Minutes of the Monetary Policy Meeting on January 19 and 20, 2006  : 日本銀行 Bank of Japan
Central bank: boj | Type: minutes | Date: 2006-01-20

Minutes of the Monetary Policy Meeting
on January 19 and 20, 2006
(English translation prepared by the Bank's staff based on the Japanese original)
March 14, 2006
Bank of Japan
A Monetary Policy Meeting of the Bank of Japan Policy Board was held in the Head Office of the Bank of Japan in Tokyo on Thursday, January 19, 2006, from 2:00 p.m. to 3:48 p.m., and on Friday, January 20, from 9:00 a.m. to 12:50 p.m.
Policy Board Members Present Mr. T. Fukui, Chairman, Governor of the Bank of Japan
Mr. T. Muto, Deputy Governor of the Bank of Japan
Mr. K. Iwata, Deputy Governor of the Bank of Japan
Ms. M. Suda
Mr. S. Nakahara
Mr. H. Haru
Mr. T. Fukuma
Mr. A. Mizuno
Mr. K. G. Nishimura
Government Representatives Present Mr. K. Akaba, Senior Vice Minister of Finance, Ministry of Finance
Mr. K. Sugimoto, Deputy Vice Minister for Policy Planning and Coordination, Ministry of Finance
Mr. Y. Nakajo, Vice Minister for Policy Coordination, Cabinet Office
Mr. J. Hamano, Director General for Economic and Fiscal Management, Cabinet Office
Reporting Staff Mr. E. Hirano, Executive Director (Assistant Governor)
Mr. M. Shirakawa, Executive Director
Mr. A. Yamamoto, Executive Director
Mr. H. Yamaguchi, Director-General, Monetary Affairs Department
Mr. S. Uchida, Senior Economist, Monetary Affairs Department
Mr. H. Nakaso, Director-General, Financial Markets Department
Mr. H. Hayakawa, Director-General, Research and Statistics Department
Mr. K. Momma, Deputy Director-General, Research and Statistics Department
Mr. A. Horii, Director-General, International Department
Secretariat of the Monetary Policy Meeting Mr. Y. Nakayama, Director-General, Secretariat of the Policy Board
Mr. T. Kozu, Adviser to the Governor, Secretariat of the Policy Board
Mr. K. Murakami, Director, Secretariat of the Policy Board
Mr. T. Kato, Senior Economist, Monetary Affairs Department
Mr. K. Masaki, Senior Economist, Monetary Affairs Department
The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on March 8 and 9, 2006 as "a document which contains an outline of the discussion at the meeting" stipulated in Article 20, Paragraph 1 of the Bank of Japan Law of 1997. Those present are referred to by their titles at the time of the meeting.
Mr. K. Iwata was absent from 2:00 p.m. to 3:12 p.m. on January 19 to attend a meeting of the Ministerial Council, which discussed issues including the Cabinet Office's
Monthly Economic Report
Messrs. K. Akaba and Y. Nakajo were present on January 20.
Messrs. K. Sugimoto and J. Hamano were present on January 19.
I. Summary of Staff Reports on Economic and Financial Developments
A. Money Market Operations in the Intermeeting Period
The Bank conducted market operations in accordance with the guideline decided at the previous meeting on December 15 and 16, 2005.
The outstanding balance of current accounts at the Bank moved in the 31-35 trillion yen range.
Reports were made based on information available at the time of the meeting.
The guideline was as follows:
The Bank of Japan will conduct money market operations, aiming at the outstanding balance of current accounts held at the Bank at around 30 to 35 trillion yen.
Should there be a risk of financial market instability, such as a surge in liquidity demand, the Bank will provide more liquidity irrespective of the above target. When it is judged that liquidity demand is exceptionally weak considering such factors as responses of financial institutions to the Bank's funds-supplying operations, there may be cases where the balance of current accounts falls short of the target.
B. Recent Developments in Financial Markets
The weighted average of the uncollateralized overnight call rate was at around zero percent, except on the last business day of 2005 when it showed a slight increase. As for interest rates on term instruments, both Euro-yen rates and yields on treasury bills (TBs) and financing bills (FBs) were stable at low levels.
Japanese stock prices rose substantially through mid-January, mainly reflecting increased expectations of economic recovery, and fell thereafter in response to news reports concerning certain firms. The Nikkei 225 Stock Average was recently moving in the range of 15,500-16,000 yen.
Long-term interest rates had basically been more or less flat, and were moving in the range of 1.45-1.50 percent recently.
The yen depreciated against the U.S. dollar through the year-end, as the dollar was purchased, mainly by domestic investors. It appreciated thereafter due mainly to market participants' speculation regarding U.S. monetary policy. It was recently being traded in the range of 114-116 yen to the dollar.
C. Overseas Economic and Financial Developments
The U.S. economy continued to expand steadily, at a pace around its potential growth rate, led mainly by household spending and business fixed investment. Although prices had recorded a high increase temporarily due to the elevated energy prices, the inflation rate was increasing moderately in terms of the basic trend.
In the euro area, although the economy remained somewhat sluggish, the momentum for recovery had been gradually increasing as evidenced by the pickup in exports and production partly due to depreciation of the euro.
With regard to East Asian economies, in China both domestic and external demand continued to expand strongly. The NIEs and ASEAN economies continued to expand at a moderate pace on the whole, although negative effects of high energy prices could be seen in some economic activity.
In U.S. and European financial markets, long-term interest rates declined, reflecting moderate movements in inflation-related indicators and an increase in market expectations that the Federal Reserve would stop raising the interest rate in the near future. Stock prices rose, reflecting an increase in expectations for favorable earnings reports. In financial markets in most of the emerging economies, their currencies and stock prices rose and yield differentials between their sovereign bonds and U.S. Treasuries narrowed.
D. Economic and Financial Developments in Japan
Economic developments
Exports had continued to increase against the background of the expansion of overseas economies. Exports to China, which had been lacking in momentum until the middle of 2005, posted a solid increase in the October-November period, particularly in IT-related goods and automobile-related goods, after having risen notably in the July-September quarter. Exports were expected to continue rising against the background of the further expansion of overseas economies, especially in the United States and East Asia.
In the corporate sector, business fixed investment had continued to increase, and was expected to keep increasing, since the expansion in domestic and external demand and the high level of corporate profits were likely to be maintained.
The uptrend in production had recently become evident again, although production had repeatedly exhibited fluctuations due to statistical factors until the middle of 2005. By industry, production of electronic parts and devices posted brisk gains, and that of general machinery and transport machinery also stepped up. Production was expected to continue its uptrend, as overseas economies continued to grow and the foundation for a recovery in domestic demand was solid.
Inventories had been relatively high in materials industries. However, high-value-added products remained in a favorable supply-demand condition and the effects of inventory adjustments in materials industries seemed to be limited.
As for the employment and income situation, household income had continued rising moderately, reflecting improvements in employment and wages. The gradual increase in household income was likely to continue, given that firms had begun to perceive their holdings of labor as insufficient and corporate profits were expected to remain high.
Private consumption had been steady, although readings varied somewhat among indicators. The number of new passenger-car registrations had been weak, while sales of electrical appliances had continued their steady increase. Sales at department stores had also been firm. As for services consumption, sales in the food service industry had continued to be steady. Outlays for travel, on the other hand, had been almost flat on average. Indicators for consumer sentiment had been improving. As for the outlook, private consumption was likely to continue recovering steadily against the background of a gradual increase in household income.
Domestic corporate goods prices had continued to increase, mainly reflecting the rise in international commodity prices and the depreciation of the yen in the second half of 2005. They were expected to continue increasing for the time being, mainly due to the effects of the rise in international commodity prices. The year-on-year rate of change in consumer prices (excluding fresh food, on a nationwide basis) had turned slightly positive (0.1 percent) in November 2005. As for the outlook, a positive trend was projected to be established in the year-on-year change in consumer prices, as supply-demand conditions continued improving gradually and the effects from the reduction in telephone charges dissipated.
Reports at the meeting of general managers of the Bank's branches and the
Regional Economic Report
released on January 13, 2006 confirmed that the economic recovery was spreading to many regions of the country, although disparities remained in the degree of improvement.
Financial environment
The environment for corporate finance was becoming more accommodative on the whole. The lending attitude of private banks was becoming more accommodative, and that of financial institutions as perceived by firms had also been improving. The pace of decline in credit demand in the private sector had been becoming very moderate. Under these circumstances, the rate of increase in the amount outstanding of lending by private banks was accelerating, and the amount outstanding of CP and corporate bonds issued had been above the previous year's level.
The year-on-year growth rate of the monetary base was at the 1.0-2.0 percent level, and that of the money stock (M2+CDs) had been around 2.0 percent.
II. Summary of Discussions by the Policy Board on Economic and Financial Developments
A. Economic Developments
On the current state of Japan's economy, members agreed that it continued to recover steadily, with both domestic and external demand continuing to increase.
Members agreed that overseas economies, particularly those of the United States and East Asia, continued to expand, and were likely to keep expanding.
On the U.S. economy, many members said that it continued to expand steadily, led mainly by household spending and business fixed investment, and was likely to keep expanding at a pace around its potential growth rate. A few members commented on private consumption that Christmas sales seemed to have shown somewhat higher growth than in 2004. Some members said that the yield curve had become almost flat, and in financial markets expectations that the Federal Reserve would stop raising the interest rate in the near future were increasing. In relation to this, one member commented that concern over inflation persisted, given that the rate of utilization of resources, including the labor force and production facilities, remained at a high level and international commodity prices continued to rise.
One member expressed the view that the growth rate of the U.S. economy for the October-December quarter of 2005 was likely to show a slight deceleration, citing a slowing in production of motor vehicles and related goods and a deceleration in growth in housing investment. The member added that as developments in housing prices would affect private consumption, for example, through wealth effects, they should be watched carefully together with developments in long-term interest rates.
With regard to East Asian economies, members agreed that both domestic and external demand continued to expand strongly in China. One member said that although the Chinese economy had so far been expanding steadily, attention still needed to be paid to developments concerning reforms of the renminbi exchange rate regime and the effects on the economy of excess production capacity.
Some members commented on risk factors for the global economy that crude oil prices had recently started to rise again against the background of concerns over geopolitical risks and tightening of the supply and demand situation. They said that how this affected inflation expectations and economic activity continued to warrant close attention.
Regarding Japan's economy, members agreed that exports had continued to increase, reflecting the expansion of overseas economies, and were likely to continue to rise. One member said that exports to China, which had been lacking in momentum until the middle of 2005, continued to post a solid increase in the October-November period after having risen notably in the summer. The member continued that an uptrend in exports to China was becoming clear.
As for domestic private demand, members agreed that both business fixed investment and private consumption had been increasing steadily, as positive developments in the corporate sector had been spreading to the household sector.
With regard to developments in the corporate sector, members agreed that business fixed investment had continued to increase and was likely to keep increasing, since the perception among firms of having excess production capacity had generally dissipated and corporate profits remained high. One member said that firms had so far implemented business fixed investment mainly for the purpose of maintenance and repair. Recently, however, there was a new movement spreading among firms to make business fixed investment to expand production capacity, albeit still cautiously. The member expressed the view that this was because, as corporate management had started to emphasize increasing profits in the medium to long term as a management goal, they were becoming concerned that a lack of proactive investment would impair future competitiveness.
As for the employment and income situation, members agreed that the number of employees and wages had been increasing, and household income had continued to rise moderately. One member said that people's incentive to seek jobs was increasing as the employment situation was improving, and it was becoming clear that the decline in the labor force participation rate was coming to a halt. Some members pointed out that the year-on-year growth rate of winter bonus payments by large firms seemed to have exceeded that of summer bonus payments, according to survey results and other sources. A few members referred to the possibility of wage increases being agreed in negotiations in spring 2006, particularly at firms with strong business performance, and said that if such movements became widespread, positive effects of corporate profits on household income would increase further.
Members agreed that private consumption had been steady, and it was likely to continue to expand steadily against the background of the improvement in the employment and income situation. Some members pointed out that, although the number of new passenger-car registrations had been somewhat weak, sales of electrical appliances were good and sales at department stores in late December to early January were favorable, particularly those of luxury goods, such as jewelry. One member expressed the view that the actual state of private consumption might be stronger than suggested by various economic indicators that the Bank was monitoring, since the statistical coverage of outlays for services was relatively limited. A different member pointed out that the personal saving rate for fiscal 2004 declined to 2.8 percent and dividend income exceeded interest income, and said that these developments might be supporting the steadiness in private consumption. Another member commented that the steadiness in private consumption was also attributable to the increase in consumer sentiment against the background of such factors as wealth effects from the rise in stock prices.
Members agreed that an uptrend in production had become evident, in a situation where demand both at home and abroad had been increasing steadily. A few members pointed out that industrial production was increasing for the fourth consecutive month, particularly in IT-related sectors, and said that recovery in production, which had been lagging behind the recovery in the demand side, had become clear. These members added that production was likely to increase further, judging from anecdotal information and other factors. One member said, however, that attention should be paid to the continuing adjustments in inventories in materials industries.
On prices, members agreed that domestic corporate goods prices had continued to increase, mainly reflecting the rise in international commodity prices and the depreciation of the yen in the second half of 2005, and said that they were expected to continue increasing. They continued that the year-on-year rate of change in consumer prices (excluding fresh food, on a nationwide basis) had turned slightly positive (0.1 percent) in November 2005, and that a positive trend was projected to be established in the year-on-year change in consumer prices, as supply-demand conditions continued improving gradually in line with economic recovery and the effects from the reduction in telephone charges dissipated.
Regarding price developments from a longer-term perspective, some members said that although the year-on-year rate of change in consumer prices might fluctuate in the short term due to temporary factors, a positive trend was likely to be established. This was because the supply-demand balance was likely to improve and downward pressures from unit labor costs were likely to decrease in a situation where wages were increasing. One member commented that people's expectations for prices were changing significantly from those of the last few years, referring to the fact that the Bank's
Opinion Survey on the General Public's Mindset and Behavior
and the Cabinet Office's
Consumer Confidence Survey
suggested that the proportion of the respondents who expected prices to have risen one year from now had reached about 50 percent.
B. Financial Developments
On the financial front, members concurred that the financial environment remained extremely accommodative.
One member noted a rise in the rate of increase in banks' lending, and said that supply-side factors, namely, a more active stance with regard to lending, seemed to have played a considerable role given that lending rates remained on a declining trend. The member added that firms' demand for funds was showing signs of improvement as seen in the continuing increase in business fixed investment and a rise in dividend payments and share buybacks. This member also commented that the environment for corporate finance was becoming more accommodative, since the rate of return on investment had been increasing significantly in line with economic recovery in a situation where firms' funding costs had generally been at low levels. A few other members expressed the view that monetary easing effects were the strongest since the introduction of the quantitative easing policy, judging from the fact that, for example, real interest rates had been declining with the improvement in the price situation and the equilibrium interest rate, the rate which was neutral for the economy, had been rising in line with the economic recovery.
Some members said that stock prices, especially those of stocks listed on emerging stock exchanges, which had been traded actively by individual investors, had recently declined relatively significantly due partly to the effects of alleged violation of the Securities and Exchange Law by certain firms. However, there was no fundamental change in the environment for stock prices, since the economy continued to recover steadily and the situation of corporate profits remained likely to be favorable. A few members commented that the pace of the recent rise in stock prices had seemed too fast, even considering the fact that the rise since the middle of 2005 basically reflected the favorable performance of corporate profits. They continued that the alleged violation of the law had triggered stock price adjustment to some extent. A few other members expressed concern about the risk that the extremely accommodative financial environment might lead to an excessive rise in asset prices. Some members commented that close attention should be paid to developments in stock prices, including the effects of the alleged violation of the law on investors' sentiment and on market participants' confidence in Tokyo stock markets.
C. Interim Assessment
Given the above assessment of economic activity, prices, and financial developments in Japan, members agreed on the following interim assessment in relation to the outlook presented in the
Outlook for Economic Activity and Prices
(hereafter the Outlook Report) released in October 2005. First, Japan's economy was expected to deviate slightly above the outlook, as both domestic and external demand continued to increase steadily. Second, domestic corporate goods prices were expected to deviate slightly above the outlook, reflecting the rise in international commodity prices and the depreciation of the yen in the second half of 2005. And third, consumer prices were projected to be broadly in line with the outlook. Some members expressed the view that, although the pace of recovery of Japan's economy was not accelerating, the recovery of Japan's economy was well balanced in terms of the balance between domestic and external demand and between the corporate and the household sector, and the resilience of the economy to shocks was increasing.
Many members said that the effects of developments in crude oil prices, which had recently been rising again, on inflation expectations and long-term interest rates, and in turn on the global economy, particularly the U.S. economy, were risk factors that should be watched closely for the time being. Members agreed that, regarding risk factors that could cause positive and negative deviations, attention should continue to be paid to the three factors mentioned in the October Outlook Report.
III. Summary of Discussions on Monetary Policy for the Immediate Future
On the monetary policy stance for the immediate future, members agreed that it was appropriate to maintain the current framework of the quantitative easing policy in accordance with the Bank's commitment.
A few members expressed the view that it would be appropriate to lower the target range for the outstanding balance of current accounts at the Bank at this point mainly for the following reasons. First, financial institutions' demand for liquidity required for funds management was on a declining trend. And second, the Bank should encourage formation of interest rates based on the market mechanism as much as possible to ensure smooth termination of the quantitative easing policy in the future. Against this view, the majority of members said that it was appropriate to maintain the current guideline for money market operations, including the proviso.
Some members said that market participants were paying greater attention to when the Bank would depart from the present monetary policy framework and to its conduct of monetary policy thereafter, given that the year-on-year rate of change in the consumer price index (CPI) had turned positive. On this point, members agreed that the Bank should thoroughly examine economic activity and prices, and make a judgment on the termination of the quantitative easing policy, without any preconceived idea, according to whether it could be judged that the year-on-year rate of change in the CPI was registering zero percent or higher on a sustainable basis.
Members discussed the Bank's communication of its thinking concerning the conduct of monetary policy after the change of the policy framework. One member said that the Bank's basic thinking was described in the Outlook Report as follows. First, conceptually, the course of monetary policy after the change of the framework would be a period of very low short-term interest rates followed by a gradual adjustment to a level consistent with economic activity and price developments. And second, if it was judged that upward pressure on prices continued to be contained and the economy followed a sustainable and balanced growth path, this was likely to give the Bank latitude in conducting monetary policy through the entire process. The member expressed the view that the Bank should have more in-depth discussions from the viewpoint of examining possible measures to ensure, in the unprecedented situation of termination of the framework of the quantitative easing policy, that financial markets would perform their pricing function smoothly reflecting underlying conditions of the economy and prices. Regarding these points, some members emphasized that a forward-looking approach would be important.
One member commented that under the quantitative easing policy the Bank's commitment based on the CPI had been playing a role as an anchor for economic agents' expectations regarding future developments in prices. The member expressed the view that when shifting to an interest rate policy the Bank should indicate a desirable rate of inflation as a new anchor to replace the current commitment. Against this view, one member said that the Bank should regard indication of a numerical target as an issue to be examined in the medium to long term. This was because Japan's economy was currently at a turning point in a shift from the economic structure which had existed since the second half of the 1990s, in which prices were not sensitive to changes in the output gap. The member continued that, taking into account considerable uncertainty regarding the economic structure, hasty indication of a numerical target for price stability to be achieved in the long term based on imperfect knowledge would not contribute to enhancing the transparency of the conduct of monetary policy. Rather, it might undermine confidence in the Bank's monetary policy. In response to this, the member who had proposed indication of a numerical target argued that the economic structure was always subject to uncertainty, and central banks abroad were taking measures to enhance the transparency of the conduct of monetary policy while facing similar problems. A different member said that for the foreseeable future it was appropriate to seek measures to enhance the transparency of the conduct of monetary policy without indicating a numerical target. This was because at present there was a considerable risk that a framework of inflation targeting would be misunderstood to be one where the Bank ought to make automatic monetary policy responses to changes in the price index, although inflation targeting was basically aimed at achieving the announced inflation target in the medium to long term. Another member commented that the choice of price index would also be a significant issue to be discussed in indicating a numerical target for price stability.
Based on the above discussions, members agreed on the following points regarding the Bank's communication of its thinking after the change of the policy framework. First, the Bank should continue to discuss the matter. And second, it was important for the Bank to keep an appropriate balance between enhancing the transparency of the conduct of monetary policy and ensuring its flexibility and timeliness.
IV. Remarks by Government Representatives
The representative from the Ministry of Finance made the following remarks.
(1) The budget for fiscal 2006 reflected the government's stance of firmly maintaining and strengthening its commitment to the fiscal restructuring policy. The government considered that it would enable it to make further progress in improving the fiscal position and provide a basis for discussions about reform of both expenditure and revenue in an integrated manner. Specifically, it contained general expenditures below the level of the previous fiscal year's budget for the second consecutive year, reflecting the ongoing progress of various reforms, such as the reform of the medical care insurance system, the reform package relating to three issues (reform of state subsidies, transfer of tax resources from the central to local governments, and reform of local allocation tax), and reduction in total personnel costs for civil servants. On the revenue side, the across-the-board income tax credit would be ended, given the improvement in the economic situation. As a result of these efforts with regard to both revenue and expenditure, planned issuance of new financial resource bonds had fallen below 30 trillion yen and the primary balance of the general account would improve for the third consecutive year.
(2) Regarding the economic outlook for fiscal 2006, the government considered that the likelihood of overcoming deflation would increase in fiscal 2006 as Japan's economy was likely to continue to recover at a moderate pace.
(3) However, this was based on the premise that policy efforts were made together with the Bank, and the utmost efforts continued to be required in overcoming deflation. The government would therefore like the Bank in its conduct of monetary policy to firmly continue efforts to overcome deflation, carrying out a careful and comprehensive assessment of economic activity and prices and closely monitoring developments in financial markets and overall interest rates. The government would also like the Bank to carefully explain its thinking concerning its monetary policy to market participants and the public in order to prevent financial markets from becoming unstable due to speculation regarding the future conduct of monetary policy.
The representative from the Cabinet Office made the following remarks.
(1) Japan's economy was recovering at a moderate pace. However, deflation persisted and overcoming it continued to be an important policy task the government should tackle together with the Bank.
(2) The Cabinet decided the text of "Fiscal 2006 Economic Outlook and Basic Stance for Economic and Fiscal Management" and "Structural Reform and Medium-Term Economic and Fiscal Perspectives -- FY 2005 Revision" on January 20, 2006. The government considered that achieving a stable inflation rate that would be compatible with sustainable economic growth led mainly by private demand should be the foundation for the conduct of macroeconomic policy and fiscal management for the medium term. The government expected that in fiscal 2006 the likelihood of overcoming deflation would increase through policy efforts together with the Bank.
(3) In order to judge whether the economy had overcome deflation, not only the CPI but also various other price indicators, such as the GDP deflator, should be monitored. The judgment should be made carefully based on a comprehensive review of the underlying trend of prices that excluded the effects of the surge in crude oil prices and other special factors, and of the background of price formation, such as developments in the output gap.
(4) The government hoped that the Bank would implement effective monetary policy that would be consistent with the government's outlook for the economy, taking into account the importance of overcoming deflation. Furthermore, the government would like the Bank to consider presenting a desirable price level and the future path, including the Bank's thinking about the course in reaching that level, in order to promote proper formation of expectations in financial markets, and thereby contribute to sustainable economic growth with price stability and the overcoming of deflation.
Based on the above discussions, the majority of members agreed that it was appropriate to maintain the current guideline, including the proviso, for money market operations with the target for the outstanding balance of current accounts at the Bank at around 30 to 35 trillion yen.
Two members, however, said that they would like to propose that the Bank should lower the target for the outstanding balance of current accounts at the Bank from "around 30 to 35 trillion yen" to "around 27 to 32 trillion yen."
As a result, the following proposal was submitted and put to the vote.
Mr. T. Fukuma and Mr. A. Mizuno proposed the following guideline for money market operations for the intermeeting period ahead:
The Bank of Japan will conduct money market operations, aiming at the outstanding balance of current accounts held at the Bank at around 27 to 32 trillion yen.
Should there be a risk of financial market instability, such as a surge in liquidity demand, the Bank will provide more liquidity irrespective of the above target. When it is judged that liquidity demand is exceptionally weak considering such factors as responses of financial institutions to the Bank's funds-supplying operations, there may be cases where the balance of current accounts falls short of the target.
The proposal was defeated by majority vote.
Votes for the proposal: Mr. T. Fukuma and Mr. A. Mizuno.
Votes against the proposal: Mr. T. Fukui, Mr. T. Muto, Mr. K. Iwata, Ms. M. Suda, Mr. S. Nakahara, Mr. H. Haru, and Mr. K. G. Nishimura.
To reflect the majority view, the chairman formulated the following proposal.
The Chairman's Policy Proposal on the Guideline for Market Operations:
The guideline for money market operations for the intermeeting period ahead will be as follows, and will be made public by the attached statement (see
Attachment
The Bank of Japan will conduct money market operations, aiming at the outstanding balance of current accounts held at the Bank at around 30 to 35 trillion yen.
Should there be a risk of financial market instability, such as a surge in liquidity demand, the Bank will provide more liquidity irrespective of the above target. When it is judged that liquidity demand is exceptionally weak considering such factors as responses of financial institutions to the Bank's funds-supplying operations, there may be cases where the balance of current accounts falls short of the target.
Votes for the proposal: Mr. T. Fukui, Mr. T. Muto, Mr. K. Iwata, Ms. M. Suda, Mr. S. Nakahara, Mr. H. Haru, and Mr. K. G. Nishimura.
Votes against the proposal: Mr. T. Fukuma and Mr. A. Mizuno.
Mr. T. Fukuma dissented from the above proposal, arguing that the Bank should lower the target range for the outstanding balance of current accounts at the Bank gradually in a step-by-step manner, while carefully examining economic and financial developments, as long as the maintenance of the current framework of the quantitative easing policy would not be hindered, for the following four reasons. First, the Bank should encourage formation of interest rates based on the market mechanism as much as possible to restore the proper functioning of the market. Second, the Bank should shorten maturities of funds-supplying operations to enhance the timeliness and flexibility of its conduct of monetary policy. Third, it would take a considerable time for the effects of monetary policy to materialize in the economy. And fourth, it was possible to support sustainable economic recovery with price stability by maintaining the zero interest rate environment based on the Bank's commitment in terms of policy duration.
Mr. A. Mizuno dissented from the proposal for the following reasons. First, to ensure financial market stability in the period around the termination of the quantitative easing policy, it would be appropriate to start lowering the outstanding balance in line with developments in the market, rather than lowering it intensively over a short period of time. Second, to minimize the possible shocks from the termination of the policy, the Bank should create an environment where it could communicate with market participants via interest rates. Third, lowering the target range for the outstanding balance of current accounts at an early stage would enable the Bank to proceed more smoothly with the normalization of its monetary policy after the termination of the quantitative easing policy. And fourth, lowering the target range could be expected to have an announcement effect that the Bank was taking into consideration the risk of asset inflation.
VI. Discussion on the Bank's View of Recent Economic and Financial Developments
Members discussed "The Bank's View" in the
Monthly Report of Recent Economic and Financial Developments
(consisting of "The Bank's View" and "The Background"), and put it to the vote.
The Policy Board decided, by unanimous vote, the text of "The Bank's View." It was confirmed that "The Bank's View" would be published on January 20, 2006 and the whole report on January 23, 2006.
The English version of the whole report was published on January 24, 2006.
VII. Approval of the Minutes of the Monetary Policy Meeting
The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of December 15 and 16, 2005 for release on January 25, 2006.
Attachment
January 20, 2006
Bank of Japan
At the Monetary Policy Meeting held today, the Bank of Japan decided, by 7-2 majority vote, to set the following guideline for money market operations for the intermeeting period:
The Bank of Japan will conduct money market operations, aiming at the outstanding balance of current accounts held at the Bank at around 30 to 35 trillion yen.
Should there be a risk of financial market instability, such as a surge in liquidity demand, the Bank will provide more liquidity irrespective of the above target. When it is judged that liquidity demand is exceptionally weak considering such factors as responses of financial institutions to the Bank's funds-supplying operations, there may be cases where the balance of current accounts falls short of the target.