Monetary Policy in the 1990s:
Bank of Japan’s Views
Summarized Based on theArchives and Other Materials
Masanao Itoh, Yasuko Morita,
and Mari Ohnuki
This monographic paper summarizes views held by the Bank of Japan(hereafter BOJ or the Bank) in the 1990s regarding economic andfinancial conditions as well as the conduct of monetary policy, basedon materials compiled during the period mainly in its Archives.
The following points were confirmed in writing this paper. First,
throughout the 1990s, the Bank’s thinking behind the conduct ofmonetary policy had shifted toward emphasizing the transparencyof its policy management. The basic background to this seemed to be
the growing importance of dialogue with market participants, reflecting a change in the target for money market operations from oﬃcial
discount rate changes to the guiding of money market rates. In addition, the fact that the revised Bank of Japan Act (hereafter the Bankof Japan Act of 1997) came into eﬀect in April 1998 under the two
principles of independence and transparency accelerated the trendof attaching importance to transparency. Second, on the back of theemphasis on transparency, the Bank enhanced its communication byincreasing its releases in the second half of the 1990s, particularly
after the enforcement of the Bank of Japan Act of 1997. Thus, thematerials, especially those referred to in the latter half of this paper,
consist mainly of the Bank’s releases. And third, in the 1990s, theBank faced a critical situation in which it needed to conduct monetary policy while paying due attention to the functioning of the financial system. Therefore, this paper includes numerous references
to the issues regarding the financial system, mainly the disposal of
nonperforming loans.
Keywords: Monetary policy conduct; Disposal of nonperforming
loans; Financial system crisis; Bank of Japan Act of
1997; Zero interest rate policy
JEL Classification: E52, E58, N15, N25

MONETARY AND ECONOMIC STUDIES / NOVEMBER 2020
DO NOT REPRINT OR REPRODUCE WITHOUT PERMISSION

55

Masanao Itoh: President, Otsuma Women’s University (E-mail: masaitoh@otsuma.ac.jp)
Yasuko Morita: Director and Senior Economist, Institute for Monetary and Economic
Studies, Bank of Japan (currently, Yamazaki Gakuen Educational Foundation, Email: y_morita@yamazaki.ac.jp)
Mari Ohnuki: Deputy Director and Economist, Institute for Monetary and Economic
Studies, Bank of Japan (E-mail: mari.oonuki@boj.or.jp)..............................................................................................................
The authors would like to thank referees and the staﬀ of the Bank of Japan for their helpfulcomments. The views expressed in this paper are those of the authors and do not necessarily reflect the oﬃcial views of the Bank of Japan.

56 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2020

Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

I. Summary
This monographic paper summarizes views held by the Bank of Japan (hereafter BOJ
or the Bank) in the 1990s regarding economic and financial conditions as well as the
conduct of monetary policy based on the materials stored in the Bank of Japan Archives(BOJ Archives) within the Institute for Monetary and Economic Studies (IMES) andother contemporary materials. One of the authors was involved in the compilation ofa similar paper covering the 1980s, and this paper may be regarded as a sequel to theprevious one.1 However, the BOJ Archives regarding the 1980s are more extensive
in volume than those regarding the 1990s, mainly reflecting the longer lapse of timesince the 1980s. On the other hand, with respect to the Bank’s releases, there are morematerials for the 1990s than those for the 1980s since the Bank changed its stance toputting an emphasis on transparency in the Bank’s thinking behind its monetary policy
conduct. Therefore, many parts of this paper, particularly its second half, are based onthese releases.2
Like Itoh, Koike, and Shizume (2015), this paper puts the focus of attention on(1) the Bank’s thinking behind the conduct of monetary policy and (2) the Bank’s assessment of economic conditions at home and abroad, as well as other factors that
potentially aﬀect the Bank’s conduct of monetary policy. In addition, this paper includes references to (3) how the occurrence of the nonperforming-loan (NPL) problem
in the financial sector and the resulting failure of financial institutions aﬀected theBank’s conduct of monetary policy, and (4) how the enactment of the revised Bank ofJapan Act (Bank of Japan Act of 1997) aﬀected the Bank’s formulation and conduct ofmonetary policy.
Looking back at the overall economic picture of Japan in the 1990s, the period was
a decade of protracted economic stagnation—as exemplified by the bursting of the bubble economy and the emergence of deflation—that had started with a plunge from thepeak of the bubble economy. In terms of financial conditions, the following four points
can be identified: (1) a sharp and continuous decline in asset prices, (2) protracted
stagnation of economic growth, (3) a slowdown in growth of monetary aggregates, and(4) deterioration in assets held by the corporate sector and the occurrence of the NPL
problem facing financial institutions.
Looking at the Bank’s conduct of monetary policy under these conditions from thehistorical perspective, the following points can be noted. First, the shift to the conductof monetary policy using short-term market interest rates as the target of control, whichstarted in the second half of the 1980s, was almost completed by the mid-1990s. The
previous conduct of monetary policy, which used the oﬃcial discount rate as the benchmark, changed in nature due to the completion of deregulation of deposit interest rates
in October 1994. In March 1995, the Bank introduced a new system under which theguidance of market interest rates was defined as a monetary policy tool. In this system,
the Bank releases a public statement regarding the guideline for market operations. As
a result, the direct linkage of the oﬃcial discount rate with deposit and loan interest
rates that had until then been assumed was lost.
................................
1. Itoh, Koike, and Shizume (2015).
2. The period for the disclosed BOJ Archives used for compiling this paper is through 2017.

57

Second, in accordance with the above change, with respect to money market operations, the shift from Bank of Japan loans to monetary control mainly based on money
market operations was completed in the second half of the 1990s. In January 1996, thecredit line system intended for nine city banks that continued after the abolition of window guidance in June 1991 was abolished, and since then, monetary policy has been
conducted mainly through various money market operations. Although the announcement eﬀect (the eﬀect of explicitly indicating the general framework of a central bank’s
policy stance) of the oﬃcial discount rate was still widely acknowledged, the rate virtually became nothing more than a loan interest rate applicable to the Bank’s provisionof liquidity to individual financial institutions.3
Third, during this period, the NPL problem induced by the bursting of the bubble
economy occurred and became serious, and the subsequent failures of financial institutions forced the Bank to continue to conduct prudential policy. The cumulative amountof losses from the disposal of NPLs between fiscal 1992 and 1999 was 54.7 trillion
yen.4 Prudential policy, which was conducted under cooperation between the banking
supervisory authority and the Bank, played a role in preventing the materialization ofsystemic risk. On the other hand, due to the delay in developing the failure resolution
legislation and a comprehensive safety net, the disposal of NPLs became prolonged,
weighing on the macroeconomy, and it also aﬀected the Bank’s conduct of monetary
policy at the time. Under these circumstances, from February 1999, the Bank adopted
the so-called zero interest rate policy to be the forerunner among the central banks.
Fourth, in this situation, the Bank of Japan Act of 1997 was put into force in April
1998. The move to enact this Act started in 1996, and it was enacted after active discussions involving academics and former monetary policymakers as well as deliberations
at the Central Bank Study Group (CBSG), an advisory panel to the Prime Minister, andthe Financial System Research Council (FSRC), an advisory committee to the Minister of Finance. During the process of enactment of the Act of 1997, deliberations weremade regarding drastic revision of the central bank system in light of the progress inglobalization in the fields of economy and finance and in marketization, and a newframework based on the principles of independence and transparency became the pillar of the new Act. Under the Act of 1997, the Policy Board has been set as the only
decision-making body, putting in place a legal and institutional framework for ensuring
independence and transparency of monetary policy. Since then, the Policy Board has
virtually assumed the responsibility for determining the Bank’s monetary policy. The
monetary policy centering on monetary control through various money market operations, which was established in the mid-1990s, was conducted based on deliberations................................
3. Later, the complementary lending facility was established in March 2001, and through June 2006, the Bank
announced the interest rate applied to complementary lending as the “oﬃcial discount rate.” However, at
the Monetary Policy Meeting (MPM) in July 2006, members of the Policy Board agreed that, given that theinterest rate applied to complementary lending did not have the function of indicating the Bank’s basic stanceon monetary policy, it was appropriate to use the term “basic loan rate” instead of the “oﬃcial discount rate,”
which tended to give the impression that this was a policy interest rate. Thereafter, the Bank announced theinterest rate applied to complementary lending as the “basic loan rate” (BOJ [2006], pp. 8–9 and 15).
4. Financial Services Agency (2000). The cumulative amount of losses from the disposal of NPLs is comprised
only of losses incurred by major banks, including city banks, long-term credit banks, and trust banks (dataon the cumulative amount of such losses incurred by all banks can be traced back only up to fiscal 1995).

58 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2020

Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

and decisions by the Policy Board.5
With the aforementioned four points in mind, this paper summarizes the Bank’s
conduct of monetary policy in the 1990s.
This paper is structured as follows. The main text summarizes the conduct of monetary policy during the period as divided into the following phases in chronologicalsequence: (1) rapid monetary tightening (spring 1989 through spring 1991); (2) shift
to monetary easing and protracted economic downturn (summer 1991 through the endof 1993); (3) changes in financial conditions and monetary policy response (early 1994
through summer 1995); (4) materialization of a financial system crisis in Japan (autumn 1995 through summer 1998); and (5) monetary policy under the Bank of JapanAct of 1997 (autumn 1998 through summer 2000). This paper also discusses in Appendixes three points among important themes that should be considered in summarizing the conduct of monetary policy in the 1990s—monetary policy rules, special loans
extended by the Bank (Nichigin Tokuyu), and the Bank of Japan Act of 1997.

II. Rapid Monetary Tightening (Spring 1989 through Spring 1991)
A. Shift to Monetary Tightening (Spring 1989 through Summer 1990)
1. Economic developments at home and abroad
With monetary easing continuing throughout the second half of the 1980s, Japan’s
economy kept expanding against the backdrop of favorable domestic private demand;and in this situation, the correction of the current account imbalance proceeded. The
improvement in the macroeconomic external imbalance shifted the focus of the JapanU.S. economic friction to structural issues such as trade barriers in the specific sectors and poor market access for foreign suppliers. Accordingly, the negotiation tablechanged to bilateral negotiations from multilateral negotiations, such as the Group of
Five (G5) and the Group of Seven (G7).
The deregulation and globalization of financial and capital markets, an initiative
launched by the Japan-U.S. Yen-Dollar Committee in 1984, was gradually implemented from 1985. In June 1987, the Ministry of Finance (MOF) released the “Immediate Outlook for Deregulation and Globalization of Financial and Capital Markets,”
which contained the schedule of deregulation for the time being. In this report, deregulation of deposit interest rates was identified as an urgent task. Meanwhile, basedon this report, the commercial paper (CP) market and the stock index futures market were established; in April 1989, a financial futures exchange was established, andtransactions of financial futures started in June. As the deregulation of deposit interest rates made steady progress, the small-lot money market certificates (MMCs) wereintroduced and the lower limit on large-lot time deposits, for which interest rates had
already been deregulated, was further reduced. Consequently, as of the end of 1989,
deposits with deregulated interest rates and those with interest rates that were linked tomarket interest rates constituted a large proportion of deposits in Japan: the amount ofordinary time deposits with regulated interest rates was 44.5 trillion yen, whereas that................................
5. As a result, the executives’ meetings that had been held until then was abolished. For details, see Appendix
3.

59

for time deposits with deregulated interest rates was 151.0 trillion yen, 11.2 trillion yen
for MMCs, and 19.3 trillion yen for small-lot MMCs.6
Against this backdrop, financial institutions’ activity became aggressive, leading to
the emergence of financial imbalances, such as rapid growth in money stock, a sharp
increase in equity finance as part of corporate financing, and surges in stock and land
prices. Financial institutions’ increased proactiveness, which had been observed since
the mid-1980s, escalated rapidly, partly because they were permitted to include 45
percent of their unrealized profits on securities holdings in their capital base underthe minimum capital requirement (Basel standards) in 1987–1988.7 The long periodof monetary easing following the Plaza Accord also made it easier for investors toraise funds by reducing the funding cost. Moreover, the land taxation system, which
imposed a relatively low tax on land holdings and a relatively high tax on capital gains,
also had the eﬀect of curbing the supply of land. This, coupled with speculative demand
for land, triggered a sharp rise in land prices. Specifically, following the enactment of
the Temporary Act for Promoting the Strengthening of Specific Facilities by Utilizing
Private Sector Business Capabilities in May 1986, Japan witnessed an asset price spiralin which numerous development projects and the ensuing speculative demand for land
triggered a rise in land prices, thereby inducing a surge in stock prices, which in turnincreased demand for land by facilitating fund-raising.8
In response to the land price surge, in October 1987, the MOF issued to financial institutions a directive requiring the adoption of more stringent conditions for providing
land-related loans and called on them to refrain from extending loans for speculative
land transactions. In addition, the Cabinet decided on the Outline of Comprehensive
Measures Related to Land in June 1988, and the government sought to contain speculative land transactions by putting into force the Basic Act for Land as well as implementing other measures in December 1989.
2. Monetary policy response
Under these circumstances, the Bank judged that, in addition to the narrowing of slack
in domestic supply and demand conditions and a wage rise, the yen’s depreciation
and an increase in crude oil prices were also gradually exerting upward pressure on
prices, as monetary easing continued for a protracted period.9 The Bank also judged................................
6. MOF Editorial Committee on the Annual Report of Financial Institutions (1989), pp. 12–19.
7. The capital adequacy ratio set for private banks in 1988 upon a proposal from the United States, supported by
the United Kingdom and Japan, among other countries (Basel Committee on Banking Supervision [1999]).
Private banks were required to keep their capital adequacy ratio—calculated by dividing the capital amountby the amount of weighted risk assets—at or above 8 percent, which was known as Basel I. This wasintended to enhance the soundness of the global banking system and reduce competitive inequality between
banks with respect to international operations. In response to a proposal from the United Kingdom and theUnited States to count only paid-in capital and disclosed reserves as capital, requests for improvement weremade by other countries. As a result, it was permitted to set various categories of supplementary capital,
and Japan decided to allow financial institutions to set the total amount of Tier 1 (equity capital) and Tier 2(subordinated loans and 45 percent of the amount of unrealized profits on securities) as part of their capital.
Therefore, it was presumed that this regulation, which was originally intended to strengthen the soundnessof the banking system, became one of the background factors of the excessive lending due to a surge in stock
prices during the bubble period (financial institutions were permitted to increase the total amount of loans
by a margin 12.5 times as large as the increase in the amount of their Tier 2 capital).
8. Ishii (2011), pp. 284–286.
9. “Governor’s Opening Speech at the General Managers’ Meeting of the Bank of Japan’s Branches on April
24, 1990,” BOJ Archives “General Managers’ Meetings (including Deputy General Managers’ Meetings)

60 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2020

Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

that it was necessary to revise the conventional monetary policy conduct, as the linkage
between various markets was expanding due to active interest rate arbitrage trade between various domestic financial markets as well as between financial markets at home
and abroad, with the progress of financial deregulation and globalization. Therefore,in November 1988, the Bank changed the framework for money market operations.
In line with this change, the new short-term prime lending rate, which was linked tomarket interest rates, was introduced in place of the existing short-term prime lending
rate, which had been linked to the oﬃcial discount rate, and this led to free interest rate
formation based on market conditions.
As the interest rate formation came to reflect market conditions, a sustained
economic expansion and rising pressure on prices further heightened anticipation
for higher interest rates from spring 1989, resulting in an uptrend in both short- andlong-term interest rates. In response, in May 1989, the Bank raised the oﬃcial discountrate (from 2.5 percent to 3.25 percent), marking a shift to monetary tightening. Subsequently, the Bank implemented additional hikes in the rate in October 1989 (to 3.75
percent) and in December of the same year (to 4.25 percent), in light of the growing
upward pressure on prices due to the narrowing slack in supply and demand conditions
and rising import costs. As to the reason why the Bank implemented a series of interest
rate hikes despite the lack of a notable change in either consumer prices or wholesale
prices—when the eﬀects of the introduction of the 3 percent consumption tax were
excluded—compared with their trends before the introduction of consumption tax inApril 1989, the Bank described these policy actions as “preemptive measures” in thesense that “inflationary expectations should be contained in advance to continue toensure price stability.”10 , 11..........................................................................................................................................
of the Bank of Japan’s Branches from April 23, 1990, to December 1991,” No. 41807 (hereafter “No.”after a document name indicates a Bank of Japan Archive Reference number corresponding to a folder with
documents in the Archives.
10. The Research and Statistics Department of the Bank was cautious about using price statistics to assess developments in prices in this period because it became diﬃcult to capture the actual price trend due to theintroduction of the consumption tax and the abolition of various commodity taxes.
The Quarterly Economic Outlook (Spring 1989), which was published on April 28, 1989, noted as follows: “Domestic wholesale prices for early April increased by 1.7 percent compared with late March (2.1
percent on a year-on-year basis) and consumer prices (in Tokyo, excluding fresh food) for April increasedby 1.5 percent month on month (2.8 percent on a year-on-year basis), following the introduction of the consumption tax.” (BOJ Research and Statistics Department [1989a], p. 6). However, it did not mention how
much of those increases was attributable to the impact of the consumption tax. When asked at a media briefing held at the time of the release of the report “whether the impact of the tax system reform on consumer
prices could be considered to be 1.2 percent,” Director (now known as “Director-General,” hereinafter thesame) Akira Nambara of the Research and Statistics Department replied, “The figure 1.2 percent is a theoretical figure calculated by the Economic Planning Agency (EPA), so I assume that we should look at itwith a certain margin of error (“Document for a Media Briefing on the Quarterly Economic Outlook [Spring1989], Price Statistics Division, Research and Statistics Department, May 1, 1989,” BOJ Archives “Documents for Media Briefings [Part 9] from April to June 1989,” No. 27915). In addition, at a media briefing
held on April 24 in relation to wholesale prices, Mr. Shigeru Hikuma, Head of Price Statistics Division,
Research and Statistics Department, stated as follows with respect to the impact of the tax system reform,
including the introduction of the consumption tax, on wholesale prices: “It is impossible to accurately identify the impact or express it as a precise numerical value because (1) prices covered by the wholesale pricesurvey are sales prices set by primary wholesalers and are diﬀerent from ex-factory prices, which are subject
to the consumption tax, and (2) it is diﬃcult to specify the impact of other taxes that have been abolishedor revised at this time, such as commodity and liquor taxes” (“Document for a Media Briefing on Wholesale61

As for window guidance, since spring 1981, the Bank had maintained the basic stance of respecting individual banks’ lending plans. However, when the Bank
started monetary tightening in May 1989, the Bank changed the existing stance andenhanced window guidance through measures such as making restrictive adjustments
to the planned loan amounts of individual financial institutions based on the assessment that “it was necessary to encourage the growth rate of bank loans to decline at afaster pace” in order to curb inflationary pressure because “the level of overall liquidity
accumulated thus far during the long period of monetary easing remained fairly highin relation to economic activity.”12
On the Bank’s rate hike in December 1989, a news article reported a possible rate
hike before the oﬃcial release, and other articles reported that Minister of Finance Ryutaro Hashimoto “said that the rate hike would be called oﬀ.” Director Tatsuya Tamuraof the Policy Planning Department of the Bank issued a statement saying that “thenews reports stating that the Bank had already decided to raise the rate are not factual.”13 Nevertheless, the Bank raised the oﬃcial discount rate six days after the firstnews article was published.
................................
Prices [Early April],” Price Statistics Division, Research and Statistics Department, April 24, 1989, BOJ
Archives “Documents for Media Briefings [Part 9] from April to June 1989,” No. 27915). Subsequently, thesummer and autumn 1989 issues of the Quarterly Economic Outlook noted, “Although the price levels rosein April in terms of both wholesale and consumer prices following the introduction of the consumption tax,
assessment will be conducted conceptually excluding the impact of the tax.” However, the reports did notquantitatively indicate the scale of the impact (BOJ Research and Statistics Department [1989b], p. 7, and
BOJ Research and Statistics Department [1989c], p. 7).
At that time, the Research and Statistics Department bore in mind the risk that, as a result of the shift to aservice economy, the function of wholesale prices as a barometer of economic activity to which importanceshould be attached in the conduct of monetary policy might be declining (“Issues Facing Japan’s Economy,
Document for General Managers’ Meeting of the Bank of Japan’s Branches on January 19, 1989,” Researchand Statistics Department, BOJ Archives “Special Report: Documents for General Managers’ Meetings ofthe Bank of Japan’s Branches 1/2,” No. 28822). Based on the recognition of this risk, the Bank developed the
Corporate Service Price Index (CSPI), which complements the wholesale price index, and started to release
the CSPI in 1991 (BOJ Research and Statistics Department [1991b], “Details of the Corporate Service Price
Index and Its Recent Trend Since 1985, Document Distributed at a Media Briefing, January 9, 1991,” BOJ
Archives “Documents for Media Briefings [Part 17] from January to February 1991,” No. 27923).
11. “Raising of the Oﬃcial Discount Rate,” a private note by the Director of the Policy Planning Department,
October 11, 1989, BOJ Archives “Private Notes by Directors from 1987 to 1990,” No. 40050. At the opening
speech of an international conference titled “The Role of Monetary Policy under Low Inflation: Deflationary
Shocks and Policy Responses,” which was held in July 2000 by the IMES, Governor Masaru Hayami pointed
out that the Bank was responsible for its monetary policy regarding the generation and expansion of the
bubble economy, in that the Bank let expectations for the perpetuation of low interest rates take hold by
maintaining low interest rates for a relatively long period even after summer 1988, when the economic
recovery became clear. Governor Hayami stated as follows: “This suggests that a central bank should aim atsustainable price stability necessary for supporting economic growth over the medium to long term, not overa temporary period”; and “therefore, even if the statistically observed inflation rate is stable, it is necessary
to secure sustainable price stability by swiftly adjusting interest rates when it can be judged that the riskof sustainable price stability being undermined is increasing. Regrettably, according to this standard, it
is diﬃcult to say that price stability has been suﬃciently secured in Japan’s economy since the bubble
economy.” His remarks indicated the view that ultimately the Bank lagged behind in shifting to monetary
tightening (Hayami [2000b]).
12. “Lending Plans of City Banks, Long-Term Credit Banks, and Shinkin Banks, for the July–September Quarterof 1989,” a private note by the Director of the Credit and Market Management Department, June 29, 1989,
BOJ Archives “Private Notes by Directors,” No. 10610.
13. “On the News Reports of the Oﬃcial Discount Rate,” a private note by the Director of the Policy Planning
Department, December 19, 1989, BOJ Archives “Private Notes by Directors from 1987 to 1990,” No. 40050.

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

After the turn of 1990, economic activity remained firm due to high growth inbusiness fixed investment and the expansion of private consumption, mainly due toa favorable employment and income environment (Chart 1). As the land price rise
continued in 1990 (Chart 6), upward pressure on prices began to grow, mainly due tothe accelerated growth rate of money stock (Chart 5) caused by front-loaded fundingreflecting heightened expectations for higher interest rates. From late February, market
interest rates rose, factoring in a subsequent hike in the oﬃcial discount rate. On theother hand, turmoil spread through financial markets, as exemplified by a sharp drop
in stock prices on February 26. In this situation, market participants strongly called for
the Bank to “give a hint to the market that there will be no more rate hikes.”14
Under these economic and financial conditions, in March 1990, the Bank raised
the oﬃcial discount rate for the fourth time (from 4.25 percent to 5.25 percent) as “thefinal preemptive measure to forestall price increases in advance.” The margin of the rate
hike was 1 percentage point.15 As for window guidance, the Bank tried to strengthen
the restraint on bank loans, especially those provided by regional banks and regionalbanks II that had been increasing their loan provision, while maintaining the same
degree of restraint on loans provided by, for example, city banks. The lending stanceof regional banks and regional banks II was becoming rather aggressive, reflecting the
spread of a rise in land prices from the Tokyo and Chubu/Kinki metropolitan areas toacross the country. In this situation, at end-March 1990, the MOF imposed restriction
on the amount of overall real estate-related loans and also required banks to reporttheir current status of lending for the real estate industry, the construction industry, andnonbanks.
After the rate hike in March 1990, the Bank basically considered the rise in interest
rates and a drop in stock prices observed after the turn of 1990 to be a “contraction of
the bubble economy,” owing to “the deeper penetration of the lagged eﬀect of the rate
hikes conducted thus far.” The Bank therefore judged that “the top-priority challenge
was still prevention of inflation” as “entrepreneurship remained active and economic
dynamism continued to be intact.” At the same time, the Bank also started to pay
attention at this point to downside risks to the economic outlook that “closer attention
should be paid to whether economic activity could worsen sharply in the face of rapidchanges in financial conditions.”16
In response to these circumstances, from April to May 1990, the Bank started todeliberate on its function as the lender of last resort (LLR) and measures to deal with fi................................
14. “Raising of the Oﬃcial Discount Rate,” a private note by the Director of the Policy Planning Department,
March 20, 1990, BOJ Archives “Private Notes by Directors from 1987 to 1990,” No. 40050.
15. “Raising of the Oﬃcial Discount Rate,” a private note by the Director of the Policy Planning Department,
March 20, 1990, BOJ Archives “Private Notes by Directors from 1987 to 1990,” No. 40050.
16. “Governor’s Opening Speech at the General Managers’ Meeting of the Bank of Japan’s Branches on April
24, 1990,” BOJ Archives “General Managers’ Meetings (including Deputy General Managers’ Meetings)of the Bank of Japan’s Branches from April 23, 1990, to December 1991,” No. 41807. In this speech,
the Governor referred to developments in land prices as follows: “If a partial repercussion of asset prices
spilled over to land prices, then a further spread of detrimental impact would be inevitable.” On May 8, theResearch and Statistics Department released a paper titled “Background to and Impact of a Rise in Land
Prices in Japan in Recent Years” (BOJ Research and Statistics Department [1990]), which summarized themacroeconomic and financial impact of developments in land prices. (“Document for a Media Briefing
on the Bank of Japan Monthly Bulletin, April issue, ‘Research,’ ” BOJ Archives “Documents for Media
Briefings [Part 13] from April to June 1990,” No. 27919).

63nancial institutions facing problems, from the viewpoint of reviewing the Bank’s credit
provision policy.17 As a result of the deliberations, the Bank judged as follows: “Themost important challenge for the Bank and other relevant parties used to be preventing
financial institutions from failing, regardless of the scale or specifics of their business
operations; in a situation where such idea had been supported by the general public, it
had been appropriate to use the Bank of Japan loans as leverage to support financial
institutions’ liquidity and profits when addressing problems facing financial institutions in an indiscernible manner before the failure of financial institutions, or in otherwords, the ensuing use of the deposit insurance system.” However, the Bank assessedthat “now that the Bank has basically taken a step toward promoting financial deregulation and globalization, as well as strengthening the principle of self-responsibility,
the conventional approach is not always eﬀective.” As for the points that needed tobe addressed over the medium to long term, the Bank raised “(1) the explicit development of a scheme for special bailout loans by the Bank based on the consensus not
only among the MOF and private financial institutions but also from the general publicand (2) drastic revision of the deposit insurance system to enhance its feasibility.” At apress conference in November 1990, Governor Yasushi Mieno stated that the Bank was
exploring the possibility of taking new measures and made the following comments:“Mergers intended to bail out financial institutions through absorption may occur inthe future”; and “the Bank is conducting research, led by the Financial and Payment
System Department, on what measures it could take in order to make the safety net,
including the settlement system, a more satisfactory one.”18
B. Further Monetary Tightening and Continuation of Tight Monetary Policy(Summer 1990 through around May 1991)
1. The Gulf Crisis and economic conditions at home and abroad
Following the onset of the Gulf Crisis in August 1990 (Chart 8), crude oil prices
showed sharp volatile movements; they rose from 18.6 U.S. dollars per barrel in July to
35.9 dollars in October, and fell back to 19.9 dollars in March 1991 (Chart 2). During
the Gulf Crisis, the United States, which had been in a mature stage of an economic................................
17. “The Bank of Japan’s Function as the Lender of Last Resort—From the Viewpoint of Reviewing the Bank’s
Credit Policy, Policy Planning Department, April 1990” and “Measures to Deal with Financial Institutions
Facing Problems—Points to Be Considered, Policy Planning Department, May 1990,” BOJ Archives “Reference Materials for Policy Planning Aﬀairs (June 1990),” No. 28108.
18. “Summary of the Governor’s Press Conference on November 14, 1990,” BOJ Archives “Summary of theGovernor’s Press Conferences (1990),” No. 28015.
In order to streamline and facilitate its operations in response to changes in economic and financial conditions at home and abroad, in May 1990, the Bank implemented a large-scale reorganization that transformeda structure comprised of 18 internal units, including a research institution, to one comprised of 16 units,
including a research institution. As part of the reorganization, the Financial and Payment System Department was established. This department was created by integrating part of business operations of the Policy
Planning Department and the Bank Supervision Department, so as to plan and formulate policy measuresnecessary for maintaining and fostering a safe and sound financial system, and was in charge of conducting
research and deliberations related to the assessment of individual financial institutions’ activity and measures for ensuring the eﬃciency and stability of the payment and settlement systems. As a result, the Policy
Planning Department was put in charge of monetary policy planning. See “Reorganization of the Bank ofJapan, May 1, 1990,” BOJ Archives “Documents for Media Briefings (Part 13) from April to June 1990,”
No. 27919.

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

expansion, was hit by a severe recession through summer 1991. In contrast, Germany
maintained an economic expansion led by the impact of the German Currency Union
in July 1990 (Chart 7). Amid the growing uncertainty about the global economic situation, the majority view in Japan was that Japan’s economy was on an expansionary
trend led mainly by domestic demand from summer through autumn 1990.
On Japan’s economic conditions, the Bank also recognized that “economic activity
is very strong, the supply and demand conditions for products and labor have tightened
further, and wages are rising prominently.” On the other hand, it recognized that “since
the slack in monetary conditions has not fully been diminished as shown, for example, by the fact that growth in money supply is still relatively high, the Bank should
immediately address the situation in view of preventing inflation.”19 Under these circumstances, the Gulf Crisis was recognized as an additional inflationary shock because
its nature was similar to the earlier two oil crises, albeit on a smaller scale. In light ofthe experiences of the earlier two oil crises, the Bank assessed that “inflation in importprices and a decline in real economic growth are unavoidable” as the primary eﬀect ofa rise in crude oil prices, and that the issue was “how to prevent inflation in domestic
prices caused as the secondary eﬀect.” The Bank judged that “preventing inflation indomestic prices through a swift policy action” was the best option.20
2. Monetary tightening and its continuation after the onset of the Gulf Crisis
Based on the aforementioned judgment, the Bank decided on August 30, 1990, toraise the oﬃcial discount rate for the fifth time from 5.25 percent to 6.0 percent. On
this occasion, the Bank internally recognized this rate hike as an “action intended toadjust aggregate demand, going beyond the earlier raises that were implemented as
preemptive measures,” and particularly focused on containing inflationary pressure by
weakening economic growth with monetary tightening.21 Regarding window guidance,
the Bank requested private banks to “considerably restrain loan plans in accordancewith the tightened monetary policy stance.” Bearing in mind the possibility of abolishing window guidance in the future, the Bank also strongly encouraged these banks
to “establish a framework to strengthen the financial base proactively and drastically”
as it considered that ensuring a “stronger capital base and higher profitability” was an“urgent necessity” for these banks.22
The oﬃcial discount rate was kept unchanged at 6.0 percent through June 1991.
This decision was made based on the following assessment: “Although the economy
has started decelerating, overall economic activity is still at a fairly high level”; “market
conditions in demand and supply, which are the major key to future developments inprices, have remained tight”; “in the current situation, the Bank should continue with
its eﬀorts to stabilize land prices instead of worrying about a possible plunge in these................................
19. “Raising of the Oﬃcial Discount Rate,” a private note by the Director of the Policy Planning Department,
August 30, 1990, BOJ Archives “Private Notes by Directors from 1987 to 1990,” No. 40050.
20. “Governor’s Opening Speech at the General Managers’ Meeting of the Bank of Japan’s Branches on October
23, 1990,” BOJ Archives “General Managers’ Meetings (including Deputy General Managers’ Meetings) of
the Bank of Japan’s Branches from April 23, 1990, to December 1991,” No. 41807.
21. “Raising of the Oﬃcial Discount Rate,” a private note by the Director of the Policy Planning Department,
August 30, 1990, BOJ Archives “Private Notes by Directors from 1987 to 1990,” No. 40050.
22. “Lending Plans of City Banks, Long-Term Credit Banks, and Trust Banks for the October–December Quarter of 1990,” Credit and Market Management Department, September 27, 1990, BOJ Archives “Private
Notes by Directors and Deputy Directors,” No. 28326.

65prices”; the Bank regarded it essential to “ensure price stability by maintaining stability
in inflationary expectations”; and the Bank judged that it was necessary to “pursue
prudent policy management with price stability as its prime objective, while keeping aclose eye on how the eﬀects of interest rate increases conducted thus far are permeating
through the economy.”23
The Bank maintained the monetary tightening until mid-1991 based on the thinking that normalization of the bubble economy would lead to a sound development ofJapan’s economy. In July 1991, the Bank changed its stance to monetary easing, but
the subsequent balance-sheet adjustments continued for more than 10 years from the
1990s to the early 2000s. With the benefit of hindsight, the Bank’s assessment of the
impact of financial imbalances on overall economic activity in the medium to longterm—as represented by large fluctuations in asset prices and money supply—and theresultant balance-sheet adjustments was not necessarily adequate. The Bank later choseto conduct monetary policy under the framework in which it gave consideration to financial imbalances when seeking to achieve price stability in the medium to long term,
based on the lesson drawn from the experience during this period when the conduct ofmonetary policy was not suﬃcient.24

III. Shift to Monetary Easing and Protracted Economic Downturn(Summer 1991 through the End of 1993)
A. Shift to Monetary Easing
1. Global economic environment and economic conditions in major countries
The revolutions of 1989 in Eastern and Middle Europe and advances in perestroika
and glasnost policies in the Soviet Union—which had started in the second half of the
1980s—led to the collapse of socialist governments in Eastern and Middle Europe, thedissolution of the Soviet Union, the fall of the Berlin Wall, and the reunification of
East and West Germany. As a result of the revolutions of 1989 and the dissolution of
the Soviet Union, the economic reconstruction of the countries concerned immediately
emerged as the most pressing challenge. Therefore, the International Monetary Fund(IMF) and the G5 countries started to provide support to Russia and countries in Easternand Middle Europe, with the market-oriented reform as their imperative. In addition,
the end of the Cold War directly induced a change in the United States’ global strategy,
and brought about the first Democratic administration in 12 years in the United States
as a result of the presidential election in 1992. The William J. Clinton administration................................
23. “Governor’s Opening Speech at the General Managers’ Meeting of the Bank of Japan’s Branches on April2, 1991,” BOJ Archives “General Managers’ Meetings (including Deputy General Managers’ Meetings) of
the Bank of Japan’s Branches from April 23, 1990, to December 1991,” No. 41807, “Governor’s Opening
Speech at the General Managers’ Meeting of the Bank of Japan’s Branches on October 23, 1990,” BOJ
Archives “General Managers’ Meetings (including Deputy General Managers’ Meetings) of the Bank ofJapan’s Branches from April 23, 1990, to December 1991,” No. 41807, and BOJ Research and Statistics
Department (1991a).
24. Okina, Shirakawa, and Shiratsuka (2000), pp. 315–319. The relationship between asset price fluctuations
and the monetary policy conduct was also discussed at the meeting of the Study Group on Monetary andEconomic Issues held with the theme “Fluctuations in Asset Prices and Japan’s Economy” by the IMES on
November 30, 1989 (BOJ IMES [1990], pp. 1–8).

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

tried to revive the U.S. economy by shifting the focus of the global strategy from political issues to economic issues. Such move was exemplified by the tough stance of theUnited States in the Japan-U.S. Framework for a New Economic Partnership and theJapan-U.S. Financial Negotiations, as well as the revival of the Super 301 provision of
the Omnibus Trade and Competitiveness Act of 1988 (Super 301).
At that time, the European integration made significant progress as well. The Commission of the European Communities advocated the goal of achieving the integrationof the European Community (EC) by the end of 1992, serving as the driving force forpromoting the integration of European markets from the late 1980s through the mid1990s, despite some setbacks. As the market integration progressed, new challenges
emerged, namely, realizing a single currency and political union.
Regarding monetary union, the “Report on Economic and Monetary Union in theEuropean Community” (the so-called Delors Report) was released in April 1989. This
report presented a three-stage plan for establishing the Economic and Monetary Union(EMU). Accordingly, the Maastricht Treaty was put into eﬀect in December 1991, andthe EC member countries, except for the United Kingdom and Denmark, assumed theobligation for the realization of EMU under the treaty. However, the road to realizing
the union was not very smooth. As a result of speculative capital transactions, a series of currency crises occurred in Europe in September 1992 and July–August 1993.
Italy and the United Kingdom withdrew from the European Exchange Rate Mechanism(ERM), while Finland, Sweden, and Norway, which were hit by the Nordic financial
crisis, abandoned their currencies’ peg to the European Currency Unit (ECU). In thissituation, Germany played a decisive role in resolving those currency crises. The turmoil was finally contained, due to the fact that the Deutsche Bundesbank providedloans to the member countries of EC and conducted currency interventions, and to thesubsequent widening of the ERM range of plus or minus 15 percent.
Meanwhile, Asian economies also expanded steadily. Following the high growth of
Newly Industrializing Economies (NIEs), the Association of South East Asian Nations(ASEAN) countries stood in the vanguard of high growth. In the 1990s, they werejoined by China, which was accelerating its shift to a market economy after Chinese
leader Deng Xiaoping advocated economic reform in his speeches during his tour ofsouthern China, and by Vietnam, which was promoting the Doi Moi reform policy.
Eastern Asia then became the largest area with high growth, as it gained prominence
as a global production site. In contrast, Japan entered the “lost decade,” following the
bursting of the bubble economy in the second half of the 1980s. The accumulationof NPLs due to persistent declines in asset prices and their disposal weighed heavily
on Japan’s economy, and this led to a financial system crisis in the second half of the
1990s.
Turning to the economic conditions in major countries in the first half of the 1990s
under such global economic environment, the 24 member countries of the Organisation for Economic Co-operation and Development (OECD) recorded an average real
gross domestic product (GDP) growth of 3.9 percent in 1989, 3.2 percent in 1990,
and 1.5 percent in 1991, falling short of the 4.6 percent growth registered in 1988 forthree consecutive years.25 In 1992, the real GDP growth rate finally recovered to 2.3
percent, but in 1993, it slowed again to 1.5 percent. In 1994, economic activity in the67

member countries clearly turned upward, with the real GDP growth rate rising to 3.0
percent from 1.5 percent in the previous year. However, the upturn was not universal
across advanced countries. Among the G7 countries, economic conditions recovered
moderately in the United States, Canada, and the United Kingdom from 1992 onward,
but remained stagnant in Japan, Germany, France, and Italy. In 1994, the U.S. economy continued to expand despite signs of a slowdown observed in part, and European
economies resumed their growth as they showed signs of a recovery on the whole(Chart 7).
Turning to real GDP growth for G5 countries by country in more details, the growthrate for the United States was 4.2 percent in 1988, 1.9 percent in 1990, 3.6 percent in
1992, and 4.0 percent in 1994. In other G5 countries, the rates over the same period
were as follows: for the United Kingdom, 5.8 percent, 0.7 percent, minus 0.4 percent,and 3.9 percent; for France, 4.7 percent, 2.9 percent, 1.6 percent, and 2.3 percent; forGermany, 3.7 percent, 5.3 percent, 1.9 percent, and 2.5 percent; and for Japan, 7.1
percent, 5.6 percent, 0.8 percent, and 0.9 percent. As is clear from these figures, theeconomic stagnation in Japan was conspicuous from the 1990s.
2. Economic conditions in Japan
Amid the aforementioned developments in the global economy, the deceleration in
Japan’s economy rapidly gained speed. After the turn of fiscal 1991, signs of economic
adjustments became clearer toward the fiscal year-end, with the emergence of inventory adjustments amid the slowdown in final demand (Chart 1). From 1992, industrial
production declined substantially, reflecting full-scale inventory adjustments. Moreover, the economic deceleration was aggravated by the enforcement in January 1992
of the land value tax, which was established in May 1991 with the aim of curbing asurge in land prices due to excessively speculative land transactions. On the financial
front, both short- and long-term market interest rates declined (Chart 4), and growth
in money stock generally showed a downtrend (Chart 5). Under these circumstances,on July 1, 1991, the Bank lowered the oﬃcial discount rate by 0.5 percentage point
for the first time in four and a half years, and implemented two additional reductionsof 0.5 percentage point before the end of the year, on November 14 and December
30. These successive reductions were implemented against the following background:eﬀorts to accelerate financial deregulation advanced, as exemplified by the progressin the deregulation of interest rates and the submission to the Diet of the bill for the
Act on Preparation, etc. of Related Acts for Reform of Finance System and Security
Exchange System; meanwhile, there were incidents that could undermine confidence
in Japan’s overall financial system, including a series of financial misconduct that followed an accumulation of financial institutions’ impaired assets due to a decline inasset prices.26
3. Reduction of the oﬃcial discount rate and abolition of window guidance (summer through winter 1991)
a. Abolition of window guidance
In June 1991, the Bank decided to abolish window guidance, a practice that had been
conducted for a long period of time, and fully abolished it in the July–September quar................................
25. IMF, World Economic Outlook Database, October 2016.
26. BOJ Research and Statistics Department (1992), pp. 1–3.

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

ter of 1991. The Bank stated the following points as factors that led to this decision.27
First, due to the progress in financial deregulation and severe business conditions at financial institutions, a herd instinct among financial institutions in terms of the amountof loan extension weakened, and managerial decisions made based on their respective
circumstances came to be suﬃciently reflected in their lending activity. As a result, thefunctioning of interest rates operated more eﬀectively in the long run. Second, in lightof the recent materialization of credit risk, financial institutions had changed their easy
lending attitudes toward individual loan provision and began to take a more prudent
lending stance. And third, the growth in financial institutions’ loans was expected to bemoderate even if financial institutions were allowed to formulate loan extension plans
without any restrictions, given the constraint imposed by the Basel standards as well as
the eﬀects of the interest rate policy conducted thus far that had been steadily spreading
through the economy.
The Bank provided the following additional explanation: “Needless to say, thispolicy change is not intended to promote monetary easing, and in fact, the Bank believes that the recent tightness in the loan market will be maintained.” In response to aquestion asking whether the Bank would not comment on a financial institution’s loan
extension plan even if it was overly ambitious compared with other financial institutions’ plans, the Bank stated as follows: “While the Bank does not make comments on
individual loan plans, it intends to accurately grasp financial developments by closely
monitoring credit extension on an ex-post basis.” The Bank also stated, “Although the
Bank does not conduct moral suasion to suppress lending, it will continue to devote
suﬃcient eﬀorts to give daily routine guidance in a broad sense to individual financial
institutions.” However, while following the aforementioned policy, the Bank decided
to present guidelines, noting that for major city banks, “it would perform the role ofan intermediary as well as a coordinator for the formulation of loan plans of individual banks by providing internal guidance” for the time being as a transitional measure,although it would not provide restrictive guidance.28
Upon the abolition of window guidance, the Director of the Credit and Market
Management Department indicated the following policy regarding the future scheme
for providing guidance for financial institutions, at a liaison meeting of the Bank’s HeadOﬃce and branches in May 1991.29 First, the Director pointed to a rapid slowdown ingrowth of bank loans and money supply as well as a surge in the amount of NPLs
as “two extremely important changes in the environment surrounding the Bank,” andnoted that, amid these changes, the Bank’s guidance for financial institutions would
transform as follows: “First, the mission of window guidance in terms of seeking policy cooperation for constraining an increase in money supply is coming to an end. . . .
And second, while the Bank will continue with its task of monitoring permeation ofmonetary policy eﬀects as an authority in charge of credit and market management, theprinciple for providing guidance for financial institutions will be focused on prudential................................
27. “Abolition of Window Guidance,” a private note by the Director of the Credit and Market Management
Department, June 27, 1991, BOJ Archives “Explanatory Documents (Others [Part 1]),” No. 40318.
28. “Recent Trend in Financial Institutions’ Loans, Credit and Market Management Department, June 1991,”
BOJ Archives “Explanatory Documents (Others [Part 1]),” No. 40318.
29. “Statement at the Liaison Meeting of the Head Oﬃce and Branches, Credit and Market Management Department, May 20, 1991,” BOJ Archives “Explanatory Documents (Others [Part 1]),” No. 40318.

69matters.” The Director then revealed the main points regarding guidance for financial
institutions as follows: “In this situation, the Bank’s task will be to pursue two policy
objectives that are sometimes contradictory: (1) ensuring that individual financial institutions maintain a strict stance in their management based on market discipline andsecure their soundness under the recent environment in which the growth in the amountof loans is slowing while that of impaired assets is increasing rapidly; and (2) leading
the economy to a soft landing without giving a significant shock to the financial system
during the process of resolving financial imbalances caused by the bubble economy.”b. First reduction of the oﬃcial discount rate (July 1991)
On July 1, 1991, the Bank lowered the oﬃcial discount rate from 6.0 percent to 5.5
percent.30 After the rate reduction, Governor Mieno stated at a press conference as follows:31 “The Bank reduced the oﬃcial discount rate for the purpose of adjusting theinterest rate levels—to be more specific, slightly lowering the interest rate levels—inlight of the fact that short- and long-term interest rates have fallen slightly comparedwith their peak levels, as a slight upturn has been observed in developments surrounding prices. Through this rate reduction, ‘the Bank aims to maintain growth led bydomestic demand over the long term by focusing on price stability,’ as is stated in today’s statement.” Governor Mieno also stated, “From the viewpoint of international
economic policy coordination, as is released in the statements at the G7 meetings in
April and late June, there is the basic understanding that ultimately, the achievementof sustainable growth with price stability by individual countries is essential for thedevelopment of the global economy. Furthermore, in order to achieve such growth,
it is necessary for individual countries to implement appropriate measures suited totheir respective economic conditions, in a situation where economic conditions began
to vary somewhat by country, as was clearly indicated in the latest statement for theG7 meeting. The Bank’s latest reduction of the oﬃcial discount rate is also a measureintended for the recent favorable economic conditions to take hold in Japan, as I mentioned earlier. In that sense, I believe that this measure is in line with the international
economic policy cooperation.” In response to a question by a reporter “whether simply
adjusting market interest rates, for example, would have been suﬃcient, consideringthat the degree of reduction was very small, because the Bank had been working on
the reform of the short-term money market since 1988 and city banks were providing
market interest rate-linked loans,” Governor Mieno stated as follows: “As you pointed
out, I assume that it is possible to make a policy response by only adjusting market................................
30. Regarding the shift to monetary easing that started with this reduction of the oﬃcial discount rate, there wascriticism that the pace of monetary easing was too slow and failed to prevent an “overkill” of the economy, orthat the magnitude of easing was too small. In this respect, Mori, Shiratsuka and Taguchi (2000), an interim
summary by the staﬀ of the IMES, oﬀered the assessment that “the monetary easing that was implemented
in the aftermath of the bursting of the bubble economy should be assessed as broadly adequate as a responseto the economic setback in a normal stock adjustment cycle.” However, with the benefit of hindsight, thenegative eﬀects of the bursting of the bubble economy might have been underestimated, as the degree ofmonetary easing that was implemented after policy decisions made based on real-time information corresponded to the economic setback in an ordinary stock adjustment phase (Itoh, Koike, and Shizume [2015],
p. 133).
31. “Summary of the Press Conference by the Chairman of the Policy Board on July 1, 1991,” BOJ Archives“Summary of the Governor’s Press Conferences,” No. 39268. The Bank of Japan Act stipulates that the
Chairman shall be elected by Policy Board members from among themselves, but between 1989 and 2000,
the Governor served as the Chairman.

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

interest rates, but in some cases, it is more appropriate to clarify the Bank’s intention
through changing the oﬃcial discount rate. This time, the Bank judged it appropriate
to clearly announce the Bank’s stance by changing the oﬃcial discount rate.”c. Decline in market interest rates
Against the background of the reduction of the oﬃcial discount rate, market interest rates declined on the whole (Chart 4). At the press conference held on September
25, 1991, Governor Mieno, citing the short-term prime lending rates as an example,
stated, “It seems that some people do not understand such market movements well.
Specifically, before the current market infrastructure was established, deposit interest
rates moved only when the oﬃcial discount rate was changed, resulting in changes inprivate financial institutions’ lending rates. However, over the past several years, market movements have been unconstrained in various respects, with market interest rates
assuming an intermediate role between the oﬃcial discount rate and private lending
rates. Therefore, as I mentioned earlier, I believe that it is quite natural that both shortand long-term prime lending rates have been lowered, reflecting movements in market
interest rates after the reduction of the oﬃcial discount rate on July 1.”32
In the meantime, the Bank continued to call for the need to revise the advantageous
characteristics of fixed-amount postal savings on various occasions, including meetingsof the FSRC, in preparation for smooth implementation of full deregulation of market
interest rates. Private financial institutions had also been making a similar appeal. Nevertheless, the upper limit on the amount of postal savings per account, which was 3
million yen through March 1988, was successively raised in April 1988, January 1990,
and November 1991—the limit being raised to 10 million yen in the end. This rise in
the upper limit combined with a stock price fallback triggered a massive shift of funds
from bank deposits to fixed-amount postal savings. Confronted with this situation, theMOF and the Bank repeatedly held informal negotiations with the Ministry of Posts
and Telecommunications on the issue of the revision of the advantageous characteristics of fixed-amount postal savings, but this issue was not settled. Therefore, the MOF
and the Bank decided to seek to exclude postal savings from the interest rate control,
aiming to link interest rates on fixed-amount postal savings to market interest rates as
an objective to be achieved in the immediate future.33
d. Reduction of the reserve requirement ratio
The Bank lowered the reserve requirement ratio in October 1991 for the first time in
10 years. As for the basic thinking behind this reduction, the Bank noted, “It aimed tomitigate financial institutions’ burden of the reserve requirement, thereby developing
an environment that enabled the Bank to manage smoother money market operations”
and “If this measure was taken as an attempt to directly promote monetary easing, thatis diﬀerent from the Bank’s true intention given its recognition of current economic
and price developments in Japan.” In addition, the Bank argued that the role of the re................................
32. “Summary of the Governor’s Press Conference on September 25, 1991,” BOJ Archives “Summary of theGovernor’s Press Conferences,” No. 39268.
33. “Developments concerning Fixed-Amount Postal Savings,” a private note by the Director of the Policy
Planning Department, December 27, 1991, BOJ Archives “Private Notes by Directors from 1991 to 1993,”
No. 39500. This objective was achieved later, when an agreement was reached between the MOF and theMinistry of Posts and Telecommunications in December 1992 that interest rates on postal savings should belinked to deposit interest rates at private financial institutions in principle.

71

serve requirement had changed, stating as follows: “As is indicated by the fact that the
recent change in the reserve requirement ratio was the first change in 10 years, it seems
diﬃcult to deny that the Bank is impelled to make slight changes to the significance ofthe reserve requirement as a policy tool, in light of the ongoing major changes in thepolicy environment such as the progress in financial deregulation and globalization.”34
At a press conference, Governor Mieno explained as follows: “Concerning money
market operations, the Bank has continued to regard it important that appropriate market rates suited to actual economic conditions be formed. In light of the fact that theburden of the reserve requirement is imposing some constraints on smooth implementation of money market operations, the Bank judged that it was necessary to mitigate
the burden to a certain degree by lowering the reserve requirement ratio and thereby
create an environment in which the Bank could continue to manage smooth money
market operations.”35
e. Second reduction of the oﬃcial discount rate (November 1991)
On November 14, 1991, the Bank lowered the oﬃcial discount rate from 5.5 percent
to 5.0 percent. The reduction was based on the Bank’s judgment that “in a situation
where short- and long-term market interest rates are falling further, it is appropriate, at
this stage, to lower the oﬃcial discount rate further, as part of the series of monetaryeasing measures the Bank had implemented thus far,” while monitoring overall economic conditions since July.36 Other grounds for the reduction included the following:“Over the past few months or so, the Bank has been conducting monetary policy that
aimed at adjusting the overall level of interest rates flexibly by immediately responding
to changes in economic activity—specifically, through promoting a decline in market
interest rates—and the intended eﬀects of such policy conduct have been produced”;
and “the Bank considered that it was one of its responsibilities, as a central bank, toclearly respond to market expectations for a decline in interest rates on important occasions.” However, as points for future reflection, the Bank stated the following: “Thelatest reduction of the oﬃcial discount rate has repeatedly been exposed to incorrectpress coverage as the media were overly intent with the timing of a reduction”; and interms of communication with the media, “it cannot be denied that both the Bank andthe MOF were responsible for some mishandling.” The Bank then noted as follows:“Taking this opportunity, the Bank would like to emphasize that, from the very beginning, the Bank has never thought of lowering the oﬃcial discount rate in ‘the weekof November 5,’ contrary to reports by newspapers and other media. The Bank decided to lower the rate today because it was not appropriate to decide on the rate before
confirming the October figures for financial institutions’ loans and the wholesale priceindex (WPI), as these were more or less expected to factor in the sharp decline in short................................
34. “Reduction of the Reserve Requirement Ratio,” a private note by the Director of the Policy Planning
Department, October 1, 1991, BOJ Archives, “Private Notes by Directors from 1991 to 1993,” No. 39500.
35. “Summary of the Governor’s Press Conference on October 9, 1991,” BOJ Archives “Governor’s Press Conferences,” No. 39268. In addition, Director Kunio Kojima of the Policy Planning Department stated on
October 1, 1991, that the magnitude of the latest reduction was around 40 percent, and the amount of funds
to be released in the money market as a result of this reduction was estimated to be approximately 2 trillion
yen (the amount of the remaining reserves estimated to be 3 trillion yen)” (the evening edition of The Nikkei
on October 1, 1991).
36. “Summary of the Press Conference by the Chairman of the Policy Board on November 14, 1991,” BOJ
Archives “Summary of the Governor’s Press Conferences,” No. 39268.

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

and long-term prime lending rates. The issue associated with regulated deposit interest
rates, which has been widely discussed among the public, was also of concern. While
this issue itself did not serve as the major reason for the reduction, the Bank judgedthat there were suﬃcient reasons for deciding on the reduction at this time.” With these
remarks, the Bank emphasized the appropriateness of the timing of the reduction.37
f. Third reduction of the oﬃcial discount rate (December 1991)
For the third time in 1991, the Bank lowered the oﬃcial discount rate on December 30
from 5.0 percent to 4.5 percent. When the rate reduction was decided, Governor Mieno
stated at a press conference as follows: “While comprehensively taking account ofvarious recent developments in economic activity and financial conditions and bearing
in mind the fact that the January–March quarter is the period for which firms formulate
their business plans for the next fiscal year, the purpose of the rate reduction this timeround (from 5.0 percent to 4.5 percent) is to further facilitate and secure a shift froman economy with excessively high growth to a better-balanced one with price stability,
which represents the Bank’s current basic stance on monetary policy.”38 It is worth
noting that the Governor explicitly emphasized such shift at this point.
However, according to a private note by the Director of the Policy Planning Department,39 after the previous reduction of the oﬃcial discount rate in November, “the Bank
was informally finalizing the judgment that it was necessary to implement the next rate
reduction sometime around the turn of 1992,” and “regarding the specific timing, one
idea initially held by the Bank was to implement the rate reduction around the timeof the January meeting of General Managers of the Bank’s branches, from the viewpoint of taking a little while longer to assess developments in land transactions andland prices after the removal of the restriction imposed on overall real estate-related
lending.” The note, however, continued to state that “the Bank abruptly decided on theimplementation before the turn of 1992 . . . due to recent developments, including (1)the heightened risk that President George H. W. Bush would cite a reduction of theoﬃcial discount rate as part of his request for Japan to expand domestic demand at
the time of his visit to the country and (2) the call from the United States for holdinga G7 meeting with the aim of enhancing economic expansions in advanced countries,
including Japan. In that sense, some political considerations have played a role.” Thenote stated that the timing of the rate reduction was determined by the combination ofinternal deliberations and political considerations.
g. Application of the deposit insurance system
In August 1991, the MOF announced the “Measures to Restore Confidence in the Financial System.” Regarding the development of a framework to maintain financial system stability, the MOF stated in the announcement that “it will strive to appropriately
manage the deposit insurance system in addition to requesting financial institutions
to further enhance the mutual aid system.” Accordingly, the deposit insurance system
was applied for the first time in resolving the failure of the Toho Sogo Bank in Octo................................
37. “Reduction of the Oﬃcial Discount Rate,” a private note by the Director of the Policy Planning Department,
November 14, 1991, BOJ Archives “Private Notes by Directors from 1991 to 1993,” No. 39500.
38. “Summary of the Press Conference by the Chairman of the Policy Board on December 30, 1991,” BOJ
Archives “Summary of the Governor’s Press Conferences,” No. 39268.
39. “Reduction of the Oﬃcial Discount Rate,” a private note by the Director of the Policy Planning Department,
December 30, 1991, BOJ Archives “Private Notes by Directors from 1991 to 1993,” No. 39500.

73

ber 1991, and it was decided that the Deposit Insurance Corporation of Japan (DICJ)
would provide financial assistance to the Iyo Bank. At that time, resolution schemes
were generally implemented in the form of providing financial assistance to a receivingbank designated as an organization that would take over business operations of a failed
financial institution. This was an extension of the conventional scheme under which
financial institutions with poor performance were bailed out outside the framework of
the deposit insurance system.
The Toyo Shinkin Bank, whose issuance of fraudulent certificates of deposits inAugust 1991 came to light, agreed in April 1992 to a merger, becoming the secondcase of the application of the deposit insurance system. The failure resolution took theform of transferring its business operations to 18 shinkin banks in Osaka Prefecture,
followed by a merger with the Sanwa Bank. At a press conference in August 1991,
when the incident came to light, Governor Mieno explained, “The Bank judged that,
if a bank run were to immediately occur due to a case of misconduct by an individual,
it would be appropriate to implement a suitable resolution by keeping in close contact
with the MOF and other parties.” When asked by a reporter “whether the Bank intends
to provide a bailout in the event of a rise in concern over financial system stability asa result of an individual’s misconduct,” Governor Mieno responded, “The provision
will be decided on a case-by-case basis.”40 On October 6, 1992, at a press conference
held after the dissolution of the Toyo Shinkin Bank, a reporter asked, “What does the
Bank think of the view that the method of the resolution adopted in the Toyo Shinkin
Bank’s case on October 1—namely, the dissolution and absorption—may become aprecedent for future bailout of failed financial institutions?” In response, Governor
Mieno stated, “The failure resolution of small and medium-sized financial institutions
may not always take this form. It will merely be one of the options.”41
B. Continuation of Monetary Easing and Worsening of the NPL Problem (Spring
1992 through Autumn 1993)
1. Progress in the Japan-U.S. Structural Impediments Initiative
From the late 1980s, the forum for international policy coordination shifted from theG5 and G7 to bilateral negotiations.42 Specifically, the emphasis shifted from multilateral negotiations realized under the Plaza Accord and the Louvre Accord to bilateralnegotiations on structural impediments, such as trade barriers in specific sectors andpoor market access for foreign suppliers. At forums such as the Japan-U.S. Working Group on Financial Markets and the Japan-U.S. Framework for a New Economic
Partnership, the United States’ negotiation stance became tougher, and Super 301 wasrevived. The follow-up meeting of the Japan-U.S. Working Group on the Yen-Dollar
Exchange Rate, which first took place in 1986, was renamed the Japan-U.S. Working
Group on Financial Markets in 1989, and the group held a total of four meetings inWashington D.C. and Tokyo from November 1989 through October 1991. Matters of................................
40. “Summary of the Governor’s Press Conference on August 21, 1991,” BOJ Archives “Summary of the Governor’s Press Conferences,” No. 39268.
41. “Summary of the Governor’s Press Conference on October 6, 1992,” BOJ Archives “Summary of the Governor’s Press Conferences,” No. 43328.
42. Asai, Itoh, and Sakurai (2017), pp. 84–93.

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

concern for the United States at those meetings were not macroeconomic issues, but
concrete issues associated with specific fields, including the deregulation of depositinterest rates, the progress in deregulation pertaining to the short-term markets, recent
developments concerning Article 65 of the Securities and Exchange Act, and the access to foreign financial instruments and services, all of which should be recognized as
structural policy matters.
In parallel with the Japan-U.S. Working Group on Financial Markets, the Structural
Impediments Initiative (SII) and its follow-up meetings were held. On May 25, 1989,
the U.S. government designated Japan, together with India and Brazil, as a country
subject to Super 301. It also announced a proposal to hold Japan-U.S. negotiations on
structural impediments separately from the negotiations concerning Super 301. Following this announcement, the SII commenced. Regarding the SII, the United States
proposed to set a goal for correcting external imbalances and to create five baskets covering automobile parts, government procurement, deregulation of financial, insurance,and other services, observance of existing agreements, and Japan-U.S. cooperation. As
for the objectives of the Japan-U.S. Framework for a New Economic Partnership, it
was proposed that Japan’s current account surplus be reduced to 1.0–2.0 percent relative to GDP within three years, benchmarks be set for market access, and that summit
meetings be held biannually to discuss macroeconomic policies to review the progress
made in the past six months.
Negotiations were held over several years, and on July 10, 1993, Prime Minister
Kiichi Miyazawa and President Clinton announced the “Joint Statement on the JapanU.S. Framework for a New Economic Partnership,” in which an agreement on a framework for Japan-U.S. negotiations was reached. The joint statement proclaimed thatsummit meetings would be held biannually. It also clarified the following basic objectives: “Japan will achieve a meaningful decrease in its current account surplus over the
medium term”; “it will promote growth led by strong and sustainable domestic demandwith determination”; “it will actively pursue the medium-term objective of increasing
market access”; and “in this context, Japan will implement measures on the fiscal andmonetary fronts as necessary to realize these objectives.” Regarding government procurement, it was confirmed that “the Japanese government should aim at expanding its
procurement to some extent.”
2. Economic conditions in Japan
Turning to economic conditions in Japan, signs of economic adjustments became clear
in a greater degree in fiscal 1992 (Chart 1). As for fiscal policy, in addition to the frontloaded implementation of the budget for fiscal 1992 regarding public construction, thegovernment formulated a comprehensive economic stimulus package worth a total of
10.7 trillion yen in August 1992. On the financial side, short- and long-term market interest rates declined sharply and loan interest rates also decreased against the backdropof the deepening of economic adjustments and the reductions in the oﬃcial discountrate (Chart 4). By the end of the year, the oﬃcial discount rate was reduced twice, on
April 1 (by 0.75 percentage point from 4.5 percent to 3.75 percent) and on July 27(by 0.5 percentage point from 3.75 percent to 3.25 percent). Despite these reductions,money stock remained on a downtrend due to the recurrence of developments that wereseen during the previous phase of monetary easing, such as asset price declines and a75

reduction in firms’ transactions in which they raised funds while making investment, in
addition to a decline in firms’ demand for funds associated with a decrease in businessfixed investment (Chart 5).
Furthermore, in fiscal 1992, it became a major policy challenge to take the initiativein securing the stability of the financial system, reflecting the failure of a financial
institution and other events caused by financial misconduct in the previous year. As
a result, the Act on Preparation, etc. of Related Acts for Reform of Finance System
and Security Exchange System was enacted. Moreover, there were strong signs ofautonomous economic adjustments due to a reversal of a long period of economic
expansion, with a sharp decline in asset prices, significant deterioration in corporate
profits, and progress in corporate restructuring. In sum, economic adjustments became
prolonged and severe in fiscal 1992, partly because of the direct and indirect eﬀects
of the asset price decline in addition to strong downward pressure from capital stock
adjustments.43
The economic recession continued through fiscal 1993 (Chart 1). In response, thegovernment formulated in April 1993—immediately after the turn of fiscal 1993—acomprehensive economic stimulus package (worth a total of 13.2 trillion yen), which
included the establishment of infrastructures and the front-loaded implementation of
the initial budget for fiscal 1993 regarding public construction. The amount of thefront-loaded budget implemented by the fiscal authorities largely exceeded that of theemergency economic stimulus package in 1987, which amounted to 6.0 trillion yen.44
However, despite the underpinnings of this public investment, economic activity as awhole remained sluggish due to a significant slowdown in the growth of private consumption, in addition to a decline in business fixed investment, and wholesale prices
had been below the previous year’s level, while the consumer price index (CPI) had
been more or less unchanged (Chart 2). The Bank recognized the reason for the prolonged recession as the following three adjustments that had progressed simultaneously: (1) cyclical capital stock adjustments; (2) balance-sheet adjustments associatedwith the bursting of the bubble economy; and (3) increased pressure to adjust the industrial structure, reflecting changes in the global competition environment triggered by
the yen’s appreciation.45 As for the second adjustments, the Bank assessed that firms’balance-sheet adjustments accompanied by the asset price decline in the 1990s hadconstrained the overall spending activity. Regarding the third adjustments, the Bank
judged that the adjustments of the industrial structure were inevitable and that it wasnecessary to reform government regulations, as the mass production technology formedium-high-technology products was being transferred to other regions such as East
Asian countries, and production of existing products had actively been shifted overseas,
particularly in the automobile and electrical machinery sectors.46
The growth in financial institutions’ loans had been declining quarter after quarter,
mainly for the following three reasons: (1) demand for funds related to investment in................................
43. BOJ Research and Statistics Department (1993a), pp. 9–11, and BOJ Research and Statistics Department(1994), p. 11.
44. Komine and Okada (2011), pp. 415–423.
45. The first clear reference to the balance-sheet adjustments appears in BOJ Research and Statistics Department(1993b), p. 16.
46. BOJ Research and Statistics Department (1994), pp. 12, and 47–72.

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

tangible assets became sluggish amid the protracted economic stagnation; (2) firms’
financial restructuring proceeded; and (3) firms’ risk-taking capacity declined due tothe asset price decline (Chart 5). Consequently, the Bank continued its monetary easing
stance on the whole in fiscal 1993, and lowered the oﬃcial discount rate on February 4(by 0.75 percentage point from 3.25 percent to 2.5 percent) and on September 21 (by0.75 percentage point from 2.5 percent to 1.75 percent) to the lowest-ever level.
In terms of the external balance of payments, Japan’s real trade surplus followed adowntrend from spring 1992 due mainly to the eﬀects of the appreciation of the yen.
Nevertheless, the dollar-based surpluses for both trade and current accounts marked
the record high due to the J-curve eﬀects arising from the yen’s appreciation and to anincrease in the receipt of investment returns. As a result, Japan faced increased pressure
from the United States to narrow the trade imbalance, and it became an important issue
for Japan to deal with the external surplus. The cause of Japan’s external surplus could
be divided into a cyclical factor and a factor pertaining to the fundamental savinginvestment balance. The former, which was attributable to the gap between the growth
rates of Japan and other countries, was likely to be resolved. However, the latter would
not be resolved in the short term, and the Bank judged it necessary to resolve this byenhancing infrastructures and housing stock in Japan.47
3. Toward an unprecedentedly low level of interest rates
a. Fourth reduction of the oﬃcial discount rate (April 1992)
On April 1, 1992, the Bank lowered the oﬃcial discount rate from 4.5 percent to 3.75
percent. After the rate reduction, Governor Mieno stated, “Japan’s economy has remained solid in some respects recently, as seen in the continued uptrend in employment. However, signs of economic adjustments have become clearer on the whole, as
firms have been constraining production more strenuously due to full-fledged inventory adjustments amid the continued slowdown in final demand.” He also noted thefollowing points: “Business sentiment has recently started to become more cautious,
mainly due to declines in sales and profits”; “as for financial conditions, growth rates infinancial institutions’ loans and money supply both have stayed relatively low, reflecting extremely sluggish demand for funds amid economic adjustments”; and “today’s
decision to lower the rate from 4.5 percent to 3.75 percent was based on the recognition that a greater rate reduction at this point after comprehensively taking account of
economic conditions would further ensure that the eﬀects of monetary easing would
permeate through economic activity and further secure the path for Japan’s economy
to shift to sustainable growth based on price stability.”48
Meanwhile, the reduction of the oﬃcial discount rate became a political issue, andvarious politicians expressed their opinions successively, including Mr. Shin Kanemaru.49 Regarding such remarks, in a private note by the Director of the Policy Planning................................
47. BOJ Research and Statistics Department (1994), pp. 11–14.
48. “Summary of the Press Conference by the Chairman of the Policy Board on April 1, 1992,” BOJ Archives“Summary of the Governor’s Press Conferences,” No. 43328.
49. At a general meeting of the Noboru Takeshita faction of the Liberal Democratic Party on February 17, 1992,
Mr. Kanemaru, Vice President of the party, stated as follows: “I have been arguing that the oﬃcial discountrate should be lowered by 0.5 percentage point. The adjustment of the rate is said to be the prerogative of
the Bank’s Governor, but the Prime Minister can handle anything. He can lower the rate by dismissing theGovernor at his will.” This comment attracted intense media attention, and the media as well as opposition77

Department, the Director emphasized the need to maintain the Bank’s independence asa central bank by stating as follows: “The series of inappropriate remarks by politicians
have made it significantly diﬃcult for the Bank to judge the best timing of lowering theoﬃcial discount rate solely from an economic perspective, while ensuring the Bank’s
credibility. I assume that those remarks are not a temporary matter as they were madeagainst the backdrop of, for example, concerns that the bursting of the economic bubble may ‘go too far,’ the political stalemate, and a sense of crisis regarding the election.
Fortunately, the government began to regard such obstruction as regrettable, and while
trying to restrain inappropriate remarks (although this eﬀort has not necessarily beensuccessful), it has adopted the stance of upholding the Bank’s argument that ‘the Bank
must not allow politicians to presume that the rate can be cut if they make a commotion.”’50
b. Fifth reduction of the oﬃcial discount rate (July 1992)
On July 27, 1992, the Bank decided on the fifth reduction of the oﬃcial discount rate(from 3.75 percent to 3.25 percent). At a press conference, Governor Mieno stated asfollows: “On the financial front, both short- and long-term interest rates have recently
been declining further, and lending rates have also been decreasing steadily. Even so,
there are some signs showing that the current situation is somewhat diﬀerent fromthe past monetary easing phases. For example, growth rates of financial institutions’lending and money supply have remained relatively low in a situation where demand
for funds remained weak mainly because of sluggish asset transactions, in addition tothe ongoing economic adjustments . . . . After comprehensively taking account of thesecircumstances, the Bank decided on today’s measure based on the judgment that it
was appropriate to further promote the monetary easing eﬀects to permeate througheconomic activity and better secure the economy’s transition to a sustainable growth
path with price stability by further reducing the rate.”51
A private note by the Director of the Policy Planning Department elaborated onthat point as follows: “The timing of today’s decision was rather complicated (in addition to the election, the summit and the Governor’s business trip to the Bank forInternational Settlements [BIS] had aﬀected the timing somewhat), but the ‘structure’of the judgment is simple and straightforward.”52 The note also mentioned the following three points. First, there was an argument that an interest rate reduction shouldbe implemented as a way of bailing out financial institutions, which had been rapidly
attracting attention since Chairman Masaru Hayami of the Japan Association of Corporate Executives referred to it. This, however, was completely diﬀerent from the Bank’s
thinking. Second, in relation to international economic policy coordination, “it is truethat uneasy movements have strengthened somewhat in the global foreign exchange
and stock markets since the interest rate hike in Germany on July 17,” but that was not
an important factor in the Bank’s decision today to lower the interest rate. And third,..........................................................................................................................................
parties unanimously criticized it as infringement of the Bank’s independence.
50. “Reduction of the Oﬃcial Discount Rate,” a private note by the Director of the Policy Planning Department,
April 1, 1992, BOJ Archives “Private Notes by Directors from 1991 to 1993,” No. 39500.
51. “Summary of the Press Conference by the Chairman of the Policy Board on July 27, 1992,” BOJ Archives“Summary of the Governor’s Press Conferences,” No. 43328.
52. “Reduction of the Oﬃcial Discount Rate,” a private note by the Director of the Policy Planning Department,
July 27, 1992, BOJ Archives “Private Notes by Directors from 1991 to 1993,” No. 39500.

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the Bank judged that a rate reduction was necessary at this time in order to further
secure the process of transition of Japan’s economy to a sustainable growth path withprice stability based on its outlook for economic activity.53
c. Sixth reduction of the oﬃcial discount rate (February 1993)
On February 4, 1993, the Bank lowered the oﬃcial discount rate from 3.25 percent to
2.5 percent. At a press conference, Governor Mieno explained the following points:“As business fixed investment, which is a major component of final demand, continues to lose momentum and private consumption has also been slowing further, final
demand has tended to remain sluggish”; “given this situation, the Bank decided on
today’s measure based on the judgment that it was appropriate to promote the eﬀects
of monetary easing to permeate through economic activity with a further interest rate
reduction”; and “while it is true that the oﬃcial discount rate has matched its record
low, the Bank decided on this measure after fully taking account of developments inthe asset markets and financial institutions’ behavior, as I mentioned earlier. In lightof the recent developments in land prices and financial institutions’ lending attitudes, I
believe that the so-called bubble phenomena, such as land price rises, are very unlikely
to heat up immediately again.”54
On this rate reduction, a private note by the Director of the Policy Planning Department provided supplementary explanation that “when announcing this policy decision,
the Bank focused on how strong the economic recovery would be toward the beginningof the new fiscal year.”55 Various economic indicators released around the turn of 1993
indicated conspicuous weakness in final demand. In addition, although not all reports
released around that time were pessimistic, on the whole, they strongly suggested thatprivate final demand remained weak. Therefore, the timing of this rate reduction inearly February was a natural consequence of the analysis of these circumstances. As
for the Bank’s assessment of the coordination between monetary policy and fiscal policy, the note explained that the Bank judged that a rate reduction at that time would
not bring about an unbalanced policy mix, given that the government’s stance on state
finance in fiscal 1992 and 1993 was quite diﬀerent from the stance adopted in the pastwhen fiscal consolidation was imperative.
d. Guiding market interest rates lower
Moreover, in August 1993, the Bank started to guide market interest rates lower. On
September 13, Governor Mieno provided the following explanation about the specificsof this measure: “Regarding economic conditions, there is no concrete evidence atpresent to assure future recovery in private demand. In that sense, the Bank’s assessment is that downside risks to the scenario that the economy will recover in the second
half of 1993 are starting to increase. In fact, the Bank has already been dealing withthese risks. For example, in money market operations, it has been guiding short-term
interest rates lower within a range consistent with the current oﬃcial discount rate of
2.5 percent as the premise.” A reporter asked the following question: “I believe that the................................
53. As for the money supply controversy that took place in Japan during 1992–1993, see Appendix 1.
54. “Summary of the Press Conference by the Chairman of the Policy Board on February 4, 1993,” BOJ Archives“Summary of the Governor’s Press Conferences,” No. 44682.
55. “Reduction of the Oﬃcial Discount Rate,” a private note by the Director of the Policy Planning Department,
February 4, 1993, BOJ Archives “Private Notes by Directors from 1991 to 1993,” No. 39500.

79

Bank has distinguished between ‘guide,’ a term used when the Bank intends to make apolicy change, and ‘tolerate,’ a term used when it lets interest rates move in line withchanges in market sentiment. May I take it that the fact that the Bank used the term
‘guide’ at this time means that in August, it was already trying to change market sentiment on the assumption of a later policy change?” To this question, Governor Mieno
responded as follows: “Ultimately, that is correct. It is not appropriate to choose words
based on one’s personal preference, but I do not really like the phrase ‘guide lower”’;“as I have already mentioned earlier, when deposit rates were regulated, it was diﬃcult, or impossible, to change deposit rates without changing the oﬃcial discount rate.
However, with the progress in deregulation of interest rates, a framework has been established under which deposit rates change in ways that reflect movements in market
interest rates, even if the oﬃcial discount rate remains unchanged. In that sense, it
is true that the function of promoting a change in deposit rates, which is one of thefunctions of the oﬃcial discount rate, has weakened, while the significance of controlling market interest rates has grown all the more”; and “many countries, including theUnited States and Germany, are fully using the functions of controlling the oﬃcial discount rate and market interest rates, although the method diﬀers by country. I believethat Japan has finally arrived at that stage.”56
e. Seventh reduction of the oﬃcial discount rate (September 1993)
On September 21, 1993, the Bank lowered the oﬃcial discount rate from 2.5 percent to1.75 percent. This rate reduction is said to have been taken in response to heightened
downside risks to the economy, in other words, a decreased likelihood of the scenariothat the economy would recover in the second half of 1993.57
It was around end-July that the Bank judged it necessary to lower interest rates further. The first measure implemented for that purpose was guiding market interest rates
lower from August, as explained in the previous section. In September, particularly
toward late September, “reports speculating about a rate reduction started to run wildin newspapers and other media, and expectations for lower interest rates increased in
the market.” However, Governor Mieno consistently and strongly instructed the Bank’s
oﬃcers and staﬀ that the utmost priority should be to thoroughly examine the outlook
for the economy from the second half of 1993 onward and that the Bank should takeaction in accordance with its assessment of the situation in an unwavering manner. The
Bank’s final assessment of the situation was that a relatively drastic monetary easing
measure was necessary, and the Bank set the margin of the rate reduction at 0.75 percentage point. As a result of the rate reduction, the oﬃcial discount rate recorded thelowest-ever level.
When the rate reduction was decided, Governor Mieno stated, “The reduction of
the oﬃcial discount rate is the maximum monetary policy measure that can be implemented in light of the present situation. The Bank is confident that the eﬀects of thisrate reduction, coupled with the cumulative eﬀects of earlier monetary easing and theeﬀects of the government’s emergency economic stimulus package that has recently................................
56. “Summary of the Governor’s Press Conference on September 13, 1993,” BOJ Archives “Summary of theGovernor’s Press Conferences,” No. 44682.
57. “Reduction of the Oﬃcial Discount Rate,” a private note by the Director of the Policy Planning Department,
September 21, 1993, BOJ Archives “Private Notes by Directors from 1991 to 1993,” No. 39500.

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been announced, will contribute to the economy’s transition to a path of sustainablegrowth with price stability.” At the same time, he expressed concern about the negativeside eﬀects by stating as follows: “However, now that the Bank has lowered interest
rates this far, the Bank cannot totally rule out the risk that unprecedentedly low interest rates may generate some ‘side eﬀects’ apart from the intended eﬀect of supporting
normalization of economic activity, if I may exaggerate a little.”58
In this respect, a private note by the Director of the Policy Planning Departmentemphasized that this rate reduction was an “emergency measure” by stating as follows:“As the Governor and other oﬃcers unanimously emphasized, reducing the rate to therange of 1–2 percent is an emergency measure, and this means that, if recovery ineconomic activity becomes clear or negative side eﬀects arise, the rate must be raised
swiftly.”59 , 60
f. Worsening of the NPL problem
In April 1992, the MOF disclosed the amount of NPLs for the first time. However, as
the MOF’s definition of NPLs was narrow, the disclosure generated various speculations.61 On August 18, 1992, the MOF announced the “Present Policy for Managementof Financial Administration—Ensuring Financial System Stability and Improving Efficiency,” which was based on the thinking that the disposal of NPLs should be implemented by banks on their own responsibility in principle.62 Governor Mieno stated at apress conference on August 19 that the “Present Policy for Management of Financial
Administration” was consistent with the Bank’s thinking that “it should request each................................
58. “Summary of the Press Conference by the Chairman of the Policy Board on September 21, 1993,” BOJ
Archives “Summary of the Governor’s Press Conferences,” No. 44682.
59. “Reduction of the Oﬃcial Discount Rate,” a private note by the Director of the Policy Planning Department,
September 21, 1993, BOJ Archives “Private Notes by Directors from 1991 to 1993,” No. 39500.
60. Regarding the reductions of the oﬃcial discount rate from the second half of 1993 onward, Okina andShiratsuka (2002) pointed out the possibility that the Bank had been reluctant about additional monetaryeasing. “The pace of the Bank’s reduction of interest rates from late 1993 to autumn 1995 was, according
to the Taylor-type policy rule, slow when the Bank was about to face a record-low oﬃcial discount rate of
2.5 percent seen during the period of expansion of the bubble, suggesting the possibility that the Bank was
rather reluctant to pursue additional easing” (Okina and Shiratsuka [2002], pp. 99–100). This paper also
oﬀered the assessment that a bolder, earlier interest rate reduction would have been desirable. Specifically,it stated, “Based on an observation that the financial system was already substantially damaged in the period
after 1993 and the eﬀectiveness of monetary easing was limited, what might have been worth trying was amore drastic interest rate reduction before 1993, even though it was adequate in light of the Taylor rule.”
61. When it disclosed the amount of NPLs in April 1992, the MOF defined NPLs as delinquent loans for whichinterest payment was overdue for six months or more. When it disclosed the amount of NPLs in October
1992, the MOF disclosed for the first time the amount of uncollectible loans that were not covered bycollateral or guarantee. In response to the criticism that the MOF’s definition of NPLs was too narrow, theMOF announced in June 1995 a new definition that expanded the scope of NPLs in two respects. First,
the scope of financial institutions covered by the NPL disclosure was expanded from 21 major banks to all
deposit-taking financial institutions. And second, loans with reduced or exempted interest rates were added
to the scope of NPLs, in addition to loans to bankrupt borrowers and delinquent loans. Komine and Okada(2011), pp. 470–472.
62. Mr. Nobuyuki Teramura, who was then Director-General of the MOF’s Banking Bureau, stated in an interview conducted in January 2010 that it was written in the “Present Policy for Management of Financial
Administration” that “the MOF intends to make its maximum eﬀorts to ensure that public confidence in thefinancial system that has been placed for many years will not be undermined at all” based on the recognition
that injection of public funds would be necessary for protecting depositors if it turned out that a bank would
become insolvent with excessive debt. However, the MOF’s basic stance was that using public funds before
disclosing that a bank was apparently insolvent and bankrupt would only cause confusion and increase theburden of the public (Matsushima and Takenaka [2011], pp. 225–226, and BOJ [1992], pp. 71–73).

81

financial institution to (1) make eﬀorts to thoroughly manage risks and improve its
capital base and (2) secure sound management; at the same time, the Bank, for its part,needs to review various systems and practices related to the management of financial
institutions and financial transactions with a view to thoroughly pursuing the principle of financial institutions’ self-responsibility, and establish a framework in which
financial institutions can conduct sound management.” He also said, “The Bank willstrongly support the government’s earnest eﬀorts” and expressed the view that it wasquite possible to ensure the stability of the financial system as a whole.63 Later, confusion arose over the government’s policy; for example, media reported that, at the Liberal Democratic Party’s Karuizawa seminar at end-August, Prime Minister Miyazawa
commented, “The government is ready to use public funds, if necessary.” However,as the Chairman of the Federation of Bankers Association of Japan (FBAJ) stated at apress conference on September 8 that banks should make every possible eﬀort on theirown responsibility, the argument for the injection of public funds subsided.
Nevertheless, the NPL problem persisted thereafter. In January 1993, the Bank
conducted on-site examinations of the Hyogo Bank, the results of which revealed significant discrepancies with those of the MOF’s inspection conducted in August 1992.
Specifically, whereas the amount of NPLs and the required write-oﬀ amount at the
Hyogo Bank identified as a result of the MOF’s inspection were 674.7 billion yen and25.3 billion yen, respectively, the corresponding amounts identified through the Bank’s
on-site examinations were 2,062 billion yen and 255.7 billion yen. While there wasa time lag of six months, the large discrepancies between the amounts identified by
the MOF and the Bank were attributable to the Bank’s calculation, which automatically included a certain proportion of the NPLs in the required disposal amount forparent banks based on the thinking that the cost of disposal of NPLs held by aﬃliatednonbanks would be borne by parent banks. Recalling that time, Mr. Nobuyuki Teramura, who was then Director-General of the MOF’s Banking Bureau, commented,“The Bank’s on-site examinations were more foresighted.”64
In February 1993, the second reconstruction plan for Japan Housing FinanceCo. was formulated under the leadership of the MOF. Regarding the bailout plan for
housing loan companies (jusen), Governor Mieno stated at a press conference, “Thiswas an issue to be addressed by jusen themselves and financial institutions supportingthem” and “Decisions should be made based on the principle of self-responsibility.”65
The memorandum of understanding concerning the reconstruction plan for jusen(exchanged between Director-General Teramura of the MOF’s Banking Bureau andDirector-General Takenori Manabe of the Ministry of Agriculture, Forestry and
Fisheries’ Economic Bureau) stated as follows: “Given that an interest rate reduction
or exemption on loans for jusen by financial institutions related to agriculture and................................
63. “Summary of the Governor’s Press Conference on August 19, 1992,” BOJ Archives “Summary of the Governor’s Press Conferences,” No. 43328.
64. Matsushima and Takenaka (2011), p. 247. In December 1992, the Bank established a commitment line of
20 billion yen for each of the Hyogo Bank’s three major shareholders—the Sumitomo Bank, the Long-Term
Credit Bank of Japan (LTCB), and the Industrial Bank of Japan. Loans provided through the commitmentline were extended by the three banks to the Hyogo Bank in their entirety.
65. “Summary of the Governor’s Press Conference on February 17, 1993,” BOJ Archives “Summary of theGovernor’s Press Conferences,” No. 44682.

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forestry is very burdensome for these institutions in light of their financial soundness,
it will be coordinated so that the Bank of Japan will provide the necessary funds to theNorinchukin Bank (this fund provision should be made in the form of ordinary Bankof Japan loans and should not be predetermined).”66 However, regarding this point,
Bank of Japan Governor Yasuo Matsushita later stated, “The Bank was not involved indrafting of the memorandum at all”; “it seems that at that time, the MOF sounded out
the Bank about the feasibility of providing loans when formulating a reconstruction
plan for jusen. I have heard that in response, the Bank did nothing more than to makea statement that ‘the provision of Bank of Japan loans is a measure implemented asnecessary while examining developments in overall financial markets and the funding
situation of each financial institution on a daily basis, and the Bank should not provide
loans for purposes other than that.”67 During the period of 1992 through 1993, theMOF and the Bank emphasized the need for (1) swiftly proceeding with the disposalof NPLs, (2) the principle of financial institutions’ self-responsibility, and (3) financial
institutions’ financial soundness as well as profitability suﬃcient to implement thedisposal of NPLs; they expressed a negative view on the idea of immediately injecting
public funds.
In retrospect, it may be said that this view was based on insuﬃcient recognition of
the balance-sheet adjustment mechanism operated during the process of the burstingof the bubble economy.68 Nevertheless, given the scale of NPLs that arose during theprocess of the bursting of the bubble economy, it was impossible for monetary policy
alone to resolve this problem. In fact, economic stimulus measures in the 1990s were
gradually implemented in terms of both macroeconomic policy, including fiscal andmonetary policies, and prudential policy.

................................
66. In June 1995, a project team was established within the ruling parties to deliberate on early resolutionof the NPL problem. At the seventh meeting of the project team held on August 24, 1995, on the topic
of the background to and current status of the jusen problem, the MOF and the Ministry of Agriculture,
Forestry and Fisheries submitted a memorandum of understanding exchanged on February 3, 1993, and thecontent of the memorandum was revealed (Nishimura [1999], p. 144, FBAJ [1995c], pp. 53–58, and themorning edition of The Nikkei on August 25, 1995). At a meeting of the Budget Committee of the House ofRepresentatives on December 13, 1995, Mr. Yoshimasa Nishimura (Director-General of the MOF’s Banking
Bureau), who was a government member of the committee, stated, “The content of this memorandum had
already been made public on August 24” (Secretariat of the House of Representatives [1995]). Meanwhile,at a meeting of the Budget Committee of the House of Representatives on February 15, 1996, Messrs.
Teramura and Manabe, who attended the meeting as unsworn witnesses, made statements with respect tothe memorandum (Secretariat of the House of Representatives [1996]).
67. “Summary of the Governor’s Press Conference on February 14, 1996,” BOJ Archives “Summary of theGovernor’s Press Conferences (1996),” No. 65161.
68. Okina, Shirakawa, and Shiratsuka (2000), pp. 315–319.

83

IV. Changes in Financial Conditions and Monetary Policy Response(Early 1994 through Summer 1995)
A. Concerns about Economic Growth Stalling due to the Yen’s Appreciation and
Pressure from Global Competition
1. Economic conditions in major overseas economies
In 1994, the economies of many countries and regions gained momentum for growth.69
The pace of growth in the U.S. economy accelerated, and in Europe, the U.K. economy
entered a recovery phase, followed by the German and French economies. The Asian
economies also continued to follow their robust expansionary paths (Chart 7).
In the United States, where the steady economic expansion continued, the monetary
policy stance shifted to tightening in February 1994; subsequently, the discount rate
was raised four times by February 1995 for total rate hikes of 2.25 percentage points.
The U.S. economy slowed in the first half of 1995, mainly reflecting the cumulativeeﬀects of the rate hikes. However, as the federal funds rate (FF rate) was reduced inJuly (from 6 percent to 5.75 percent), marking a shift of the monetary policy stanceto easing, the U.S. economy started expanding again. Meanwhile, consumer prices
stayed relatively stable. In the foreign exchange market, the U.S. dollar depreciatedagainst the currencies of other major countries, mainly due to the dim prospects forfurther reductions of the U.S. fiscal deficit and the growing view that it was not easy toresolve the Japan-U.S. trade imbalance. After the turn of 1995 in particular, the dollar
depreciated further, partly because of the Mexican Currency Crisis.
The U.K. economy expanded, led by exports and private consumption (Chart 7).
Therefore, the Bank of England raised the policy interest rate three times between
September 1994 and February 1995. The pace of economic expansion slowed because
growth in domestic demand, mainly private consumption, decelerated due to the tightening measures (Chart 7). The German and French economies recovered in 1994 amidrobust exports; however, in 1995, the pace of expansion of these economies moderated,reflecting slowdowns in exports caused by the appreciation of the deutsche mark andthe French franc (Germany lowered the discount rate in August). Meanwhile, prices
generally stayed stable in these countries.
In Asia, the growth rates of the NIEs and ASEAN countries remained at high levels
in 1994, mainly due to increases in exports to industrialized countries and in intra-Asia
exports, an expansion of inward direct investment, and active infrastructure investment(Chart 7).70 In the ASEAN countries, while the momentum for growth in exports to
the United States subsided, economic expansions continued on the back of inflows of
direct investment and active trade within East Asia. In China, although a somewhat
overheated economic expansion continued, the growth rate of industrial production
declined slightly because construction and business fixed investment were restrainedby the strengthening of the austerity policy. Under these circumstances, the inflation
rate was relatively high and the trade deficit expanded due to an increase in imports of................................
69. BOJ Research and Statistics Department (1995c), p. 15.
70. The economic expansion is known as the East Asian Miracle. This was a phrase used in a report releasedby the World Bank in September 1993. As characteristics of the economic miracle of East Asia, the report
pointed out rapid growth and highly equal income distributions (World Bank [1993]).

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

capital and intermediate goods.71
2. Economic conditions in JapanIn 1994, Japan’s economy finally moved out of the recession that continued for two
and a half years from spring 1991, and started to show signs of recovery (Chart 1).
This was attributable to low levels of interest rates and the government’s economic
stimulus package adopted in February 1994, amounting to a total of 15.3 trillion yen(including 6 trillion yen of tax reductions in, for example, income tax and inhabitanttax). The package aimed to (1) expand domestic demand to stimulate the economy,(2) implement priority measures in sectors that faced challenges, and (3) develop an
environment that induced economic vitalization. However, the economy lacked momentum for recovery as was particularly evident in the slow recovery of business fixed
investment, which plays a key role in a self-sustaining economic expansion.72
As a background to such slow recovery in business fixed investment, the Bank
pointed out the following three factors in 1994. First, economic activity remained ata low level. Although indicators such as corporate profits and the capacity utilization
rate were recovering, their levels remained low due to the eﬀects of the precedinglarge-scale economic adjustments, and this showed that the perception among firms of
having excess capital stock persisted. Second, financial positions of firms and financial
institutions had been deteriorating, reflecting the earlier declines in asset prices. The
Bank assumed that the balance-sheet adjustment pressure might have intensified therisk aversion among firms and financial institutions. And third, Japan’s economy wasbrought under pressure to adjust the industrial structure mainly against the backdrop of
the yen’s appreciation and development of the NIEs. The Bank believed that, with theglobal economic structure changing, manufacturers had reduced their domestic investment, mainly reflecting a shift of production sites overseas, while nonmanufacturingfirms had also constrained their investment due to imports of low-priced goods brought
about by the intensification of global competition in the field of, for example, distribution and due to firms’ cost-cutting eﬀorts.73
Although Japan’s economy followed a recovery trend thereafter through early 1995,
albeit at a moderate pace, the pace of recovery became stagnant from early spring 1995.
On a quarter-on-quarter basis, industrial production, which had been increasing fromearly 1994, started to decline from the turn of 1995 (Chart 1). This was caused by thefollowing three factors amid a lack of momentum for suﬃcient recovery in businessfixed investment and private consumption: (1) economic activity such as production
temporarily weakened after the Great Hanshin-Awaji Earthquake, which occurred inearly 1995; (2) exports declined mainly due to the rapid appreciation of the yen and atemporary slowdown of the U.S. economy; and (3) growth in public investment weakened, while households postponed housing investment as their expectations for a fallin interest rates heightened.74
The Great Hanshin-Awaji Earthquake—a disaster caused by the Hyogoken-Nanbu
Earthquake that occurred on January 17, 1995—resulted in severe financial damage................................
71. BOJ Research and Statistics Department (1995c), pp. 15–17.
72. BOJ Research and Statistics Department (1995a), pp. 15–16.
73. BOJ Policy Board (1995), pp. 3–4, and BOJ Research and Statistics Department (1995b), pp. 19–26.
74. BOJ Research and Statistics Department (1996), p. 5.

85

estimated at a total loss of approximately 9.6 trillion yen.75 Immediately following theearthquake, many economic indicators, including those of industrial production, private
consumption, as well as exports and imports, recorded temporary declines (Chart 1).76
The Bank’s Kobe Branch, the building of which fortunately did not suﬀer any significant damage, commenced its business operations from 9 a.m. as usual.77 With the support of other branches mainly through the dispatch of staﬀ, the Kobe Branch was able
to execute the most crucial operation in times of disaster—namely, the smooth supply of cash, including withdrawals of deposits and exchange of damaged banknotes.
Meanwhile, from January 21 through February 26, the Kobe Branch conducted its
business operations not only on business days but also on weekends and holidays.78
Moreover, in order to avoid confusion in terms of the financial and settlement systems
in the disaster-stricken areas, the General Manager of the Bank’s Kobe Branch and the
Director of the Kobe Finance Oﬃce of the MOF’s Kinki Local Finance Bureau jointly
issued various requests for financial measures to assist the disaster-stricken areas, as
did the General Manager of the Bank’s Osaka Branch and the Director-General of the
MOF’s Kinki Local Finance Bureau. The requests were addressed to financial institutions to implement measures to flexibly meet the financial needs of their customers,
including withdrawals of deposits, processing of overdue bills, exchange of damaged
banknotes, and provision of disaster-related loans. In addition, the Bank recognizedthat support from the financial side through private financial institutions’ smooth supply of funds for rebuilding was important in steadily proceeding with rebuilding in thedisaster areas. Based on this recognition, with a view to supporting eﬀorts of private
financial institutions in providing loans intended for rebuilding in the aﬀected areas,
the Bank decided in July to disburse disaster assistance loans with a lending period ofaround one year to financial institutions. Eligible counterparties were those that hadbusiness oﬃces in the disaster-stricken areas and that wished to apply for the loans(loan disbursement amounted to 271.5 billion yen).79
From March 1995, uncertainty over the outlook for the economy heightened
rapidly, mainly because of the sharp appreciation of the yen and falls in stock prices(Charts 3 and 6).80 Regarding foreign exchange rates, the yen temporarily exceeded
80 yen against the U.S. dollar in mid-April in the Tokyo foreign exchange market,
recording the highest-ever level in the postwar period of 79.75 yen on April 19,
reflecting the yen’s appreciating trend that had accelerated from the second half of
February 1995. Thereafter, the yen mostly stayed around 85 yen amid concern overthe slowdown of the U.S. economy and an overshooting of the yen (Chart 3). Bullishmarket sentiment on the yen started to change from around summer, mainly because of................................
75. Estimate by the National Land Agency in February 1995 (the morning edition of The Nikkei on February
17, 1995).
76. BOJ Research and Statistics Department(1995c), p. 19.
77. From January 20 through February 3, 1995, the Bank provided temporary windows on behalf of 14 financial
institutions whose oﬃces had collapsed.
78. Descriptions on the Bank’s Kobe Branch at the time of the Great Hanshin-Awaji Earthquake are based on
the morning edition of The Nikkei on January 20, 1995, the evening edition of Asahi Shimbun on February
25, 1995, and BOJ Kobe Branch (1995).
79. BOJ Policy Board (1996) p. 41.
80. BOJ Research and Statistics Department (1995c), pp. 19 and 25, and BOJ Research and Statistics Department (1996), pp. 9 and 13–14.

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coordinated actions concerning foreign exchange rates taken by monetary authorities
of major countries, resulting in the yen’s depreciation to the 97–98 yen level towardearly September.
Stock prices declined in the first half of 1995, mainly reflecting the failure of British
investment bank Baring Securities at end-February, in addition to concern over matters such as the rapid appreciation of the yen. In late March, they fell below 16,000
yen. From late May, they followed a downtrend mainly against the backdrop of uncertainty over the outlook for the economy, and fell below 15,000 yen in mid-June.
They rebounded to around 18,000 yen in mid-August, and temporarily regained the
20,000–21,000 yen level in end-December (Chart 6). Meanwhile, land prices continued to decline (Chart 6).
Prices had bottomed out in the second half of 1994, but started declining by early
spring 1995 because of the yen’s appreciation and a further slack in domestic supply
and demand conditions (Chart 2).
Under these circumstances, in order to further stimulate the economy, the Bank
decided on March 31, 1995, to encourage a decline in short-term market interest rates,
while giving consideration to the possible impact of an excessive price decline on theeconomy. It then reduced the oﬃcial discount rate on April 14 by 0.75 percentage
point to 1.0 percent. Thereafter, the Bank successively implemented monetary easing
measures. In July, it decided to guide money market rates lower, and reduced the oﬃcial
discount rate in September from 1.0 percent to 0.5 percent (see Section B.2. of thischapter for the details of the Bank’s monetary policy).
Meanwhile, the government also adopted (1) the Emergency Economic Measures
to Cope with the Yen Appreciation in April and June, which primarily consisted of
deregulatory initiatives, and (2) the largest-ever economic stimulus package in September, worth a total fiscal stimulus of 14.2 trillion yen. As for the foreign exchange market, the G7 statement released in April 1995 included an agreement that “orderly reversal of movements in such market was desirable,” and a concerted intervention with themonetary authorities of major countries was conducted.81 In the second half of 1995,
the economy regained its momentum toward recovery.82 This was mainly attributable
to the fact that adjustment pressure on the private sector waned to a certain extent, accompanied by the progress in capital stock adjustments and by the strengthened profit
base of firms due to restructuring, in addition to the aforementioned policy actions on
both the monetary and fiscal fronts. In particular, business fixed investment became
active among large manufacturers, such as those of personal computer-related goods
and in the communications sector—including mobile phone and personal handy-phonesystem (PHS) service providers—in which deregulation proceeded.

................................
81. BOJ Research and Statistics Department (1996), p. 5. The term “concerted intervention” was used in the
Bank of Japan Monthly Bulletin and Nenji Houkoku Sho (Annual Report of the Policy Board of the Bank ofJapan), but when reporters asked questions using such term at press conferences and on other occasions, theGovernor took the stance of avoiding use of the term.
82. BOJ Research and Statistics Department (1996), pp. 5 and 67.

87

B. Changes in Financial Conditions and Policy Response
1. Changes in financial conditions
a. Progress in financial deregulation
Discussions on the need for the deregulation of deposit interest rates had been hosted
mainly by the Financial Problems Research Group (a private advisory panel to the
Director-General of the MOF’s Banking Bureau) since the mid-1970s.83 In September
1993, the group embarked on a study on the final stage in the deregulation of interest
rates, and subsequently submitted a report entitled “Implementation of Deregulationof Interest Rates on Term Deposits and Future Deregulation of Interest Rates on Liquid Deposits” (December 22, 1993), in which stability of the payment and settlement
systems as well as the presence of postal savings were raised as relevant points to beconsidered in deregulating interest rates on liquid deposits. Accordingly, in April 1994,
an agreement was reached between the MOF and the Ministry of Posts and Telecommunications on rules concerning the setting of interest rates on ordinary postal savingsand ordinary private deposits. The agreement paved the way for the deregulation ofinterest rates on private liquid deposits other than current deposits, for which a banon the provision of interest remained in place, on October 17, 1994.84 This marked
the completion of the deregulation process, which had gradually taken place since theintroduction of large-lot term deposits in October 1985.85
b. NPL problem and the Bank’s response
NPLs held by financial institutions that had financed firms’ excessive investments during the bubble period had grown over the years, reflecting the protracted economic
stagnation and the continued decline in land prices (Charts 5 and 6).
In a list of anticipated questions and answers compiled in February 1994 for a G7
meeting, the Bank adopted a cautious stance toward the NPL problem, having prepared
the following response: “In numerical terms, impaired assets as a whole continue on
an increasing trend, with new recession-induced NPLs arising from the prolonged economic stagnation in addition to existing developments regarded as after-eﬀects of the
bursting of the bubble economy, such as sluggish sales of collateral real estate. It therefore remains to be said that the amount of impaired assets has peaked out.” In the samevein, for a subsequent G7 meeting, the Bank again chose its words carefully as suggested by its list of anticipated questions and answers prepared in September 1994. In
one of its responses, the Bank stated, “According to figures disclosed by city banks,
long-term credit banks, and trust banks, the total amount of impaired assets (the sum ofloans to failed borrowers and loans delinquent for six months or longer) stands at 13.6
trillion yen as of the end of this March, almost flat compared with the level as of the endof last September (13.8 trillion yen), and appears to show signs of peaking out,” andtherefore “the situation surrounding the problem of impaired assets is turning favorable on the whole.” At the same time, the Bank noted, “Given the scope of the problem
and other factors, it can be presumed that solving it in general will require some moretime.”86 When inquired of the Bank’s approach to and the future outlook for the NPL................................
83. Nishimura (2003), p. 218.
84. Nishimura (2003), pp. 230–232.
85. BOJ Policy Board (1995), p. 17.
86. “Anticipated Questions and Answers Related to G7, Policy Planning Department, International Department,

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problem at the press conference on December 19, 1994, Governor Yasuo Matsushita
stated, “As far as I understand, the generation of NPLs has passed its peak—the outstanding amount is peaking out.” He continued, however, as follows: “It appears thatthe disposal of collateral real estate will not necessarily proceed at once, given that therecovery of the real estate market has been very slow and that Japanese real estate assets are entangled in complicated webs of rights in many cases. Therefore, it all comes
down to taking measures considered most suitable at each point in time, while bearing
in mind that the overall process is an extensive one.” Governor Matsushita’s remarks
reflected his awareness of the continued significance of the NPL problem.87
Meanwhile, another issue emerged. The Tokyo Kyowa and Anzen credit cooperatives had been judged insolvent, with excess debt of approximately 110 billion yen,meaning that they had gone virtually bankrupt. Together with the Tokyo Metropolitan Government, which directly supervised them, the Shinkumi Federation Bank, theAssociation of Tokyo Shinyou Kumiai, and the LTCB as well as other private financial institutions, the Bank reached an agreement concerning the failure resolution of
the credit cooperatives.88 Accordingly, a resolution plan, under which the two credit
cooperatives would be dissolved and their business operations would be transferred toa newly established receiving bank, was announced on December 9, 1994.89 The process went as follows: (1) the Bank of Japan, together with private financial institutions,would establish an ordinary bank (to be called the Tokyo Kyodo Bank), to which theentire business operations of the Tokyo Kyowa and Anzen credit cooperatives would betransferred for the resolution of the two credit cooperatives; (2) the Tokyo Metropolitan
Government and private financial institutions would provide necessary assistance forthe transfer of those business operations; (3) the Tokyo Kyodo Bank would dispose of
NPLs in addition to inheriting all deposits from the Tokyo Kyowa and Anzen credit
cooperatives; and (4) the Tokyo Kyodo Bank would request financial assistance fromthe DICJ.90
From the viewpoint of maintaining the stability of the financial system as a whole,
the Bank of Japan decided in January 1995 to establish the Tokyo Kyodo Bank by making a joint investment with private financial institutions, with the aim of resolving themanagement problems facing the two credit cooperatives. In doing so, it made a total
investment of 20 billion yen (equivalent to the amount by private financial institutions)pursuant to Article 25 of the Bank of Japan Act.91 The Tokyo Kyodo Bank, which
would later replace the investment with that of the DICJ and become an organization
specializing in the disposal of NPLs (to be called the Resolution and Collection Corporation), started as an ordinary bank that collected deposits and provided new loans. As
such, it succeeded the business operations of the two credit cooperatives with financial
assistance from the DICJ, and transferred NPLs to the Tokyo Credit Cooperative Debt..........................................................................................................................................
and Financial and Payment System Oﬃce, February 1994,” and “Materials Related to G7, September 1994,”
BOJ Archives “G Process (2) (1/3),” No. 47671.
87. “Summary of the Governor’s and Deputy Governor’s Press Conference on December 19, 1994,” BOJ
Archives “Summary of the Governor’s Press Conferences,” No. 46878.
88. Nishimura (2003), p. 310, and BOJ Policy Board (1995), pp. 14 and 22–23.
89. FBAJ (1995a), pp. 42–44.
90. BOJ Policy Board (1995), pp. 14 and 22–23.
91. BOJ Policy Board (1996), pp. 13 and 36.

89Collection Agency (established within the Tokyo Credit Cooperative) in March 1995.92
On reasons behind the implementation of such emergency measure, at the press
conference on December 9, 1994, Governor Matsushita noted, “Considering that thecredit cooperatives were insolvent and left without a single bank that was enthusiastic
about a merger . . . on account of their excessive amount of NPLs, leaving the current
situation unattended could well trigger significant turmoil.” Regarding investment in
the Tokyo Kyodo Bank, the Bank’s view was that “smooth functioning of the receiving bank following its establishment would require back-up of a capital base suﬃcientenough for it to maintain credibility as a legitimate institution.”93 Subsequently, thefollowing inquiries were made at the press conference on January 25, 1995. “Does the
Bank consider the investment in question—based on Article 25 of the Bank of Japan
Act—as public funds? While a consensus seems yet to be reached, is it possible thatthe Bank will carry out investment and other emergency measures again at such stage
based on Article 25?” In response, Governor Matsushita stated the following points:“As this was not the kind of problem that the Bank could resolve by asking a favor ofa specific bank, the Bank formulated a resolution plan through the support of a broad
range of financial institutions”; “in doing so, the Bank judged that widespread support
from financial institutions would be within greater reach if the central bank eﬀectively
communicated its deep concern about the given circumstances and its determination
to fully resolve the problem”; and “as long as the resolution plan was based on thepremise that the Bank of Japan would be among the investors, the Bank would need tocollect the funds after the receiving bank’s business got on track, and this, among otherreasons, made investment a reasonable method.”94 With regard to why blanket deposit
insurance was not applied to the two credit cooperatives, at the press conference on
April 6 at the Kobe Branch, Governor Matsushita noted, “Many financial institutions
are in a diﬃcult situation because they hold some amount of NPLs, which they are
struggling to dispose of, and there is still room for improvement in their information
disclosure and depositors’ understanding of the blanket deposit insurance scheme.” Hecontinued, raising as a source of concern the fact that “applying blanket deposit insurance under these circumstances could upset not only depositors of the two credit
cooperatives but also depositors across the country, triggering a chain reaction of concern over the stability of the financial system,” and that, therefore, “the Bank was givenno other choice but to resolve this case without applying blanket deposit insurance.”95
By the end of July 1995, less than six months after the Tokyo Kyodo Bank had
begun its operations, the failure of the Cosmo Credit Cooperative, based in Tokyo, had
manifested itself. As this credit cooperative was larger in size than the aforementioned
two, it was expected that liquidity support from the Bank of Japan (the so-called Nichigin Tokuyu) would become necessary in order to ensure smooth repayment of deposits.
................................
92. BOJ Banking Study Workshop (2001), pp. 42–43, BOJ Policy Board (1996), p. 11, and FBAJ (1995b), p. 53.
93. “Summary of the Governor’s Press Conference (in Attendance of Executive Director Kunio Kojima) on
Resolution of the Management Problems of Tokyo Kyowa and Anzen Credit Cooperatives, December 9,
1994,” BOJ Archives “Summary of the Governor’s Press Conferences,” No. 46878.
94. “Summary of the Governor’s Press Conference on January 25, 1995,” BOJ Archives “Summary of theGovernor’s Press Conferences,” No. 53956.
95. “Summary of the Governor’s Press Conference on April 6, 1995,” BOJ Archives “Summary of the Governor’s Press Conferences,” No. 53956.

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Therefore, until a resolution package was implemented, the Bank of Japan—throughthe provision of loans based on Article 25 of the Bank of Japan Act—supplied theminimum amount of funds required for the repayment of deposits via the Shinkumi
Federation Bank.96 Apart from this, the Bank of Japan decided to provide the Tokyo
Kyodo Bank—to which all business operations of the Cosmo Credit Cooperative were
to be transferred—with additional loans as part of the resolution package, as a meansof funding and profit support.97 Regarding the repeated invocation of Article 25 of the
Bank of Japan Act, Governor Matsushita stated at the press conference on August 9,“Naturally, it was necessary to consider strict requirements for its invocation, as Article 25 prescribes the authority to implement, only in very special cases, measures thatcannot be recognized in other provisions of the Act.”98
By the end of August 1995, the failure of the Kizu Credit Cooperative and the
Hyogo Bank had materialized. Their large amount of cash held at hand—slightly over1 trillion yen and around 2.5 trillion yen, respectively—gave rise to concerns about
possible repercussions on other financial institutions. The Kizu Credit Cooperative wasordered to suspend its operations, and it was decided that its business operations would
be transferred to the Resolution and Collection Bank, reorganized from the Tokyo Kyodo Bank as an exclusive organization specializing in the failure resolution of credit
cooperatives. Meanwhile, it was decided that, while the Hyogo Bank would be liquidated, its business operations would be transferred to the Midori Bank—a receivingbank created mainly from investments by local business and financial circles—as it
was necessary to preserve the financial function of the failed bank considering possible
eﬀects on the local economy in the aftermath of the Great Hanshin-Awaji Earthquake.
At the press conference on August 30, Governor Matsushita stated as follows regarding
the invocation of Article 25: “When the failure resolution of a financial institution is
implemented, there is, naturally, a dimension of providing liquidity as temporary funding support, while at the same time the Bank needs to address the issue of how losses
should be dealt with . . . . Considering the nature of a central bank, where liquidity provision should be given top priority under normal circumstances, conducting this for the
purpose of failure resolution should well be an indication of a kind of temporary emergency measure.”99 In January 1996, the Bank of Japan decided to provide the Midori
Bank with subordinated loans amounting to 110 billion yen, pursuant to Article 25.
Under these circumstances, the Bank of Japan advised financial institutions holding
a current account with the Bank to work to further ensure sound management through(1) the appropriate disposal of NPLs, (2) restructuring through streamlining and ensuring capital adequacy, and (3) developing their risk management frameworks, among................................
96. Specifically, “when deposits were repaid by the Cosmo Credit Cooperative, the portion of deposits that was
not covered by cash on hand at the cooperative or funds borrowed from the Shinkumi Federation Bank wascovered by loans from the Bank of Japan (“Summary of the Governor’s Press Conference on August 9,
1995,” BOJ Archives “Summary of the Governor’s Press Conferences,” No. 53956).
97. BOJ Banking Study Workshop (2001), pp. 43–44, BOJ Policy Board (1996), p. 36, and BOJ Policy Board(1997), p. 43.
98. “Summary of the Governor’s Press Conference on August 9, 1995,” BOJ Archives “Summary of the Governor’s Press Conferences,” No. 53956.
99. “Summary of the Governor’s Press Conference on August 30, 1995,” BOJ Archives “Summary of the Governor’s Press Conferences,” No. 53956.

91other measures.100
c. Disclosure of the amount of NPLs
Moves to disclose the amount of NPLs had been spreading gradually, for example,
with city banks, trust banks, and long-term credit banks starting their verbal disclosureof the amount of loans exempted from interest payment (loans to borrowers to whichinterest rates below the oﬃcial discount rate at the time of financial assistance wereapplied) and lenders including some regional banks, regional banks II, and shinkinbanks considering to expand the scope of information they would disclose.101 The NPL
problem facing financial institutions thus saw an increase in the amount of write-oﬀs
and provisions on the whole as well as an expansion of NPL disclosure. Nevertheless, itremained a significant issue for Japan’s financial system, as could be seen, for example,
in the fact that the total amount of NPLs remained considerable and some financial
institutions were lagging behind in their disposal of NPLs, given the large volume
relative to their financial strength.102
2. Shift in monetary policy tools
a. Encouraging a decline in short-term market interest rates (March 1995)
Through 1994, the Bank maintained its policy stance of continuing its monetary easing
based on the recognition that the economy was recovering moderately. After the turnof 1995, uncertainty over the economic outlook strengthened due to such factors as
the Great Hanshin-Awaji Earthquake and the rapid appreciation of the yen as well as a
sharp decline in stock prices amid these developments, giving rise to expectations of adecline in interest rates.103
In this situation, on March 31, 1995, the Bank’s Policy Board approved the decision
to encourage a decline in market interest rates as the guideline for market operations
for the immediate future.104 Specifically, the Bank judged that it was appropriate to................................
100. BOJ Policy Board (1996), p. 35.
101. The FBAJ defined the scope of NPL disclosure for each type of bank based on the uniform disclosure
standards established by the federation. Starting in fiscal 1992 (ending in March 1993), the 21 city banks,
trust banks, and long-term credit banks were required to disclose the amounts of loans to failed borrowers
and delinquent loans (loans for which interest payment was overdue for six months or longer). Regionalbanks and regional banks II were required to disclose the amount of loans to failed borrowers but not theamount of delinquent loans. Starting in fiscal 1995 (ending in March 1996), the city banks, trust banks, andlong-term credit banks were required to disclose the amounts of loans exempted from interest payment andloans to borrowers receiving management support as well, while regional banks were required to disclose
the amount of delinquent loans. In fact, regional banks and regional banks II voluntarily started to disclose
the amount of loans exempted from interest payment. Starting in fiscal 1996 (ending in March 1997), allfive types of banks disclosed the amounts of loans to failed borrowers, delinquent loans, loans exemptedfrom interest payment, and loans to borrowers receiving management support. From fiscal 1997 (ending inMarch 1998) onward, all types of banks were required to disclose the amount of risk management loans(loans to failed borrowers, delinquent loans, loans delinquent for three months or longer, and loans withrelaxed borrowing conditions) (BOJ Policy Board [1998a], p. 21, BOJ [1999c], p. 130, and Komine andOkada [2011], pp. 470–473).
102. BOJ Research and Statistics Department (1996), p. 21.
103. BOJ Research and Statistics Department (1995c), p. 21.
104. BOJ Policy Board (1996), pp. 42–43. As for why the term “approval” rather than “decision” was usedconcerning the Policy Board’s judgment on this measure, Director Yutaka Yamaguchi of the Policy Planning
Department provided the following explanation at the press conference on March 31: “Authority over the
daily conduct of market operations is entrusted to the Executive Directors in accordance with the Policy
Board’s basic principles. When a significant adjustment is made, the measure is explained to the Policy
Board, as was the case today, after which it was approved” (the evening edition of The Nikkei on March

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encourage a decline in short-term market interest rates within a range consistent withthe level of the oﬃcial discount rate, so that the eﬀects of monetary easing could be
exercised to the maximum possible extent (implementation of the so-called measure
to guide interest rates toward a lower target range).105 It was then that the Bank began
to place more emphasis on short-term interest rate control than oﬃcial discount rate
control and to release the target range.106 As a result of the measure to guide shortterm market interest rates toward a lower target range, the uncollateralized overnight
call rate declined by around 0.5 percentage point from the previous level of 2.2–2.3
percent to around 1.75 percent, the same level as the oﬃcial discount rate (Chart 4).
In a rare press conference on March 31, Director Yamaguchi of the Policy Planning
Department sought to clarify the Bank’s intent behind the policy change. However, as
market participants interpreted this as a reflection of the Bank’s reluctance to lower theoﬃcial discount rate, the yen continued to appreciate and stock prices kept declining.
Such market developments led news reports to state on April 1 that “the Bank will soon
be left with no other choice but to lower the oﬃcial discount rate.”107
b. Eighth reduction of the oﬃcial discount rate (April 1995)
On April 14, 1995, the Bank lowered the oﬃcial discount rate by 0.75 percentage point
to 1.0 percent in order to guard against the risk that developments such as a further
appreciation of the yen and sluggish stock prices would harm the sustainability of theeconomic recovery trend through a decline in corporate profits and deterioration inbusiness sentiment.108
The reduction of the oﬃcial discount rate to 1.0 percent was followed by an exchange of questions and answers at the press conference by the Chairman of the Policy
Board held on the same day.109 First, a reporter asked for comments on the concernthat any leeway in conducting monetary policy would be lost, which meant no moreroom for a further rate reduction. In response, Governor Matsushita pointed out that,in the history of central banks across the globe, there had been precedents in terms of..........................................................................................................................................
31, 1995). The Bank of Japan Act of 1997, which came into eﬀect on April 1, 1998, stipulates that mattersconcerning monetary control shall be decided by the Policy Board (Article 15, paragraph 1 [iv]). However,given that the Bank of Japan Act of 1942 did not contain such provisions yet, the term “approval” rather
than “decision” was applied to the Policy Board’s judgment on March 31, 1995.
105. With regard to the measures announced on March 31 and July 7, 1995, while the expression “guide market
interest rates toward a lower target range” appears in some cases in questions and answers, for example,
at the Governor’s press conferences, the standard expression used in the Bank’s releases was “encourage adecline in short-term market interest rates.”
106. Miyanoya (2000), p. 8.
107. The morning editions of The Nikkei and The Yomiuri Shimbun on April 1, 1995. Some news articles noteda shift in the Bank’s policy tools, which was the foremost intent behind this measure. For example, one
article (the evening edition of The Nikkei on March 31, 1995) observed that “it may be said that the Bank
has started to adopt policy tools similar to those adopted by the U.S. Federal Open Market Committee(FOMC) and the Central Bank Council of the Deutsche Bundesbank, which eﬀectively communicate to the
public their monetary policy and the intent thereof.” Such perspective was hardly taken note of at that stage,
however. On this point, Deputy Governor Toshihiko Fukui commented on November 13, “When the interest
rate was reduced in March, the Bank’s message was not necessarily understood clearly because the measure
was unfamiliar to market participants and because the reduction of the discount rate in Germany the previous
day stirred intense speculation of a similar measure in Japan” (Fukui [1995], p. 7).
108. BOJ Research and Statistics Department (1995c), pp. 21–22.
109. “Summary of the Press Conference by the Chairman of the Policy Board on April 14, 1995,” BOJ Archives“Summary of the Governor’s Press Conferences,” No. 53956.

93lowering the discount rate to 1 percent, and stated as follows: “The Bank does not havean overly rigid policy approach, such as setting limits on the oﬃcial discount rate. If
policy measures are feasible within the realm of acting flexibly and prudently in lightof economic and financial developments, they will be eﬀective and useful enough whentaken together. Therefore, although the level of 1 percent is unprecedented in Japan, theBank believes that this measure is within the scope of what can be considered an appropriate combination of policy measures.” A question was also raised regarding the factthat the Bank resorted to a change in policy just two weeks after implementing the measure to guide market interest rates toward a lower target range on March 31, namely,
whether this would act as an impediment to lowering market interest rates in the future. In response, Governor Matsushita replied, “It was necessary to conduct monetary
policy in view of the future economic outlook through the combined eﬀects of the two
measures, namely, guidance of market interest rates toward a lower target range andreduction of the oﬃcial discount rate.” Regarding the timing of the interest rate reduction, a reporter inquired whether the measure had been implemented in coordination
with the government’s decision on the Emergency Economic Measures to Cope with
the Yen Appreciation the same morning and whether it had been taken as international
economic policy coordination in anticipation of the forthcoming Japan-U.S. Finance
Ministers’ Meeting and G7 meeting. Governor Matsushita replied in the negative, stating, “The measure was not based on such factors as the relationship with various otherforums of policy decision-making and the schedules of international meetings.”
c. Encouraging a decline in short-term market interest rates (July 1995)
Subsequently, economic recovery stalled and downward pressure on prices persistedon the whole toward summer (Chart 2). In light of this, on July 7, 1995, the Bank
implemented a measure to encourage a further decline in short-term market interest
rates. In doing so, it announced that it expected these rates to remain on average slightly
below the oﬃcial discount rate and supplied ample funds to the market. Under thesecircumstances, the uncollateralized overnight call rate generally stayed at around 0.8–
0.9 percent from late July onward.110 Neither the type of market interest rate targeted
for guidance (target interest rate) nor the target level of the rate was specified in thestatements released on March 31 and July 7.111 Specifically, the March statement readthat “it was appropriate to encourage a decline in short-term market interest rates withina range consistent with the oﬃcial discount rate so that the eﬀects of monetary easing
can be exercised to the maximum possible extent.” In a similar vein, the July statement
went only so far to say that “the Bank expected market interest rates to remain on
average slightly below the current oﬃcial discount rate.”d. Ninth reduction of the oﬃcial discount rate (September 1995)
As a result of an interest rate decline that reflected the monetary easing measures implemented thus far and the correction of the yen’s appreciation against the U.S. dollar, excessive deterioration in business sentiment subsided, and stock prices recovered.
However, as downward pressure on general prices persisted, there were concerns about
the possibility that economic activity would remain stagnant for an extended period oftime. In light of this situation, on September 8, 1995, the Bank lowered the oﬃcial................................
110. BOJ Research and Statistics Department (1996), p. 11.
111. BOJ Policy Board (1996), pp. 42–43 and 47.

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

discount rate by an additional 0.5 percentage point to 0.5 percent. At the same time, itannounced that market operations were directed toward maintaining the uncollateralized overnight call rate on average slightly below the oﬃcial discount rate. Following
the implementation of this measure, the uncollateralized overnight call rate fell to therange of 0.4–0.5 percent, lower than the oﬃcial discount rate.112
Regarding the appropriateness of lowering the rate below 1 percent, Governor Matsushita made the following remarks at a press conference: at the September Policy
Board meeting, when the oﬃcial discount rate was lowered from 1.0 percent to 0.5
percent, “no argument was made from the standpoint that a reduction to below 1 percent
should not be conducted or was not appropriate because 1 percent was a thresholdthat was very diﬃcult to cross”; and “this might have reflected the situation where
market interest rates had already fallen below the oﬃcial discount rate, which was
set at 1 percent.” When Governor Matsushita was asked about the factors behind thedecision to lower the oﬃcial discount rate instead of only guiding money market rates
lower for monetary easing, he replied as follows: “The Bank has revised downward its
outlook for economic activity, recognizing emerging concerns that economic activity
will remain stagnant for an extended period of time. Given this assessment, the intent of
the latest policy measure is to suﬃciently support, from the financial side, the economy
to return to a recovery path in order to prevent the spread of deflationary phenomena.
The Bank has concluded that, in order to clarify its strong determination on this point toboth the market and the general public, it is desirable to lower the oﬃcial discount rate,a move that sends a strong signal. The Bank has implemented a composite measureof lowering the oﬃcial discount rate and promoting a further decline in actual market
interest rates at the same time.”113
e. Change in monetary policy tools
With the completion of deregulation of deposit interest rates in 1994 and the ensuing change in the financial market environment, the guidance of market interest rates
became more important than the control of the oﬃcial discount rate, the function ofwhich was to directly bring changes to deposit interest rates and lending rates.114 Consequently, as was mentioned earlier, the Bank introduced, on March 31, 1995, a new
system under which the guidance of market interest rates was defined as a monetary
policy tool, which was as significant as the oﬃcial discount rate. In this system, theBank releases a public statement regarding the guideline for market operations after
it is approved by the Policy Board, announcing clearly the target level of the uncollateralized overnight call rate; for example, it “expects that the call rate will remain
on average slightly below the oﬃcial discount rate.”115 When the Bank encouraged adecline in the market rates on July 7, the policy intent permeated smoothly through the................................
112. BOJ Research and Statistics Department (1996), p. 11.
113. “Summary of the Press Conference by the Chairman of the Policy Board on September 8, 1995,” BOJ
Archives “Summary of the Governor’s Press Conferences,” No. 53956.
114. With respect to the oﬃcial discount rate, however, the Bank retained the idea that “the oﬃcial discount rate
still has the function of more explicitly indicating the general framework of a central bank’s policy stance(the so-called announcement eﬀect); therefore, the oﬃcial discount rate does not lose its significance evenafter interest rates are fully deregulated.” The Bank believed that it was necessary to make eﬀective use ofboth oﬃcial discount rate changes and the guidance of money market rates. BOJ Research and Statistics
Department (1995c), p. 22.
115. Matsushita (1997), p. 7.

95

market without causing any confusion.116
Meanwhile, the Bank continued to make eﬀorts to improve and expand daily money
market operations. Specifically, it increased the frequency of same-day operations concerning treasury bills (TBs). In addition, it improved transparency over money market operation tools, for example, by changing the auction method of same-day settlement bill purchasing operation tools from the fixed-rate method to the competitive
auction method, starting in July. Regarding the expansion of the capacity to supply
funds through the use of various market operations, from July, the Bank increased thefrequency of outright purchases of Japanese government bonds (JGBs) (often referred
to as Rinban operations) and the purchases/sales of Japanese government securities(JGSs) with repurchase agreements.117 In September, the Bank decided to purchasecertificates of deposit (CDs) through tanshi companies that conducted auctions using
loans provided by the Bank. The Bank explained, “This operation was implemented
for the purpose of securing the flexibility of money market operations and further facilitating overall market transactions in view of expected tightening of the supply anddemand conditions for funds.”118 In November, it resumed the purchases of CP with
repurchase agreements for the first time in four years.119 Unlike in the case of the previous CP operation scheme, “from the viewpoint of improving the transparency andfairness of the operation and securing a certain volume for the operation, the Bank decided to (1) use, in principle, the competitive auction method for the determination ofinterest rates, (2) purchase mainly term instruments, and (3) add financial institutions
and securities companies as eligible counterparties.” In a list of anticipated questions
and answers in preparation for the announcement concerning the expansion of eligible
counterparties, the Bank explained, “It decided to add financial institutions and securities companies, which were major participants in the CP market along with tanshi
companies, to the eligible counterparties in order to secure stable bids, among otherpurposes.”120................................
116. On this point, Governor Matsushita stated that the eﬀects of the measure to encourage a decline in market
interest rates “have permeated smoothly through the market” and that “the Bank’s use of the guidance ofmoney market rates has gradually gained understanding and has taken root in Japan as well” (Matsushita[1997], p. 7).
117. BOJ Research and Statistics Department (1996), pp. 11–12.
118. “Extension of Bank of Japan Loans to Be Used by Tanshi Companies to Purchase CDs, September 26,
1995,” BOJ Archives “Operations,” No. 53988.
119. It was the first implementation of CP operations since November 1991. As for the background to the resumption of CP operations, a roundtable paper (reference materials prepared by the Policy Planning Department
and the Credit and Market Management Department for a meeting of the Bank’s oﬃcers) noted as follows:“As the outstanding amount of loan extension will increase further toward the year-end—when shortages offunds tend to occur—the capacity to supply funds through the existing money market operation tools is expected to decline significantly. Under these circumstances, it is necessary to strengthen the funds-supplying
operation tools in order to continue to smoothly conduct money market operations and secure the formationof stable market conditions” (“Resumption of CP Operations, Policy Planning Department and Credit andMarket Management Department, November 9, 1995,” BOJ Archives “Operations,” No. 53988).
120. “139th Document concerning the Resumption of CP Operations, Credit and Market Management Department, November 10, 1995,” BOJ Archives “Operations,” No. 53988.

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

V. Materialization of a Financial System Crisis in Japan (Autumn
1995 through Summer 1998)
A. Beginning of Global Financial Crises (Autumn 1995 through the End of 1996)
1. Economic conditions in major overseas economies121
In the United States, the economy continued to expand (Chart 7). Due to continued
increases in private consumption and production, labor market conditions remained
tight, and the rate of rise in wages accelerated somewhat; meanwhile, prices werestable.
The European economies as a whole remained sluggish (Chart 7). In major continental European countries, long-term interest rates converged on a downtrend overall,due mainly to the respective governments’ eﬀorts to reduce fiscal deficits before introducing a single currency, the euro. Short-term interest rates in Germany were flat,
whereas those in France and Italy declined somewhat, reflecting marginal policy rate
cuts. Meanwhile, in the United Kingdom, both long- and short-term interest rates rosesomewhat. This reflected a policy rate hike implemented in October 1996, owing toincreased upward pressure on prices on the back of continued economic expansion led
by domestic demand. With respect to the European Union (EU), the European Council,
at its December 1996 meeting, reaﬃrmed that the third stage of the EMU would commence in January 1999. At the meeting, the council also concluded the Stability and
Growth Pact so as to maintain fiscal discipline after the euro adoption, and reached basic agreement on such matters as the introduction of the new exchange rate mechanism(ERM II)—an arrangement to provide the framework for exchange rate relationships
between the euro area and other EU countries. In this sense, progress was made in
the deliberations on the EMU’s institutional arrangements, and this seemed to havecontributed to the rise in the EMU’s credibility in the financial and capital markets.
With regard to East Asia, in the Asian NIEs, such as South Korea and Singapore,and the ASEAN countries, such as Thailand, the pace of economic expansion decelerated, mainly due to continued slowdown in exports. Chinese economic growth also
slowed, but remained at a high level. In Hong Kong, the economy headed toward recovery: exports and private consumption picked up, supported mainly by increased
trade with China, which was to resume the exercise of sovereignty over Hong Kong inJuly 1997. In Taiwan, the pace of economic expansion slowed somewhat (Chart 7).
2. Economic conditions in Japan
Japan’s economy had been facing the challenge of establishing an economic structure
suitable for the new era while overcoming the aftereﬀects of the bursting of the bubble
economy. In 1996, there were some positive developments toward overcoming thischallenge.122
The economy started to move out of stagnation at the end of 1995, reflecting powerful economic stimulus measures on the monetary and fiscal sides, and then followeda recovery path in 1996. Due in part to the reversal of the yen’s appreciation from 1995,
the momentum for recovery in private demand became increasingly firm, business fixed
investment increased steadily, and private consumption continued to increase moder................................
121. BOJ International Department (1997), pp. 41–47.
122. BOJ Policy Board (1997), pp. 1–8.

97

ately on the whole. As for prices, the downward pressure seen during 1995 subsided in
1996, and prices stopped declining in the second half of 1996 (Chart 2).123
With regard to financial developments, until around July 1996, long-term interest
rates and stock prices followed an uptrend overall. Thereafter, however, long-term interest rates declined (Chart 4), and stock prices fell through the end of 1996 (Chart 6).
This was mainly because views about the outlook for Japan’s economy became morecautious in the markets. Meanwhile, the yen was on a depreciation trend throughout
1996 (Chart 3).
3. The jusen problem and six financial system related laws
NPLs of financial institutions had increased as firms had financed their excessive investment during the bubble years from bank loans reflecting the prolonged economic
stagnation as well as the continued decline in land prices since the 1990s (Chart 5).124 A
typical example of excessive investment was seen at bank-aﬃliated nonbanks including
jusen that had aggressively financed real-estate investment during the bubble years.125
It was of great concern that borrower nonbanks, including jusen, might fail becausethat would exert an adverse impact on the soundness of lender financial institutions.126
To address the situation, deliberations progressed on measures to secure the soundness of financial institutions and to further facilitate the disposal of failed financial
institutions. In December 1995, the FSRC and the Financial System Stabilization Committee made public a basic framework for conducting such measures in light of the deliberations. Furthermore, there were discussions on the method of disposing of jusen,
and a wide range of eﬀorts had been made toward the swift disposal of NPLs as seen,for example, in the Cabinet decision on December 19 regarding a package of measures
for the disposal, including injection of public funds.
Specifically, the Cabinet decision included the following points. First, the Jusen
Disposal Organization would be established and it would dispose of expected losses
pertaining to NPLs that were uncollectible at seven jusen, which amounted to about
6.27 trillion yen in total, and of about 140 billion yen of expected deficit. Second, thegovernment would request the parent banks to give up on their claims for jusen, of
which the total amount was 3.5 trillion yen, and other banks to give up a part of theirclaims, amounting to about 1.7 trillion yen; it would also request financial institutions
for small businesses to donate about 530 billion yen to the Jusen Disposal Organization.
Third, after setting up the Jusen Account at the DICJ, the government would disburse
680 billion yen to the account from its initial budget for fiscal 1996. And fourth, the................................
123. BOJ Research and Statistics Department (1997e), pp. 2–4, and BOJ Research and Statistics Department(1997a), pp. 13–19.
124. At that time, the Bank’s assessment on land price developments was as follows: “Land prices as a wholeremained on a weakening trend, but prices of superior residential land had gradually stopped declining
and those of some commercial land with favorable conditions saw improvement in their supply-demandconditions” (BOJ Policy Board [1997], p. 8).
125. There is no standard definition of nonbanks, but a working group on research on nonbanks—established asa private advisory panel headed by the Director-General of the MOF’s Banking Bureau—defined nonbanks
as “companies that provide loans without taking deposits,” for example, housing finance companies andconsumer credit companies. In other words, those categorized as financial institutions, namely, cooperative
financial institutions, securities companies, and insurance companies are not defined as nonbanks (BOJ
IMES [1995], p. 387).
126. Council for Nonbanks (1997).

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

Jusen Disposal Organization would strongly proceed with debt collection under the
DICJ’s guidance, while taking legal steps with support from experts such as lawyers
and those specialized in real-estate transactions.127
At the press conference on January 24, 1996, Governor Matsushita responded toa question from a reporter about whether the Bank was responsible for causing the
bubble economy by its misconduct of monetary policy, in view of the fact that the government had announced its decision to inject fiscal funds to address the jusen problem,
as follows: “The bubble economy was caused by various factors such as heavy concentration of population and industry in the Tokyo metropolitan area as well as laws
and taxes pertaining to land transactions, and it cannot be denied that the prolonged
monetary easing had also played a role.128 However, given that the national policy atthat time was to stabilize the foreign exchange market and correct external imbalances,the Bank had to make diﬃcult decisions on its monetary policy conduct in view ofsuch policy. We therefore cannot argue on the cause of the bubble economy based on
the results alone in retrospect. I also believe that it was quite diﬃcult to prevent the
bubble economy from emerging solely by monetary policy.” Moreover, he responded
to a question about the role of the Bank’s on-site examinations and oﬀ-site monitoring
as follows: “Needless to say, the Bank’s purposes are to aim at achieving price stability
and to contribute to financial system stability, and the soundness of Japan’s currency
can only be ensured when these purposes are achieved. In this regard, the Bank’s onsite examinations and oﬀ-site monitoring are indispensable in achieving these purposes
as well as inseparable from various policy measures conducted by the Bank.”
Under these circumstances, the serious state of the NPL problem facing Japanesefinancial institutions became widely recognized among the public. Moreover, distrust
grew over Japanese financial institutions’ information disclosure concerning their business conditions, triggered by a revelation that trading losses had been covered up at the
Daiwa Bank’s New York branch.129 Such movements heightened concern over the stability of Japan’s financial system, particularly among overseas market participants, andthe so-called Japan premium expanded.130................................
127. BOJ Policy Board (1996), pp. 14–15.
128. “Summary of the Governor’s Press Conference on January 24, 1996,” BOJ Archives “Summary of theGovernor’s Press Conferences (1996),” No. 65161.
129. The Daiwa Bank incident—which took place at the U.S. branch and subsidiary of the Daiwa Bank—came
to light in autumn 1995. Following this incident, the U.S. federal and state banking regulators ordered the
Daiwa Bank to withdraw from the U.S. market. In September 1995, the Daiwa Bank announced that it
would write oﬀ in the first half of fiscal 1995 the entire losses stemming from the misconduct by its New
York branch’s employee of about 1.1 billion dollars. It also reported in October that its New York-based
subsidiary had incurred losses of about 97 million dollars from trading activities during the period of 1984
to 1987. In November, the U.S. federal and state banking regulators issued consent orders terminating all
U.S. operations of the Daiwa Bank’s branches, oﬃces, and subsidiary. In the meantime, the Bank of Japan
conducted a special on-site examination of the Daiwa Bank. Reflecting these movements, the credibility ofJapanese banks deteriorated in overseas financial markets, and their foreign currency funding rates became
higher than those for major European and U.S. banks (BOJ Policy Board [1996], p. 12).
130. “Japan premium” refers to the additional interest rate imposed on Japanese banks when they raise foreigncurrency funds. This was caused by an overall decline in the creditworthiness of Japanese financial institutions in overseas financial markets. At the Governor’s press conference on September 8, 1995, the Japanpremium drew attention as a problem arising from the failures of financial institutions in Japan. This premium expanded following the Daiwa Bank incident, but Governor Matsushita commented, “At the moment,
this has not caused a significant problem in Japanese financial institutions’ funding conditions” (“Summary99

To address the situation, the government introduced a package of measures for securing the financial system stability. It amended the Deposit Insurance Act and enacted
six laws relating to the financial system, mainly aiming at ensuring the managementsoundness of financial institutions. The package of measures also incorporated the establishment of the Resolution and Collection Bank—a restructured institution of theTokyo Kyodo Bank, which was originally established to take over the assets and liabilities of the Tokyo Kyowa and Anzen credit cooperatives—and the Housing Loan
Administration Corporation (HLAC).
The six laws relating to the financial system were passed by the Diet in June 1996.
These laws were intended as (1) a framework to ensure financial institutions’ management soundness and to further facilitate smooth disposal of failed financial institutions,and (2) a step toward implementing measures to address the jusen problem. The HLAC
was established in July 1996, so as to take over and handle the assets and liabilities ofseven failed jusen. The HLAC’s capital of 200 billion yen was all financed by the
DICJ—of which 100 billion yen was provided by the Bank of Japan as funds to be returned upon the HLAC’s dissolution. Moreover, an incorporated association, the New
Financial Stabilization Fund, was established in September, with the aim of stabilizing Japan’s financial system and securing the system’s credibility at home and abroad.
This establishment was in response to a joint statement by the government and the ruling coalition parties released in June concerning the disposal of failed jusen. The Bankof Japan became the founder of the New Financial Stabilization Fund, and decided toprovide 100 billion yen to the Fund as the special member.131
4. Monetary policy conduct from autumn 1995 through 1996
The Bank conducted a series of successive monetary easing measures in 1995, partof this being the adoption of a measure to control short-term market rates until theyreached levels below the oﬃcial discount rate.132 Given this measure, through which it
now conducted monetary control through market operations other than extending Bankof Japan loans, the Bank abolished the credit line system intended for nine city banks
on January 16, 1996.133
In this situation, attention came to be focused on the role of the oﬃcial discountrate in the Bank’s monetary policy conduct. At the Governor’s press conference on
January 24, 1996, a reporter inquired whether the current measures taken by the Bank
would result in a reduced role of the oﬃcial discount rate as well as an increased significance of the measure for controlling market rates, and ultimately, a change in the
Policy Board’s role of deciding the oﬃcial discount rate. Governor Matsushita stated in
response, “The Bank abolished the credit line system recently on the assumption that,..........................................................................................................................................
of the Governor’s Press Conference on October 26, 1995,” BOJ Archives “Summary of the Governor’s Press
Conferences,” No. 53956).
131. BOJ Policy Board (1997), pp. 14–17, 68–69, and 76–78.
132. “Announcement of the Guideline for Money Market Operations” released on July 7, 1995. The monthly
average of the uncollateralized overnight call rate for July was below the oﬃcial discount rate.
133. “Guidelines for Bank of Japan Loans in Future Money Market Operations and Abolishment of the Credit
Line System,” written by the Director of Policy Planning Department and the Director of Credit and Market
Management Department, January 12, 1996, BOJ Archives “Loan Extension,” No. 65178. This document
includes the description that “Bank of Japan loans are measures to extend credit in the most timely manner;
however, when market rates exceeded the oﬃcial discount rate in the past, there was some criticism that they
were ‘subsidies to financial institutions.”’

100 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2020

Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

for future money market operations, the Bank would avoid, in principle, using Bankof Japan loans in monetary adjustment.” In comparison with the measure for controlling market rates, he added, “While market rates are to be controlled in a flexible andtimely manner, Bank of Japan loan rates are set at a relatively stable level; however,they both have signal eﬀects to encourage the market rates to be at levels that central banks consider appropriate.”134 Similarly, at the Governor’s press conference on
May 15, 1996, in response to a question about the change in the relative significanceof controlling market rates and altering the oﬃcial discount rate in monetary policy,
Governor Matsushita stated, “The Bank considers that changing the guideline for controlling market rates has taken hold as an independent policy tool.” Meanwhile, theGovernor expressed his view in which he continued to value the role of the oﬃcial
discount rate, stating, “Nevertheless, the Bank judges that the fundamental role of theoﬃcial discount rate has not changed. In other words, altering the oﬃcial discount rate
in light of significant changes in the Bank’s assessment of economic conditions still
plays the role of announcing the change in the Bank’s basic policy stance to various
economic entities with clarity and intelligibility.”135
B. Outbreak of the Asian Financial Crisis and a Financial System Crisis in Japan(1997)
1. Outbreak of the Asian Financial Crisis
Overseas economies experienced sustained economic expansion during 1997. The
United States entered the seventh year of its economic expansionary phase. The
European economies, particularly Germany, France, and the United Kingdom, also
registered relatively high growth compared to the previous year. As for East Asia,
while the Chinese economy continued its high growth—one that led to sustained economic expansion in Taiwan and Hong Kong—countries such as Thailand, Indonesia,
and South Korea experienced economic slowdowns (Chart 7).136
Meanwhile, on July 2, the Thai government abandoned the Thai baht’s peg to the
U.S. dollar and implemented a managed float exchange rate regime. In this situation,
the Thai baht—which had repeatedly been under devaluation pressure since the turnof the year—immediately depreciated sharply on that day, down by about 15 percent against the U.S. dollar. Following the plunge of the baht, the contagion spreadfrom one Southeast Asian country to another; starting in mid-July, the Philippine peso,
the Malaysian ringgit, and the Indonesian rupiah began to depreciate, and they registered a 25–35 percent depreciation against the U.S. dollar by early October. From
mid-October, the currency crises in these countries spilled over to Taiwan, Hong Kong,and South Korea. Specifically, in mid-October, the New Taiwan dollar plunged as theCentral Bank of the Republic of China (Taiwan) switched its stance to one allowing
currency depreciation. This triggered large-scale speculation against the Hong Kong
dollar. As a punitive action against this movement, the Hong Kong Monetary Author................................
134. “Summary of the Governor’s Press Conference on January 24, 1996,” BOJ Archives “Summary of theGovernor’s Press Conferences (1996),” No. 65161.
135. “Summary of the Governor’s Press Conference on May 15, 1996,” BOJ Archives “Summary of the Governor’s Press Conferences (1996),” No. 65161.
136. BOJ Policy Board (1998a), p. 13.

101

ity raised interest rates, which resulted in the largest-ever fall in the Hong Kong Stock
Exchange’s benchmark Hang Seng Index. The contagion then spread to the stock markets in Tokyo, New York, and South Korea. The Korean won, for example, depreciatedsignificantly in parallel with the plunge in stock prices. These developments show thatthe currency crises that broke out in Asian countries directly resulted in a larger financial crisis (the Asian Financial Crisis).137
Under these circumstances, the governments of Thailand, Indonesia, and South Korea requested emergency assistance from the IMF on July 29, October 8, and November
21, respectively. In response, the IMF provided emergency financial assistance understrict conditionality to carry out structural reforms. The IMF’s decision to provide support bore no fruit, however, and the Indonesian rupiah plunged again in January 1998.
In light of this, Malaysia introduced capital and currency exchange control while shifting toward monetary and fiscal easing, upon witnessing a drop in the country’s domestic demand following the implementation of severe austerity measures to avoid further
depreciation of its currency.138 This action was based on Prime Minister Mahathir bin
Mohamad’s view that whether a currency crisis materialized was not an issue of economic structure, nor was it the result of a deterioration in economic activity; rather, it
was caused by financial panic in such forms as capital outflows, banks’ liquidity crises,
and bank runs. Thus, each country responded diﬀerently to its own currency crisis.
However, the real GDP of Indonesia, Thailand, Malaysia, and South Korea for 1998
all recorded negative growth year on year, at minus 13.7 percent, minus 8.0 percent,minus 6.8 percent, and minus 5.5 percent, respectively.139
In this situation, the Bank of Japan took the following measures to contribute tointernational assistance in stabilizing the East Asian economies. First, in July 1997, it
attended the Executives’ Meeting of East Asia-Pacific Central Banks (EMEAP) Governors’ Meeting, where Governors discussed countermeasures against the East Asiancurrency turmoil.140 Second, in August 1997, the Bank of Japan, together with the
Asian, European, and U.S. monetary authorities as well as the BIS, clarified its position that it would support the stabilization program prepared by the Thai authorities andthat together they should stand ready, in case of need, to provide a short-term bridging
facility. This was announced in the “Statement in support of the Thai adjustment programme” released by the BIS. Third, in November 1997, in response to requests fromBank Indonesia, the Bank of Japan sent a team consisting of its staﬀ members on atechnical assistance mission to improve Indonesia’s payment and settlement systems.
................................
137. Asai, Itoh, and Sakurai (2017), pp. 250–256.
138. Hayami (1998b), p. 2.
139. Asai, Itoh, and Sakurai (2017), pp. 257–258.
140. EMEAP was established in 1991 on the initiative of the Bank of Japan to foster closer cooperation among
member central banks. While executive-level meetings were initially held on a regular basis, a decision
was reached at the first EMEAP Governors’ Meeting held in Tokyo on July 19, 1996, to hold Governors’Meetings once a year. The members of the first meeting in 1991 comprised the Reserve Bank of Australia,
Bank Indonesia, the Bank of Korea, Bank Negara Malaysia, the Reserve Bank of New Zealand, Bangko
Sentral ng Pilipinas, the Monetary Authority of Singapore, the Bank of Thailand, and the Bank of Japan.
Currently, it comprises the central banks and monetary authorities of 11 economies with the addition of thePeople’s Bank of China in 1992 and the Hong Kong Monetary Authority in 1993 (BOJ International Department [2005], “Document on the Fifth EMEAP Meeting and Reference on the List of Past EMEAP Participants, International Department, January 13, 1993,” BOJ Archives “EMEAP,” No. 44848, and EMEAP[http://www.emeap.org/]).

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

And fourth, in December 1997, in response to requests from the Bank of Korea, theBank of Japan provided a short-term bridging facility amounting to 165.0 billion yen
until loans were provided by the IMF.141
2. Economic conditions in Japan
Japan’s economy had been on an improving trend from the second half of 1995,
as described in Section A.2. of this chapter. From April 1997, however, it staged
a turnaround and entered a deceleration phase that grew increasingly evident overtime.142 Specifically, the economic slowdown was triggered by a consumption tax
hike—from 3 percent to 5 percent—and the discontinuation of the special tax cut, bothof which were implemented in April 1997.143, 144 Thereafter, Japan’s stagnant economic
growth became particularly evident from autumn 1997 due to the following factors:(1) household spending waned as consumer sentiment became cautious due mainly
to the failures of some financial institutions and (2) exports peaked out against thebackground of currency and economic adjustments in Asian economies.145, 146
Meanwhile, prices had been stable on the whole, excluding the eﬀects of the consumption tax hike; however, from autumn 1997, they softened somewhat (Chart 2),
and asset prices, namely, land prices and stock prices, continued to decline throughout the year (Chart 6).147 Regarding land prices, while commercial land prices nearcity centers—where large-scale development was possible—showed signs of bottoming out, prices of irregular-shaped and small-scale commercial land continued to decline, and residential land prices also remained somewhat weak. As for stock prices,
after a temporary decline around the turn of 1997, they rose moderately from the beginning of April but started to decline again from summer.
In this situation, the year 1997 witnessed the failure of many financial institutions—
namely, 11 depository institutions, 5 securities firms, and 1 life insurance company.
In particular, since the beginning of November, financial institutions including somecity banks and major securities firms failed successively, such as Sanyo Securities, the................................
141. BOJ Policy Board (1998a), pp. 47–48.
142. BOJ Research and Statistics Department and Policy Planning Oﬃce (1998), p. 24.
143. In autumn 1994, with the tax reform to rectify the imbalance between direct and indirect income taxes,
the consumption tax hike as well as income tax and inhabitant tax cut of 5.5 trillion yen—of which 3.5
trillion yen was an institutional tax cut by changing the tax rate table and 2 trillion yen was a special tax
cut—were decided. Since 1995, although the institutional tax cut prior to the consumption tax hike and thespecial tax cut had been implemented, in the outline of the tax reform decided by the Cabinet on January
10, 1997, a decision was reached to discontinue the special tax cut during fiscal 1997 (Tajika and Yashio[2014], pp. 556–557, and BOJ [1997a], p. 179).
144. Initially, the eﬀects of the consumption tax hike were considered to be only temporary; however, private consumption continued to be sluggish even as of autumn 1997. In light of the lasting eﬀects, the Bank changed
its assessment from “Japan’s economy continues on a moderate recovery trend” to “Japan’s economic growthhas been decelerating” (BOJ [1998i], p. 1, and BOJ Research and Statistics Department [1997b, 1997c, and1997d]).
145. In addition, implementation of the health-care insurance system reform, namely, raising coinsurance of theinsured, intensification of debate over the pension system reform, and other such factors are considered tohave led to the weakening of consumer sentiment (Research and Statistics Department and Policy PlanningOﬃce, BOJ [1998], p. 45).
146. BOJ (1998i), p. 1.
147. BOJ Research and Statistics Department and Policy Planning Oﬃce (1998), pp. 27–28 and 60–65, BOJ
Research and Statistics Department (1997b), p. 10, BOJ Research and Statistics Department (1997c), p. 10,
BOJ Research and Statistics Department (1997d), pp. 13 and 23, and BOJ Policy Board (1998a), pp. 7 and 9.

103

Hokkaido Takushoku Bank, Yamaichi Securities Co., and the Tokuyo City Bank.148 , 149
On November 3, Sanyo Securities announced that it had decided to suspend part ofits business operations and that the application for the commencement of reorganization proceedings based on the Corporate Reorganization Act that it had filed with theTokyo District Court had been accepted.150 Sanyo Securities had been raising funds inthe call market, but with the commencement of reorganization proceedings, a default
occurred in the call market for the first time.151 This was followed by the Hokkaido
Takushoku Bank, which, on November 17, made a request to the DICJ to have its
NPLs purchased and announced the transfer of its business operations in the Hokkaido
region to the North Pacific Bank (Hokuyo Bank), on the grounds that it was no longer
possible to fulfill its overall funding requirements, making it diﬃcult to continue its
business operations. Thereafter, on November 24, Yamaichi Securities announced its
decision to suspend its business operations as a step toward closing down its businessand dissolving the firm. Furthermore, on November 26, the Tokuyo City Bank madea request to the DICJ for financial assistance including the purchase of its NPLs, andannounced a business transfer to the Sendai Bank on the premise that a part of its assets
and deposits would be transferred to financial institutions within and outside Miyagi
Prefecture, including the 77 Bank.152
Concern among market participants regarding Japan’s financial system heightened,reflecting the successive failures of financial institutions, and resulted in major turmoil
in financial markets.153 In particular, on November 25 and 26, stock prices fell significantly, mainly for bank stocks, giving rise to confusion among market participants
as various rumors proliferated. Monetary authorities and other related entities denied
these rumors through press conferences and other means, and as a means to reinforce
these eﬀorts, the Minister of Finance and the Governor of the Bank of Japan, in a jointstatement released in the evening of November 26, 1997, asked the public to avoid
being misguided by groundless rumors and to act sensibly.154 , 155
3. Monetary policy measures as part of crisis management operations
a. Use of the New Financial Stabilization Fund for restructuring the Nippon
Credit Bank (April 1997)
On April 1, 1997, the Nippon Credit Bank (NCB) announced the following: a packageof restructuring plans including sales of real estate it had owned, reduction in its personnel, and the disposal of its NPLs; the legal resolution of its three nonbank aﬃliates;................................
148. The Hokkaido Takushoku Bank was established as a special bank in 1900 under the Hokkaido Takushoku
Bank Law, but was eventually converted to an ordinary bank in 1950 in accordance with the enforcement of
the Act on Repeal of the “Nihon Kangyo Ginko Act” and Other Acts (Hokkaido Takushoku Bank [1971],
pp. 37–39, 44, 303–305, and 310).
149. BOJ Policy Board (1998a), pp. 14–15.
150. BOJ (1998a), pp. 43–44, and FBAJ (1997d), pp. 49–53.
151. FBAJ (1997d), p. 50.
152. The Tokuyo City Bank held a press conference at 7:45 a.m., and the Minister of Finance and the Governorof the Bank of Japan each held a press conference at 8:00 a.m. (the evening editions of Asahi Shimbun and
Mainichi Shimbun on November 26, 1997, and “Summary of the Governor’s Press Conference on November
26, 1997,” BOJ Archives “Summary of the Governor’s Press Conferences [1997],” No. 66741).
153. BOJ Policy Board (1998a), p. 15.
154. Specifically, the Kiyo Bank, the LTCB, the Ashikaga Bank, the Keiyo Bank, and the Hiroshima Bank eachdenied the various rumors in the market through the release of statements and other means.
155. FBAJ (1998a), pp. 120–121.

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

the revision of its financial results for fiscal 1996 to record a significant deficit; and thesuspension of its fiscal year-end dividend payments.
The NCB had worked to improve its financial conditions following the burstingof the bubble economy by addressing the deterioration in its asset portfolio, namely,
through the disposal of its NPLs. Despite these eﬀorts, however, yields on bank debentures issued by the NCB generated a significantly higher premium relative to those on
other bank debentures, giving rise to rumors confirmed on February 5, 1997, that the
NCB might be facing financial diﬃculties. Markets soon regained composure but only
briefly. Taking into account the downgrading of its debentures by a U.S. credit rating agency on March 21, market participants had been directing their attention to the
NCB’s restructuring plans in view of the upcoming book-closing period at end-March.
Subsequently, given newspaper coverage of the NCB’s restructuring plans on March
27, which included its withdrawal from overseas operations, the NCB made its oﬃcial
announcement at the turn of the fiscal year on April 1, 1997.156
In compiling the package, the government strongly requested that the Bank of Japan
contribute to the Primary Account of the New Financial Stabilization Fund, in whichfunds provided by the Bank would be managed.157 Given this request for the reinforcement of the NCB’s capital base by about 300 billion yen, the Bank judged it appropriate
to use the Fund with an upper limit of 80 billion yen through underwriting preferredstocks to supplement the shortage of capital subscribed by private financial institutions.
The Bank agreed to the use of funds it would contribute to the Primary Account upon
consultation by the Fund, in line with the procedure specified in the articles and rules of
the Fund. This was based on the judgment that (1) the underwriting of preferred stocks
using the Fund as part of the NCB’s restructuring package met the objective of theFund, namely, “to enhance the stability of Japan’s financial system and to ensure confidence in it at home and abroad,” and (2) the use of the Fund was considered reasonablein light of the Bank’s four principles for fund provision, namely, that there must be astrong likelihood that systemic risk will materialize, there must be no alternative to theprovision of central bank money, appropriate measures will be taken to prevent moral
hazard, and that the financial soundness of the Bank must not be impaired.158................................
156. FBAJ (1997b), pp. 131–132.
157. An incorporated association established on September 25, 1996, with the objective of enhancing the stability of Japan’s financial system and ensuring confidence in it at home and abroad. In its establishment, thefollowing decisions were made: in said association, a fund for receiving contributions from oﬃcial members(private financial institutions such as banks, life insurance companies, securities companies, as well as agricultural and forestry financial institutions) and the special member (BOJ) will be set up; it will be managed
in two separate accounts, the Primary Account for contributions by the special member and the Secondary
Account for contributions by oﬃcial members; and the Primary Account will be utilized to consolidate thecapital base of financial institutions. With a view to ensuring the stability of the financial system as a whole,
the Bank became a founder of the association, and, as the special member, provided 100 billion yen to theFund. See BOJ Policy Board (1997), pp. 76–78.
158. BOJ Policy Board (1998a), p. 120. At this point, provisions of risk capital had been conducted as these wereregarded as satisfying the four principles for the Bank’s fund provision. However, reflecting the refinementof other components of the special safety net to avoid a financial crisis, it was specified in “Application ofFour Principles of Special Loans to Maintain Financial System Stability,” which was decided by the Bank’s
Policy Board on May 14, 1999, that the Bank should not provide risk capital (BOJ Policy Board [1999b]).
For details, see Appendix 2.

105

b. The Bank of Japan’s fund provision for the resolution of the Hokkaido
Takushoku Bank, Yamaichi Securities, and the Tokuyo City Bank (November
1997)
On April 1, 1997, the Hokkaido Takushoku Bank announced that, alongside its decision to withdraw from its overseas operations, it had reached an agreement with the
Hokkaido Bank that they would merge on equal terms.159 However, on September 12,
the Hokkaido Takushoku Bank announced postponement of its planned merger due todiscrepancies in understanding on such issues as the recognition of NPLs and plans forwriting them oﬀ. On the same day, it also made public a restructuring program consisting of the disposal of NPLs, raising of new capital, and improvement in management eﬃciency, and made eﬀorts toward its implementation.160 However, the Hokkaido
Takushoku Bank’s financial position deteriorated due to its failure to gain market confidence, as was seen in the sharp decline in its stock prices in addition to a decrease in
the amount of deposits, and due to diﬃculties in securing funds in the money market
mainly given the eﬀects of Sanyo Securities defaulting in the call market.161
Under these circumstances, the Bank of Japan was informed by the Hokkaido
Takushoku Bank of the following points in the evening of November 16: (1) it had
become diﬃcult to continue its business operations on its own; (2) in order to maintainits role as a financial intermediary in Hokkaido, it would seek to transfer its business toa receiving bank, and in doing so, request the DICJ to purchase its NPLs, among othermeasures; and (3) in order to clarify management responsibility, all of its directors
would resign prior to the transfer of its business operations. Given this situation, theBank of Japan held an unscheduled Policy Board meeting in the morning of November 17, and, from the perspective of ensuring the stability of the financial system as awhole, it decided to provide the Hokkaido Takushoku Bank with a minimum amountof liquidity necessary to continue such business operations as deposit repayments, pursuant to Article 25 of the Bank of Japan Act of 1942, until a resolution package was
implemented.162, 163
Thereafter, early in the morning of November 24, 1997, Yamaichi Securities decided to suspend its business operations as a step toward closing down its businessand dissolving the firm.164 Developments leading up to this decision were as follows.
After having faced a continued decline in profits since the bursting of the bubble economy, the situation grew increasingly severe from spring 1997. Specifically, the decline
in market confidence in the firm became significant at home and abroad due to, forexample, moves among credit rating agencies to downgrade the firm’s rating and tothe materialization of scandals, such as profit provision involving corporate racketeers.
................................
159. FBAJ (1997b), pp. 129–131.
160. FBAJ (1997c), pp. 83–91.
161. BOJ Policy Board (1998a), pp. 101–105, and FBAJ (1997d), pp. 39–43.
162. At a press conference held on November 17 from 8:20 a.m., Governor Matsushita responded to a question
from a reporter that “the Bank held the unscheduled Policy Board meeting this morning, and decided on
the measure” (“Summary of the Governor’s Press Conference regarding the Hokkaido Takushoku Bank on
November 17, 1997,” BOJ Archives “Summary of the Governor’s Press Conferences [1997],” No. 66741).
163. BOJ Policy Board (1998a), pp. 49–50 and 100–101.
164. Regarding this decision, President Shohei Nozawa of Yamaichi Securities explained at a press conference
held on November 24 that it had been “decided oﬃcially at the board meeting at 6:00 this morning” (themorning edition of Mainichi Shimbun on November 25, 1997, p. 8).

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Moreover, massive oﬀ-the-book liabilities held by the firm surfaced.165 In response, theBank of Japan held an unscheduled Policy Board meeting in the morning of November
24, and, in order to fulfill its mission of maintaining stability of the financial system, decided to take an extraordinary measure, pursuant to Article 25 of the Bank of Japan Act
of 1942.166 Under this measure, the Bank of Japan would provide liquidity to Yamaichi
Securities through extending loans to the Fuji Bank—the firm’s major correspondent
financial institution—of an amount necessary for proceeding with the following: return of customer assets, orderly settlement of outstanding transactions, and withdrawal
from overseas operations.167
Moreover, on November 26, 1997, the Tokuyo City Bank transferred its business
operations to the Sendai Bank after (1) making a request to the DICJ for financial assistance, including the purchase of its NPLs, and (2) transferring part of its assets anddeposits to financial institutions within and outside Miyagi Prefecture, including the77 Bank. In order to clarify management responsibility, it was decided that the Tokuyo
City Bank’s Chairman and President would resign.168 After developing a restructuring
plan in March 1996, the Tokuyo City Bank had sought to carry it out. However, concern about financial stability arising from the successive failures of Sanyo Securities,
the Hokkaido Takushoku Bank, and Yamaichi Securities, among other developments,
led customers to continue withdrawing their deposits amid stock price declines, resulting in the failure of the Tokuyo City Bank to raise the necessary funds.169 In thissituation, the Bank of Japan held an unscheduled Policy Board meeting in the morning of November 26, and decided to provide the Tokuyo City Bank with a minimum
amount of liquidity—through extension of loans pursuant to Article 25 of the Bankof Japan Act of 1942—necessary for continuing such business operations as deposit
repayments, until a resolution package was implemented.170, 171
c. Market developments and the Bank of Japan’s money market operations(November through end-December 1997)
Following the series of failures of financial institutions, concern about financial systemstability in Japan heightened. The Japan premium—which had been low and stablethrough October 1997—expanded rapidly from late November. Liquidity declined in
the domestic financial market as well.172 Specifically, in the call market, regional banks
and trust banks almost instantly adopted a cautious lending stance following the vol................................
165. BOJ Policy Board (1998a), pp. 105–106, and FBAJ (1998a), pp. 129–134.
166. The press conference on the Policy Board’s decision on the measure was held on November 24 from 10:30
a.m. (“Summary of the Governor’s Press Conference on November 24, 1997,” BOJ Archives “Summaryof the Governor’s Press Conferences [1997],” No. 66741). A newspaper reported on November 25 that the
Policy Board meeting was held from 8:15 a.m. to around 9:00 a.m. (the morning edition of Tokyo Shimbun
on November 25, 1997, p. 5).
167. BOJ Policy Board (1998a), pp. 49–51 and 106–110.
168. The Tokuyo City Bank’s unscheduled board meeting was held from around 5:00 a.m., and a press conference
was held by President Tokio Niida from 7:45 a.m. (the evening editions of Sankei Shimbun, Asahi Shimbun,
and Mainichi Shimbun on November 26, 1997).
169. BOJ Policy Board (1998a), pp. 110–114, and FBAJ (1998a), pp. 127–129.
170. The press conference on the Policy Board’s decision was held on November 26 from 8:00 a.m. (“Summaryof the Governor’s Press Conference on November 26, 1997,” BOJ Archives “Summary of the Governor’s
Press Conferences [1997],” No. 66741).
171. BOJ Policy Board (1998a), pp. 49–50 and 111–114.
172. FBAJ (1998a), pp. 121–123, and BOJ Policy Board (1998a), pp. 15 and 40–41.

107untary closure of Yamaichi Securities in late November. As a result, market liquidity
declined temporarily, and the weighted average of the uncollateralized overnight callrate, which had been slightly below the 0.5 percent level, reached 0.64 percent on
November 27. In the Eurodollar market, the Japan premium began to expand graduallyin the wake of the failure of Sanyo Securities in early November, and widened further,reflecting the successive failures of the Hokkaido Takushoku Bank and Yamaichi Securities, with the 3-month premium reaching around 1.0 percent by early December.
Similarly, in the money market, interest rates on term instruments with approximate
maturities ranging from 1 month to 1 year—for example, interest rates on CDs andeuro-yen rates—rose significantly from late November, primarily reflecting the expansion of the Japan premium. Among these, 3-month euro-yen rates reached the range of
1.1–1.2 percent in early December, rising sharply from their previous level of slightly
below 0.6 percent.
In view of such market developments, the Bank of Japan—while maintaining its
monetary easing stance—made its utmost eﬀorts to reduce market anxiety throughmoney market operations.173 Specifically, in response to the upward divergence of
the uncollateralized overnight call rate from its target level, the Bank provided ample liquidity to the money market through its money market operations with the aim of
ensuring the stable formation of market interest rates and smoothing interbank transactions.174
As part of its eﬀorts, the Bank also supplied longer-term funds with a duration
over the year-end and fiscal-year end, so as to restrain upward pressure on interest
rates on term instruments maturing beyond the year-end or the fiscal year-end, thereby
promoting stability in market interest rates as a whole. Specific tools of the operation
included borrowings of JGBs against cash collateral (the so-called repo operations),
purchases of TBs and CP, and outright purchases of bills.175 The Bank’s provision of
ample longer-term funds resulted in excess liquidity relative to immediate liquidity
needs arising from payment and settlement in the market, and caused the uncollateralized overnight call rate to remain susceptible to downward pressure. In order toprevent the rate from approaching zero percent, the Bank, in tandem with its longerterm funds-supplying operations, conducted funds-absorbing operations, in which it
absorbed relatively short-term funds—mostly with approximate maturities of 1 day to
3 weeks—through sales of bills.176 As a result of these money market operations, theuncollateralized overnight call rate, which had temporarily exhibited a substantial rise,................................
173. The Bank’s stance on the conduct of money market operations during this time was also disclosed in thestatement by the Governor released on November 24, 1997, upon the failure of Yamaichi Securities, andin the joint statement by the Minister of Finance and the Bank’s Governor on ensuring financial systemstability, released on November 26 (BOJ Policy Board [1998a], pp. 52–54 and 108–110).
174. Throughout 1997, the Bank continued to conduct money market operations based on the following guideline
adopted in September 1995: “The Bank will maintain the money market interest rate (the uncollateralized
overnight call rate) slightly below the oﬃcial discount rate (cut to 0.5 percent per annum in September 1995)
on average” (BOJ Policy Board [1998a], p. 37).
175. At the Policy Board meeting held on October 28, 1997, it was decided that “bonds such as JGBs withcash collateral shall be valid for borrowing or lending, but for the time being, only repo operations shall be
conducted.” Following the approval by the Minister of Finance on October 30, the Bank released a statement
introducing the repo operations on October 31 (BOJ Policy Board [1998a], pp. 81–84).
176. BOJ (1998i), pp. 49–52, 64, and 66.

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gradually regained stability from the beginning of December, and thereafter stayedsomewhat below the oﬃcial discount rate on average, albeit with some fluctuations.177
When extending loans on bills based on Article 20 of the Bank of Japan Act of1942, the Bank used to calculate the amount of interest by including both the date ofextension and the date of repayment in the loan period. However, given the increasingneed to flexibly extend short-term loans on bills in line with money market developments, the Bank decided on November 28 to adopt another method of interest calculation as a special measure eﬀective through end-December 1997. By introducing thismethod, under which the loan period covered day two of loan extension through thedate of repayment, the Bank aimed at preventing the eﬀective interest rate of loans onbills from largely exceeding the market interest rates.178 Subsequently, on December
25, the Bank decided to modify calculation methods for amounts of both discounts andinterest arising from discounts and loans on bills, fully conforming to the aforementioned method. This was based on the line of thinking that (1) the decision would allow
for consistency between the said method and conventional rules governing transactionsin the call market and the bill market, and (2) equivalence in the oﬃcial discount rate
and the eﬀective interest rate would enhance the transparency of the Bank’s policy
conduct.179
d. Revision of the Bank of Japan Act
Prompted by the emergence, expansion, and bursting of the bubble economy as wellas the occurrence of the NPL problem and other repercussions, vigorous discussions
were held on Japan’s financial administration and monetary policy among a wide range
of entities. This led to increasingly heated arguments calling for reform of the institutional framework of the central bank, responsible for conducting monetary policy, byrevising the Bank of Japan Act of 1942, which had been legislated during World War
II; specifically, through further clarification of the Bank’s independence and accountability regarding its policy decisions, in other words, greater transparency of its policy
management.180 Under these circumstances, the government proceeded with revisions................................
177. BOJ Policy Board (1998a), pp. 41–42.
178. FBAJ (1998a), p. 123, and “125th Document Consulted on with the Governor concerning the Special Measure for the Calculation of Interest on Loans on Bills, Credit and Market Management Department, Policy
Planning Department, Operations Department, and Financial and Payment System Department, November
28, 1997,” BOJ Archives “Loan Extension,” No. 66574.
179. “148th Document Consulted on with the Governor concerning Changes in the Calculation Method forAmounts of Discounts and Interest Arising from Discounts and Loans on Bills, Credit and Market Management Department, Policy Planning Department, Financial and Payment System Department, Operations
Department, and Information System Services Department, December 25, 1997,” BOJ Archives “Loan Extension,” No. 66574.
180. A report titled “Reforms of Financial Administration and Monetary Policy,” published on June 13, 1996, by
a project team of the ruling coalition parties, raised the revision of the Bank of Japan Act of 1942 as oneof the important pillars of the reforms. The report stated, “It is necessary to revise the Bank of Japan Act
in the form of further clarifying the Bank’s independence and accountability regarding its policy decisions
as a central bank, so as to avoid any repetition of failures of macroeconomic policy in addressing excessive
liquidity and the bubble economy” (FBAJ [1996b], pp. 17–19). The following day, Governor Matsushita,
at a speech at the Japan National Press Club, stated that a common understanding on the basic thinking on
central banking was a prerequisite for deliberating on specifics of the revision of the Bank of Japan Act. He
then explained the following three major points that constituted the basis of any debate on central banking by
also making reference to discussions that had taken place outside Japan: (1) roles of a central bank; (2) the
relationship between a central bank and the government; and (3) the status of a central bank in a democratic109

to the Bank of Japan Act of 1942, and on March 11, 1997, the bill for the new Bank ofJapan Act was submitted to the Diet after the Cabinet’s approval was obtained. The billpassed the House of Representatives and the House of Councillors by a majority voteon May 22 and June 11, respectively, and was then promulgated as the Bank of JapanAct of 1997 on June 18.181
At a press conference held on June 11, 1997, upon passage of the Bank of JapanAct of 1997 in the Diet as well as its enactment, Governor Matsushita commented
that the revision was “the most remarkable event in the 115 years of the Bank’s history.” Meanwhile, the following question was raised at the press conference: “Given
that there are views that the Bank has mistaken the timing of implementing its monetary policy measures twice—in the first half of the 1970’s and in the latter half of the
1980’s—both of which resulted in inducing economic downturns, can we say that therevision of the Bank of Japan Act of 1942 completely dispelled concerns that the Bank
would make a mistake again?”, Governor Matsushita responded, “The Bank has indeed
undergone some valuable experiences that should be reviewed and reflected when conducting monetary policy, such as the emergence, expansion, and bursting of the bubble
economy as well as inflation prior to the bubble period.” He then pointed to the following as lessons learned from such experiences: “(1) It is not necessarily appropriate
to consider that the objective of monetary policy is to directly address the issues of,for example, exchange rates and balance of payments; and (2) in conducting monetary
policy, it is a matter of course that the Bank pay attention to developments in such factors as prices, but at the same time the Bank needs to swiftly take preemptive responses
by making eﬀorts to foresee how developments in, for example, asset prices will aﬀect
the future course of the economy or economic activity.” He further stated, “The Bank
will ensure appropriate policy management by paying due attention to these points inmaking policy decisions and implementing measures going forward.”182
C. Pursuing Financial System Stability amid the Prolonged Financial Crisis(Early 1998 through Summer 1998)
1. Economic conditions in major overseas economies183
In the United States, exports followed a decreasing trend since the turn of 1998 due
mainly to a decline in demand stemming from the currency and economic adjustments
in Asia. Nevertheless, the economy continued to expand firmly on the whole, supported by solid expansion in domestic demand, particularly in household spending andbusiness fixed investment (Chart 7).
Regarding the European economies, the GDP growth rate for 1998 exceeded theprevious year’s level in the case of France, while remaining more or less unchanged in
the United Kingdom and Germany (Chart 7).
As for East Asia, domestic demand remained sluggish in many of the NIEs andthe ASEAN countries due to the implementation of economic austerity measures, in..........................................................................................................................................
society (Matsushita [1996]).
181. BOJ Policy Board (1997), p. 49, and BOJ Policy Board (1998a), pp. 58–59. For an outline of the revision of
the Bank of Japan Act of 1942, see Appendix 3.
182. “Summary of the Governor’s Press Conference on June 11, 1997,” BOJ Archives “Summary of the Governor’s Press Conferences (1997),” No. 66741.
183. The description in this section is based on Chapter I.A.3. of BOJ (1998i), unless otherwise noted.

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evitably bringing about economic deceleration in the overall region. The Chinese economy, which continued to exhibit high growth through 1997, also saw a gradual deceleration mainly due to the slower growth in private consumption, in addition to downward
pressure on exports from such factors as the decline in domestic demand in other Asian
countries (Chart 7).
Meanwhile, in Russia, financial markets had been unstable since the turmoil in
Asian currencies and financial markets in summer 1997. From May 1998, capital flightfrom the country increased, and prices of bonds and stocks plunged. In response, thegovernment announced on August 17 a change in the target zone for exchange rates, thede facto devaluation of the ruble, and emergency measures—including the suspensionof some repayments of external public debt for 90 days.184 Thereafter, however, partly
aﬀected by political unrest, economic and financial conditions remained unstable. Suchturmoil in the currency and financial markets further spread to countries in Central
and South America, as seen in Brazil’s substantial rate hike aimed at defending its
currency’s depreciation.
2. Economic conditions in Japana. Falling into negative growth
As mentioned in Section B.2. of this chapter, from April 1997, Japan’s economy entered a deceleration phase triggered mainly by the consumption tax hike. From autumn
1997, stagnant economic growth became evident: household spending waned as consumer sentiment became cautious due mainly to failures of some financial institutions;
exports peaked out, reflecting currency and economic adjustments in Asian economies.
From the start of 1998, business fixed investment fell sharply, reflecting not only
the economic factors mentioned above, but also financial factors such as private banks’lending attitudes that became cautious due to the NPL problem.185 As final demandplunged, production activity declined significantly with downward pressure from inventory adjustments. A vicious cycle among production, income, and spending gradually became strong: the decline in production activity led to decreases in corporate
profits and employment income, which in turn restrained firms’ and households’ spending, such as business fixed investment and private consumption (Chart 1).
In response to the deterioration in the economy, the government set out a series of
expansionary fiscal policies, and implemented the following fiscal stimulus measuresin 1998: (1) special income tax cut (applied from February); (2) an economic stimulus
package with a total project size of 16 trillion yen (announced in April); (3) amendmentof the Fiscal Structural Reform Act (in May) to make the issuance amount of deficit
financing bonds flexible in order to carry out the economic stimulus package, and topostpone the target year for reducing fiscal deficit from fiscal 2003 to fiscal 2005; and(4) suspension of enforcement of the Fiscal Structural Reform Act (in December) until
a date specified separately by an act.186................................
184. EPA (1999), Chapter I.C.3.
185. The description in this section is based on Chapter I.A.1. of both BOJ (1998i) and BOJ (1999n), unlessotherwise noted.
186. Tajika and Yashio (2014), pp. 165 and 177, and Ide, Ikegami, and Miyajima (2013), pp. 640–643 and 659–
660.

111

b. Enactment of two acts to stabilize financial functioning (February 1998)
As a result of successive failures of large financial institutions in autumn 1997, banks’lending attitudes became severe and the so-called credit crunch occurred, thereby making it diﬃcult for the corporate sector to raise funds. This reinforced the view that adelay in financial institutions’ disposal of NPLs would exert strong adverse eﬀects on
the economy as a whole. In consequence, the importance of resolving the NPL problem
promptly through the injection of public funds and recovering the financial intermediation function was reconfirmed.187
Against this background, in December 1997, the ruling party of the government
drafted and decided on a scheme to stabilize the financial system, through which 30
trillion yen of public funds was set to be injected to dispose of the failed financial institutions and enhance capital bases of surviving institutions.188 Two acts based on thisscheme were passed on February 16, 1998, namely, the Act on the Partial Revisionof the Deposit Insurance Act and the Act on Emergency Measures for the Stabilization of Financial Functions. These acts stipulated the government’s provision of JGBs
worth 10 trillion yen in total to the DICJ—specifically, 7 trillion yen to the Special
Operations Fund and 3 trillion yen to the Financial Crisis Management Fund.189 The
government also formulated the supplementary budget of the general account for fiscal
1997 on February 4, 1998, and the general account budget for fiscal 1998 on April 8,
1998. It decided to provide the DICJ’s accounts with the government guarantees worth
20 trillion yen in total—specifically, 10 trillion yen each of guarantees against loans
extended under the Special Operations Account and the Financial Crisis Management
Account.190
In this manner, public funds of 17 trillion yen were secured to protect depositors
in case financial institutions failed, and those of 13 trillion yen were secured to enhance surviving financial institutions’ capital bases. In March 1998, 1,815.6 billion
yen of public funds were decided to be injected for the first time, into 21 financial
institutions.191 These funds were borrowed from the Bank of Japan and private financial institutions; put into the Financial Crisis Management Account established at the
DICJ pursuant to the Act on Emergency Measures for the Stabilization of Financial
Functions; then lent to the Resolution and Collection Bank as it invested in or provided................................
187. Ikeo (2009), pp. 95–97.
188. The headquarters in charge of deliberating on emergency measures for stabilizing the financial system,
which was set up at the Liberal Democratic Party, drafted and decided on the scheme on December 16,
1997, and made public on December 24, 1997, specific actions to support financial institutions in enhancing
their capital bases as part of the emergency measures (FBAJ [1998a], pp. 105–113). In addition, the Cabinet
decided on the draft supplementary budget of the general account for fiscal 1997, which included the government guarantee funds, and the draft budget of the general account for fiscal 1998 on December 20, 1997,
and December 25, respectively (FBAJ [1998b], pp. 39–40 and 53).
189. The Special Operations Fund is established under the Special Operations Account for the purpose of conducting specially permitted business operations—namely, financial aid exceeding costs of blanket deposit
insurance and asset purchases from failed financial institutions. The Financial Crisis Management Fund iscreated, pursuant to the Act on Emergency Measures for the Stabilization of Financial Functions, in the Financial Crisis Management Account for the purpose of conducting financial risk management (DICJ [2007],
pp. 60 and 238–240, and BOJ [1998b], pp. 119 and 126).
190. DICJ (2007), pp. 32 and 58–59, BOJ (1998b), pp. 113 and 118–128, BOJ (1998c), p. 177, and FBAJ
(1998b), pp. 39–40 and 53.
191. FBAJ (1998c), pp. 57–62.

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materialsloans to individual financial institutions. On March 24, 1998, the Policy Board of the
Bank of Japan decided on the principal terms and conditions on loans for the Financial
Crisis Management Account at the DICJ, which stipulated that the amount should be
kept to the minimum necessary for implementing business operations and repaying theexisting loans.192
c. Launch of the Financial Supervisory Agency (June 1998)
On June 22, 1998, the Financial Supervisory Agency (FSA) was launched as an external agency of the Prime Minister’s Oﬃce with the enforcement of the Act Establishing
the Financial Supervisory Agency and the Act on Arrangement of Relevant Acts Incidental to Enforcement of the Act Establishing the Financial Supervisory Agency, bothof which passed the Diet on June 16, 1997.193 The FSA took charge of inspection andsupervision of private financial institutions—such as those in the banking, insurance,
securities, and other financial sectors—including the authority to address matters related to failure resolution.
As a result, the inspection and supervisory authority over private financial institutions was completely transferred from the Minister of Finance to the Prime Minister,ranging from giving/revoking licenses, ordering business improvement and businesssuspension, and approving mergers. The authority was then legally transferred fromthe Prime Minister to the FSA Commissioner, except for licensing.
In addition, the acts stipulated that, in cases where the Prime Minister (or the FSA
Commissioner, to whom the authority was legally transferred) acknowledged the riskthat revocation of banks’ licenses or provision of business suspension orders would
exert grave adverse eﬀects on the stability of the financial system, the Prime Minister(or the FSA Commissioner) should discuss the necessary measures in advance with the
Minister of Finance.
d. Emergence of financial problems at the Long-Term Credit Bank of JapanIn June 1998, financial problems emerged at the LTCB.194 The LTCB recorded a net
deficit of 280 billion yen when settling accounts in March 1998, due mainly to thedisposal of an enormous amount of NPLs. Meanwhile, its stock price fell due to thefollowing factors: a release of an article on June 5 with a title including “bankruptcy of
the LTCB” in a monthly magazine; circulation from June 9 of a rumor that a partnershipwith the Swiss Bank Corporation would dissolve; spreading of another rumor from
June 17 that the LTCB faced financing diﬃculties; and a downgrade on June 18 by
a rating agency.195 Specifically, its stock price closed at 199 yen on June 4, but thentemporarily marked below 100 yen on Friday, June 19, with the lowest price at 95 yen
and the closing price at 112 yen, and remained below 100 yen from the opening on thefollowing business day of Monday, June 22, and closing at 62 yen on that day.196
Reflecting these developments, on June 26, the LTCB announced a merger planwith the Sumitomo Trust and Banking Co. (STB).197 On the same day, the FSA Com................................
192. BOJ Policy Board (1998b).
193. The description in this section is based on FSA (1999), pp. 1–3, and FBAJ (1997a), pp. 81–84.
194. BOJ (1999c), p. 131.
195. FBAJ (1998d), pp. 108–109.
196. The stock price of the LTCB was taken from the securities column on The Nikkei (a reduced-size, reprinted
edition, June 1998).
197. On June 26, President Atsushi Takahashi of the STB and President Katsunobu Onogi of the LTCB held113

missioner and the Governor of the Bank of Japan each released a statement, making it
clear that the FSA, the MOF, and the Bank of Japan would cooperate closely to provide
necessary support for the smooth implementation of the merger plan.198
Nevertheless, even after the announcement of the merger plan with the STB, information about the LTCB facing excess debt or financing diﬃculties, as well as a rumor
that the merger plan might be cancelled, continued to circulate in the markets, and its
stock price closed at below 50 yen on July 22, and at 38 yen on August 11.199 In orderto address the situation, on August 21, the LTCB announced that it would take drastic
restructuring measures in preparation for the merger with the STB and would work
to improve its financial structures by applying for a capital injection pursuant to the
Act on Emergency Measures for the Stabilization of Financial Functions. In response,
the Prime Minister announced on the same day that the government would take every
possible measure to support the merger plan, and the FSA Commissioner, the Minister of Finance, and the Governor of the Bank of Japan each released a statementthat they would respond appropriately when the LTCB filed its application for capital
injection.200
3. Pursuing a new approach to the monetary policy regime
a. New monetary policy framework based on the Bank of Japan Act of 1997
From January 1998, the Bank began to hold Monetary Policy Meetings (MPMs) inline with the new Bank of Japan Act of 1997 prior to the enforcement of the Act
on April 1, 1998. With a view to enhancing the transparency of policy management,
the Bank of Japan Act of 1997 stipulates that the MPMs, Policy Board meetings onmonetary control matters, shall be held regularly (Article 17, paragraph 2) and thatthe minutes and other related documents of the meetings shall be made public (Article
20).201 The Bank decided to implement all possible measures as soon as preparations
were completed, even before the Bank of Japan Act of 1997 took eﬀect.202 Specifically,
the Bank decided on the following at the Policy Board meeting held on December
26, 1997: (1) the meeting on monetary policy conduct would be named the Monetary
Policy Meeting; (2) the MPM would be held about twice a month in principle andthe schedule would be announced at the end of each quarter, that is, at the end of
March, June, September, and December, for the six months following the month of the..........................................................................................................................................
individual press conferences and explained that they had started a negotiation from June 22 (FBAJ [1998e],
p. 86).
198. FBAJ (1998e), pp. 86–88, and BOJ (1999c), pp. 159–160.
199. FBAJ (1998f), p. 71.
200. FBAJ (1998f), pp. 71–76, and BOJ (1999c), pp. 161–162.
201. “Monetary control matters” refers to matters concerning currency and monetary control listed in the itemsof Article 15, paragraph 1 of the Bank of Japan Act of 1997.
202. At the press conference on June 11, 1997, when the Bank of Japan Act of 1997 was enacted, Governor
Matsushita noted, “We are determined to promote, in line with the aim of the revision of the Act, wideranging reforms to further improve the transparency of policy management and the eﬃciency of the Bank’s
operational management” (“Summary of the Governor’s Press Conference on June 11, 1997,” BOJ Archives“Summary of the Governor’s Press Conferences [1997],” No. 66741). At a speech on the theme of a newframework for monetary policy under the new Bank of Japan Act given on June 27, Governor Matsushita
elaborated on the content of the Act and mentioned as follows: “The Bank intends to implement all possible
measures as part of the Bank’s self-reform even before the new Act takes eﬀect, to accommodate the aimsof the new Act”; and “The Bank is currently studying a concrete mechanism for holding regular Policy
Board meetings on monetary control matters and for disclosing the minutes of those meetings, which will
be implemented as soon as preparations are completed” (Matsushita [1997]).

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

announcement; (3) matters to be decided at the MPM were (i) the guideline for money
market operations, (ii) the level of the oﬃcial discount rate, (iii) changes in the reserve
requirement ratio, and other related matters; (4) decisions made at the MPM would bemade public immediately after the meeting; and (5) the minutes of the MPM would beapproved by the Policy Board at the second MPM following the MPM concerned andwould be released on the third business day after the approval.203
The first MPM was held on January 16, 1998. At the regular press conference on
January 20, 1998, Governor Matsushita was asked about the impression on the firstmeeting and answered, “It was the first experience for me to have discussions comprehensively and intensively with Policy Board members for determining the Bank’s
stance on monetary policy, and it was very meaningful to discuss at MPMs the future
course of policy conduct, including the possibility of policy changes, given that theminutes of the MPMs will be released.” He also noted, “Through the release of theminutes of the MPMs, we, the Policy Board members, intend to enhance the transparency of a policy decision-making process that is appropriate for the independenceof a central bank.”204
With regard to the rules for the formulation of policy proposals and the determination of policy action, Chairman Matsushita proposed the following at the first MPM:
(1) the guideline for money market operations would be determined at every MPM,
including determination of unchanged guidelines, and (2) the oﬃcial discount rate andthe reserve requirement ratio would be determined only when policy changes were involved. This proposal was approved by the Policy Board members, and the monetary
policy decisions started to be made in line with these rules.205
b. Conduct of monetary policy from early 1998 through summer 1998
From early 1998 through summer 1998, a downtrend in Japan’s economy graduallybecame evident, as described in Section C.2. of this chapter. So as to firmly underpin
economic activity from the financial side, the Bank maintained the monetary easing
stance that it had decided to take in September 1995. Specifically, at the 13 MPMs
held from January 16 to August 11, 1998, the Bank decided to maintain the guideline
for money market operations, which set that “the Bank will encourage the uncollateralized overnight call rate to remain on average slightly below the oﬃcial discountrate.” Throughout this period, the Bank did not make any decisions of changing the official discount rate and maintained the rate at 0.5 percent on an annualized basis since
September 8, 1995. As for the definition of the duration to which the guideline applies “on average,” Chairman Matsushita explained, in submitting the proposal at the
MPM held on January 16, 1998, “It seems appropriate to continue considering the reserve maintenance period of one month as the average duration, in principle.” He also
said that “if the average duration is the intermeeting period of two weeks, the duration
would be too short to conduct money market operations in a deliberate manner.” The
Policy Board members agreed on this view.206................................
203. BOJ (1997b).
204. “Summary of the Governor’s Press Conference on January 20, 1998,” BOJ Archives “Summary of theGovernor’s Press Conferences (1998),” No. 69034.
205. BOJ (1998i), pp. 43 and 128.
206. BOJ (2008), p. 53.

115

With regard to monetary policy decisions, four Policy Board members—namely,
the Governor and three appointed members—had the right to vote under the provisionsof the Bank of Japan Act of 1942, and the decisions were made by a unanimous voteat the MPMs held from January 16 to March 26, 1998.207 From April, the vote wastaken by nine Policy Board members under the Bank of Japan Act of 1997, namely, theGovernor, two Deputy Governors, and six Members of the Policy Board, and monetary
policy decisions continued to be made by a unanimous vote through the MPM held on
May 19.208 Thereafter, at the MPMs held from June 12 to August 11, the Chairman’s
proposal was decided by a majority vote, as some members dissented from the proposal: Board Member Nakahara, for example, proposed to lower the target level of theuncollateralized overnight call rate to boost monetary aggregates since economic conditions had been deteriorating further.209 At the MPM held on June 12, Board Member
Gotoh made a proposal to change the expression of the target level of the uncollateralized overnight call rate from “slightly below the oﬃcial discount rate” to “a low
level within the 0.40–0.50 percent range” because (1) the current expression was ambiguous and (2) it was not appropriate to decide the target level of the uncollateralized
overnight call rate based on the oﬃcial discount rate since guiding of the overnight callrate had already played the central role in monetary policy management. However, this
proposal was defeated by a majority vote, as many members were of the opinion that,
if the guideline for money market operations was to be unchanged, then the Bank had
better keep the expression used in the guideline unchanged to preclude any misinterpretation, and changes in the expression should be considered when implementing a
policy shift in the future.210
Meanwhile, the reserve requirement ratios were kept unchanged. At the MPM heldon June 12, however, Board Member Miki made a proposal to lower the ratios to reduce
the average amount outstanding of required reserves by approximately 1 trillion yen,with a view to reinforcing the accommodative monetary policy. This proposal was
defeated by a majority vote, because many members were of the opinion that a loweringof the reserve requirement ratios would alleviate the burdens of financial institutions
only marginally, with interest rates already being at low levels and that a reductionin the required reserves might in turn destabilize the formation of short-term interest
rates.
During the period from January through August 1998, the Bank provided ample
funds, taking account of market developments, through daily money market operations
in line with the guideline that “the Bank will encourage the uncollateralized overnight
call rate to remain on average slightly below the oﬃcial discount rate.” As a result,the uncollateralized overnight call rate had been at the level of 0.42–0.44 percent on
average.211................................
207. Specifically, the vote was taken by the following four members: the Governor, Mr. Shigeru Koino, Mr.
Yasuo Gotoh, and Mr. Susumu Taketomi. Governor Hayami succeeded Governor Matsushita on March 20,
1998.
208. Specifically, the vote was taken by the following nine members: Governor Hayami, Deputy Governor
Sakuya Fujiwara, Deputy Governor Yutaka Yamaguchi, Mr. Yasuo Gotoh, Mr. Susumu Taketomi, Mr.
Toshio Miki, Mr. Nobuyuki Nakahara, Ms. Eiko Shinotsuka, and Mr. Kazuo Ueda.
209. BOJ (1998i), pp. 43–48, 228–231, 242–244, 261–263, 276–278, and 294–296.
210. BOJ (1998i), pp. 49 and 228–229.

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

In addition, at the MPM held on June 12, with a view to improving the transparencyof money market operations, the Bank decided and released the criteria and rules forthe selection of the bidders in the Bank’s repo operations (the lenders of government
securities in the Bank’s government bond-borrowing operations against cash collateral).212

VI. Monetary Policy under the Bank of Japan Act of 1997 (Autumn
1998 through Summer 2000)
A. Easing of the Global Financial Crises
1. Economic conditions in major overseas economies213
The U.S. economy continued to expand on the back of strong domestic demand throughsummer 2000 (Chart 7). In Europe, economic activity continued to decelerate throughsummer 1999 as external demand decreased significantly due to the eﬀects of Russia’s
financial crisis in summer 1998. The economy then started to expand moderately as exports recovered with solid domestic demand. Meanwhile, on January 1, 1999, the single
currency, the euro, was introduced in 11 countries (Germany, France, Italy, Spain, theNetherlands, Belgium, Austria, Finland, Portugal, Ireland, and Luxembourg) out of the
15 EU member countries, and the euro began to be used in interbank fund transfers.214
East Asian economies had fallen into recession due to the significant eﬀects of thecurrency and financial crisis that began in summer 1997, and adjustments in economic
activity continued until early 1999 (Chart 7).
2. Economic conditions in Japana. Enactment of the Act on Emergency Measures for the Revitalization of the
Financial Functions and the Act on Emergency Measures for Early Strengthening of Financial Functions (October 1998)
From summer 1998, discussions regarding institutional arrangements for revitalizing
the financial system became active. The Government-Ruling Party Conference to Promote the Comprehensive Plan for Financial Revitalization released the “Comprehensive Plan for Financial Revitalization (First Report)” on June 23, 1998, and subsequently the “Comprehensive Plan for Financial Revitalization (Second Report)” on
July 2, 1998, as measures to comprehensively address issues concerning the disposalof NPLs by financial institutions and other parties.215 In this situation, at a regular press
conference on June 16, 1998, Governor Hayami commented, “The Bank expects thatthe market confidence in Japan’s financial system will be restored and prospects forfinancial revitalization will become clear as more information related to the NPLs is................................
211. BOJ (1998i), pp. 47–49 and 228–229.
212. BOJ (1998i), pp. 42–44 and 72–83.
213. The description in this section is based on Chapter I.A.3. of BOJ (1998i, 1999n, 1999u, 2000e, and 2000j),
unless otherwise noted.
214. Greece hoped to join the euro area from January 1999, but its entry was put oﬀ because it failed to meet theconvergence criteria as of 1998. Greece applied for a membership in March 2000, and at the meeting held in
June of that year, the European Council approved that Greece would join the euro area on January 1, 2001
(EPA [2000], Chapter I.C.1.a. [1]).
215. BOJ (1999c), p. 131, BOJ (1998d), pp. 164–170, and BOJ (1998e), pp. 95–100.

117disclosed on the whole and the disposal of such loans is consequently facilitated.”216
He also stated in his speech on July 29, 1998, that keys to the prompt solution of the
NPL problem were (1) full disclosure of NPLs, (2) removal of NPLs and collateral realestate from balance sheets, and (3) eﬀective use of public funds.217 Through such occasions, the Bank expressed that it was urgently necessary for each financial institution
to clearly disclose the details of its NPLs and the path toward the drastic disposal ofthese loans, while strengthening its capital base to a level that was suﬃcient to restore
market confidence at home and abroad.218
On October 12, 1998, the Act on Emergency Measures for the Revitalization of
the Financial Functions (Financial Revitalization Act) was enacted. It lays down thefollowing: rules, such as the basic principles for the disposal of failed financial institutions; as emergency measures, systems regarding the management of financial
institutions by the financial reorganization administrators, transfer of failed financial
institutions’ business operations, and the temporary nationalization of banks; and asystem that allows the DICJ to purchase assets from financial institutions and otherparties to promote the disposal of NPLs.219 The Financial Revitalization Account wasestablished at the DICJ as an account for operations conducted under the Financial Revitalization Act. Through this account, the DICJ could borrow funds from the Bankof Japan, financial institutions, or other parties if it was necessary to conduct operations for financial revitalization. In accordance with the Financial Revitalization Act,
the Act on Emergency Measures for the Stabilization of Financial Functions was repealed, and the Financial Revitalization Account took over the assets and liabilitiesof the abolished Financial Crisis Management Account. In response to these developments, the Bank, at the Policy Board meeting held on October 22, determined theprincipal terms and conditions regarding loans to the DICJ’s Financial Revitalization
Account.220 On October 16, the Act on Emergency Measures for Early Strengtheningof Financial Functions (Early Strengthening Act) was enacted, and an emergency response scheme for strengthening financial institutions’ capital bases was establishedwith the aim of contributing to the reconstruction of Japan’s financial system and revitalization of the economy. The Financial Revitalization Act and the Early Strengthening Act were both enforced on October 23.221
After the enactment of laws and regulations related to the Financial Revitalization
Act and the Early Strengthening Act as well as discussions at the Diet, 13 trillion yen of
public funds—secured based on the Act on Emergency Measures for the Stabilization................................
216. A handout regarding his comments was distributed at 6:27 p.m. after the press conference, which lasted
about 80 minutes starting from 5:00 p.m. The handout is filed in BOJ Archives “Summary of the Governor’s
Press Conferences (1998),” No. 69034, together with the “Summary of the Governor’s Press Conference onJune 16, 1998.” Regarding these comments, FBAJ (1998d, p. 101) wrote, “A statement by the Governor was
released,” while BOJ (1998d, pp. 149–150) noted, “The Governor made the following comments regarding
financial institutions’ voluntary disclosure of the results of self-assessment of assets.” BOJ (1999c, pp. 158–
159) also recorded them as “comments by the Governor” not as “a statement by the Governor.”
217. Hayami (1998a), pp. 3–5.
218. BOJ (1999c), p. 131.
219. DICJ (2007), p. 193, BOJ (1999c), p. 135, and BOJ (1998j), p. 92.
220. BOJ Policy Board (1998c). The principal terms and conditions were revised on July 9, 1999 (BOJ Policy
Board [1999c]).
221. BOJ (1999c), p. 136, BOJ (1998j), p. 92, and DICJ (2007), p. 70.

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

of Financial Functions—was abolished.222 However, 18 trillion yen and 25 trillion yenof government guarantees were provided against borrowings under the Financial Revitalization Account and the Early Strengthening of Financial Functions Account, an
account for operations conducted to achieve an early strengthening of financial functions, respectively. The government also allocated 7 trillion yen in grant bonds under
the Special Operations Account—an account for such operations as the provision offinancial assistance—and 10 trillion yen in government guarantees against borrowings
under such account. As a result, a total of 60 trillion yen of public funds was secured
for the stabilization of Japan’s financial system.223
b. Temporary nationalization of the Long-Term Credit Bank of Japan (October1998) and the Nippon Credit Bank (December 1998)
Based on the new framework established under the said circumstances, the LTCB and
the NCB were decided to be temporarily nationalized on October 23, 1998, and December 13, 1998, respectively, in accordance with the Financial Revitalization Act.224
As described in Section C.2.d. in Chapter V, on June 26, 1998, the LTCB announced a plan to merge with the STB in order to address the decline in its stock
price due mainly to reputational damage caused by rumors. On August 21, it further
announced measures for the disposal of its NPLs and for restructuring based on themerger plan, but failed to regain market confidence, and continued to face a fall in
its stock price and a withdrawal of deposits. Meanwhile, on September 25, the rulingand the opposition parties agreed to put the LTCB under temporary nationalization,and on October 8, President Takahashi of the STB stated at a press conference that the
STB would terminate merger negotiations with the LTCB.225 On October 19, the FSA
notified the LTCB that the inspection it conducted on the LTCB—as part of a series
of inspections on 19 major banks that began in July—revealed that the capital of the
LTCB, estimated based on the results of the inspection, was significantly lower than its
unrealized capital losses mainly on securities as of end-September 1998. On October
23, 1998, in accordance with the Financial Revitalization Act enacted on that day, the
LTCB submitted a report to the Prime Minister indicating that “there is a possible danger that, in light of the LTCB’s business and financial conditions at present, the LTCB
will be forced to suspend repayment of its obligations including deposits.” Based on thereport and the LTCB’s financial conditions, the Prime Minister decided to temporarily
nationalize the LTCB on the same day. In response to the decision, the Bank of Japan
released the Governor’s statement that it strongly expected that restructuring measureswith respect to the LTCB would be promptly implemented while the LTCB was nationalized, and that the Bank was determined to continue to make the utmost eﬀorts, incooperation with the government, to ensure the stability of Japan’s financial system.226................................
222. FBAJ (1998g), p. 53.
223. BOJ (1999c), p. 136, and FBAJ (1998g), pp. 53–54.
224. FSA (1999), pp. 70–73, 301–303 (Source 7-4-4), and 324–325 (Source 7-4-13).
225. FBAJ (1998h), p. 23. As the reasons for calling oﬀ the merger, President Takahashi stated at the press
conference that “the basic framework for merger negotiations is starting to change, in that this is no longer
a private sector case,” and that “the LTCB’s assets and customer bases have been deteriorating over time”(the morning edition of The Nikkei on October 9, 1998, p. 1, and the morning edition of Mainichi Shimbun
on October 9, p. 9).
226. BOJ (1999c), pp. 162–163, and BOJ (1998j), pp. 93–94.

119

On November 16, the FSA notified the NCB that the inspection it conducted on
the NCB—as part of the series of inspections on 19 major banks—showed that the
NCB was insolvent as of end-March 1998, with the amounts of write-oﬀs and loan-loss
provisions exceeding its capital. The FSA ordered the NCB to consider and report backwhat measures it could take to recapitalize itself and restore its financial soundness;
however, the NCB had yet to outline a realistic path to achieve recapitalization evenafter a month had almost passed since the notification of the inspection results. Under
these circumstances, on December 13, 1998, the Prime Minister decided to temporarily
nationalize the NCB in accordance with the Financial Revitalization Act. In responseto the decision, the Bank of Japan expressed that (1) it was truly regrettable that theNCB ended up being temporarily nationalized; (2) it strongly hoped that the temporary
nationalization would be terminated as soon as possible; and (3) it would continue tomake every eﬀort, in cooperation with the government, to ensure the stability of Japan’s
financial system.227
c. Establishment of the Financial Reconstruction Commission (December 1998)
and the Financial Services Agency (July 2000)
Among laws and regulations related to the Financial Revitalization Act legislated on
October 12, 1998, the Act for Establishment of the Financial Reconstruction Commission and the Act on Arrangement of Relevant Acts Incidental to Enforcement of the
Act for Establishment of the Financial Reconstruction Commission were enforced on
December 15, 1998. On the same day, the Financial Reconstruction Commission wasestablished as an external agency of the Prime Minister’s Oﬃce, and it was decided
that the Financial Reconstruction Commission would (1) carry out investigations andplanning and drafting of matters concerning the financial failure resolution system andfinancial crisis management, (2) inspect and supervise the financial industry, (3) supervise institutions such as the DICJ, and (4) have jurisdiction over operations such as theresolution of financial institutions. Moreover, on this day, the Act Establishing the Financial Supervisory Agency was repealed and the FSA was set up under the Financial
Reconstruction Commission.228
Thereafter, as part of the reorganization of government oﬃces stipulated in the Basic Act on Central Government Reform, which was legislated on June 12, 1998, the
FSA and the Financial System Planning Bureau of the MOF were integrated to form
the Financial Services Agency on July 1, 2000. This integration preceded the rest of thereorganization of oﬃces which was to be conducted as the central government reform.
When such reform took place on January 6, 2001, the Financial Reconstruction Commission was abolished and it was decided that the Financial Services Agency become
an external agency of the Cabinet Oﬃce.229
d. Injection of public funds based on the Early Strengthening Act (March 1999)
The Early Strengthening Act, which was enacted and enforced in October 1998, stipulated the following: (1) the DICJ could, with approval from the Financial Reconstruction Commission, entrust the injection of funds into financial institutions to the
Resolution and Collection Bank, conducted through underwriting of stocks and other................................
227. BOJ (1999c), pp. 163–164, and BOJ (1999d), p. 107.
228. FSA (1999), pp. 3–5, and BOJ (1999c), p. 135.
229. Financial Services Agency (2001), p. 1.

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

capital-raising instruments (hereafter, injection of funds conducted in such way is referred to as “injection of public funds”); (2) as for funds necessary to conduct suchoperations as underwriting of stocks, the DICJ could extend loans to the Resolution
and Collection Bank; (3) as for funds needed by the DICJ in extending loans to the
Resolution and Collection Bank, the DICJ could borrow from the Bank of Japan orother financial institutions, or it could issue bonds, and the government could guarantee the debt of the DICJ pertaining to such loans and bonds; and (4) when the DICJ
decided to borrow funds, the Bank of Japan could extend loans to the DICJ, regardlessof Article 43, paragraph 1 of the Bank of Japan Act of 1997.230, 231
Under such legal framework, the Financial Reconstruction Commission carried out
preliminary examinations from January 1999 on 15 major banks that planned to apply for injection of public funds, and a total of 7,459.2 billion yen of public funds
were injected in March 1999 (the Financial Reconstruction Commission approved theapplications for the injection of public funds on March 12; the restructuring plan ofeach bank was released on March 15, and payments of capital increase mainly frompreferred stocks were made on March 30).232
Upon the aforementioned injection of public funds, the Bank of Japan, at the Policy
Board meeting held on March 3, 1999, decided on the basic stance regarding its loans to
the DICJ’s Early Strengthening of Financial Functions Account, stating, “The Bank’s
lending to the DICJ is originally meant to provide temporary bridge funds, and it is a
supplementary provision of funds that is conducted after greatest possible eﬀorts are
made by the DICJ in borrowing funds from the private sector.”233
B. Introduction and Termination of the Zero Interest Rate Policy
1. Introduction of the zero interest rate policy and enhancement of the functioning of money market operations
a. Lowering the target level of the uncollateralized overnight call rate to 0.25 percent (September 1998)
From mid-1998 to early autumn, deterioration in Japan’s economic conditions became
further notable, and prices were on a downtrend (Charts 1 and 2). Against the background of the global plunge in stock prices and the heightened cautiousness towardcredit risks, at end-August, stock prices in Japan temporarily marked the lowest-everlevel since the bursting of the bubble economy (Chart 6). In addition, there were expansions in (1) the yield spreads between Euro-yen deposits and TBs, (2) the Japanpremium, and (3) the yield diﬀerentials between private-sector bonds and JGBs. In thisway, financial markets became increasingly volatile, and uncertainties regarding theoutlook for the economy increased further.234
Based on these circumstances, at the MPM held on September 9, the Bank decided
to further ease the stance of money market operations, changing the guideline for the................................
230. Of the injection of public funds into financial institutions, those conducted in the way described in thissection were indicated as “injection of public funds” in statements released by the Bank in 1999 (including
BOJ [1999a]).
231. BOJ (1999c), p. 153.
232. BOJ (1999c), pp. 131 and 153, FBAJ (1999), p. 63, and BOJ (1999l), p. 90.
233. BOJ (1999c), pp. 153–154.
234. BOJ (1998i), pp. 54–58, and BOJ (1998h), p. 14.

121

operations as follows: “The Bank will encourage the uncollateralized overnight callrate to move on average around 0.25 percent. Regardless of this target level of thecall rate, the Bank will provide more ample funds, if judged necessary, to maintainthe stability of financial markets.”235 As described in Section B.2. in Chapter IV, theBank had already introduced a monetary policy measure in March 1995 by which itannounced the guideline for money market operations in its statement in response to
the increased significance of the guiding of money market rates, due to the completionof deregulation of deposit interest rates and the subsequent changes in the environment surrounding financial markets. However, it was in September 1998 that the Bank
started referring to a specific target level (“on average around 0.25 percent”), rather
than describing the uncollateralized overnight call rate in relation to the oﬃcial discount rate.
With regard to the reason for further easing the stance of money market operations,
the Bank explained in its statement on September 9 that it was “to prevent the economy
from falling into a deflationary spiral and to ensure the slowdown of economic deterioration.” At the press conference held on the same day, Governor Hayami explained
the background for implementing monetary easing as follows: “The dominant factor
is that economic activity has been extremely deteriorating. In addition, market participants are beginning to grow somewhat concerned about financial instability. Thus, theBank judged that this was the appropriate timing to decide to conduct monetary easing
to ensure financial stability.”236
In accordance with the monetary easing decision made on September 9, the Bank
provided funds that largely exceeded required reserves into financial markets on
September 10. As a result, the uncollateralized overnight call rate declined smoothly
to 0.23 percent, close to the new target level of “on average around 0.25 percent” on
September 10, from 0.45 percent as of the previous day. In the morning of September
14, the last day of the reserve maintenance period when upward pressure on the uncollateralized overnight call rate intensified, the Bank made an advance announcementthat it would leave excess reserves in the markets at closing so as to restrain the risein market interest rates. As a result of the Bank’s carefully considered money market
operations, the uncollateralized overnight call rate moved in line with the new target
level from September 10 through end-September.237
b. Introduction of new measures for money market operations to facilitate firms’
financing activities
Around autumn 1998, the lending attitudes of private financial institutions generally
tightened as they faced a severe hardship in fund-raising and the worsening performance of borrowing firms. In addition, capital market participants became more sensitive to credit risks, and it seemed likely that borrowers would encounter more diﬃculties in raising funds, especially toward the end of calendar year 1998 and the fiscal
year, end-March 1999. In light of these situations, the Bank decided at the MPM held
on November 13, 1998, to take the following three measures “to contribute to facilitating firms’ financing activities, both in the lending market and the capital market, while................................
235. BOJ (1998f).
236. BOJ (1998g).
237. BOJ (1998i), p. 61.

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

maintaining the soundness of the Bank’s balance sheet.”238
The first measure was to expand the size of CP repo operations in the day-to-day
money market operations, by extending the remaining maturity of eligible CP from up
to three months to up to one year (decided on November 13, eﬀective from November 16). The second measure was to establish a temporary lending facility to support
firms’ financing activities. Specifically, with the intention of encouraging financial institutions to extend loans to firms, the Bank decided to establish a temporary lending
facility for refinancing 50 percent of the increase in loans provided by each financial
institution in the October-December quarter of 1998, and set the lending period until
April 1999 with an interest rate of 0.5 percent, in principle. The Principal Terms andConditions on a Temporary Lending Facility to Support Firms’ Financing Activities,
which prescribed the fundamental matters on this lending facility, were decided at the
MPM held on November 27, 1998, and the Bank oﬀered the facility from the same day.
The third measure was to establish a new market operation scheme utilizing corporate
debt obligations as eligible collateral. Specifically, in order to facilitate smooth money
market operations and further utilize private firms’ debt obligations in its money market
operations, the Bank decided to introduce an operation scheme in which it purchasedbills issued by financial institutions through a bidding process against pooled collateralsolely composed of corporate bonds and loans on deeds. At the MPM held on February
12, 1999, the Bank decided the Principal Terms and Conditions for Bill Purchasing Operations Utilizing Corporate Debt Obligations as Eligible Collateral, which prescribed
the fundamental matters regarding the said operations, and started to conduct them on
the same day.
c. Introduction of the zero interest rate policy (February 1999)
From around the end of 1998, the pace of deterioration in Japan’s economy gradually
moderated, due to the increase in public investment (Chart 1). Nevertheless, as corporate profits continued to be on a downward trend and the unemployment rate remained
high, corporate and household sentiment remained cautious and prices were also on a
downward trend (Chart 2). With respect to financial developments, long-term interest
rates rose from late November 1998 (Chart 4).239 In particular, the pace of the rise inthese rates accelerated in late December when the government’s JGB issuance plan forfiscal 1999 and the suspension of JGB purchases by the MOF’s Trust Fund Bureau wereannounced (the so-called Trust Fund Bureau shock).240 Also, in the foreign exchange
market, the yen appreciated almost consistently from October 1998 through January
1999 (Chart 3), and stock prices remained weak on the whole (Chart 6). Concerns
gradually grew over the adverse impact of such market developments on the future
prospect of the economy.
In this situation, the Bank decided at the MPM held on February 12, 1999, to ease................................
238. BOJ (1999c), pp. 84–95.
239. BOJ (1999a), pp. 14 and 33, BOJ (1999b), pp. 6 and 22, BOJ (1999i), p. 28, and BOJ (1999n), pp. 34–36,
40, 42, and 71.
240. On December 22, 1998, when the MOF decided to suspend JGB purchases by the Trust Fund Bureau fromJanuary 1999, JGB prices fell sharply, as seen, for example, in the JGB futures prices reaching the pricelimit for the first time since August 10, 1988. In a newspaper article released on the following day, suchmarket developments were reported as the “Trust Fund Bureau shock” (the morning edition of The Nikkei
on December 23, 1998, p. 19).

123

further the stance of money market operations as follows: “The Bank will provide more
ample funds and encourage the uncollateralized overnight call rate to move as low as
possible. To avoid excessive volatility in the short-term financial markets, the Bank
will, by paying due consideration to maintaining market functioning, initially aim toguide the call rate to move around 0.15 percent, and subsequently induce a further
decline in view of the market developments.”241
The public statement, “Change of the Guideline for Money Market Operations,”
approved and released on February 12, stated that the pace of deterioration in Japan’s
economy was moderating, but clear prospects for a rebound of the economy had yet to
emerge. It also noted, “The Bank has judged it appropriate to provide, through monetary policy operations, the utmost support for economic activities in order to avoid possible intensification of deflationary pressure and to ensure that the economic downturn
will come to a halt.”242 Board Member Ueda reflected on the decision in his speechentitled “The Bank of Japan’s Forward Looking Approach” that “this was a forward
looking decision” based on the assessment that “the economy has stopped declining,
but downside risks remain going forward.”243
In line with the change in the guideline for money market operations, the Bank
decided to lower the interest rate applied to the temporary lending facility to support
firms’ financing activities from 0.5 percent to 0.25 percent.244 Yet, the oﬃcial discountrate was kept unchanged. In this regard, at a press conference held on February 12,
Governor Hayami responded to the question “whether the lowering of the oﬃcial discount rate was among policy options in the course of discussion” as follows: “As you
may know, I think that the oﬃcial discount rate has virtually become insignificant since1996.”245
Moreover, at that time, the appropriateness of the Bank’s underwriting of JGBs or
increasing of its outright purchases of JGBs as a countermeasure against a surge inlong-term interest rates was discussed among market participants and economists aswell as on occasions such as the Diet. At the MPM held on February 12, however, thefollowing points were noted: (1) long-term interest rates were a kind of asset price—which reflected various expectations, including the outlook for the economy and pricedevelopments—and were therefore outside the control of a central bank, and (2) there
was a risk that active purchases of long-term government bonds by a central bank,by whatever means—including outright purchases of long-term government bonds or“operation twist” in which a central bank purchased long-term government bonds while
selling short-term government bonds—would lead to a lack of fiscal discipline andgenerate vicious inflation in the future. On this basis, Policy Board members shared theview that the Bank should retain the basic stance that the outright purchases of JGBs
should be conducted in accordance with the long-term trend of increase in banknotes
issued.246 Furthermore, in consideration of the attention directed toward the Bank’s
stance of outright purchases of JGBs, in the public statement, “Change of the Guideline................................
241. BOJ (1999n), pp. 71–72.
242. BOJ (1999e).
243. BOJ (1999o), p. 32.
244. BOJ (1999c), pp. 90–91.
245. BOJ (1999g).
246. BOJ (1999n), pp. 78–81.

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

for Money Market Operations,” the following phrase was included: “With respect tooutright purchases of JGBs, the Bank will continue to maintain the current frequency
and amount.”247
Regarding the monetary easing measures decided on February 12, 1999, the word
“zero interest rate policy” was not used either in the public statement released or at thepress conference held on the same day.248 At the Governor’s regular press conference
held on February 16, Governor Hayami was asked, “Does ‘encouraging the overnight
call rate to move as low as possible’ mean the Bank is aiming at a zero interest rate?”
He answered, “If there is no problem with a zero interest rate, I think that it is a possible
option.”249 On February 17, the media referred to his statement as “the Bank is virtually
guiding a short-term interest rate down to a ‘zero interest rate.”’250 From March, theword “zero interest rate policy” started to be seen in media reports.251 With regard
to the Bank’s releases, the word “zero interest rate policy” began to be used in thefollowing: (1) a comment from “one member” in the minutes of the MPM held on
March 25, 1999 (released on April 27); (2) Governor Hayami’s speech and a statement
concerning the Semiannual Report on Currency and Monetary Control before the Diet
released in June; and (3) the statement, “On the Current Monetary Policy,” released
after the MPM held on September 21, 1999.252, 253
d. Commitment to maintain the zero interest rate policy
In accordance with the new guideline for money market operations determined at the
MPM held on February 12, 1999, the Bank provided more ample funds, initially aiming
to guide the uncollateralized overnight call rate to move around 0.15 percent. Specifically, while the Bank provided funds that significantly exceeded the daily averageamount of required reserves during the day, it took such measures as ceasing its billselling operation for absorbing funds conducted at the end of the day (usually at 5:00
p.m.) to prevent an excessive decline in the uncollateralized overnight call rate. As aresult, the uncollateralized overnight call rate plummeted from 0.28 percent on February 12 to 0.12 percent on February 15, declining further to 0.10 percent on February
16. Thereafter, until the following MPM held on February 25, the uncollateralized
overnight call rate remained at around 0.10 percent. At the MPM held on February 25,
however, the Policy Board deemed it appropriate to confirm whether the market could
accommodate any further lowering of the uncollateralized overnight call rate, giving
due consideration to avoiding disruptions to the market, and the Bank further strengthened its stance on the provision of funds. Consequently, the uncollateralized overnight................................
247. BOJ (1999f) and BOJ (1999n), pp. 346–350.
248. At the press conference held on the same day, Governor Hayami was asked, “Is there a possibility of the
Bank using a zero interest rate or a negative rate?” He answered, “When the interest rate is guided to around0.15 percent and if it can still be lowered, the Bank may lower it further. I cannot say whether it can go down
to zero at this point, as a zero interest rate is beyond our imagination” (BOJ [1999g]).
249. BOJ (1999h).
250. “Bank of Japan Governor states unprecedented money market operations of guiding a short-term interest
rate down to virtually a ‘zero interest rate,”’ the morning edition of The Yomiuri Shimbun on February 17,
1999, p. 1.
251. For example, see “Further decline in interest rates, the ripple eﬀect of the zero interest rate,” the morning
edition of The Nikkei on March 6, 1999, p. 1.
252. Hayami (1999a), pp. 1–10, and Hayami (1999b), pp. 11–12.
253. BOJ (1999s).

125

call rate declined further from the beginning of March and remained generally in therange of 0.03 to 0.05 percent, which was in line with the guideline that the Bank would
encourage the rate to move “as low as possible” considering, for example, the brokers’
margin included in the rate.254
Under such circumstances, the Policy Board deliberated on the possibility of setting some kind of quantitative indicators or interest rates on term instruments as a target
for money market operations, in order to ensure intelligibility of the Bank’s policy conduct. At the MPMs held in February and March, however, the Policy Board members
generally shared the view that both quantitative indicators and interest rates on term
instruments had numerous issues, including the setting of a target level and technicalmatters regarding their controllability.255
Given these developments, at the end of the MPM held on March 25, 1999, Board
Member Ueda made the following comments: “I think that the Bank can announce
the degree of its commitment to the current policy of maintaining the overnight rate
at almost zero a little more strongly to the market,” and “a zero interest rate is exceptional and the Bank should not continue with the zero interest rate policy without
any conditions; however, it is worth considering whether it is possible to surprise themarket in some way by delivering a message that the Bank will continue with thispolicy until the economy achieves a full-fledged recovery.”256 Moreover, at the MPM
held on April 9, Policy Board members sought for means to ensure intelligibility of theBank’s policy conduct while at the same time maximizing the eﬀects of the zero interest rate policy.257 Specifically, Deputy Governor Yamaguchi said, “It may be betterto express a little more clearly as to how long the Bank will continue with the policy that will keep the overnight call rate close to zero percent” and “Monetary policy
over the past several years was aimed at realizing sustainable economic growth and atachieving price stability—that is, a non-inflationary and non-deflationary situation. I
suggest that the Bank reiterate its determination to persistently endure diﬃculties untilthat situation is realized, at such occasions as Governor’s press conferences.” Board
Member Ueda stated, “I agree with the idea to demonstrate to the market and the others in some way that the Bank has a strong commitment to continue with the policy of
keeping the overnight call rate close to zero percent.” Governor Hayami noted, “TheBank has no other way but to say that it is conducting the current monetary easing
with a view to achieving a situation in which deflationary concern is dispelled.” Board
Member Gotoh stated, “In order to relieve concern about the economic outlook, it may
be appropriate to announce on some occasions that the Bank, as the monetary policy
authority, will maintain the current decisive easing stance until the signs of autonomous................................
254. BOJ (1999n), pp. 82–92.
255. BOJ (1999u), p. 59.
256. BOJ (2009a), p. 78. Board Member Ueda later commented that it was at this MPM that the idea of policy
duration eﬀect was first proposed (Ueda [2005], p. 66). In addition, regarding the relationship between
the idea of policy duration eﬀect and discussions among academics at that time, Ueda (2005) introduced
Woodford (1999) as well as Eggertsson and Woodford (2003) as discussions among academics back then,stating that the idea of policy duration eﬀect adopted by the Bank was “essentially the same as what was
discussed among academics around that time” (Ueda [2005] pp. 75–86). See Appendix 1 for details on how
policy duration eﬀect was later placed in discussions among academics as one of the monetary policy tools
under the zero lower bound.
257. BOJ (1999u), pp. 59–60, and BOJ (2009b), pp. 62–81.

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

recovery emerge or the risk of deflationary spiral diminishes, and it will promptly provide necessary, suﬃcient reserves.” There was no explicit opposition to the view that it
was appropriate to announce to the public that the Bank would continue with the zerointerest rate policy until deflationary concern was dispelled.
Based on these discussions at the MPMs, Governor Hayami, at the press conference
on April 13, 1999, explained, “Until we reach a situation in which deflationary concern
is dispelled, we will continue with the current policy of providing necessary liquidity
to guide the uncollateralized overnight call rate down to virtually zero percent, while
paying due consideration to maintaining the proper functioning of the market. This
was the view on which many Policy Board members agreed at the MPM held last Friday.”258, 259 At the following press conference on May 20, Governor Hayami responded
to the question about “how the Bank will determine whether deflationary concern isdispelled,” stating, “It is not something we can determine by simply looking at one
indicator or something we can provide with certain a priori conditions.” He then explained, “The thinking behind the zero interest rate policy is as follows: (1) the Bankhas been taking every possible measure in terms of monetary policy; (2) the Bank will
maintain the current policy until deflationary concern is dispelled; (3) the Bank has nointention of employing measures that will lead to the loss of fiscal discipline and, asa result, burden future generations; and (4) the Bank acknowledges the importance ofprogress in structural reforms.”260
In addition, at the press conference on August 17, Governor Hayami was questioned about the assessment of the zero interest rate policy that was introduced six................................
258. Regarding the discussion at the MPM held on April 9, 1999, the minutes that were approved by the Policy
Board at the MPM held on May 18 and released on May 21 summarized as follows: “One member concluded these discussions by stressing that monetary policy over the past several years had been aimed atachieving price stability—that is, non-inflationary and non-deflationary situation—and at realizing sustainable economic growth under price stability. To underline this stance, the member suggested that the Bank
explicitly convey to the market its intention to maintain the current zero interest rate policy until deflationary
concern was dispelled, not in the policy directive, but at such occasions as Governor’s press conferences.
Many members supported this suggestion” (BOJ [1999j]). The transcript for this meeting was released on
July 31, 2009 (BOJ [2009b]). Umeda (2011, pp. 64–68) introduced the discussion at that time in detail byciting the transcript.
259. BOJ (1999k). Regarding this commitment stated at the Governor’s press conference, Deputy Governor
Yamaguchi commented at the international conference (titled “Role of Monetary Policy under Low Inflation:
Deflationary Shocks and Policy Responses”) hosted by the IMES in July 2000, as follows: “This statement
was received by the financial markets as a signal that the Bank would continue with the zero rate policy
for a considerable period of time. Reflecting such market expectations, interest rates on term instruments
declined rapidly, and the yield curve became extremely flat. At this point, we confirmed that the zero interest
rate with future commitment had a powerful automatic easing eﬀect when economic activity tended tosoften” (Yamaguchi [2000a], p. 203). Moreover, Fujiki, Okina, and Shiratsuka (2000), released in October
2000, presented the following analysis: important components of the zero interest rate policy were (1)guiding the call rate to virtually zero percent through the provision of ample funds and (2) a commitment
to the zero interest rate policy “until deflationary concern is dispelled,” in other words, two aspects were
important, namely, the “quantity” and the “policy duration.” In addition, Fujiki and Shiratsuka (2001) calleda mechanism in which a commitment to future policy conduct aﬀected market expectations the “policy
duration eﬀect.” This policy duration eﬀect was based on the same idea as the forward guidance adopted in
the United States after the collapse of Lehman Brothers (Nakaso [2017]). At the 17th World Congress hosted
by the International Economic Association in June 2014, regarding the Bank’s commitment announced in
April 1999 to continue with the zero interest rate policy until deflationary concern was dispelled, Governor
Haruhiko Kuroda explained that “the Bank introduced qualitative forward guidance” (Kuroda [2014]).
260. BOJ (1999m).

127months ago. He explained, “The zero interest rate policy has eased concern over theavailability of overnight funds and generally brought about positive eﬀects on thewhole, as seen in, for example, stable long-term interest rates and firm stock prices,”and “The policy has been contributing significantly to preventing further economic
deterioration.” He also stated that there were concerns about side eﬀects of the zerointerest rate policy, including an issue of income distribution where a decrease in theinterest income of households resulted in the transfer of funds to firms, delay in structural adjustment, emergence of moral hazard, and market malfunctioning through adecline in the amount outstanding in the call money market, but it was not appropriate
to discuss them independently from each other and the current situation was not so
critical.261
e. Enhancement of money market operations
At the MPM held on September 21, 1999, Chairman Hayami instructed the Bank’s
staﬀ to deliberate on the enhancement of money market operation tools to assure further permeation of the eﬀects of the zero interest rate policy.262 Market speculation
emerged that some kind of monetary easing measures might be taken to address theappreciation of the yen observed since summer 1999 (Chart 3).263 In this situation,
the Chairman’s instruction was based on the fact that Policy Board members generally shared the following recognition at this MPM: it was desirable to further enhancemoney market operations in terms of quality, considering the risk that the yen’s appreciation and a rise in long-term interest rates would continue in a way that did not reflect
the actual state of the economy.264
The following MPM on October 13 was held amid that situation. At that time, inthe financial markets, interest rates on 3-month contracts that would mature beyond theyear-end 1999 started to rise in view of the Year 2000 problem. It had become more
appropriate to clarify the Bank’s stance on the provision of funds that took account ofdevelopments such as those regarding the year-end fund demand. Under such policy
environment, the following three points were decided at the MPM held on October
13 so as to assure further permeation of the eﬀects of monetary easing. First, while
deciding to continue with the zero interest rate policy, the Bank revised the expression of the guideline for money market operations, which implied the zero interest rate
policy, as follows: “The Bank will flexibly provide ample funds and encourage theuncollateralized overnight call rate to move as low as possible.” Second, in order tofirmly continue with the zero interest rate policy even in a market environment where
the Year 2000 problem started to attract attention, the Bank decided to respond flexibly,
such as by providing ample funds over the year-end, paying due consideration to funddemand related to the Year 2000 problem in conducting money market operations.265................................
261. BOJ (1999r).
262. BOJ (2000e), p. 58.
263. The yen moved around 120 yen against the U.S. dollar until mid-July 1999. After following an uptrend fromthe second half of July, it appreciated temporarily to the 103–104 yen level in mid-September (BOJ [1999u],pp. 38–40).
264. BOJ (2000e), pp. 57–58.
265. From the end of 1999 to the beginning of 2000, the financial markets were generally stable, reflecting ample
fund provision by the Bank in accordance with this guideline. There were no significant disruptions resulting
from the millennium date change in financial transactions (BOJ [2000b], p. 10).

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And third, the Bank decided, in maintaining its zero interest rate policy, to flexibly
use a wider range of the operations so as to assure further permeation of the eﬀects
of monetary easing, paying due consideration to developments in financial markets,
including the foreign exchange market.266 Specifically, with respect to operations using financing bills (FBs) and TBs, in addition to the existing sales and purchases with
repurchase/resale agreements (conditional trading), the Bank decided to introduce outright sales and purchases (unconditional trading) at the same MPM.267 This decision
was released together with other measures that could be carried out without a vote by
the Policy Board, for example, adding 2-year government securities for repo operations, making full use of operations utilizing private corporate debt obligations such as
bill purchasing/selling operations and CP operations.268
2. Termination of the zero interest rate policya. Basis for judging whether “deflationary concern is dispelled”
Japan’s economy appeared to have stopped deteriorating around spring 1999, due
mainly to the fact that (1) the government’s stimulus measures implemented in 1998
gradually exerted positive eﬀects and (2) the anxiety about the stability of the financial
system eased against the background of the injection of public funds into financial institutions.269 Thereafter, the economy stopped deteriorating and started to improve, andthen entered a moderate recovery phase after the turn of fiscal 2000. This was mainly
because production activity turned upward, reflecting the rise in exports from summer
1999, and business fixed investment bottomed out and started to increase moderately
after the turn of 2000. As for prices, the CPI for all items less fresh food leveled oﬀ insummer 1999, and domestic wholesale prices exceeded the previous year’s level after
the turn of 2000. However, from autumn 1999, the CPI had been below the previous
year’s level (Chart 2).
In this situation, the Policy Board discussed the basis for judging whether “deflationary concern is dispelled,” which was announced in April 1999 as the condition
for continuing with the zero interest rate policy. At first, the Policy Board concluded
that it would be diﬃcult to judge simply from a specific indicator or numerical value
whether “deflationary concern is dispelled,” and it was appropriate to judge comprehensively based on the economic outlook as well as various factors and risks related
to price developments.270 Although the Bank’s communication to the public was basedon this recognition, its communication was criticized as being “ambiguous.”271, 272 Since................................
266. BOJ (2000e), pp. 58–59.
267. Until March 1999, the Bank conducted purchases under repurchase agreements only for TBs and sales under
repurchase agreements only for FBs. In light of public tender for FB issuance to be introduced in April 1999,
TBs and FBs were expected to form one short-term JGS market. It was then decided to consolidate these
operations as short-term JGS operations at the MPM held on March 25. BOJ (1999n), p. 131, and BOJ(2000a), p. 105.
268. BOJ (2000e), pp. 58–59.
269. BOJ (1999n), pp. 1–2, BOJ (1999u), p. 1, BOJ (2000e), p. i, and BOJ (2000j), pp. i and 120–122.
270. BOJ (1999u), p. iv.
271. For example, a regular press conference by Governor Hayami on May 20, 1999 (BOJ [1999m]), a press
conference by Board Member Ueda on July 1, 1999 (BOJ [1999p]), and a press conference by Deputy
Governor Fujiwara on July 7, 1999 (BOJ [1999q]).
272. For example, at a press conference by the Chairman of the Policy Board on September 21, 1999, a reportermade a comment that “the Governor often says that ‘the Bank will continue with the current policy until
deflationary concern is dispelled,’ but I think that ‘until deflationary concern is dispelled’ may be highly

129then, discussion about the basis for judging whether “deflationary concern is dispelled”
deepened at MPMs held from the second half of 1999 through 2000, at which the majority of Policy Board members shared the following recognition: (1) in order to judge
whether a risk of falling into deflation became suﬃciently small, factors underlying
prices, such as the slack in supply and demand balance and downward pressure on
wages, should be examined thoroughly; (2) “deflation” should be basically defined asa price decline stemming from weak demand; and (3) therefore, the meaning of “deflationary concern is dispelled” was very similar to “a self-sustained recovery in private
demand is in prospect.”273
Based on the above discussion, Governor Hayami stated in his speech on March
21, 2000, “What is of central concern in our conduct of monetary policy is to avoid adeflationary spiral, which is a vicious cycle of price declines and recession.” He alsosaid, “If we become confident that economic recovery is sustained and that the negative
output gap continues to narrow, then we can say that deflationary concern has been almost dispelled.”274 In addition, Deputy Governor Fujiwara stated in his speech on June22, 2000, “The zero interest rate policy is an unprecedented policy to address a criticalsituation where the economy was on the verge of falling into a deflationary spiral at the
beginning of 1999.” He also said, “What is of central concern in our conduct of monetary policy is to avoid downward pressure on prices that triggers a deflationary spiral,
which is a vicious cycle of recession and price declines, and, based on this thinking, theBank defines abatement of deflationary concern as a state in which downward pressure
on prices stemming from weak demand becomes suﬃciently small.”275
b. Decision to maintain the zero interest rate policy at the MPM on July 17, 2000
At the MPM held on July 17, 2000, Policy Board members expressed the recognition that the momentum for recovery in the corporate sector had further strengthened,
and that an improvement in the employment and income situation was starting to appear. On this basis, they revised their economic assessment upward to the following:“Japan’s economy is recovering gradually, with corporate profits and business fixed
investment continuing to increase.” As for the outlook, many members supported theview that “the economy is likely to recover gradually, led mainly by business fixed
investment, unless there are major adverse external shocks.” With regard to prices,
members judged that the downward pressure on prices stemming from weak demand
was declining significantly compared to the first half of 1999, when the zero interest
rate policy was introduced. Given this situation, many members generally agreed thatthe economy was coming to a stage where “deflationary concern is dispelled.”276
Many members, however, took the standpoint that careful consideration should begiven in deciding to terminate the zero interest rate policy at this MPM for the following
two reasons.
The first reason was the filing of reconstruction proceedings under the Civil Re..........................................................................................................................................
ambiguous” (BOJ [1999t]). In addition, in a speech on April 20, 2000, Board Member Miki stated, “Firms
and households have criticized the phrase ‘deflationary concern is dispelled’ as being ambiguous in termsof accountability” (BOJ [2000d], p. 2).
273. BOJ (2000e), pp. iv-v, and BOJ (2000j), p. 60.
274. Hayami (2000a), pp. 9–10.
275. BOJ (2000g), pp. 3–4.
276. BOJ (2000j), p. 68.

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

habilitation Act by major department store operator Sogo Co. on July 12, just before
this MPM.277 At the MPM, many members took the position that the Bank should takesome more time to assess the eﬀect of the failure of Sogo on market sentiment, and it
was appropriate to wait for clearer signs that financial markets had overcome the shockand had become stable.278 , 279
Another reason concerned the assessment of economic activity. At the same MPM,
many members commented that it was desirable to ensure the judgment on the firmness of economic conditions, given that the termination of the zero interest rate policy
would be the first rise in the policy rate in about 10 years. For example, with regard
to the employment and income situation in which the improvement was starting to appear, some members expressed the view that it was not too late to terminate the zerointerest rate policy after examining the overall level of wages, including summer bonus
payments.
Based on the above discussion, it was considered appropriate to decide to continue
with the zero interest rate policy. At the same MPM, it was also judged appropriate torelease a statement on the Bank’s thinking behind the decision to continue with the zerointerest rate policy, considering that this meeting was attracting much attention frommarket participants. Based on this, the statement, “On the Current Monetary Policy,”
was decided and released immediately after the MPM.280
c. Termination of the zero interest rate policy (August 2000)
At the MPM held on August 11, 2000, the majority of Policy Board members agreed
that the employment and income situation, which was considered at the previous meeting to require further examination before a final decision to lift the zero interest rate
policy was reached, had stopped deteriorating and was starting to improve.281 Many
members shared the view that the economy had reached the stage where “deflationary concern is dispelled” on the basis of the following assessment: “Japan’s economy
is showing clearer signs of recovery, and this gradual upturn, led mainly by businessfixed investment, is likely to continue” and “the downward pressure on prices stemmingfrom weak demand has markedly receded.” Also, many members expressed the viewthat Sogo’s failure, which was another reason for deciding to maintain the zero interest
rate policy at the previous MPM, had not triggered any significant spread of concern
over the financial system, nor induced any notable deterioration in market sentiment.
Based on the above discussion, the Chairman formulated the guideline for money market operations in the intermeeting period ahead as follows: “The Bank will encourage
the uncollateralized overnight call rate to move on average around 0.25 percent.”
In response to the Chairman’s proposal to terminate the zero interest rate policy,
the MOF and EPA representatives stated, “It is premature to terminate the zero interest
rate policy, given the economic situation and recent developments in financial markets.”
Subsequently, the MOF and EPA representatives filed a request, pursuant to Article 19,................................
277. Japanese Bankers Association (2000), pp. 61–67.
278. In this regard, Deputy Governor Yamaguchi explained in his speech on August 4, 2000, “When large firms
like Sogo fail, the market sometimes becomes extremely nervous” and “At the moment, we need to closely
monitor whether there is the risk that the market may suddenly turn nervous” (Yamaguchi [2000b]).
279. BOJ (2000j), pp. 58–59.
280. BOJ (2000j), p. 69, and BOJ (2000f).
281. BOJ (2000h), and BOJ (2011).

131

Paragraph 2 of the Bank of Japan Act, that the Policy Board postpone until the next
MPM a vote on the Chairman’s proposal regarding the termination of the zero interest
rate policy. After the discussions, however, the request was voted down by a majority
vote.282
A vote was then taken on the guideline for money market operations, and the termination of the zero interest rate policy was decided by a majority vote.283 After the votes,
the government representatives stated, “It is deeply regretful that our request to postpone the vote on the Chairman’s proposal has been voted down.” They continued that“the government would like the Bank to continue implementing monetary policy in an
appropriate and flexible manner—for example, by providing ample funds in the markets, giving due consideration to the economic situation and developments in financial
markets under the new guideline.”
A statement on the change of the guideline for money market operations for the intermeeting period ahead was then discussed. Board Member Miki expressed the view
that, in drawing up the statement, the Bank should take into account the fact that its
monetary policy should be consistent with the government’s basic economic policy.
After some discussion on this point, it was decided to include a phrase that the Bank
would conduct monetary policy appropriately and flexibly in the final sentence of thestatement, which was as follows: “The Bank will conduct monetary policy in an appropriate and flexible manner to support the economic recovery consistent with pricestability.”284

VII. Conclusion
This monographic paper summarizes views held by the Bank in the 1990s regarding
economic and financial conditions as well as the conduct of monetary policy, based onmaterials compiled during the period mainly in its Archives.
The following points were confirmed in writing this paper. First, throughout the
1990s, the Bank’s thinking behind the conduct of monetary policy had shifted towardemphasizing the transparency of its policy management. The basic background to thisseemed to be the growing importance of dialogue with market participants, reflecting
a change in the target for money market operations from oﬃcial discount rate changes
to the guiding of money market rates. In addition, the fact that the new Bank of JapanAct came into eﬀect in April 1998 under the two principles of independence and transparency accelerated the trend of attaching importance to transparency. Second, on theback of the emphasis on transparency, the Bank enhanced its communication by in................................
282. Board Member Nakahara voted for the government’s request, and the others dissented.
283. Board Members Nakahara and Ueda dissented from the Chairman’s proposal. Board Member Ueda’s reason
for the dissent was that it would be desirable to examine developments in the stock market and trends ininflation for a little while longer, although his view of the economic situation did not diﬀer significantly
from that of other members. Okina (2011, p. 196) stated that the reason why Board Member Ueda, who
voted against the termination of the zero interest rate policy, dissented from the government’s request was
because “he may have considered it a significant risk to provide a precedent of voting for the request to
postpone a vote on the Chairman’s proposal.”
284. The last sentence in the draft statement prepared by the Bank’s staﬀ was as follows: “The Bank will maintainthe current accommodative stance to support the economic recovery consistent with price stability from thefinancial side.”

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

creasing its releases in the second half of the 1990s, particularly after the enforcementof the Bank of Japan Act of 1997.285 Thus, the materials, especially those referred toin the latter half of this paper, consist mainly of the Bank’s releases. And third, in the
1990s, the Bank faced a critical situation in which it needed to conduct monetary policy
while paying due attention to the functioning of the financial system. Therefore, unlike
Itoh, Koike, and Shizume (2015), which can be considered as a prequel, this paper
includes numerous references to the issues regarding the financial system, mainly thedisposal of NPLs.286
Various assessments can be made regarding the Bank’s conduct of monetary policyin the 1990s, but it seems important to accurately look back upon the views held during
the period as a precondition for those assessments. Instead of conducting assessments,
this paper focuses on examining facts and views held during the 1990s and presenting
a summary that contains basic information from the period, which saw the bursting of
the bubble economy and the emergence of deflation. It is always meaningful to learn
from history by summarizing facts and views held at the time of events, as it is often
the case that they fade away over time.

APPENDIX 1: MONETARY POLICY RULES
I. Role of Monetary Policy Rules
Monetary policy rules are approaches of systematically conducting monetary policy
in response to macroeconomic developments, with a view to ensuring the stability ofprices and economic activity. When adopting such approaches, it is desirable to use
observable, easy-to-understand indicators in as simple and clear a manner as possible.
There have been various studies and discussions on which indicators should be selected
and how they should be used.
From the second half of the 1970s through the first half of the 1980s, an approachcalled “money supply targeting,” also known as “monetary targeting,” became popular, and it was adopted by central banks in many advanced countries, including theDeutsche Bundesbank. The BOJ did not adopt this policy approach, but it started torelease projected figures for the money supply (MS) from the July–September quarterof 1978. Many central banks abandoned this approach by the early 1990s, as it ceased
to function eﬀectively when the stable relationship of the MS with the inflation rateand economic activity collapsed, due mainly to financial and technological innovation.
In the 1990s, inflation targeting and the Taylor rule were introduced.287 Inflation................................
285. On the other hand, the availability of the BOJ Archives was limited as it had been only 27 years since thebeginning of the 1990s and 18 years since the end of the 1990s, when this paper was originally drafted inJapanese.
286. This paper refers to developments in the financial system on the basis of the awareness of the ways inwhich the occurrence of the NPL problem and the subsequent failures of financial institutions aﬀected theBank’s monetary policy. Therefore, this paper does not refer to financial developments such as the so-called“Japanese Financial Big Bang” (the Prime Minister asked the Minister of Finance and others to consider thereform of Japan’s financial system in November 1996, and the Financial System Reform Act was enacted inJune 1998), mainly due to restrictions on the number of pages.
287. The Taylor rule was first proposed in Taylor (1993), pp. 195–214. There were other approaches, such as

133

targeting is intended to enable central banks to stabilize inflation expectations and more
flexibly respond to short-term exogenous shocks by strongly committing themselves toa slightly positive inflation target.288 The Taylor rule determines the policy interest
rate based on the equilibrium interest rate determined by the potential growth rate andthe target inflation rate, by observing the deviation of the actual inflation rate from thetarget rate, and also the GDP gap. Several variations of these two approaches have beendeveloped, but they have been categorized into two: inflation targeting as a forwardlooking rule and the Taylor rule as a backward-looking rule whereby the monetary
policy is generally conducted based on a forecast value for the former and an actual
value for the latter.289
Inflation targeting was adopted by central banks in many advanced countries. The
central banks that adopted this approach not only disclosed and committed themselvesto their inflation targets but also implemented various initiatives to enhance policy
transparency, such as releasing inflation reports, disclosing the minutes of monetary
policy meetings, and holding Policy Board Chairman’s press conferences. As a result,inflation targeting proved eﬀective in enabling the central banks to curb the ongoing inflation or to maintain the existing low inflation rates for an extended period of time.290
At that time, it was understood that, although none of the U.S. Federal Reserve Board(FRB), the European Central Bank (ECB), or the BOJ adopted inflation targeting in its
original form, they were using similar policy approaches.291
II. Money Supply Controversy
As the conduct of monetary policy changed as described above, an academic debate
over monetary policy known as the “money supply controversy” arose in Japan from..........................................................................................................................................
nominal GDP targeting, which determines the policy interest rate based on a deviation of the nominal GDP
growth rate from the target rate, and the McCallum rule, which uses the monetary base as a policy instrument.
In November 1995, the IMES held an international conference titled “Toward More Eﬀective Monetary
Policy,” at which discussions were held on the theoretical basis of the shift to a framework emphasizing
policy consistency and transparency, such as inflation targeting, and other issues, including the independence
and accountability of central banks. At the conference, Professor John B. Taylor, Honorary Adviser tothe IMES, and Tommaso Padoa-Schioppa, Deputy Director General of the Bank of Italy, each made akeynote address. In-depth discussions were held on monetary policy rules as well as the independence andaccountability of central banks. For further details of this conference, see BOJ IMES (1996).
288. See Bernanke and Mishkin (1997) and Bernanke et al. (1999). These papers pointed out that it was important to understand inflation targeting as “constrained discretion,” rather than a rigid policy rule. As for thetheoretical basis of inflation targeting, see Walsh (1995), Svensson (1997), and Fujiki and Shiratsuka (1997).
289. “Issues concerning Monetary Policy Rules, December 11, 2000,” BOJ Archives “Study Sessions, etc., with
the Policy Board (2000),” No. 78702.
290. The Bank judged that it required careful consideration toward immediate introduction of inflation targetingin Japan because “it was not necessarily clear whether the significantly low level of the inflation rate in
the 1990s compared with that in the 1980s was achieved solely by inflation targeting,” although the Bank
acknowledged the significance of inflation targeting, given the growing perception that the role and responsibility of central banks should be further clarified as high inflation rates were observed in other countries.
BOJ Policy Planning Oﬃce (2000).
291. See Bernanke et al. (1999). Regarding the Bank’s stance of “continuing with the zero interest rate policy
until deflationary concern is dispelled” adopted at that time, Board Member Ueda made a reference at aspeech titled “Discussion regarding Japan’s Economy and Monetary Policy Framework” on February 25,
2000. In this speech, he explained that the Bank’s stance was “not inflation targeting itself but somethingsimilar” (BOJ [2000c], p. 5). Concerning the approach of the Bank’s Policy Board to inflation targeting atthat time, see BOJ (2000i).

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

1992 to 1993. In particular, Kikuo Iwata, who was a professor of economics at Sophia
University, and Kunio Okina, who was the Chief Manager of the Strategic Research
Division of the Bank’s Research and Statistics Department, continued to engage in thecontroversy for about a year. The key points of the controversy were as follows: (1)Whether a central bank could control the monetary base (MB; called the base money atthat time) by adjusting current account balances at the Bank (reserve balances) throughmoney market operations; (2) whether the relationship between the MB and the MS(currently known as the money stock) was stable and whether the causal relationshipbetween the two was clear; and (3) whether the relationship between the MS and economic activity was stable and robust.
Iwata advocated the money multiplier approach, arguing that it was possible to ultimately aﬀect economic activity by linking the control of the MB with that of the MS.
Contrary to this, Okina argued that, under the framework of money market operations
at that time, the Bank supplied the MB so as to accommodate the market’s demand forfunds and was unable to supply funds in excess of such demand. He also stated that
there was no such thing as the money multiplier—a causal relationship between the
MB and the MS—and that the empirical data showed that the relationship between the
MS and economic activity was also weakening.
With respect to this controversy, Kazuo Ueda, who was an associate professor at
The University of Tokyo at that time, published a paper on how to correctly assess
developments in the MS, and reviewed the arguments.292, 293 The key points of Ueda’s
review were as follows: (1) Okina’s interpretation of developments in the MS and the
MB at that time was correct, but the Bank should take notice of Iwata’s argument that
central banks should pay more careful attention to and assume more responsibility for
the MS; and (2) a central bank’s control of the MB should be classified into three
categories according to the time horizon of the control—that is, daily control exercised
within the reserve maintenance period, short-term control exercised over periods longer
than the 1-month reserve maintenance period, and medium- to long-term control exercised over a cycle in which the impact of monetary policy caused changes in economic
activity and prices, leading to changes in the MS, thereby aﬀecting the required reserve
level. Based on such categories of the time horizon, although it was possible to exert
some influence over the MB with respect to daily control and medium- to long-term
control, it was quite diﬃcult to do so with respect to short-term control.294 As a result,Ueda concluded that it was not impossible but diﬃcult and not very desirable to control
the MB.295................................
292. Their opinions are summarized in Iwata (1993) and Okina (1993).
293. Ueda (1992). Although the original title of this paper was “Assessment of the ‘Iwata vs. Okina
Controversy’—How to ‘Correctly’ Assess Developments in Money Supply,” the phrase “Assessment of the‘Iwata vs. Okina Controversy”’ was deleted when the paper was carried again in Iwata (2000) pp. 291–299
as a reference material.
294. The reason why it was “quite diﬃcult” was as follows: “The amount of the base money that can be reduced
through a practical rate of increase in interest rates is highly limited” because “banknotes in circulation andcurrent account balances at the Bank (reserve balances) scarcely react to changes in interest rates in a shortperiod of about a few months,” although “it is necessary, for example, that interest rates rise and the demandfor base money suﬃciently declines in order to reduce the base money,” which is “the sum of banknotes incirculation and current account balances at the Bank (reserve balances).” Ueda (1992), p. 293.
295. Ueda (1992). Also, see Ueda (1993).

135

III. Toward Unconventional Monetary Policy
The money supply controversy was reignited in a new form in February 1999, when thezero interest rate policy was introduced, and in August 2000, when the policy was terminated.296 There were heated discussions involving not only Iwata and Okina, but also
Ryutaro Komiya, Koichi Hamada, Mitsuhiro Fukao, and Nobuyuki Nakahara, among
others. It started with discussion in relation to foreign exchange interventions conducted to contain the sharp appreciation of the yen in summer 1999 after the introduction of the zero interest rate, whether the MB supplied into the market should be left toremain in the market (unsterilized intervention) or should be absorbed (sterilized intervention). Then, in terms of an increase in the MS, discussions took place on whether
outright purchases of JGBs should be conducted as an additional monetary easing measure to supplement the zero interest rate policy. Furthermore, views were exchanged
on how to interpret “deflation” and “deflationary concern is dispelled,” when deciding
the termination of the zero interest rate policy.297
These points were raised given the recognition of the so-called zero lower bound,which refers to significant limits imposed on the possibilities of monetary policy wheninterest rates are near zero. As a result, the following new approaches or thinking
emerged with respect to monetary policy to be conducted at interest rates near zero:(1) the policy duration eﬀect, which controls expectations for future monetary policyor short-term interest rates; (2) eﬀorts to reduce the risk premia of assets eligible for acentral bank’s money market operations by purchasing a large amount of specific assets, such as medium- to long-term government bonds and corporate bonds; and (3) the
provision of funds in excess of demand by expanding the size of a central bank’s balance sheet.298 These approaches became the basis for various initiatives, which would
later come to be collectively known as “unconventional monetary policy.”

APPENDIX 2: BANK OF JAPAN’S SPECIAL LOANS (NICHIGIN TOKUYU)Special loans of the Bank of Japan (Nichigin Tokuyu) are temporary loans (liquidity
provision) extended by the Bank acting as the lender of last resort (LLR) when financial
institutions face a temporary shortage of funds and there is no other lender available,
in order to secure and maintain the stability of Japan’s financial system. The first time
the Bank provided this type of the special loans after World War II was to Yamaichi
Securities during the securities recession in 1965.299
Pursuant to Article 33 of the Bank of Japan Act of 1997, the Bank normally provides financial institutions with loans against collateral in the form of negotiable instruments, government securities, and other securities in cases where it is acting as
the LLR. However, when there is a request from the government—that is, the Prime
Minister (practically, the Commissioner of the Financial Services Agency delegatedby the Prime Minister) and the Minister of Finance—the Bank, in accordance with
Article 38 of the Act of 1997, may conduct “business necessary to maintain stability................................
296. Iwata (2000), and Japan Center for Economic Research and Komiya (2002).
297. Okina (1999).
298. See Bernanke and Reinhart (2004), and Bernanke, Reinhart, and Sack (2004), pp. 96–100.
299. BOJ Committee for Compiling the One Hundred Year History of the BOJ (1986), pp. 151–165.

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materialsof the financial system, such as to provide loans under special conditions,” including
uncollateralized loans, if deemed necessary by the Policy Board to maintain financial
stability. The provision of loans to financial institutions under such special conditions
is called Nichigin Tokuyu.300, 301
Since the 1990s, the Bank had often supplied funds through Nichigin Tokuyu in response to the emergence of severe financial system problems. According to the Bank’s
Nenji Houkoku Sho published until 1998 (Annual Report of the Policy Board of the
Bank of Japan, available only in Japanese) and Gyoumu Gaikyo Sho (Outline of Business Operations, excerpts of which are available in English in the Annual Review),
the amount outstanding of Nichigin Tokuyu (loans pursuant to Article 25 of the Bankof Japan Act of 1942 through end-1997, and since 1998, loans pursuant to Article 38of the Act of 1997) was 1.3 trillion yen at end-1995, 1.2 trillion yen at end-1996, 3.7
trillion yen at end-1997, 0.6 trillion yen at end-1998, 1.5 trillion yen at end-1999, 0.5
trillion yen at end-2000, and 0.8 trillion yen at end-2001.302
Financial institutions’ casual dependence on Nichigin Tokuyu may invite moral hazard, and may also lead to, for example, a deterioration in the Bank’s balance sheet.
Therefore, the Bank determines whether or not to provide Nichigin Tokuyu to failed financial institutions for their resolution based on the following four principles: (1) there
must be a strong likelihood that systemic risk may materialize, (2) there must be no alternative to the provision of central bank funds, (3) all responsible parties are required
to take clear responsibility to avoid moral hazard, and (4) the financial soundness of the
Bank itself should not be impaired. These had been described from 1995 onward in the
Bank’s Nenji Houkoku Sho and the Gyoumu Gaikyo Sho.303 In May 1999, the Policy
Board examined the four principles under the Act of 1997, and outlined the Bank’s
thinking on the specific management of these principles. It decided to release them in
the Gyoumu Gaikyo Sho for fiscal 1998 as “Four Principles in Conducting Business
Necessary to Maintain Financial Stability.”304
In the content of the “Four Principles in Conducting Business Necessary to Maintain Financial Stability” decided in May 1999, the Bank noted as the basic thinking“since the provision of special loans is one of the countermeasures to avoid a financial
crisis (hereafter “safety net”), it should be reviewed in light of the changes in the overall
framework of the safety net including deposit insurance.” Furthermore, in the explanation of the second principle—namely, there must be no alternative to the provisionof central bank funds—there were descriptions that “in the framework of dealing with................................
300. Provisions of the Act of 1997. Under the Bank of Japan Act of 1942, regular business was prescribed in
Article 20, and Nichigin Tokuyu were prescribed in Article 25.
301. Such business includes loan provision and capital injection.
302. For the amount outstanding of Nichigin Tokuyu, see BOJ Policy Board (1997), p. 45, BOJ Policy Board(1998a), p. 52, BOJ (1999c), p. 140, BOJ (2000a), p. 135, BOJ (2001), p. 131, and BOJ (2002), p. 91.
303. BOJ Policy Board (1996), pp. 37–45, BOJ Policy Board (1997), p. 44, and BOJ Policy Board (1998a),
p. 50. The Nenji Houkoku Sho for 1995 stated that the Bank would provide special loans to failed financial
institutions for their resolution, only when the conditions in the principles (1) to (3) were met, and that“since the Bank’s assets present evidence for the issuance of banknotes, the Bank—from the viewpoint ofmaintaining confidence in the currency—will give consideration to its financial soundness in implementing
such credit provision.” However, in the Nenji Houkoku Sho for 1996 and 1997, the expression was changed
to one that the Bank will provide special loans to failed financial institutions for their resolution, only when
the conditions in the four principles were met.
304. BOJ Policy Board (1999b).

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failed financial institutions, special loans are provided as bridging finance until failed
financial institutions obtain financial assistance under the deposit insurance system ontransferring their business to other financial institutions,” and that “the LLR function ofa central bank basically refers to the temporary provision of liquidity, and is diﬀerent
in nature from funds intended to cover existing losses.” Moreover, in the explanation of
the fourth principle—namely, the financial soundness of the Bank itself should not be
impaired—it was stated that “in coping with financial system uncertainty in the past,
the Bank provided not only temporary liquidity but also risk capital such as capitalsubscription as a special and exceptional measure.” The explanation also stated that“the latter was necessary to avoid systemic risk given the then underdeveloped safety
net system,” and that the Bank’s thinking on the specific management of the fourthprinciple was that “in principle, liquidity should be provided, not risk capital.”
Based on the above principles, the Bank determined whether to provide Nichigin
Tokuyu by fully assessing the situation at that time, taking into consideration the individual circumstances facing financial institutions. In addition, the interest rate andother conditions for the extension of Nichigin Tokuyu had been individually decided by
the Policy Board in view of the particular nature of the loans being provided under special conditions for the stability of the financial system. Under such lending principle,
Nichigin Tokuyu were almost completely collected afterward (the uncollectible loans
were those provided to Yamaichi Securities in 1997 [111.1 billion yen]).305
As another fund-provisioning measure during the time of a financial crisis, theBank also provides loans to the DICJ. Such loan provisions were conducted in thecases where the DICJ gave financial assistance for the resolution of failed financial
institutions. The Bank also provided loans to the DICJ in relation to the start of thetemporary nationalization of financial institutions, pursuant to the Financial Revitalization Act, and to the capital injection based on the Early Strengthening Act.306 The
outstanding amount of loans provided to the DICJ reached 8.477 trillion yen at endDecember 1998.307

APPENDIX 3: OUTLINE OF THE REVISION OF THE BANK OF JAPANACT (PROMULGATION OF THE BANK OF JAPAN ACT
OF 1997)
I. Background of the Revision
The Bank of Japan Act of 1942 was legislated during World War II, and bore a strong
characteristic of state control. After World War II, in the latter half of the 1940s, several
attempts were made to change the role and organization of the Bank. However, none................................
305. The amount of uncollectible loans was written oﬀ by withdrawing the Bank’s provisions for possible loan
losses (BOJ Financial Systems and Bank Examination Department [2005], pp. 3–4).
306. BOJ (1999c), p. 7.
307. BOJ (1999c), p. 142. In April 2001, the DICJ fully repaid all loans made by the Bank by refinancing themwith loans from private financial institutions (BOJ Financial Systems and Bank Examination Department[2005], p. 12). Nakaso (2001) gave a detailed summary of a series of financial crises that occurred in the
1990s, the measures adopted by Japan’s monetary authorities and the Bank during that period, and thethinking on the role of a central bank in maintaining financial system stability based on the experience
gained from such crises.

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materialsof them were successful, apart from the act revision made in 1949, which included
establishment of the Policy Board. Meanwhile, from August 1957 to September 1960,
the FSRC, an advisory committee to the Minister of Finance, deliberated on reformof the Bank. Nevertheless, there was a severe conflict of opinions in the deliberation
process, particularly regarding the relationship between the central bank and the government, and both sides of the conflict ended up being indicated in the report by the
FSRC; accordingly, a bill incorporating the deliberation results failed to be drafted.308
From 1964 to 1965, revision of the Bank of Japan Act of 1942 was discussed, but nobill was submitted to the Diet.309
Prompted by the emergence, expansion, and bursting of the bubble economy aswell as the occurrence of the NPL problem and other repercussions, vigorous discussions were held on Japan’s financial administration and monetary policy among a wide
range of entities in the mid-1990s. This led to increasingly heated arguments calling forreform of the institutional framework of the central bank, responsible for conducting
monetary policy, by revising the Bank of Japan Act of 1942, which had been legislated
during World War II; specifically, through further clarification of the Bank’s independence and accountability regarding its policy decisions. For example, in a report titled“Reforms of Financial Administration and Monetary Policy,” published on June 13,
1996, by a project team of the ruling coalition parties, raised the revision of the Bankof Japan Act as one of the important pillars of the reforms.310 The report stated, “It isnecessary to revise the Bank of Japan Act in the form of further clarifying the Bank’s
independence and accountability regarding its policy decisions as a central bank, so
as to avoid any repetition of failures of macroeconomic policy in addressing excessive liquidity and the bubble economy.” Under such circumstances, the CBSG wasestablished in July 1996 as an advisory panel to the Prime Minister. After about threemonths of deliberations, the CBSG compiled a report entitled “Reform of the Central
Bank System—In Pursuit of Open Independence” (CBSG Report), and submitted it to
the Prime Minister on November 12.311
Based on the CBSG report, the FSRC discussed issues to be tackled in revising the
Bank of Japan Act, and submitted the “Report concerning the Revision of the Bank of................................
308. BOJ Committee for Compiling the One Hundred Year History of the BOJ (1985), pp. 623–641. The reportsubmitted by the FSRC to the Minister of Finance in September 1960 proposed two approaches to deal witha case where the competent minister found that the Bank’s policy was likely to hinder implementation of
the government’s policy, consulted about it with the Bank’s Governor, but failed to reach an agreement:
Approach A, which granted the competent minister the power to give directions on the Bank’s policy, andApproach B, which only granted the minister the right to request postponement of a vote on monetary control
matters (BOJ Committee for Compiling the One Hundred Year History of the BOJ [1985], pp. 664–668).
309. BOJ Committee for Compiling the One Hundred Year History of the BOJ (1986), pp. 273–289.
310. FBAJ (1996b), pp. 17–19 and 36–37. This report was compiled by the Ministry of Finance Reform Project
Team in Enhancing Financial Administration. The team was established based on the purpose of the ThreeParty Policy Agreement toward the New Administration, which was agreed and published on January 8,
1996, by the three ruling coalition parties at the time—the Liberal Democratic Party, the Japan Socialist
Party (the party name was changed to the Social Democratic Party on January 19, 1996), and the New Party
Sakigake—toward the inauguration of the Ryutaro Hashimoto Cabinet on January 11 of that year. For theThree-Party Policy Agreement, see FBAJ (1996a), p. 57.
311. BOJ Policy Board (1997), p. 49. The CBSG Report and the minutes of the CBSG meetings are containedin CBSG (1996a and 1996b). The Chairman of the CBSG was Mr. Yasuhiko Torii, the President of Keio
University.

139Japan Act” to the Minister of Finance on February 6, 1997.312 This report made specificproposals mainly on the Bank’s purpose, organization, and business operations basedon the following idea: “The Bank of Japan Act of 1942 has many outdated provisions,and it needs to be fundamentally reviewed in light of the progress in globalizationand marketization in the fields of economy and finance”; and “in order for the Bank
to gain confidence of the public and market participants, it is essential to reform theoverall policy decision-making framework from the viewpoint of ensuring the Bank’s
independence as a central bank and the transparency of its monetary policy conduct.”
In response to the report by the FSRC (FSRC Report), the government proceededwith revisions to the Bank of Japan Act of 1942, and on March 11, 1997, the bill forthe new Bank of Japan Act was submitted to the Diet after the Cabinet’s approval was
obtained.313 The bill passed the House of Representatives and the House of Councillors
by a majority vote on May 22 and June 11, respectively, and was then promulgated as
the Bank of Japan Act of 1997 on June 18.314
II. Outline of the Revision
The Bank of Japan Act of 1942, legislated during World War II, was revised basedon two principles—independence and transparency—in line with major changes in thefinancial and economic environment, namely, globalization and marketization. The
outline of the revision is as follows.
A. Purposes and Principles of the Bank of JapanThe Bank of Japan Act of 1942 set the Bank’s purpose as “the regulation of the currency, control and facilitation of credit and finance, and the maintenance and fosteringof the credit system, pursuant to the national policy, in order that the general economic
activities of the nation might adequately be enhanced” (Article 1). As it was legislated
during the war, it became obsolete.
The Bank of Japan Act of 1997 provides that the Bank’s first purpose is “to issuebanknotes and to carry out currency and monetary control” (Article 1, paragraph 1),
and set forth that the Bank is to implement currency and monetary control (monetary
policy) based on the principle of “achieving price stability, thereby contributing to thesound development of the national economy” (Article 2).315 In addition, it provides that................................
312. BOJ Policy Board (1998a), p. 58. This report and the “Statement of Reasons for the Report concerning the
Revision of the Bank of Japan Act” are contained in FSRC (1997).
313. In submitting the bill to the Diet, the purpose of revising the Bank of Japan Act was elaborated as follows:“The Bank’s fundamental reform will be implemented, including strengthening of the authority of the Bank’s
Policy Board and prompt release of the minutes of the Policy Board meetings, in light of the need to (1)respond to economic and social changes at home and abroad, (2) increase the degree of independence in
conducting currency and monetary control as well as transparency of its decision-making process as thecentral bank of Japan, and (3) secure the Bank’s appropriate and eﬃcient conduct of business operations”(BOJ [1998i], p. 39).
314. BOJ Policy Board (1998a), pp. 58–59.
315. There was a question of whether the purpose of monetary policy was the stability of currency value or
prices. It was determined to be price stability based on the conclusion derived in the FSRC Report that “itis appropriate to regard the purpose of monetary policy to be price stability instead of currency value.” Thereason for this was stated as follows: “Currency value has two aspects, namely, prices, which is an internal
value, and exchange rates, which is an external value. A conflict of interest could occur if the stability inthese two aspects was pursued by a single economic means of monetary policy.”

140 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2020

Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

the Bank’s second purpose is “to ensure smooth settlement of funds among banks andother financial institutions, thereby contributing to the maintenance of stability of thefinancial system” (Article 1, paragraph 2). In other words, the Bank will aim to achievefinancial system stability by ensuring smooth and stable operation of the payment andsettlement systems.
B. Independence of the Bank of Japan (Respect of Autonomy)
Under the Bank of Japan Act of 1942, the government had strong authority against the
Bank on extensive matters, and the Bank’s independence was not clearly ensured.316
For example, it provided the Minister of Finance with the power to order the Bank
to undertake necessary business operations (Article 43) and the government with thepower to dismiss the Bank’s oﬃcers (Article 47).317
On this point, the Statement of Reasons for the FSRC Report, which was submitted by the FSRC to the Minister of Finance and published along with the FSRC Report, stated as follows: “The most important objective of monetary policy conductedby a central bank is to achieve price stability. In order to achieve this objective, it isdesirable that a central bank can conduct monetary policy with a high degree of independence from the government, as the experiences of the central banks of various
countries indicate that the conduct of monetary policy tends to come under pressure toadopt inflationary policies.”
In light of such thinking, the Bank of Japan Act of 1997 provides that “the Bank ofJapan’s autonomy regarding currency and monetary control shall be respected” (Article 3, paragraph 1). Given that the monetary policy is implemented through the Bank’sbusiness operations, the Act stipulates that “due consideration shall be given to theautonomy of the Bank of Japan’s business operations” (Article 5, paragraph 2). As aframework for ensuring its independence in eﬀect, the Act provides that the Bank’s
oﬃcers shall not be dismissed on the grounds of having a diﬀerent opinion from thegovernment (Article 25). Some provisions were deleted, including those on the government’s extensive power to order the Bank to undertake necessary business operations
and those on the system to dispatch supervisors from the MOF to the Bank. Meanwhile,the clause on loss compensation by the government stipulated in the Supplementary
Provisions of the Bank of Japan Act of 1942 (a clause whereby the government must
supplement an amount equivalent to the Bank’s loss incurred by the Bank’s inability
to fully compensate for the loss incurred in each fiscal year, even if the Bank used its
reserve fund) was not incorporated into the Bank of Japan Act of 1997.318................................
316. CBSG (1996a), Chapter I.A.
317. Article 47 of the Bank of Japan Act of 1942 stipulated that the Cabinet could dismiss the Governor and
Deputy Governors, and the competent minister could dismiss Executive Directors, Executive Auditors, andCounsellors, not only when they violated laws and regulations, but also when they violated the competent
minister’s order, harmed public interest, or were found particularly necessary to do so for the purpose of
attaining the Bank’s objectives.
318. Regarding the treatment of the loss compensation clause stipulated in paragraph 9 of the Supplementary
Provisions of the Bank of Japan Act of 1942, there were no particular descriptions in the CBSG Report
and the minutes of the CBSG meetings, the FSRC Report and its Statement of Reasons, or the summaryof discussions at the Subcommittee of the Revision of the Bank of Japan Act in the FSRC (CBSG [1996aand 1996b], FSRC [1997], and MOF Research Division of Banking Bureau [1996]). A speech given by
Mr. Ueda, a Member of the Policy Board, at the Autumn Annual Meeting of the Japan Society of Monetary141

C. Securing Transparency
The CBSG Report stated, “In order for the Bank to conduct its monetary policy, its
strong independence and neutrality need to be granted, . . . at the same time, the Bankis accountable to the public and the Diet through transparent policy conduct.” The
Statement of Reasons for the FSRC Report indicated, “In order to gain public support for strengthening the independence of the Bank’s monetary policy, the Bank’s
monetary policy conduct needs to involve accountability to the public and the Dietby clarifying the policy decision-making body and increasing the transparency of thedecision-making process,” and, “It should be clarified that the basic thinking in revising the Bank of Japan Act is to secure transparency of the Bank’s monetary policy
decisions. Specifically, it is important to secure transparency mainly through releasing
the minutes and transcripts of Policy Board meetings for monetary control matters.”
In light of such thinking, the Bank of Japan Act of 1997 provides that “the Bankof Japan shall endeavor to clarify to the citizen the content of its decisions, as wellas its decision-making process, regarding currency and monetary control” (Article 3,
paragraph 2), and obliged the Bank to prepare and release the minutes and transcripts
of Policy Board meetings for monetary control matters (Article 20).
D. Strengthening the Policy Board
The Policy Board was established following the 1949 revision of the Bank of Japan
Act, but it had been pointed out that its status was unclear, including whether it was
the Bank’s internal or external body.319 In addition, apart from the Policy Board, theBank had organized the meetings of the executives, consisting of the Governor, Deputy
Governors, and Executive Directors based on the provisions of the Bank’s articles ofincorporation. These meetings deliberated on important matters concerning the Bank’sbusiness execution and held discussions prior to submitting the executives’ draft proposals to the Policy Board. Accordingly, there was a criticism that the Bank virtually
had two decision-making bodies.
With regard to the status of the Policy Board, the Statement of Reasons for the
FSRC Report set forth that “it is appropriate to set the Policy Board as the Bank’s
internal body.” As for the relationship between the Policy Board and the executives,
it indicated, “In order to fully demonstrate and activate the functions of the Policy
Board, the meetings of the executives should be abolished and the authority should
be concentrated to the Policy Board, adopting a one-board system.” With regard tomatters that should be decided by the Policy Board, the Statement of Reasons set forththat “in order for the Policy Board to make decisions on the Bank’s policy as the Bank’shighest decision-making body,” “such matters as guidelines for market operations andthe basic assessment of financial conditions should be included in the agenda of the
Policy Board.”..........................................................................................................................................
Economics in fiscal 2003 suggested that the provisions on loss compensation by the government described in
the Bank of Japan Act of 1942 were deleted in the Act of 1997 from the viewpoint of ensuring independenceof the Bank—that is, respect of autonomy (Ueda [2003], p. 58).
319. Article 13-2 of the Bank of Japan Act of 1942 provided that “there shall be established a Policy Board in the
Bank of Japan,” but it also had provisions which expressed the Policy Board as if it were an external body,such as “the expenses of the Policy Board, including allowances for appointive members, shall be borne by
the Bank of Japan” (Article 13-4, paragraph 5).

142 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2020

Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

Based on this thinking, the provisions of the Bank of Japan Act of 1997 concerning
the Policy Board were stipulated. Whereas the Bank of Japan Act of 1942 did notprovide that the appointive members were to be the Bank’s oﬃcers, the Act of 1997
explicitly indicates that the Members of the Policy Board are to be the Bank’s oﬃcers(Article 21). As it took eﬀect, the Bank’s articles of incorporation were fully revised,
and the provisions on the meetings of the executives were abolished.320
E. Relationship with the Government
As for the relationship with the government, the Statement of Reasons for the FSRC
Report indicated as follows: “The monetary policy conducted by a central bank contributes to the sound development of the national economy in combination with the economic policy implemented by the government. With a view to ensuring that the Bank’s
monetary policy contributes to the sound development of the national economy, it isnecessary to endeavor to maintain compatibility between the Bank’s monetary policy
and the government’s economic policy.” On this basis, the Bank of Japan Act of 1997
provides that “the Bank of Japan shall, taking into account the fact that currency andmonetary control is a component of overall economic policy, always maintain close
contact with the government and exchange views suﬃciently, so that its currency andmonetary control and the basic stance of the government’s economic policy shall bemutually compatible” (Article 4).
In addition, as an institutional framework for ensuring suﬃcient exchange of views
with the government, Article 19 of the Bank of Japan Act of 1997 provides that government representatives may attend and express opinions at Policy Board meetings formonetary control matters, when necessary (paragraph 1), and that government representatives attending a Policy Board meeting may submit proposals concerning monetary control matters or request that the Policy Board postpone a vote on proposals
submitted at the meeting until the next Policy Board meeting (paragraph 2). A system has been adopted whereby, when the right to request postponement of a vote has
been exercised, the vote is not automatically postponed and the Policy Board is able todecide whether to accommodate the request (paragraph 3).

................................
320. This revision of the articles of incorporation was decided at the Bank’s Policy Board meeting on March 24,
1998 (BOJ [1999c], pp. 387–409).

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155

Charts
Chart 1 Economic Conditions in Japan(1) Real GDP

Note: The data is obtained from “Economic and Financial Data on CD-ROM 2001,” Bank of Japan.
Source: Cabinet Office.

(2) Industrial production

Note: The data is obtained from “Economic and Financial Data on CD-ROM 2001,” Bank of Japan.
Source: Ministry of Economy, Trade and Industry.

156 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2020

Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

Chart 2 Inflation Indicators in Japan(1) Consumer price index (all items less fresh food)Note: The base year of the CPI is 1990.
Source: Ministry of Internal Affairs and Communications.

(2) Domestic wholesale price index

Note: The base year of the WPI is 1995.
Source: Bank of Japan.

(3) Crude oil prices (WTI)

Source: IMF.

(4) Tankan Employment conditions DI (all industries)

Source: Bank of Japan.

157

Chart 3 Exchange Rates and Balance of Payments(1) Exchange rate (yen/dollar)

Note: Figures are as of 17:00 in the Tokyo market.
Source: Bank of Japan.

(2) Exchange rates (yen/major currencies)

Note: Figures are as of year-end.
Source: Bank of Japan.

(3) Balance of payments

Source: Bank of Japan.

158 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2020

Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

Chart 4 Interest Rate Benchmarks in Japan(1) Official discount rate and uncollateralized overnight call rate(2) Prime rates(3) 10-year JGB yields

Notes: 1. Figures in (1) are end-month for the official discount rate and monthly averages for the uncollateralized overnight call rate.
2. Figures for long-term prime rates are those of the Mizuho Bank.
3. Figures for 10-year JGB yields are end-month for over-the-counter sales.
Source: Bank of Japan.

159

Chart 5 Bank Lending and Money(1) Bank lending

Note: Figures are from banking accounts (sum of the five types of banks: city banks, long-term credit
banks, trust banks, regional banks, and regional banks II).
Source: Bank of Japan.

(2) Money

Source: Bank of Japan.

(3) Nonperforming loans

Notes: 1. Total of city banks, long-term credit banks, and trust banks.
2. Figures for risk-management loans are as follows: those through fiscal 1994 (ending in March
1995) indicate the sum of loans to failed borrowers and delinquent loans; those for fiscal 1995
and 1996 indicate the sum of loans to failed borrowers, delinquent loans, and loans exemptedfrom interest payment; and those for fiscal 1997 (ending in March 1998) onward indicate thesum of loans to failed borrowers, delinquent loans, loans delinquent for three months or
longer, and loans with relaxed borrowing conditions. See Footnote 101.
Source: Financial Services Agency (2004).

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

Chart 6 Asset Prices in Japan(1) Nikkei 225 Stock Average

Note: Figures are as of the end of the day.
Source: Nikkei, Inc.

(2) Land prices
Level of Urban Land Price Index

Rate of decline in Urban Land Price Index from 1991

Note: Figures are averages of each fiscal year-end. The 6 major cities are the wards of Tokyo, Yokohama, Nagoya, Kyoto, Osaka, and Kobe.
Source: Japan Real Estate Institute.
(continued on next page)161

Chart 6 Asset Prices in Japan (continued)(3) Asset prices of and capital gains from land and stocks

Note: Figures are as of year-end.
Source: Cabinet Office.

Note: Figures are as of year-end.
Source: Cabinet Office.

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Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

Chart 7 Overseas Economic Conditions(1) Real GDP

Source: IMF, World Economic Outlook (October 2016).
(continued on next page)163

Chart 7 Overseas Economic Conditions (continued)(2) Inflation rates

Source: IMF, World Economic Outlook (October 2016).
(continued on next page)

164 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2020

Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

Chart 7 Overseas Economic Conditions (continued)(3) Current account balance

Source: IMF, World Economic Outlook (October 2016).

(4) Exchange rates around the time of the Asian Currency Crisis

Sources: IMF; Bank Negara Malaysia; Bank Indonesia.

165166 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2020

Jan.

1993

June

Mar.

July
Dec.

June

Jan.

Nov.

Aug.

Cooperative Credit Purchasing Corporation was established by capital subscription from 162 private financial institutions.
Interest rates on term deposits were deregulated completely.

The MOF directed quantitative restrictions on real estate-related loans extended by financial institutions.
Iraq invaded Kuwait (multinational force started to attack Iraq in January1991).
The Federal Reserve Board shifted the seasonal lending rate from the discount rate to a floating market rate (from January 9, 1992).
“Outline of Promotion of Comprehensive Policies Related to Land” was decided by the Cabinet (for the purpose of lowering land prices, ensuring
rational use of land, and others).
Abolition of window guidance was decided (abolished from the July–
September quarter).
The Bank started to lower the official discount rate.
The Wholesale Price Index declined in November for the first time in 2
years and 10 months.
The government decided to remove the quantitative restrictions on realestate-related lending by financial institutions through year-end.
Official land prices fell for the first time in 17 years.

The Nikkei 225 Stock Average recorded the highest level (38,915 yen).

Dec.

Mar.

EventsThe Bank started to raise the official discount rate.

Month
May

1992

1991

1990

Year
1989

Chart 8 Major Events in the 1990s

Dec. 17, 1989–
Yasushi Mieno

BOJ Governor
Dec. 17, 1984–
Satoshi Sumita

Aug. 9, 1993–
Hirohisa Fujii

Aug. 9, 1993–
Morihiro Hosokawa

Nov. 5, 1991–
Kiichi Miyazawa

Aug. 10, 1989–
Toshiki Kaifu
Feb. 28, 1990–
Toshiki Kaifu(the second term)

Prime Minister
Nov. 6, 1987–
Noboru Takeshita
June 3, 1989–
Sousuke Uno(continued on next page)Oct. 14, 1991–
Toshiki Kaifu
Nov. 5, 1991–
Tsutomu Hata
Dec. 12, 1992–
Yoshiro Hayashi

Minister of FinanceDec. 24, 1988–
Tatsuo Murayama
June 3, 1989–
Tatsuo Murayama(reappointed)
Aug. 10, 1989–
Ryutaro Hashimoto
Feb. 28, 1990–
Ryutaro Hashimoto(reappointed)

1997

1996

1995

1994

Six laws relating to the financial system were passed by the Diet.
The Bank provided funds to the DICJ for financing the HLAC.
Tokyo Kyodo Bank was renamed and reorganized as the Resolution andCollection Bank.
HLAC took over the assets of seven failed jusen (housing loan companies).
The consumption tax was raised from 3 percent to 5 percent.
The Thai baht was shifted to the managed float exchange rate regime (beginning of the Asian Financial Crisis).
Sanyo Securities filed an application for the commencement of reorganization proceedings based on the Corporate Reorganization Act (first default
in the call market).

June
July
Sep.

Nov.

Dec.
Apr.
July

Jan.

Dec.

Sep.

July

Apr.

Mar.

Jan.

Dec.

Oct.

The yen appreciated against the U.S. dollar (1 U.S. dollar was worth 100
yen or less).
Financial deregulation was completed with deregulation of interest rates on
liquid deposits.
A resolution plan for the Tokyo Kyowa and Anzen credit cooperatives wasannounced.
Tokyo Kyodo Bank was established (started business operations in March).
The Great Hanshin-Awaji Earthquake broke out.
The Policy Board approved of encouraging a decline in market interest
rates as the guideline for market operations for the immediate future (released the target range).
The yen appreciated against the U.S. dollar (1 U.S. dollar was worth 80 yen
or less).
The Policy Board decided to encourage a decline in short-term market interest rates.
Daiwa Bank released a statement on an enormous loss of its New Yorkbranch.
“On the Package of Specific Measures for the Jusen Problem” was approved by the Cabinet.
The Bank abolished the credit line system intended for nine city banks.

June

Chart 8 Major Events in the 1990s (continued)

Dec. 17, 1994–
Yasuo Matsushita

Nov. 7, 1996–
Ryutaro Hashimoto(the second term)

Jan. 11, 1996–
Ryutaro Hashimoto

June 30, 1994–
Tomiichi Murayama

Apr. 28, 1994–
Tsutomu Hata(continued on next page)

Nov. 7, 1996–
Hiroshi Mitsuzuka

Jan. 11, 1996–
Wataru Kubo

Apr. 28, 1994–
Hirohisa Fujii(reappointed)
June 30, 1994–
Masayoshi Takemura

Monetary Policy in the 1990s: Bank of Japan’s Views Summarized Based on the Archives and Other Materials

167

168 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2020

Mar.

July

2000

Mar. 20, 1998–
Masaru Hayami

Notes: 1. Masaharu Hino assumed the post of Financial Supervisory Agency Commissioner on June 22, 1998.
2. Masaharu Hino assumed the post of Financial Services Agency Commissioner on July 1, 2000.

Aug.

Feb.
Mar.

1999

Dec.

The zero interest rate policy was terminated.

The FCMEB decided to inject about 1.8 trillion yen of public funds into 21
major financial institutions.
Bank of Japan Act of 1997 was enforced.
The Financial Supervisory Agency was launched.
Laws and regulations related to the Financial Revitalization Act and the
Early Strengthening Act were enacted (the amount of public funds wasincreased to 60 trillion yen).
The government decided to temporarily nationalize the Long-Term Credit
Bank of Japan.
The government decided to temporarily nationalize the Nippon Credit
Bank.
The Financial Reconstruction Commission was established.
The zero interest rate policy was introduced.
The Financial Reconstruction Commission decided to inject about 7.5 trillion yen of public funds into 15 major financial institutions.
The Financial Services Agency was established.

Feb.

1998

Apr.
June
Oct.

Hokkaido Takushoku Bank announced the transfer of its business operations to the North Pacific Bank (Hokuyo Bank).
Yamaichi Securities announced the suspension of its business operations.
Two acts to stabilize financial functioning were enacted (30 trillion yen of
public funds was secured, and the Financial Crisis Management Examination Board (FCMEB) was established at the DICJ).

Nov.

1997

Chart 8 Major Events in the 1990s (continued)

Apr. 5, 2000–
Kiichi Miyazawa(reappointed)
July 4, 2000–
Kiichi Miyazawa(reappointed)

July 30, 1998–
Kiichi Miyazawa

Jan. 28–30, 1998
RyutaroHashimotoJan. 30–July 30,
1998
Hikaru Matsunaga

July 4, 2000–
Yoshiro Mori(the second term)

Apr. 5, 2000–
Yoshiro Mori

July 30, 1998–
Keizo Obuchi