Minutes of the Monetary Policy Meeting on February 7 and 8, 2002  : 日本銀行 Bank of Japan
Central bank: boj | Type: minutes | Date: 2002-02-08

Minutes of the Monetary Policy Meeting
on February 7 and 8, 2002
(English translation prepared by the Bank's staff based on the Japanese original)
March 26, 2002
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, February 7, 2002, from 2:00 p.m. to 4:03 p.m., and on Friday, February 8, from 9:00 a.m. to 12:20 p.m.
Policy Board Members Present
Mr. M. Hayami, Chairman, Governor of the Bank of Japan
Mr. S. Fujiwara, Deputy Governor of the Bank of Japan
Mr. Y. Yamaguchi, Deputy Governor of the Bank of Japan
Mr. T. Miki
Mr. N. Nakahara
Mr. K. Ueda
Mr. T. Taya
Ms. M. Suda
Mr. S. Nakahara
Government Representatives Present
Mr. T. Taniguchi, Senior Vice Minister of Finance, Ministry of Finance
Mr. H. Fujii, Deputy Vice Minister for Policy Planning and Coordination, Ministry of Finance
Mr. Y. Kobayashi, Vice Minister for Economic and Fiscal Policy, Cabinet Office
Reporting Staff
Mr. M. Matsushima, Executive Director
Mr. M. Masubuchi, Executive Director
Mr. S. Nagata, Executive Director
Mr. M. Shirakawa, Advisor to the Governor, Policy Planning Office
Mr. M. Amamiya, Associate Director, Policy Planning Office
Mr. I. Yamashita, Director, Financial Markets Department
Mr. H. Hayakawa, Director, Research and Statistics Department
Mr. T. Yoshida, Senior Manager, Research and Statistics Department
Mr. E. Hirano, Director, International Department
Secretariat of the Monetary Policy Meeting
Mr. I. Yokota, Director, Secretariat of the Policy Board
Mr. Y. Nakayama, Advisor to the Governor, Secretariat of the Policy Board
Mr. H. Onobuchi, Manager, Secretariat of the Policy Board
Mr. K. Etoh, Senior Economist, Policy Planning Office
Mr. S. Nagai, Senior Economist, Policy Planning Office
The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on March 19 and 20, 2002 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. Taniguchi was present on February 8.
Mr. Fujii was present on February 7.
I. Summary of Staff Reports on Economic and Financial Developments
A. Money Market Operations in the Intermeeting Period
Market operations in the intermeeting period were conducted in accordance with the guideline determined at the previous meeting on January 15 and 16, 2002.
The outstanding balance of current accounts held at the Bank was maintained at around 15 trillion yen, and the weighted average of the uncollateralized overnight call rate stayed at 0.001 percent.
In the Bank's market operations, undersubscription, where bids fell short of the Bank's offers, had occurred frequently. In this situation, the Bank had maintained the outstanding balance of current accounts at the Bank at around 15 trillion yen by such means as increasing the number of operations, diversifying the maturity of market operations, and raising the upper limit of the amount of the bid for each counterparty in market operations.
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 the current accounts at the Bank at around 10 to 15 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 guideline above.
B. Recent Developments in Financial Markets
1. Developments in domestic financial markets
In the intermeeting period, prices of stocks and long-term Japanese government bonds (JGBs) were falling while the yen was depreciating. Some market participants voiced concern about these simultaneous movements.
Interest rates on term instruments continued to decline in the intermeeting period due to the fact that a massive amount of excess funds stayed in the market over a long period. In this situation, the bids in auctions of short-term Japanese government securities (JGSs) had become overheated since the end of January 2002, and as a result, the bid-to-cover ratio surged to as high as 198 times and the accepted bid rate dropped to as low as 0.002 percent.
Stock prices continued to fall, and both TOPIX (Tokyo Stock Price Index) and the Nikkei 225 Stock Average posted new lows for the period since the collapse of the bubble economy. By industry, IT-related stock prices fell reflecting weak developments in U.S. stock prices and the announcement of the financial results of some Japanese firms. Bank stock prices also declined due to concerns over the possible emergence of unrealized losses on stocks. Developments in bank stock prices were regarded as the key to the outlook for overall stock prices, and in this regard the possibility of concerns growing about the stability of the Japanese financial system required close attention.
Yields on JGBs in the secondary market were on an uptrend in the intermeeting period reflecting concerns about a further depreciation of the yen and an increase in government expenditure. A characteristic of the current uptrend was that the selling pressure from foreign investors had increased mainly in the futures market. As for the outlook, however, the majority of market participants forecasted that the yields would move within the 1.4-1.6 percent range, given that demand for JGBs remained strong among Japanese investors, who faced difficulties in finding other attractive investment opportunities.
Credit spreads, the yield differentials between corporate bonds and JGBs in the secondary market, stayed almost at the same level in the intermeeting period. The market remained cautious about the credit risk of firms whose business performance was poor. Meanwhile, investment trusts stopped selling their holdings of corporate bonds, which they had been selling since prices of some money management funds (MMFs) fell below their face value.
2. Developments in the foreign exchange market
The yen recovered temporarily to around 131 yen against the U.S. dollar, reflecting market speculation that Japanese investors might sell their assets denominated in foreign currencies before the end of the fiscal year in March 2002. It weakened thereafter, reflecting the following factors: the widening gap between the market view regarding economic conditions in Japan and that regarding conditions in the United States; the speculation that currency authority officials would accept a depreciation of the yen; and anxiety about the delay in the progress of Japan's structural reforms. Lately, the yen was fluctuating centering around the 133-134 yen level.
C. Overseas Economic and Financial Developments
The outlook for final demand remained highly uncertain, although there were signs of the economy bottoming out in the United States, Europe, and some parts of Asia.
In the U.S. economy, GDP returned to positive growth, increasing at an annual rate of 0.2 percent in the October-December quarter of 2001 from the previous quarter after declining in the July-September quarter. This was largely attributable to the rise in automobile sales in response to sales promotion and an increase in defense expenditures, despite a significant fall in business fixed investment and inventory investment. The pace of decline in production was slowing, and indexes compiled by the Institute for Supply Management (ISM) continued to improve. In the household sector, there were some signs that the pace of deterioration in employment conditions would moderate to some extent. Weekly retail sales statistics suggested that private consumption maintained its firmness after the turn of the year. As for the outlook, the pace of economic recovery and its strength, rather than its timing, were the focus of attention. It was generally expected that the pace of recovery would be moderate because demand components such as housing investment, business fixed investment, and exports were unlikely to increase rapidly.
The U.S. financial markets basically continued to factor in economic recovery, although developments in the market lacked clear direction reflecting changing views on future economic developments and monetary policy. Many stock prices were undergoing a fairly distinct adjustment, as market participants had started to consider that stocks were overvalued relative to corporate profits and had become uncertain about firms' accounting information since the problems related to Enron emerged. The Federal Open Market Committee (FOMC) decided to keep its target for the federal funds rate unchanged in its meeting on January 29 and 30, 2002, and assessed the risks as being weighted mainly toward conditions that might generate economic weakness in the foreseeable future. Despite this, the U.S. federal funds futures factored in a raise of 25 basis points in the federal funds rate around the middle of 2002.
In Europe, economies on the whole continued to decelerate due to slower growth in exports and business fixed investment, and in Germany the economy was in a recessionary phase. Recently, however, there were signs that the pace of production cuts was moderating, as the Purchasing Managers' Index (PMI) for the euro area manufacturing sector for December 2001 continued to improve partly due to progress in inventory adjustments following the production cuts. The rate of increase in prices basically remained on a downtrend, although the annual percentage increase in the overall index in the Harmonised Index of Consumer Prices (HICP) increased significantly in January 2002 due to a rise in prices of fresh food.
NIEs and ASEAN economies also continued to decelerate on the whole. However, exports and production started to show signs of leveling off against the background of the progress in inventory adjustments in semiconductors worldwide. Stock prices were firm and foreign exchange rates were stable reflecting the continuing inflow of foreign capital.
The situation in Argentina was worsening considerably amid political and social turmoil as anxieties about the financial system emerged, in addition to the implementation of a temporary suspension of payments of external public debt and a currency devaluation.
D. Economic and Financial Developments in Japan
1. Economic developments
Japan's economy continued to deteriorate. Inventory adjustments were progressing in many industries including electronic parts, and the rate of decline in production was contracting. The severity of employment and income conditions on the other hand was intensifying, as evident in the rise in the unemployment rate and the decrease in winter bonuses.
With regard to final demand, public investment on a GDP basis was on a downward trend despite the implementation of the supplementary budget for fiscal 2001. Real exports marked a negative growth of 1.7 percent in the October-December quarter of 2001, a smaller fall than in the previous quarter, and they were likely to stop decreasing and turn up gradually around the middle of 2002 against the background of the completion of inventory adjustment of IT-related goods, a recovery in overseas economies, and the depreciation of the yen. Although real imports increased slightly in the October-December quarter of 2001 following the substantial decline in the July-September quarter, it was judged that they were on a declining trend, taking into account technical factors arising from the number of business days at customs clearance.
Business fixed investment continued to decrease. As for the outlook, business fixed investment was likely to decrease not only in IT-related manufacturing industries, where a decrease was already evident, but also in a wider range of industries including nonmanufacturing, given the environment for investment, for example corporate profits and financing conditions, and the developments in machinery orders.
Private consumption was weakening, while the severity of employment and income conditions intensified. Sales of passenger cars, especially those of small cars, recovered in January 2002 owing to the introduction of new models. Although consumer confidence remained weak, private consumption had not deteriorated beyond a level that was in line with developments in income conditions.
The unemployment rate had been marking a new record high each month due mainly to the increase in the number of those involuntarily unemployed. The mismatch between supply and demand of labor seemed to be considerable given that the number of new job offers was still at a higher level than in 1996 and 1997. Household income was weakening more evidently as seen in the weakness in employees' income due to the fairly large decline in winter bonuses. As a result, private consumption would continue to be lackluster.
Domestic wholesale prices continued to decline, especially in machinery and chemical products, although the decrease in some prices, such as those of electronic parts, seemed to have ceased. Consumer prices were declining somewhat faster than the previous month due to the effects of the decline in petroleum products in addition to the decline in prices of imported goods and domestic goods that were competing with imported goods.
Japan's economy would continue to deteriorate, but the pace was expected to moderate gradually with the downward pressure from exports and inventories abating. The pace of decline in production was likely to slow gradually and the decline was expected to more or less come to a halt by the middle of 2002. However, monitoring was required of many uncertain factors regarding future economic developments overseas especially in the United States, and of a risk of further deterioration in corporate financing conditions and consumer sentiment in Japan against the background of the fall in stock prices.
2. Financial environment
The year-on-year rate of decline in bank lending expanded slightly in January 2002. Financial institutions were becoming more cautious in extending loans to firms with high credit risks while they continued to be more active in extending loans to blue-chip firms. Various diffusion indexes of financial institutions' lending attitude as perceived by firms and of corporate financing conditions of firms had been deteriorating, albeit gradually, to levels close to those in 1997 and 1998.
Regarding fund-raising through the markets, the amount outstanding of CP issued in January 2002 marked a record high, yet the year-on-year growth rate continued to decline. The issuing conditions for A-2/P-2 rated CP were becoming slightly severe. In the corporate bond market, the year-on-year growth rate of the amount outstanding of corporate bonds issued had been slowing because the issuance of those with low credit ratings was sluggish.
With regard to the monetary aggregates, the year-on-year growth rate of the monetary base (currency in circulation plus current account balances at the Bank) had increased further to 23.4 percent in January due to the rise in the growth of banknotes in addition to the large increase in the current account balances at the Bank. This was the highest growth since August 1974 when it marked 23.9 percent during the hyperinflation period, exceeding the 22.8 percent growth in January 2000 when the rate surged in preparation for the Year 2000 problem. The year-on-year growth rate of the money stock (M2+CDs) was 3.6 percent in January, an increase from the 3.4 percent growth in the previous month.
Fund-raising costs for firms continued to be at extremely low levels on the whole. However, the long-term prime lending rate had risen for the third consecutive month reflecting the widening of yield spreads between interest-bearing bank debentures and JGBs. In the corporate bond and CP markets, the fund-raising conditions were generally favorable particularly for firms with high credit ratings as seen in a slight decline in CP issuance rates, but the issuing environment for those with low credit ratings continued to be severe on the whole.
II. Summary of Discussions by the Policy Board on Economic and Financial Developments
A. Current Economic Situation and the Outlook
On the current state of Japan's economy, most members concurred with the assessment, basically unchanged from the previous meeting, that "Japan's economy continues to deteriorate." These members cited both positive and negative factors. As positive factors, these members pointed out that exports and production seemed to be improving mainly in IT-related industries as signs of bottoming out in overseas economies became stronger. As negative factors, they cited further deterioration in business fixed investment and private consumption.
As for the outlook for Japan's economy, members generally shared the view that the economy was following the standard scenario indicated in the "Outlook and Risk Assessment of the Economy and Prices" released in October 2001 which forecasted that "Japan's economy will stop deteriorating towards the second half" of fiscal 2002 reflecting the recovery in exports. However, many members expressed the view that the outlook for the economy would likely remain highly uncertain given that (1) there was still much uncertainty about the outlook for overseas economies; and (2) on the domestic front, there was cause for concern, for example the deterioration in employment and income conditions and downside risks stemming from the financial side. Most members stressed the need to pay closer attention to developments in financial markets and their effects on the economy toward the fiscal year-end in March 2002.
One member expressed a more cautious view of the Japanese economy than other members, pointing out the following factors: (1) the Indexes of Business Conditions were basically on a sharp downtrend, although they had recently recovered somewhat; and (2) some economic indicators had deteriorated considerably to unprecedented levels as seen in the unemployment rate which was at the highest level since data were first compiled. The member further expressed a more severe view on Japan's economy that the deflationary spiral was progressing rapidly, and it would enter a phase in which the decline in wages and service prices would accelerate.
On overseas economic developments, many members shared the view that it was becoming likely that overseas economies would recover gradually. One of these members pointed out that it could be considered that the worldwide adjustment since late 2000 was attributable to the following three causes: the end of the IT bubble; the rise in oil prices; and monetary tightening in various countries. Based on this assessment, this member continued that it was fairly reasonable to assume a recovery in 2002, when the effects of these factors would either have disappeared or be diminishing. However, many members also pointed out that developments in final demand would remain uncertain.
Discussion on the U.S. economy centered on members' views of the pace and strength of the expected recovery. On its current situation, members generally shared the view that production was likely to bottom out in the near future due to the progress in inventory adjustments, and that private consumption remained firm. On this basis, a few members raised the following as factors posing risks to the economic outlook. First, there could be a swing back in private consumption given the recent sales incentive measures and discount sales. Second, with regard to business fixed investment, it was not clear whether the adjustments in excessive capital stock and investment of the past had been completed. And third, labor cost remained high despite the fact that the inflation rate was on a declining trend. On the effect of the failure of Enron, a few members expressed concerns about the negative effect associated with investors becoming increasingly risk averse through impairment of confidence in U.S. capital markets and accounting rules. Further, one member raised concerns regarding a possible fall in the amount outstanding of consumer credit after the large increase and the risk that it would become difficult to continue the refinancing of mortgages, which had been supported by overseas investors' active purchasing of agency bonds. This member expressed a severe view on the results of GDP for October-December quarter of 2001, pointing out that the GDP deflator had declined from the previous quarter and GDP was supported by growth in fiscal spending.
Regarding economies other than that of the United States, one member pointed out that the outlook for East Asian economies was brighter as evident in the signs that the decline in exports and production were coming to a halt in general, and developments in stock prices were favorable due partly to an inflow of foreign capital. A different member remarked that the Chinese renminbi and the Korean won had depreciated substantially against the yen over the long term, and the ratio of exports to GDP had increased in both countries.
On the outlook for Japan's economy, members generally concurred that a full-fledged recovery in domestic demand could not yet be expected given that private consumption and business fixed investment would further deteriorate, although an improvement was becoming distinct in exports and production, which were the principal factors behind the economic deterioration. One member remarked that it could not be said that production as a whole would stop declining because inventories in some goods had declined very little. This member further commented that the economy was experiencing deflation and corporate sentiment was becoming increasingly cautious reflecting the decline in stock prices and concern about the stability of the financial system, and therefore, an expansion in production was not in prospect. A different member expressed the view that the economic recovery would inevitably be weak given that the severity of employment and income conditions of households was intensifying. A different member commented that, depending on developments in overseas economies, there was a high risk that, at best, the economy might be plodding along at bottom even in the latter half of 2002.
A few members expressed the view that, for Japan's economy to return to a recovery path in the medium to long term, a cut in wages or a reduction in employment would be inevitable. One of these members said that such adjustments would continue for a period of two to three years irrespective of economic developments related to the business cycle. Another member said that, with a view to strengthening international competitiveness, it was indispensable that the high labor cost relative to international standards should be reduced. As a forthcoming task, this member raised the issue of work sharing, and said that it was also essential to establish a framework that would provide a safety net for the unemployed.
With regard to prices, members shared the view that given the deteriorating economy, downward pressure would continue to be exerted on prices due to the domestic supply-demand imbalance. A few of these members noted that the domestic wholesale price index seemed to have stopped declining or the pace of the decline was slowing due partly to reduction in production, progress in inventory adjustments, and waning of pressure to narrow the price differential between Japan and other countries reflecting the depreciation of the yen. One of these members commented that, in some industries, prices, after declining to a level close to marginal cost, had been bottoming out in response to the concerted action to reduce production triggered by business consolidation and reorganization of industries. These members, however, pointed out that against the background of weak private consumption and wages, there were no signs that the consumer price index (CPI) would stop decreasing. One member commented that prices would inevitably continue falling for goods and services that were not exposed to global competition, and for industries protected by regulation due to pressures to correct their high cost structure.
One member expressed the view that crude oil prices seemed to have hit a short-term bottom in January 2002, and therefore a further decline was unlikely in the near future.
B. Financial Developments
Most members expressed the view that no significant change had been observed in the economic situation, but downside risks stemming from the financial side were increasing, and thus developments in financial markets and their effects on the economy required closer monitoring than in the past, particularly toward the fiscal year-end.
Members' discussion on the recent developments in financial markets centered on the phenomenon that prices of stocks and JGBs and the foreign exchange rates of the yen fell simultaneously. One member explained that the background to the phenomenon was market participants' severe view of Japan's structural problems, in particular the nonperforming-loan (NPL) problem, and this view and asset price declines were reinforcing each other in a vicious circle. One member commented that the simultaneous fall of these asset prices seemed to stem from independent causes and was not a coordinated move by market participants to sell Japanese financial assets, but the situation warranted attention given the possibility of a serious depreciation of the yen associated with the capital flight from Japan.
With regard to the bond market, many members pointed out that market participants were sensitive about fiscal discipline. One member's analysis was that bond prices had declined because foreign investors started to sell bonds against the background of the depreciation of the yen and, in the meantime, domestic investors were reluctant to take duration risk with the approach of the fiscal year-end. The member continued that, although long-term interest rates seemed not to have reached their peak yet, market participants would start buying bonds in due course as they would start to perceive bond prices as being at reasonable levels. Another member commented that it appeared that speculative sales of bond futures were being made in the market amid various speculations about future market developments. A different member noted that developments in interest rates suggested that there was no expectation at all of default on JGBs in the market.
As for the decline in stock prices, most members pointed out that the background to this was the recent political situation and market concerns about the possibility of a retreat from structural reform, especially concerns that the path for an early disposal of NPLs was unclear. One member expressed concern about the outlook for U.S. stock prices that, toward the end of 2002, they might fall below the lowest level marked in September 2001.
One member said that the member was doubtful about the view that Japanese financial institutions' funding conditions with regard to foreign currency were stable compared to those in 1997 and 1998 citing the fact that the Japan premium had not emerged. This member continued that the fact was that few transactions that could incur premiums were being made by Japanese financial institutions, and said that given the situation where credit lines extended to Japanese financial institutions were being reduced, foreign exchange and the foreign currency funds markets warranted close attention toward the fiscal year-end. A different member pointed out that credit default swap rates for Japanese financial institutions had surged again recently, following the temporary fall after the turn of the year.
One member commented on the effect of the decline in asset prices that the recent decline would intensify the deterioration in the economic and financial situation, in the same way as the increase in asset prices had accelerated the emergence of the bubble economy. This member continued that expectations played an extremely important role in formation of asset prices, and it was essential to prevent expectations from going too far in order to avoid credit contraction or a deflationary spiral. A different member commented that a severe liquidity crisis like that of 1998 had been avoided through liquidity provision by the Bank, but depending on developments in prices of bank stocks, due attention should be paid to liquidity problems. Further, a few members expressed a concern that the decline in prices of bank stocks not only affected banks themselves but could also cause appraisal losses to firms that held bank stocks.
Members also discussed the effect of the NPL problem on corporate financing. A few members commented that in line with the progress in the disposal of NPLs, banks might become more selective about borrowers, especially smaller firms, from the start of fiscal 2002 in April. One of these members expressed the view that it was inevitable that the polarization of corporate financing conditions between firms with high and low credit standings would further intensify. A different member commented that firms' funding conditions would likely remain under strain because firms that were raising funds would come directly up against the risk averse stance of households and investors, as financial institutions could not be expected to absorb risks.
In relation to securities regulations, one member said that (1) an article in the ministerial ordinance, which exempted margin transactions from the uptick rule--which required short sales to be made only at the same or a higher price than the most recent one--was problematic; and (2) the detailed rules on the restriction on or suspension of applications for loans for margin transactions should be reviewed from the viewpoint of ensuring free market transactions.
III. Summary of Discussions on Monetary Policy for the Immediate Future
Members discussed the monetary policy stance for the immediate future.
Most members agreed that (1) the economy continued to deteriorate, but the standard scenario that "Japan's economy will stop deteriorating towards the second half" of fiscal 2002 remained valid; and (2) downside risks related to the financial side was increasing against the background of a decline in asset prices such as stock prices and emergence of concerns over the financial system.
On this basis, most members expressed the view that the Bank should (1) maintain the current guideline for money market operations and promote stability of financial markets through provision of ample funds, and (2) examine how the significant increase in the outstanding balance of current accounts at the Bank would affect developments in financial institutions' behavior and financial markets, and (3) conduct monetary policy in a timely manner if liquidity demand increased for some reason in the future.
However, one member who took a more cautious view of the economy than other members said that the member would like to propose that the Bank should (1) introduce inflation targeting, (2) start purchasing foreign bonds in order to provide funds smoothly, and (3) raise the target for the outstanding balance of current accounts at the Bank to around 18 trillion yen.
Members shared the view that the change in monetary policy in December 2001 had had some effects such as a decline in interest rates on term instruments and a pause in the widening trend of credit spreads. With regard to its effects as a stimulus to economic activity, however, a few members said that they were skeptical about the significance of a further increase in the outstanding balance of current accounts at the Bank, although the Bank should continue to monitor the effects for a while. A different member said that the effects of rebalancing of financial institutions' portfolios through the increase in the outstanding balance of current accounts at the Bank had not appeared clearly yet, but monitoring should be continued for a while as it was only after summer 2001 that the year-on-year increase in the monetary base had become significant.
Many members shared the view that the money stock was unlikely to increase to the extent that had been expected, given the fact that credit creating activity of financial institutions remained sluggish despite the increase in the monetary base. One member remarked that there could be a long-term relationship between the money stock and economic activity but in the short term there was no stable relationship between the two. This member continued that this view was supported by the fact that the money stock was excluded in the recent revision of the components of the Indexes of Business Conditions.
Regarding how the Bank should conduct money market operations, members generally agreed that within the guideline's target range of "at around 10 to 15 trillion yen," the Bank should continue to aim as far as possible at the upper end of the range, even though there had been frequent cases of undersubscription in the Bank's money market operations.
Many members said that the undersubscription was proof that the Bank was providing liquidity to its utmost and this fact itself was contributing to the maintenance of stability in the market. On this basis, a few members remarked that considering the fact that the Bank had already taken various measures to improve the way in which funds were provided, there was no need to be overly concerned about 15 trillion yen as the level for the outstanding balance of current accounts as long as the Bank could keep it above 10 trillion yen. On this point, some members expressed the view that it was not necessary to attain a specific target level, but the Bank should aim as far as possible at the upper end of the range. Most members agreed with this view.
Members exchanged views on the role of the Bank's outright purchases of JGBs. One member said that it might be worth considering increasing these as a possible policy option. In addition, this member raised questions such as (1) whether they should be regarded simply as a means of funds provision or from a slightly different viewpoint, and (2) how the effects on the market should be assessed.
This member expressed the view that in the current situation where undersubscription occurred frequently, increasing the Bank's outright purchases of JGBs could be considered in theory as one policy option. This member, however, continued that this matter should be handled carefully at this point given the recent sensitive movements in long-term interest rates. Another member said that even if the Bank increased its outright purchases of JGBs, the outstanding balance of current accounts at the Bank might not increase, because it would induce more undersubscription in its other market operations. Many members remarked that the risk should be kept in mind that long-term interest rates might rise due to concerns about whether fiscal discipline could be maintained. A few members said that the Bank should further examine various measures other than increasing the outright purchases of JGBs to improve the current situation of bidding in its money market operations.
Some members commented on the possibility that the Bank's outright purchases of JGBs could be used as a means of influencing long-term interest rates instead of as a means of funds provision. A few members said that theoretically it could be used in this way when disruptions in the market were expected. These members continued that the current 1.5-1.6 percent level would not lead to panic in the market, and given the possibility that JGBs might be downgraded and the market's concerns over the medium- to long-term fiscal outlook, the Bank should bear in mind the risk that an increase in its outright purchases of JGBs might on the contrary have adverse effects.
Regarding the conduct of monetary policy for the future, most members said that if liquidity demand increased reflecting developments in financial markets, the Bank would need to deal with the situation by further increasing its provision of liquidity.
On this basis, a few members noted that there was a limit to the extent to which liquidity provision alone could solve the present problems, since the essential problems of Japan's economy were not an insufficiency of liquidity but (1) the increase in credit risks of firms and financial institutions, (2) a potential insufficiency in their capital bases, and (3) inability to establish new business models.
A few other members remarked that the most important task for the time being was not monetary policy at the macroeconomic level but prudential policy at the microeconomic level. One of these members remarked that it was essential that the Bank make it clear that it was fully prepared for action in a timely manner as the lender of last resort. This member said that the fall in bank stock prices was a warning from the market, which demanded progress in disposal of NPLs and an early determination of the final amount of losses, and the member strongly emphasized that (1) a decisive disposal of NPLs should be started, and (2) an early injection of public funds into banks which could not strengthen their capital bases by themselves should be implemented. A different member said that precautions against rumors and event risk were essential, and the problem was that it was unclear how Article 102 of the Deposit Insurance Law would function with regard to a liquidity crisis.
IV. Remarks by Government Representatives
The representative from the Ministry of Finance made the following remarks.
(1) The Government was making efforts to ensure prompt implementation of the second supplementary budget for fiscal 2001, which had been passed by the Diet recently. The Government would (a) further promote structural reforms based on "Structural Reform and Medium-Term Economic and Fiscal Perspectives," as well as (b) make the utmost effort to obtain the Diet's approval for the fiscal 2002 budget as quickly as possible, which would, as part of the structural reforms, improve the efficiency of government expenditures further and shift funds boldly to priority areas.
(2) The Government hoped that the Bank would conduct money market operations more smoothly with the measures to strengthen money market operations decided at the previous meeting. It was necessary to give due consideration to developments in the economy and financial markets and to the stability of the financial system. From these perspectives, the Government would like the Bank, in particular, to provide as ample a supply of funds as possible to deal promptly with developments in liquidity demand toward the end of the fiscal year so that there would not be anxiety in the market about the availability of liquidity.
(3) The CPI showed that prices continued to fall. It was the most important task for the Government and the Bank to stop deflation in close cooperation with each other, as stated in "Structural Reform and Medium-Term Economic and Fiscal Perspectives." The Government would like to ask the Bank to further discuss measures to prevent the economy from sliding into a deflationary spiral and hoped that such discussion would lead to adoption of monetary policy that would be more effective in relation to the economy.
The representative from the Ministry of Finance made the following additional remarks.
(4) The Government would like the Bank to (a) make further use of CP operations under repurchase agreements maturing beyond the end of fiscal 2001 to alleviate market concerns toward the fiscal year-end, and (b) discuss monetary policy giving due consideration to developments in life insurance companies from the standpoint of ensuring the stability of the financial system.
The representative from the Cabinet Office made the following remarks.
(1) The Government was making its assessment of the current state of the Japanese economy for the Monthly Economic Report, and it was basically in line with the Bank's staff's assessment of the economy.
(2) Based on discussions at the meeting of the Council on Economic and Fiscal Policy to be held on February 12, 2002, the Government would strive to achieve an economic recovery and stabilize prices as soon as possible, taking into consideration new options to deal with the current situation in close cooperation with the Bank. The Government would like to ask the Bank to implement monetary policy in an appropriate and timely manner to stop deflation.
Based on the above discussions, the majority of members considered it appropriate to maintain the current guideline for money market operations.
One member, however, said that the current guideline for money market operations was inadequate to deal with the current situation of the economy. The member proposed that the Bank should (1) introduce inflation targeting, (2) start purchasing foreign bonds in order to provide funds smoothly, and (3) raise the target for the outstanding balance of current accounts at the Bank to around 18 trillion yen. This member said that it was necessary to increase the Bank's outright purchase of JGBs from 800 billion yen to 1 trillion yen per month.
This member gave the following reasons for the proposals. First, it would be easier for the public to understand if the target for prices was set in terms of the rate of inflation rather than the level of prices, and the former was more commonly used by overseas central banks than the latter. Second, the Bank should diversify its means of providing funds. Third, purchases by the Bank of a fixed amount of foreign bonds on a regular basis would not be in contravention of the Bank of Japan Law. And fourth, the Bank should strengthen its monetary easing stance by raising the target for the outstanding balance of current accounts at the Bank.
As a result, the following proposals were submitted.
Mr. N. Nakahara proposed the following procedures for money market operations:
The Bank of Japan will (1) conduct money market operations, aiming at maintaining the average of the year-on-year CPI (excluding fresh food, on a nationwide basis) in the October-December quarter of 2003 at 1.0-3.0 percent; and (2) start to purchase foreign bonds as soon as all arrangements are made. Foreign bonds will be purchased when it is judged necessary to increase the outstanding balance of current accounts at the Bank smoothly.
The proposal was defeated with one vote in favor, eight against.
Further, this member proposed the following guideline for money market operations for the intermeeting period ahead:
The Bank of Japan will conduct money market operations, aiming at an outstanding balance of current accounts at the Bank of around 18 trillion yen. Should there be a risk of financial market instability, e.g., a rapid surge in liquidity demand, the Bank will provide ampler liquidity irrespective of the guideline above.
The proposal was defeated with one vote in favor, eight against.
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 in 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 the current accounts at the Bank at around 10 to 15 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 guideline above.
Votes for the proposal: Mr. M. Hayami, Mr. S. Fujiwara, Mr. Y. Yamaguchi, Mr. T. Miki, Mr. K. Ueda, Mr. T. Taya, Ms. M. Suda, and Mr. S. Nakahara.
Vote against the proposal: Mr. N. Nakahara.
Mr. N. Nakahara dissented for the following reasons. First, the range of 10 to 15 trillion yen was inappropriate as it gave the staff too much discretion. Second, at 10 trillion yen, the lower end of the range was insufficient to have a quantitative effect. And third, the current guideline for money market operations was inadequate to deal with the current situation of the economy, considering that it had gone beyond the early stages of deflation and wages and service prices would start to fall in the near future.
VI. Discussion on the Bank's View of Recent Economic and Financial Developments
The Policy Board discussed "The Bank's View" of recent economic and financial developments, and put it to the vote. By majority vote, the Board decided to publish "The Bank's View" on February 12, 2002 in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background").
Votes for the proposal: Mr. M. Hayami, Mr. S. Fujiwara, Mr. Y. Yamaguchi, Mr. T. Miki, Mr. K. Ueda, Mr. T. Taya, Ms. M. Suda, and Mr. S. Nakahara.
Vote against the proposal: Mr. N. Nakahara.
Mr. N. Nakahara dissented for the following reasons. First, it was inappropriate to delete the word "broadly," which was used in the previous month's "Bank's View"--"Japan's economy is deteriorating broadly"--because the deterioration of the economy was spreading broadly. Second, it should refer to corporate bankruptcies and the unemployment rate. Third, it was premature to tone up the expressions used to describe the outlook for overseas economies. And fourth, the judgment that prices were expected to follow a "gradual" declining trend for the time being was not appropriate.
The original full text, in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on February 12, 2002 together with the English version of "The Bank's View." The English version of "The Background" was published on February 13, 2002.
Attachment
For immediate release
February 8, 2002
Bank of Japan
At the Monetary Policy Meeting held today, the Bank of Japan decided, by majority vote, to maintain 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 the current accounts at the Bank at around 10 to 15 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 guideline above.