Minutes of the Monetary Policy Meeting on May 20 and 21, 2002  : 日本銀行 Bank of Japan
Central bank: boj | Type: minutes | Date: 2002-05-21

Minutes of the Monetary Policy Meeting
on May 20 and 21, 2002
(English translation prepared by the Bank's staff based on the Japanese original)
July 1, 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 Monday, May 20, 2002, from 2:00 p.m. to 4:02 p.m., and on Tuesday, May 21, from 9:00 a.m. to 12:56 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. K. Ueda
Mr. T. Taya
Ms. M. Suda
Mr. S. Nakahara
Mr. H. Haru
Mr. T. Fukuma
Government Representatives Present
Mr. H. Fujii, Deputy Vice Minister for Policy Planning and Coordination, Ministry of Finance
Mr. H. Takenaka, Minister of State for Economic and Fiscal Policy, Cabinet Office
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. K. Yamamoto, Director, Financial Markets Department
Mr. H. Hayakawa, Director, Research and Statistics Department
Mr. K. Monma, Senior Manager, Research and Statistics Department
Mr. E. Hirano, Director, International Department
Secretariat of the Monetary Policy Meeting
Mr. Y. Hashimoto, 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. Shimizu, Senior Economist, Policy Planning Office
The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on June 26, 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. Takenaka was present on May 21 from 10:38 a.m. to 11:44 a.m.
Mr. Kobayashi was present on May 20 for the whole of the session, and on May 21 from 9:00 a.m. to 10:35 a.m.
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 April 30, 2002.
Given the decrease in precautionary demand for funds resulting from a waning of markets' cautiousness about the effects of the system failure of a major bank group, the Bank was conducting market operations, aiming at an outstanding balance of current accounts at the Bank of around 15 trillion yen currently.
As a result, the weighted average of the uncollateralized overnight call rate was in the 0.001-0.002 percent 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 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
Short-term interest rates were stable in the intermeeting period. For example, three-month Euro-yen rates stayed in the 0.04-0.05 percent range.
Long-term interest rates continued to reflect market participants' nervousness stemming from speculation that foreign credit rating agencies were considering a possible downgrading of the rating of Japanese government bonds (JGBs). The rates declined to the 1.35-1.40 percent level due partly to an increase in banks' investment in bonds. Stock prices were firm, staying in the 11,000-12,000 yen range, supported by expectations for a recovery in the Japanese economy and corporate profits, and by speculation about a possible buyback of Japanese stocks by foreign investors.
The yen appreciated to the 125-126 yen level against the U.S. dollar, as the dollar tended to weaken against major currencies. Many market participants forecasted that, judging from the difference between the state of the U.S. economy and that of the Japanese and European economies, the U.S. dollar would appreciate in the medium to long term. However, some market participants started to consider that concerns about the sustainability of the economic recovery and about financing of the current account deficit in the United States would cause depreciation of the U.S. dollar in the immediate future. Against the euro, the yen stayed in the 115-117 yen range.
Credit spreads, the yield differentials between corporate bonds or bank bonds and JGBs in the secondary market, tended to contract, as regional banks and institutional investors such as insurance companies had become active in purchasing corporate and bank bonds amid heightening of expectations that the Japanese economy had hit bottom. The credit spreads for low-rated bonds, however, remained wide, suggesting that concern about credit risk still persisted among market participants.
C. Overseas Economic and Financial Developments
Overseas economies were generally improving. As the U.S. economy continued to recover, East Asian economies seemed to have turned around and European economies showed changes that would lead to recovery. However, the outlook for final demand in the United States, a key factor for overseas economies, remained uncertain, and thus the pace of U.S. economic recovery toward the latter half of 2002 was the focus of attention.
In the United States, private consumption remained firm as seen in retail and automobile sales, and consumer confidence basically tended to improve. Housing starts decreased considerably in April from the previous month. In the corporate sector, production and orders started to improve, but business fixed investment had not yet recovered clearly, judging from developments in orders for capital goods. Regarding employment, the decrease in the number of employees was almost coming to a halt. The unemployment rate rose to 6.0 percent in April, its highest level since 1994. This rise, however, seemed to be mainly due to an increase in the number of people entering the labor market in anticipation of an increase in job opportunities amid economic recovery. Despite this, firms remained cautious about offering new jobs.
In the U.S. financial markets, developments in long-term interest rates and stock prices suggested that market participants' views on the pace of the recovery in the near future had become more cautious than before, since corporate profits and business fixed investment had not shown clear improvement.
In the euro area, the deterioration of the economy was almost coming to a halt as exports and production had stopped decreasing, although domestic demand components, such as private consumption and business fixed investment, remained weak. Consumer prices remained stable. However, expectations that the key ECB interest rates would be raised after the middle of 2002 heightened in the market, reflecting the rise in crude oil prices and an expectation of a relatively large increase in wages.
In East Asia, NIEs and ASEAN economies were starting to recover. Exports and production had started to increase reflecting the completion of adjustments in production and inventory of IT-related goods. As for domestic demand, the decline in private consumption and business fixed investment was about to come to an end. In China, the economy continued to maintain high growth, with exports recovering. In Argentina, the turmoil continued, but to date, this had not had significant effects on other developing countries.
D. Economic and Financial Developments in Japan
1. Economic developments
With regard to developments in demand components, exports were increasing due to the recovery in overseas economies. Specifically, exports of intermediate goods, capital goods and parts, and automobiles increased, and those of IT-related goods seemed to have recovered. On the domestic front, however, business fixed investment continued to decrease. In addition, private consumption was weak, as evident in various sales statistics, reflecting the continuing cautiousness among consumers. Moreover, housing investment remained sluggish, and public investment was on a downtrend.
Production was starting to pick up due to the increase in exports and progress in inventory adjustments. However, firms were maintaining their stance on reducing personnel expenses given persistently strong excessiveness in employment. Therefore, employment and income conditions of households continued to worsen on the whole, as seen in the decrease in the number of employees and the faster pace of decline in wages. However, there were marginal signs of improvement, such as in overtime hours as well as new job offers, reflecting the rebound in production.
Turning to the outlook, Japan's economy was projected to stop deteriorating as a whole, since the increase in exports and production would lead to an improvement in corporate profits and in turn, domestic private demand. However, the recent strength in exports seemed to some extent to be supported by temporary factors such as restocking of inventories overseas, and the pace of recovery in exports was likely to become somewhat slower in the future. Business fixed investment was expected to follow a downtrend for a while, and private consumption was also likely to remain lackluster mainly due to worsening employment and income conditions. Therefore, it would take a significant period of time for the positive effects to spread across the nonmanufacturing sector, small firms, and households.
With regard to prices, domestic wholesale prices were almost flat, since machinery prices continued to decline while prices of petroleum products had started to rise. On the other hand, consumer prices and corporate service prices continued to decline. Attention should be paid to the effect of the decline in wages on service prices. However, a significant widening of the decline had not been observed so far, judging from consumer prices in the Tokyo metropolitan area in April, a month when there were usually many revisions in service prices.
As for the outlook for prices, domestic wholesale prices, which tended to be greatly affected by depreciation of the yen and any rise in international commodity prices, were likely to be more or less flat for the time being. On the other hand, consumer prices were expected to stay on a gradual declining trend.
2. Financial environment
With regard to corporate finance, private banks' lending continued to decline by 2-3 percent on a year-on-year basis. In the corporate bonds and CP markets, the issuing environment for firms with low credit ratings continued to be severe on the whole, but the environment for firms with high credit ratings was improving recently. According to surveys and other information, the lending attitude of financial institutions as perceived by small firms was becoming more severe. Some signs were starting to appear that the deterioration in the funding situation of firms was coming to a halt, against the background of the improving trend in sales and the decrease in inventories.
The year-on-year growth rate of the monetary base increased further in April. This was due to the continued high liquidity demand even after the start of the new fiscal year reflecting the system failure of a major bank group.
The year-on-year growth rate of the money stock remained 3.5-4.0 percent. The increase in the growth rate of M1 (cash currency plus deposit money) became clearer. In particular, the year-on-year growth rate of deposit money was 38.2 percent in April, higher than the previous record of 34.3 percent marked in July 1973, as liquid deposits continued to be fully guaranteed.
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 generally agreed that the pace of deterioration had moderated, with production starting to pick up reflecting the increase in exports and progress in inventory adjustments.
As for the outlook, members generally shared the following view. Japan's economy was projected to stop deteriorating as a whole, since the increase in exports and production would lead to an improvement in corporate profits and in turn, domestic private demand. However, it would take a significant period of time for the positive effects of the developments in exports and production to spread across the nonmanufacturing sector, small firms, and households. This was because in addition to the weak employment and income conditions, the pace of increase in exports and production was likely to remain modest on balance.
Many members expressed the view that the recovery in exports and production was becoming more evident. Some of these members said that the pace of the recovery might be faster than expected in April when the "Outlook and Risk Assessment of the Economy and Prices" was released. A few members, however, warned that the increase in exports in the January-March quarter might have been bolstered considerably by the fast inventory restocking of IT-related goods particularly in the United States.
Most members agreed that there was, however, no clear sign indicating that the recovery in exports and production had spread to domestic final demand. They remarked that business fixed investment remained on a downtrend, judging from a declining trend in machinery orders, which was a leading indicator of business fixed investment. One member, however, said that the deterioration in business fixed investment might be coming to a halt, judging from the forecast for machinery orders for the April-June quarter and the production capacity D.I. released by the Japan Finance Corporation for Small Business.
A few members pointed out that firmness in developments related to private consumption was observed to some extent. For instance, the Family Income and Expenditure Survey showed that household spending was firm, consumer confidence improved, and the employment and wage situation, for example the number of new job offers, recovered marginally. One member said that it was a focus of attention whether the rise in stock prices would positively affect consumption through the wealth effect, as happened in 1999. Many members including these members expressed the view that given the severity of employment and income conditions, private consumption would basically remain weak.
Many members raised the sustainability of the recovery in the U.S. economy and the trend of depreciation of the U.S. dollar in the foreign exchange market as risk factors for the near future.
Most members commented on the U.S. economy that the recovery was becoming clear mainly due to the progress in inventory adjustments in IT-related goods and the firmness in household spending, but the sustainability of the recovery remained highly uncertain. They added that the optimistic view of the economic outlook among U.S. financial market participants might be beginning to be revised downward.
Many members raised the following as background: doubt about the sustainability of the firmness in household spending, which had been underpinned by the rise in housing prices; and possible negative effects of the rise in energy prices on the economy. A few members said that it would take more time for business fixed investment to recover, given the weakness of business confidence and profits, and excessiveness in capital stock perceived by firms. One member noted the following possibilities: a decline in the capacity of investors and banks to take risks might lead to a rise in funding costs, which, in turn, might restrain corporate activity; and long-term interest rates might rise as a stimulative fiscal policy was in place. In relation to developments in U.S. stock prices, a different member expressed the view that skepticism about firms' disclosure of accounting information and about their morals was one factor causing investors to leave the stock market.
Many members commented on the recent developments in the foreign exchange market. Some members said that if the U.S. dollar depreciated further it could negatively affect Japan's economy, which was still fragile, through a decrease in exports and corporate profits. A few members expressed the view that the background to the depreciation of the U.S. dollar was a slowdown in inflow of funds to the United States while it had a large amount of external debt and a large current account deficit. Some members pointed out that the external financing of the United States had become more dependent on portfolio investment. They continued that attention should be paid to the possibility of large fluctuation in the foreign exchange market caused by the shift in the means of external financing.
One member raised a question about whether the changes in the international flow of funds were attributable to a change in the trend of inflow of funds to the United States whose productivity was fairly high or were just a temporary phenomenon. A few members presented their analysis that the long-term trend of the appreciation of the U.S. dollar remained unchanged. However, in the short term, the U.S. dollar was depreciating because optimism about the U.S. economy was being revised downward and the Japanese and European economies were recovering. One member, however, expressed the view that the trend of the appreciation of the U.S. dollar was being corrected in the medium to long term. This member explained as the background to this view that overvaluation of the U.S. dollar due partly to the IT boom had subsided and that the fall in stock prices had induced capital outflow from the United States.
Based on the above discussions, members generally agreed that it was appropriate to revise the assessment of Japan's economy slightly upward for the third consecutive month. The majority of members, however, said that there were still not sufficient grounds to change the basic assessment of Japan's economy that it had not stopped deteriorating. They continued that it was necessary to examine the sustainability of the recovery in exports and production and the likelihood of this recovery spurring domestic demand. Many members made the following comments regarding the Government's assessment of the economy in its Monthly Economic Report for May which stated that the economy "has bottomed out": there was no fundamental difference between the Government's and the Bank's assessment, with the Government laying stress on the recovery in exports and production in expressing the state of the economy, while the Bank took into account developments in final demand as well.
As for prices, a few members commented on domestic wholesale prices, which were flat or starting to rise slightly. These members explained the background to this as follows: the depreciation of the yen since last year and the rise in crude oil prices affected domestic wholesale prices greatly, while factors stemming from the supply-demand balance such as progress in inventory adjustments in Japan were also contributing to the developments in wholesale prices. In response to this, another member argued that even without the ongoing decline in machinery prices due to technological innovation, factors stemming from the domestic supply-demand balance would have pushed wholesale prices downward. A different member expressed the view that an improvement in the supply-demand balance of a few products such as liquid crystals had enabled some firms to raise prices of these items, but firms in most other industries were not successful in raising prices as demand remained sluggish.
A few members pointed out that although consumer prices remained on a downtrend, there were signs of a slight change. One of these members remarked that a recent consumer survey suggested that expectations for deflation might start to be revised to some degree. Another member said that the member would monitor how consumer prices were affected by a revision of retailers' business models depending on imported goods and by a change in consumers' preference for goods and services. Many members including these members expressed the view that consumer prices were likely to stay on a gradual declining trend, given the effects of the decrease in wages and a tendency of the output gap to expand.
B. Financial Developments
A few members pointed out the following marginal improvements as recent changes in financial markets: demand for liquidity had stabilized in the money market; credit spreads for high-rated CP and corporate bonds had contracted; and deterioration in small firms' funding situation was coming to a halt. These members said that the recovery in the economy had led to these marginal improvements in the financial environment. A few other members pointed out that, although firms were still in the process of severe restructuring, the stock market was gradually starting to appreciate their steady progress and their establishment of new business models.
These members also pointed out that the differential between firms with different credit standing, i.e., polarization of firms, had become clearer in corporate finance, since investors' stance toward firms with high credit risk remained severe and banks were trying harder to set interest rates on loans to cover the credit risk of borrowers. A different member said that attention should still be paid to developments in nonperforming-loan (NPL) disposal and the lending stance of financial institutions. Members therefore generally shared the view that careful monitoring was still required of risks stemming from the financial side.
III. Summary of Discussions on Monetary Policy for the Immediate Future
Members first discussed the monetary policy stance for the immediate future. All members expressed the view that it was appropriate to maintain the current guideline for money market operations and continue providing ample funds to the money market. This was because a recovery in domestic demand was not in prospect and there were various downside risks, even though the assessment of the economy was revised upward.
Many members stressed the importance of stabilizing expectations of private economic entities and market participants and of maintaining the Bank's commitment in terms of policy duration at the present time when the economy was finally starting to show positive signs and the market was becoming stable to some extent. They continued that it was therefore essential to maintain the current monetary easing stance.
One member raised the question of the background to the current situation where the outstanding balance of current accounts at the Bank remained high, even though the fiscal year had ended and the system of the major bank group was being restored. This member said that a mechanism might be operating that caused liquidity, once provided by the Bank, to stay in the money market. A different member expressed concern about the decline in the function of the money market, pointing out that lenders in the market had become disinclined to invest in the money market since they had become more sensitive to credit risk after the partial removal of blanket deposit insurance. Another member remarked that, although the decline in financial institutions' willingness to invest in the money market was cause for concern, it also enabled the Bank to maintain the high level of the outstanding balance of current accounts at the Bank.
Based on the above discussion, some members said that the Bank should continue to monitor developments in the money market carefully because demand for liquidity remained unstable, although the outstanding balance was finally within the target range of "around 10 to 15 trillion yen."
Some members then commented on the monetary policy stance in the longer term. A few members said that it was necessary to continue deliberating on measures in case further monetary easing was needed, given the weak developments in the economy. In response to this, one member argued that further increasing the target for the outstanding balance of current accounts at the Bank and diversifying the means of market operations involved various uncertainties in terms of the feasibility, the expected effects, and the possible negative effects. This member added that the feasibility and effectiveness of monetary policy with the aim of preventing further deterioration of the economy due to a liquidity crunch was becoming clear.
A few members commented on other economic policies, in particular, structural reform. They said that at the present time when some positive signs were starting to appear in the economy, it was important that private firms take an active management stance which would boost private demand. They added that in this situation, an improvement in firms' business environment through structural reforms would be very effective. One member stressed that it was important that private financial institutions evaluate borrowers and projects appropriately so that the financial intermediary function would operate effectively. A different member drew attention to the effects of NPL disposal on financing for small firms, and said that detailed measures should be taken, for example regarding the safety net and taxes.
Some members commented on the effects of progress in structural adjustment on banks' loans outstanding and the money stock. They said that the following should be kept in mind when assessing them. First, in the present situation where banks were attempting to restore the soundness of their assets and firms were reducing excessive debts, banks' loans outstanding in the economy were likely to decrease even if the economy recovered to some extent. Second, diversification of firms' financing in line with the expansion of the capital market would restrain the growth of banks' loans outstanding. Third, in this situation, even if banks' loans outstanding did not increase due to these factors, it did not mean that funds needed for economic growth were not being sufficiently provided. Fourth, therefore, it was no longer appropriate to judge the effects of monetary easing by the growth of banks' loans outstanding and the money stock. And fifth, the Bank should explain these points clearly to the public.
IV. Remarks by Government Representatives
The representative from the Cabinet Office made the following remarks.
(1) In the May issue of its Monthly Economic Report, the Government assessed the economy as follows: "While the economy continues to be in a difficult situation, it has bottomed out." The Government did not expect strong economic recovery, since business fixed investment was in a very severe situation and the developments in prices could not be viewed optimistically.
(2) Regarding structural reform, the Government considered that the following three key issues should be decided by the end of June. The first was the economic revitalization strategies, focusing on regulatory reform, in particular, special structural reform areas. The second was tax reform. The Government was keenly interested in how the effective tax rate for firms should be reviewed. And the third was fiscal consolidation. The Government was discussing fiscal revenues and expenditures with a view to restoring the primary balance of the Government's budget within the next ten years.
(3) The Government would like the Bank to discuss how a situation could be created where the money stock would increase steadily. It was understandable that the money stock was being put under stock adjustment pressure in the course of NPL disposal. In this situation, it was important what kind of medium-term goal the Bank would adopt in conducting monetary policy.
(4) The Government was firmly resolved to stop deflation in cooperation with the Bank. In this regard, the Government would continue promoting the disposal of NPLs, and further discuss measures to strengthen the Japanese financial system. The Government would like the Bank to continue deliberating on monetary policy measures which were effective in overcoming deflation and implementing them.
The representative from the Ministry of Finance made the following remarks.
(1) In the May issue of its Monthly Economic Report, the Government stated as follows: "While the economy continues to be in a difficult situation, it has bottomed out. With the aim of fostering the bottoming out of the economy to a sustainable private-demand led growth, the Government will continue to take decisive actions for structural reform, and remains to be firmly resolved, in close cooperation with the Bank of Japan, to emerge from deflation." The Government would draw up a basic guideline in June for fundamental tax system reforms and economic revitalization policies.
(2) The Government would like the Bank to continue to give due consideration to developments in the economy and financial markets when providing liquidity and conduct monetary policy in a flexible manner should there be a rapid surge in liquidity demand. It was necessary that the Bank continue to conduct appropriate monetary policy to overcome deflation and ensure a full-fledged economic recovery at the present time when the economy had just bottomed out. The Government would also like the Bank to consider a variety of options to devise additional monetary policy measures and to take drastic measures.
Based on the above discussions, members shared the view that it was appropriate to maintain the current guideline for money market operations.
To reflect this 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. K. Ueda, Mr. T. Taya, Ms. M. Suda, Mr. S. Nakahara, Mr. H. Haru, and Mr. T. Fukuma.
Votes against the proposal: None.
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 unanimous vote, the Board decided to publish "The Bank's View" on May 22, 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. K. Ueda, Mr. T. Taya, Ms. M. Suda, Mr. S. Nakahara, Mr. H. Haru, and Mr. T. Fukuma.
Votes against the proposal: None.
The original full text, in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on May 22, 2002 together with the English version of "The Bank's View." The English version of "The Background" was published on May 23, 2002.
VII. Approval of the Minutes of the Monetary Policy Meeting
The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of April 10 and 11, 2002 for release on May 24, 2002.
Attachment
For immediate release
May 21, 2002
Bank of Japan
At the Monetary Policy Meeting held today, the Bank of Japan decided, by unanimous 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.