for immediate release (see Attachment 3).
Attachment 1
March 9, 2006
Bank of Japan
Change in the Guideline for Money Market Operations
Change in the Guideline for Money Market Operations
At the Monetary Policy Meeting held today, the Bank of Japan decided to change the operating target of money market operations from the outstanding balance of current accounts at the Bank to the uncollateralized overnight call rate, and to set the following guideline for money market operations for the intermeeting period.
The Bank of Japan will encourage the uncollateralized overnight call rate to remain at effectively zero percent.
Measures concerning Money Market Operations
The outstanding balance of current accounts at the Bank of Japan will be reduced towards a level in line with required reserves. Given that financial institutions have managed liquidity against the backdrop of large amounts of current account balances and extensive funds-supplying operations by the Bank for a prolonged period since the adoption of the quantitative easing policy, the reduction in current account balance is expected to be carried out over a period of a few months, taking full account of conditions in the short-term money market. The process will be managed through short-term money market operations. With respect to the outright purchases of long-term interest-bearing Japanese government bonds, purchases will continue at the current amounts and frequency for some time, with due regard for future conditions of the balance sheet of the Bank. With respect to the complementary lending facility, the loan rate will remain at the current level. The temporary waiver of add-on rates for frequent users of the facility, in effect since March 2003, will also be maintained.
The Bank's View on Economic Activity and Prices
Since March 2001, in view of preventing sustained decline in prices and preparing the basis for sustainable growth, the Bank of Japan has supplied extremely ample liquidity with current account balance at the Bank as the main operating target. The Bank also made a clear commitment to maintain the policy until the consumer price index (excluding fresh food, on a nationwide basis) registers stably zero percent or an increase year on year. The Bank has since maintained the quantitative easing policy according to this commitment.
Currently, Japan's economy continues to recover steadily. Exports have continued to increase reflecting the expansion of overseas economies. With respect to domestic private demand, business fixed investment has also continued to increase against the backdrop of high corporate profits. Robust corporate activity is positively influencing households, and private consumption has become solid. Looking ahead, the Bank expects a sustained recovery.
Concerning prices, year-on-year changes in the consumer price index turned positive. Meanwhile, the output gap is gradually narrowing. Unit labor costs generally face weakening downward pressures as wages began to rise amid productivity gains. Furthermore, firms and households are shifting up their expectations for inflation. In this environment, year-on-year changes in the consumer price index are expected to remain positive. The Bank, therefore, judged that the conditions laid out in the commitment are fulfilled.
Current View on Monetary Policy
Given that the effects of the quantitative easing policy on economic activity and prices now mainly result from short-term interest rates being zero, there will be no abrupt change as a result of today's policy decision.
Looking ahead, in considering the central scenario for economic activity and prices, there is a high probability of realizing sustainable growth under price stability. In the meantime, it should be noted that, over the medium- to long-term, there is a risk of swings in economic activity, as the stimulus from monetary policy is amplified against the backdrop of improving corporate profitability and a positive turn in price developments.
On the future path of monetary policy, there will be a period in which the overnight call rate is at effectively zero percent, followed by a gradual adjustment in the light of developments in economic activity and prices. In this process, if the risk mentioned above remains muted, in other words, if it is judged that inflationary pressures are restrained as the economy follows a balanced and sustainable growth path, an accommodative monetary environment ensuing from very low interest rates will probably be maintained for some time.
March 9, 2006
Bank of Japan
At the Monetary Policy Meeting held today, the Bank of Japan decided, by 7-1 majority vote, to set the following guideline for money market operations for the intermeeting period:
The Bank of Japan will encourage the uncollateralized overnight call rate to remain at effectively zero percent.
Attachment 2
March 9, 2006
Bank of Japan
The Introduction of a New Framework for the Conduct of Monetary Policy
The Bank of Japan Law stipulates the principle of monetary policy as "contributing to the sound development of the national economy" "through the pursuit of price stability." Based on this principle, the Bank is pursuing an appropriate course of monetary policy. At the Monetary Policy Meeting held today, the Bank decided to introduce a new framework for the conduct of monetary policy, as well as to review its thinking on price stability.
1. A New Framework for the Conduct of Monetary Policy
(1) Clarifying Price Stability
The Bank of Japan will review its basic thinking on price stability, and disclose a level of inflation rate that its Policy Board members currently understand as price stability from a medium- to long-term viewpoint, in their conduct of monetary policy ("an understanding of medium- to long-term price stability," see infra). Board members will conduct monetary policy in the light of such thinking and understanding.
(2) Examining Economic Activity and Prices from Two Perspectives
In deciding the conduct of monetary policy, the Bank of Japan will examine economic activity and prices from two perspectives explained below.
The first perspective is examining, as regards economic activity and prices one to two years in the future, whether the outlook deemed most likely by the Bank of Japan follows a path of sustainable growth under price stability.
The second perspective is examining, in a longer term, various risks that are most relevant to the conduct of monetary policy aimed at realizing sustainable growth under price stability. More specifically, for example, the Bank of Japan may examine risk factors that will significantly impact economic activity and prices when they materialize although the probability is low.
(3) Outlining the Current View on Monetary Policy
The Bank of Japan will, in the light of deliberations from the two perspectives described above, outline the current view on monetary policy, and, as a rule, disclose it periodically in the Outlook for Economic Activity and Prices.
2. The Bank's Thinking on Price Stability
Price stability is a state where various economic agents including households and firms may make decisions regarding such economic activities as consumption and investments without being concerned about the fluctuations in the general price level.
Price stability is an indispensable prerequisite for realizing sustainable growth, and the Bank of Japan is responsible for realizing price stability through an appropriate conduct of monetary policy. In this regard, given that the effects of monetary policy take time to work through the economy and that volatility of output may actually be amplified when attempts are made to absorb every short-term change in prices resulting from various shocks, the Bank strives to forecast developments in economic activity and prices from a sufficiently long-term viewpoint and to realize price stability over the medium to long term.
The basic indicator for the evaluation of price developments is a price index that covers goods and services consumed by households and which the public at large is accustomed to. In particular, the consumer price index is important in the light of its favorable attributes including timeliness.
Price stability is, conceptually, a state where the change in the price index without measurement bias is zero percent. Currently, there seems to be no significant bias in the Japanese consumer price index. If there is a risk of falling into a vicious cycle of declining prices and deteriorating economic activity, depending on the weight attached to the risk, the accommodation of slight inflation may be deemed consistent with an understanding of price stability in the conduct of monetary policy.
In the case of Japan, the average rate of inflation over the last few decades is lower than major overseas economies. Japan has also experienced a prolonged period of low rates of inflation since the 1990s. Consequently, the rate of inflation at which households and firms perceive price stability seems to be low, and economic decisions may be guided by such a low inflation environment. The conduct of monetary policy must take account of such possibilities.
In today's Monetary Policy Meeting, there was a discussion of the level of inflation rate that each Policy Board member currently understands as price stability from a medium- to long-term viewpoint, in the conduct of monetary policy ("an understanding of medium- to long-term price stability"). While there was a range of views, reflecting the differences in the relative weight attached to factors affecting the understanding of price stability, it was recognized that the level was somewhat lower than that in major overseas economies. It was agreed that, by making use of the rate of year-on-year change in the consumer price index to describe the understanding, an approximate range between zero and two percent was generally consistent with the distribution of each Board member's understanding of medium- to long-term price stability. Most Board members' median figures fell on both sides of one percent. Given that the understanding of medium- to long-term price stability may change gradually reflecting developments such as structural changes in the economy, as a rule, Board members will review it annually.
Attachment 3
March 9, 2006
Bank of Japan
Scheduled Dates of Monetary Policy Meetings in April-September 2006
| Date of MPM | Publication of Monthly Report (The Bank's View) |
Publication of MPM Minutes |
|
|---|---|---|---|
| Apr. 2006 | 10 (Mon.), 11 (Tue.) | 11 (Tue.) | May 24 (Wed.) |
| 28 (Fri.) | -- | June 20 (Tue.) | |
| May | 18 (Thur.), 19 (Fri.) | 19 (Fri.) | June 20 (Tue.) |
| June | 14 (Wed.), 15 (Thur.) | 15 (Thur.) | July 20 (Thur.) |
| July | 13 (Thur.), 14 (Fri.) | 14 (Fri.) | Aug. 16 (Wed.) |
| Aug. | 10 (Thur.), 11 (Fri.) | 11 (Fri.) | Sep. 13 (Wed.) |
| Sep. | 7 (Thur.), 8 (Fri.) | 8 (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 (April 2006) will be published at 3:00 p.m. on Friday, April 28, 2006 (the whole report including the background will be published at 2:00 p.m. on Monday, May 1).