Discussions about the Review at the Monetary Policy Meetings
Discussions about the review of monetary policy from a broad perspective at the Monetary Policy Meetings (MPMs) are excerpted from the minutes of the meetings and provided in order of the most recent being first.
II. Summary of Staff Reports and Discussions by the Policy Board on the Review of Monetary Policy from a Broad Perspective
A. Staff Reports
As part of the Review of Monetary Policy from a Broad Perspective, the Research and Statistics Department was conducting a research project that looked back on developments in economic activity and prices over the past 25 years.
In this project, the staff had been conducting the following so far: (1) summarizing past discussions and previous studies, and (2) with regard to economic activity and prices in Japan since the late 1990s, making analyses from various perspectives, such as the effects of globalization, sluggish productivity, deterioration in the terms of trade, and people's mindset on prices as well as the social norm for them. The staff reported an overview of the analyses made so far, as follows.
With regard to productivity and other factors, (1) it was likely that productivity of Japan's trading sector had not necessarily benefitted fully from globalization, compared with in the United States and Europe. In this situation, (2) the decline in the competitiveness of Japan's trading sector relative to that of other countries seemed to be a factor that had led to deterioration in Japan's terms of trade, and this in turn had a negative impact on household income and private consumption. Meanwhile, (3) it was less likely that the so-called zombie firms had significantly inhibited Japan's economic growth, as their share had been at low levels in recent years.
As for price and wage developments, (1) the view that prices and wages do not increase easily was deemed to have gradually taken hold in society, as the costs that firms incur when revising prices -- or menu costs -- had increased, and to have strengthened due to the prolonged low-inflation environment. Meanwhile, (2) firms seemed to have secured profits by holding down wages as markups had contracted due to a highly competitive environment. In addition, (3) as globalization had proceeded, it was highly likely that overseas factors had acted to continuously exert downward pressure on Japan's consumer prices, except for the most recent period. Furthermore, (4) the relationship between economic activity and prices seemed to have weakened, as observed by the deviation between growth expectations and inflation expectations, as well as the flattening of the Phillips curve.
As inflation rates had been relatively high over the past year or two, there seemed to be signs of change in the long-standing situation of prices not increasing easily. Specifically, the frequency of price revisions had seen a rapid rise recently, and it was likely that the view that prices do not increase easily would begin to dissipate through the accumulation of firms' experiences from raising prices. In addition, downward pressure on costs from abroad that had been observed over most of the past 25 years was turning to upward pressure. However, the sustainability of such changes continued to warrant attention.
The Research and Statistics Department would continue with this research project, also making use of the results of a survey that was mainly on corporate behavior since the mid-1990s, which the Bank's Head Office and branches were currently working on together. With regard to the analyses of individual research, these were expected to be released in the form of research papers, such as the Bank of Japan Working Paper Series, and the staff would exchange views on the findings with experts, making use of occasions such as workshops.
B. Discussions by the Policy Board
Based on the above staff reports, members discussed developments in economic activity and prices over the past 25 years, particularly the background to the prolonged situation of wages and prices not increasing easily.
Some members expressed the recognition that it was the norm that wages and prices do not increase easily having taken hold in society during the deflationary period that had significantly contributed to the subsequent prolongation of low inflation. One of these members said that, with the low-inflation environment expected to be maintained, firms' pass-through of cost increases to selling prices had been less likely to take place. The member continued that this in turn had in part further intensified the perception that prices do not increase easily. A different member expressed the view that, when faced with such substantial shocks as financial crises, the impact on corporate and household behavior, as well as the adaptive formation mechanism of inflation expectations, would likely be prolonged by around a decade or more. The member added that, in the current situation where the Bank patiently continued with monetary easing for a long period, there had been a new shock of significant cost increases, and this had finally started to create an environment that was favorable for inflation expectations to change. One member pointed out that it was necessary to conduct a more detailed analysis of how, and to what extent, the norm of prices not increasing easily had affected the price formation mechanism.
Some members pointed to the effects of changes in Japan's growth potential and in the global environment on corporate behavior and prices. One of these members expressed the view that, amid environmental changes surrounding firms, including globalization, the declining population, and the yen's appreciation, Japanese firms had lagged behind reforms in their business models, and business management that emphasized cutting costs had taken hold against the background of the lingering management philosophy that had become entrenched during Japan's high-growth era -- namely, the idea that "wage increases stemming from improved labor productivity should be absorbed by firms' efforts, including the containment of costs through mass production." The member continued that this had resulted in stagnant innovation and wages. A different member pointed out that, as Japanese firms had long been exposed to intense competition, they had improved their production efficiency to secure high international competitiveness. The member -- noting that such competent business models of Japanese firms had seen a collapse during the 1990s -- expressed interest in whether the collapse was brought about by the effects of rapid appreciation of the yen or of monetary policy. One member commented that it also was important to consider whether changes in the global inflationary environment over the past few years were a structural or temporary phenomenon, with the latter arising from the course of recovery from the COVID-19 pandemic. The member -- noting that the norm for prices and the global low-inflation environment had significantly influenced past low inflation -- pointed out that, if these structural factors were beginning to shift, the implication would be that there was a greater possibility of Japan's economy achieving the price stability target of 2 percent and enabling it to take hold.
Meanwhile, one member noted, as an example, that there could be varied views regarding the relationship between the so-called zombie firms and Japan's growth potential. The member then said that, with a view to enhancing the objectivity and transparency of the review from a broad perspective, it was important that the Bank incorporate diverse expertise through such initiatives as conducting surveys, holding interviews and workshops, and inviting public comment concerning its releases. A different member commented that it was necessary to continue to examine whether low interest rates had been one of the causes of the issue of zombie firms. On this basis, the member pointed out that low interest rates provide benefits for a wide range of firms, and even if there was a certain chance of such low rates extending the lifespan of zombie firms, it would not imply that the level of interest rates should have been raised. The member then added that the impact of other factors, such as various public measures, should be examined.
Based on these discussions, members shared the recognition that it was appropriate to continue with some on such factors as the background to the continued low-inflation environment, while taking into account the staff's additional analyses and examinations.
II. Summary of Staff Reports and Discussions by the Policy Board on the Review of Monetary Policy from a Broad Perspective
A. Staff Reports
As part of the Review of Monetary Policy from a Broad Perspective, the staff was working on a research paper that described the basic thinking on central bank finances and monetary policy conduct.
The research paper would provide an overview of the following points: (1) central banks' balance sheets and profit structures; (2) the mechanisms through which the expansion and contraction of a central bank's balance sheet affects such factors as its profits; (3) the debate over central bank finances; and (4) recent developments in the finances of foreign central banks. It would then summarize (5) the basic thinking on central bank finances and monetary policy conduct. Specifically, the basic thinking was described as follows.
Under a fiat money system, confidence in the currency is not directly ensured by the assets held by the central bank or its financial soundness, but by the appropriate conduct of monetary policy with the aim of achieving price stability. Based on this premise, central banks are generally set up in such a way that they make profits from a somewhat longer-term perspective and, moreover, can supply their own means of payment and settlement. Therefore, even if the central bank temporarily makes losses or has negative equity, this does not impede its ability to conduct monetary policy. That said, this does not mean that the central bank can run up unlimited losses and negative equity. If the central bank's financial risks become a matter of undue attention and give rise to unnecessary confusion over monetary policy, there is a risk that this could lead to a decline in its credibility. Therefore, ensuring the soundness of the central bank's finances is important.
This paper was expected to be released within 2023. In addition, the staff would exchange views on these topics with experts at the first workshop regarding the review from a broad perspective, scheduled to be held on December 2023.
B. Discussions by the Policy Board
Based on the above staff reports, members discussed the Bank's basic thinking on central bank finances and monetary policy conduct and other related matters.
Members shared the recognition that, with regard to the relationship between central bank finances and monetary policy conduct, it was appropriate for the Bank to continue with conducting proper policies based on the basic thinking that the staff had summarized, while also paying attention to financial soundness. On this basis, some members expressed the view that, although the Bank's profits could be subject to downward pressure temporarily, it was important to explain clearly to the public that such developments in profits would not set a limit on the Bank's conduct of appropriate monetary policy to achieve price stability. A few members expressed the view that it was necessary to carefully explain that central bank finances were in some ways different from those of private financial institutions or business corporations; for example, central banks generate seigniorage and can supply their own means of payment and settlement. One of these members added that, although profits and capital had declined at central banks such as those in the United States and Europe due to policy interest rate hikes, this had not affected their monetary policy conduct. In addition, this member pointed out that central banks' large-scale monetary easing should not be assessed merely on the basis of its effects on central banks' profits, but should be assessed in consideration of the effects on economic activity and prices as a whole. A few members expressed the view that it was extremely important to summarize the Bank's basic thinking and make it public at this point to avoid a situation where a central bank's financial risks became a matter of undue attention and gave rise to unnecessary confusion over monetary policy. A few other members pointed out that providing a more concrete explanation on appropriate occasions in the future could be one option.
IV. Summary of Discussions on Monetary Policy
Members then discussed a review of monetary policy from a broad perspective, which the Bank had decided on conducting and announced at the April Monetary Policy Meeting. With regard to the themes of the review, they agreed that it was necessary to assess the effects of various unconventional monetary policy measures that had been implemented over the past 25 years in the context of interactions with developments in economic activity and prices at each point in time, and at the same time to analyze the impact of these measures on financial markets and the financial system, including their side effects. Furthermore, members shared the recognition that it was important to deepen its understanding on the effects of these measures, including (1) how various changes in the economic environment since the 1990s -- for example, the globalization of the economy and the declining and aging population in Japan -- had affected factors such as corporate and household behavior and the formation mechanisms of wages and prices, and (2) the implications that the effects of these changes had had for monetary policy. On this basis, they agreed that it was preferable to flexibly consider more specific themes of the analyses during the course of the review. One member expressed the opinion that examination of the positive and side effects of the Bank's unconventional monetary policy measures would be of great significance because the Bank had been the forerunner in terms of conducting such measures since the 1990s in the face of asset deflation as well as headwinds from overseas.
In addition, members concurred that, in reviewing monetary policy from a broad perspective, the Bank should incorporate diverse expertise in the review and take various initiatives with a view to enhancing the review's objectivity and transparency. They continued that such initiatives included not only conducting internal analyses, but also making use of existing series of materials, such as reports and surveys, holding interviews at the Bank's Head Office and branches, exchanging views at meetings with local and business leaders, inviting public comment concerning the Bank's releases, and holding workshops involving academics and other experts. One member expressed the view that it was vital that the Bank ask for the opinions of wide-ranging entities, such as business managers, households, and market participants. A different member expressed the intention to obtain feedback from business managers on occasions such as meetings with local and business leaders regarding such issues as sluggishness in firms' growth expectations and the ensuing changes in their spending behavior. Meanwhile, a few members expressed the view that, in order to make the review useful for future policy conduct, it was important to not only examine the positive and negative effects of the Bank's monetary policy measures but also make an assessment of each measure from the Bank's own perspective. One of these members commented that the criteria for assessing past monetary policy measures could differ depending on economic entities. The member continued that, nevertheless, the Bank should make an assessment solely in light of its mission and objective as a central bank.
Moreover, as for communication regarding the review of monetary policy, one member said that it was appropriate to launch a page on the Bank's website on the review and provide successive information on it as needed. A different member commented that it was desirable that the Bank provide communication on the review in an appropriate and timely manner, since it had attracted high attention from the public. Another member stated that it was important for the Bank to devise a way of communicating the results of the review so that they would be understandable not only to academics and experts but also to the wider public.
Based on the above discussions on the review of monetary policy, the chairman said that presenting the themes of the review and the Bank's thinking on the review process at the press conference after this meeting could be an option. All other members expressed agreement with the chairman's comment.
III. Summary of Discussions on Monetary Policy
Members also discussed the Bank's review of its monetary policy. One member said that, since the late 1990s, with Japan's economy facing the effective lower bound on short-term interest rates, the Bank had stepped in to implement various unconventional monetary policy measures. On this basis, the member raised the point that a broad-perspective review of its monetary policy over the past 25 years might provide useful insights for the future conduct of monetary policy. One member -- noting that the Bank's monetary easing measures to date had been implemented based on the judgment that it would be necessary in light of the economic and financial developments at each point in time -- expressed the view that, when conducting a review of its monetary policy, it was appropriate to take into account how the easing measures had interacted with the circumstances that Japan's economy had undergone. This member said that the review would be useful in, for example, effectively continuing with monetary easing. The member then argued that, in order to make the review objective and reasonable, it should be conducted from a broad perspective, without bearing a specific policy change in mind. A different member pointed out that much of Japan's experience since the late 1990s did not necessarily coincide with what had been inferred from various economic theories, such as in terms of the relationships between the unemployment rate and wage growth, as well as between money and inflation. The member then expressed approval to conduct a broad and multi-perspective review of monetary policy. A different member pointed out that the prolonged monetary easing was largely attributable to the formation of the "norm" that prices and wages do not rise, which had resulted from the protracted deflationary equilibrium since the bursting of the bubble economy. The member then said that an analysis based on a broad perspective was necessary in the assessment of monetary policy.
In response to the members' views, the chairman requested that the staff present possible responses regarding the review of monetary policy. Based on the members' views, the staff explained that the following responses could be considered.
- (1) Looking back at the 25 years since the late 1990s, when Japan's economy fell into deflation, the Bank would conduct a broad-perspective review of how monetary policy had interacted with developments in economic activity and prices as well as financial conditions during that period. Based on the results of these analyses, the Bank would aim at gaining useful insights for the future conduct of monetary policy. To conduct the review from a broad perspective, it would set a planned time frame of around one to one and a half years. This course of action would be made public in the Statement on Monetary Policy of this meeting.
- (2) The review would be conducted by giving due consideration to objectivity and transparency. Specifically, (a) during the course of the review process, the Bank would release as needed results of the analyses that could be made available to the public on individual bases; (b) upon completion of the review, it would make public the final results; and (c) in conducting the review, the Bank -- in addition to holding discussions within the Policy Board -- would take such initiatives as organizing workshops involving external experts, thereby gathering diverse insights and incorporating them into the review.
Members concurred that it was appropriate for the Bank to conduct a review of its monetary policy from a broad perspective, as in the manner explained by the staff. One member commented that it was necessary for the Bank to take sufficient time to comprehensively review structural changes in the economy during the "lost three decades" and the monetary policy effects seen thus far, so as to make use of the findings in the future conduct of monetary policy. One member said that analyses and assessments should be performed as objectively as possible, rather than merely focusing on the achievements of the policy measures to date. In response, a different member expressed the view that it was inappropriate to place emphasis on the negative aspects of the measures more than necessary, as this would make the review one-sided. One member noted that it was appropriate that (1) the findings of the review be understandable not only to experts but also to a wide range of Japanese citizens and (2) the review be conducted on a variety of issues, including the Bank's policy measures and its strategy for communication to the public. Meanwhile, a different member said that, partly because the Bank had introduced various unconventional monetary policy measures ahead of the rest of the world, a broad-based assessment, including of the positive and side effects of these measures, might be worthwhile, mainly to gain a deeper international understanding regarding developments in Japan's economic activity and prices as well as the conduct of monetary policy in response to these developments.