Minutes of the Monetary Policy Meeting on April 10 and 11, 2002  : 日本銀行 Bank of Japan
Central bank: boj | Type: minutes | Date: 2002-04-11

Minutes of the Monetary Policy Meeting
on April 10 and 11, 2002
(English translation prepared by the Bank's staff based on the Japanese original)
May 24, 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 Wednesday, April 10, 2002, from 1:59 p.m. to 3:47 p.m., and on Thursday, April 11, from 8:59 a.m. to 12:11 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. 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. 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. S. Nagai, Senior Economist, Policy Planning Office
Mr. H. Yamaoka, Senior Economist, Policy Planning Office
The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on May 20 and 21, 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 April 11.
Mr. Fujii was present on April 10.
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 March 19 and 20, 2002.
Until the fiscal year-end in March 2002, the Bank conducted market operations so as to increase the outstanding balance of current accounts at the Bank substantially, with the aim of ensuring the stability of financial markets by taking all possible measures. As a result, the outstanding balance was 27.6 trillion yen at the end of March 2002. Since the beginning of April 2002, the Bank, carefully monitoring developments in the market, had gradually decreased the outstanding balance, because demand for funds maturing over the end of the fiscal year subsided. However, demand for liquidity remained high even after the start of the new fiscal year in April 2002 against the background of a system failure of a major bank group. Therefore, the Bank was maintaining the outstanding balance at a level higher than the guideline's target range and continued to make efforts to ensure the stability of financial markets.
As a result of these operations, the weighted average of the uncollateralized overnight call rate was generally stable at 0.001-0.002 percent, except on the last day of the fiscal year when it increased to 0.012 percent.
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.
For the time being, to secure the financial market stability towards the end of a fiscal year, the Bank will provide more liquidity irrespective of the guideline above.
B. Recent Developments in Financial Markets
Against the background of the Bank's money market operations, there had not been any significant disruption in the money market at the turn of the fiscal year and short-term interest rates generally remained stable in the intermeeting period.
Long-term interest rates generally followed a downtrend reflecting the fact that institutional investors had become active in investing. Stock prices were generally unchanged and firm recently reflecting expectations of an inflow of new funds from institutional investors, although the prices had fallen temporarily due to profit-taking sales by investors after the rapid rebound until the beginning of March.
The yen rebounded rapidly against the U.S. dollar in early March, then depreciated again. It was moving around the 130-135 yen level recently.
As for credit spreads, the yield differentials between corporate bonds or bank bonds and Japanese government bonds (JGBs) in the secondary market, the widening had been restrained recently. 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 moving toward an improvement, as a recovery in the U.S. economy was coming into prospect and gradual changes toward a recovery were being observed in economies in East Asia and Europe. The pace of the recovery, however, was likely to be gradual particularly in the United States.
In the United States, while private consumption remained firm, inventory adjustment had been completed and production was recovering in the corporate sector. There were signs that pressures to adjust employment were easing gradually.
U.S. stock prices were weak, despite the firmness in economic indicators. Market participants seemed to remain cautious about the outlook for corporate profits due partly to the fact that developments in final demand still remained uncertain and crude oil prices were rising.
In the euro area, domestic demand components, such as private consumption, remained weak, but there were signs that exports and production had stopped decreasing due to an increase in exports to the United States and progress in inventory adjustment.
In East Asian countries, movements toward an economic recovery were being observed. For example, exports and production seemed to have almost stopped decreasing, and also in domestic demand, the decline in private consumption and business fixed investment was coming to a halt.
D. Economic and Financial Developments in Japan
1. Economic developments
Japan's economy still continued to deteriorate as a whole, but the pace had moderated somewhat.
With regard to developments in demand components, exports were gradually starting to increase while overseas economies were clearly gaining momentum for recovery. On the domestic front, however, business fixed investment continued to decrease and private consumption remained weak. In addition, public investment was declining and housing investment remained sluggish.
Final demand overall was still weak. However, production appeared to have stopped declining, reflecting the increase in exports and the progress in inventory adjustment. The deterioration in business sentiment of firms had almost ceased mainly in large manufacturers. However, firms had maintained their stance on reducing personnel expenses given persistently strong excessiveness in employment. Therefore, employment and income conditions of households continued to worsen, with the ongoing decrease in the number of employees and the growing trend in the rate of decline in wages.
Turning to the outlook, the economic deterioration in Japan was projected to come to a gradual halt, as production stopped declining and then turned up reflecting the improvement in exporting conditions. However, there also remained various uncertain factors regarding the pace of recovery in exports, in terms of both worldwide IT-related demand and overseas economies. Also, it would take quite a while for the positive momentum starting from exports and production to spread to nonmanufacturing, small firms, and the household sector, thereby leading the economy as a whole to a clear recovery.
With regard to prices, the year-on-year decline in domestic wholesale prices was contracting and the month-on-month decline was coming to a halt against the background of the increase in import prices and the progress in inventory adjustment. On the other hand, the consumer price index (excluding fresh food, on a nationwide basis) continued to fall at a pace of a little less than 1 percent from the previous year.
As for the outlook for prices, the balance between supply and demand was basically expected to keep exerting downward pressure on prices, although the increase in import prices and the progress in inventory adjustment would contribute to bring price falls to a halt. Factors such as the ongoing technological innovations, deregulation, and the streamlining of distribution channels would also continue to restrain prices.
2. Financial environment
With regard to corporate finance, private banks' lending continued to decline by about 2 percent on a year-on-year basis. Fund raising through corporate bonds and CP markets was above the previous year's level, but the growth rate was declining.
The year-on-year growth rate of the monetary base in March showed a significant increase of over 30 percent, due to the continued high growth of banknotes in circulation in addition to the substantial increase in the outstanding balance of current accounts at the Bank. The year-on-year growth rate of the money stock (M2+CDs) in March continued to increase, reaching 3.8 percent, due to the shift of funds from investment trusts.
Looking at the financial environment as a whole, credit spreads had been narrowing since April, and there were signs that the deterioration in fund-raising conditions of small firms was coming to a halt reflecting the fact that production and sales had ceased falling. However, investors remained cautious about taking credit risk, and the lending attitude of financial institutions was becoming more severe. Hence, developments in the behavior of financial institutions and corporate financing continued to require closer monitoring.
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, members generally shared the view that Japan's economy still continued to deteriorate as a whole, but the pace had moderated somewhat, as exports were gradually starting to increase and production appeared to have stopped declining.
As for the outlook for Japan's economy, many members noted that the economic deterioration in Japan was projected to stop, as production stopped declining and then turned up. At the same time, these members generally shared the view that it was likely to take quite a while for the economy as a whole to start recovering clearly, as final domestic demand, for example business fixed investment and private consumption, was expected to remain weak for some time.
Members discussed overseas economic developments.
Many members commented on the U.S. economy that the recovery was becoming more distinct, as economic indicators such as those related to private consumption showed noticeable firmness.
Some members raised the issue of how the relationship between such firmness in economic indicators and the recent weakness in U.S. stock prices should be interpreted. These members expressed the view that market participants seemed to remain cautious about the outlook for corporate profits against the background of factors such as (1) uncertainty about the outlook for final demand, (2) deterioration in the situation in the Middle East and the consequent rise in crude oil prices, and (3) skepticism about firms' accounting information.
A few members expressed the view that economic imbalances such as excessive capital stock and debts had not been adjusted sufficiently, as the recession in the U.S. economy had been relatively short and marginal, and that this might restrain the pace of the economic recovery after the completion of inventory adjustment. One member said that one of the factors behind the firmness in private consumption in the United States was a rise in housing prices supported by low interest rates. On this basis, this member pointed out that there was a risk that there might be a strong negative effect on household spending if a decline in housing prices was triggered by a rise in interest rates in the future. A different member raised a question about the sustainability of the large U.S. current account deficit, which exceeded 4 percent of GDP.
Based on the above discussions, members generally shared the view that (1) many uncertainties about the outlook for overseas economies still remained, although downside risks were decreasing recently; and (2) caution was required with regard to the pace of recovery.
Members then discussed the current economic situation and the outlook for Japan's economy.
Many members noted the following positive developments in the corporate sector: (1) production stopped declining given the further progress in inventory adjustment; and (2) the deterioration in business sentiment had almost ceased.
These members remarked that business fixed investment continued to decrease and it seemed that it would take more time for it to start to recover. These members continued that the current movement toward economic recovery starting from exports and production was observed mainly in large manufacturers, and it was likely to take a while for it to spread to nonmanufacturers and small firms.
One of these members pointed out that problems related to excessive debts were concentrated mainly in sectors other than large manufacturers, and there was a risk that this structural problem would hamper a recovery of the overall economy. Another member said that the increase in production at sites overseas in line with the globalization of corporate activity might restrain domestic business fixed investment.
As for the household sector, many members expressed the view that employment and income conditions continued to worsen, given the ongoing corporate restructuring, and that private consumption was likely to remain weak.
A few members said that the pressure to reduce wages and the number of employees would continue as pressure for restructuring in the corporate sector remained strong against the backdrop of the intensification of international competition and the setting of stricter standards for accounting. Given these developments, many members expressed the view that the environment surrounding private consumption would remain severe.
Some members, on the other hand, remarked that there were signs of a marginal recovery in employment conditions, as was evident in positive signs in part-time job offers and the ratio of new job offers to applicants and the improvement in the diffusion indexes of employment conditions in the March Tankan (Short-Term Economic Survey of Enterprises in Japan). One of these members pointed out that there was a possibility that the pace of adjustment in employment might have been accelerating compared with the past, reflecting the changes in the structure of the labor market.
Regarding price developments, many members noted that the pace of year-on-year decline in domestic wholesale prices had recently contracted gradually and the month-on-month decline was coming to a halt. Consumer prices, on the other hand, continued to decline by slightly less than 1 percent year on year.
A few members pointed out that the decline in wholesale prices was coming to a halt reflecting the effects of a marginal improvement in the supply-demand balance in line with the progress in inventory adjustment, in addition to the increase in international commodity prices and the depreciation of the yen. One member said that consumer prices remained weak due to supply-side factors, such as the streamlining of distribution channels and penetration of imported consumer goods in the domestic market. A few members including this member said that how the current downtrend in wages would affect price developments through service prices would be the main focus of attention for the near future.
Some members compared the recent economic improvement with the previous recovery phase experienced during 1999-2000 and said that the following warranted attention: the spread of the current momentum for a recovery in the economy was likely to be limited compared to that recovery phase, judging from the momentum of economic growth overseas, the size of the financial system problem, and the strength of the pressure for corporate restructuring.
Based on the above discussion, many members said that although the recent economic environment had allowed the assessment of the economy to be revised slightly upward, regarding risk to the economic outlook, attention should still be paid to the downside risks. Specifically, these members pointed to the following as points to which attention should be paid: (1) the momentum for a recovery in domestic private demand; (2) overseas economic developments including developments in crude oil prices; (3) developments in the domestic financial system and financial markets; and (4) the effects of structural adjustment.
B. Financial Developments
Many members noted that any significant disruption in the money market at the turn of the fiscal year had been avoided against the background of the Bank's ample liquidity provision, and the capital market was stable as was evident in the fact that long-term interest rates were declining and stock prices were firm. In addition, some members pointed out that the deterioration in firms' fund-raising conditions was coming to a halt as seen in the contraction in credit spreads in the market.
Many members including these members, however, said that attention should be paid to the following points: (1) views at home and abroad on the financial system remained severe; (2) market participants' attitude toward taking credit risk and banks' lending attitude remained cautious; and (3) the financial strength of nonmanufacturers, especially that of small firms, was weakening. Many members therefore expressed the view that attention should still be paid to risks stemming from the financial side.
A few members said that the key to a recovery in financial intermediary functions would be an improvement in conditions for the capital market, in addition to the disposal of nonperforming loans. One of these members added that, to achieve this, an enhancement of disclosure of information would be vital.
III. Summary of Discussions on Monetary Policy for the Immediate Future
On the monetary policy stance for the immediate future, members shared the view that it was appropriate to maintain the current target for the outstanding balance of current accounts at the Bank of around 10 to 15 trillion yen, and reinstate the contingency clause in the guideline for money market operations as it was before the meeting on February 28, 2002, given the assessment of the economy discussed earlier and the fact that there had not been any significant disruption at the turn of the fiscal year.
Many members remarked that, in order to secure the stability of the market, it was essential to deal with the changes in liquidity demand in an appropriate manner in accordance with the contingency clause of the guideline for money market operations, given the fact that liquidity demand remained high against the background of a system failure of a major bank group due to business integration.
Some members pointed out the need for the Bank to be extremely careful in explaining the reinstatement of the contingency clause of before February 28, 2002 to the public to avoid possible misunderstanding that the Bank had weakened its monetary easing stance. In addition, in order to secure financial market stability, it was important that the Bank appropriately account to the market for factors that were causing liquidity demand to remain high even after the turn of the new fiscal year in April 2002. A few members noted that the Bank should avoid possible misunderstanding about its guideline for money market operations, as the outstanding balance of current accounts at the Bank would decrease following resolution of the system failure of the major bank group.
In the course of the above discussion, one member pointed out that it was becoming difficult to gauge the degree of monetary easing from the change in the outstanding balance of current accounts at the Bank. Regarding the transmission mechanism of the current quantitative easing measures, the Bank should consider whether it should put emphasis on interest rates as the main channel or regard it as meaningful to increase the outstanding balance. In response to this, a few members expressed the view that there had been no clear-cut conclusion reached at this point, since the effects of an increase in the outstanding balance could not be denied at this stage, even though it was the standard view that the transmission mechanism through which the monetary easing would have effects would be mainly the channel of interest rates. Another member expressed the view that the Bank's firm stance of providing ample liquidity while maintaining the quantitative target contributed to restraining an increase in the credit risk stemming from concerns over the availability of liquidity.
IV. Remarks by Government Representatives
The representative from the Ministry of Finance made the following remarks.
(1) Japan's economy continued to experience moderate deflation, and this had produced various kinds of negative effects on economic activity. The Government considered it essential to cooperate with the Bank in dealing with deflation comprehensively and continuously, and the Government would stimulate the economy by pressing forward with structural reforms.
From this viewpoint, the Government was making efforts to implement the budget for fiscal 2002 and the supplementary budgets for fiscal 2001 in an integrated and seamless manner, and draw up a basic guideline by around June for drastic tax reform and measures to stimulate the economy.
(2) The Government would like the Bank to continue to give due consideration to developments in financial markets and financial conditions. The Government would also like to ask the Bank to pay more attention to the stability of the financial system than in the past under the new environment after the removal of blanket deposit insurance and continue to do its utmost. Although the economy was showing movements toward bottoming out, prices continued to decline, and decisive monetary easing was still necessary.
(3) Given that the effects of the Bank's conventional market operations mainly using short-term Japanese government securities were limited, the Government would like to ask the Bank to stop the continuous price falls and stabilize prices by devising additional monetary policy measures, and consider a variety of options and take drastic measures to prevent the economy from sliding into a deflationary spiral.
The representative from the Cabinet Office made the following remarks.
(1) While the economy continued to be in a difficult situation, it was showing movements toward bottoming out. As for short-term prospects, there were concerns over the downward pressure on private demand that might be exerted by such factors as severe employment and wage situations. On the other hand, improvement in overseas economies and progress in inventory adjustment were expected to prevent the economy from deteriorating further. While taking decisive actions for structural reform, the Government was firmly resolved, in close cooperation with the Bank, to stop deflation.
(2) The Government would like the Bank to continue deliberating on drastic monetary policy measures and implementing them to stop deflation.
Based on the above discussions, members shared the view that the Bank should reinstate the contingency clause in the guideline for money market operations as it was before the meeting on February 28, 2002 and maintain the current target for the outstanding balance of current accounts at the Bank of around 10 to 15 trillion yen.
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.
Vote 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 April 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. K. Ueda, Mr. T. Taya, Ms. M. Suda, Mr. S. Nakahara, Mr. H. Haru, and Mr. T. Fukuma.
Vote against the proposal: None.
The original full text, in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on April 12, 2002 together with the English version of "The Bank's View." The English version of "The Background" was published on April 15, 2002.
VII. Approval of the Minutes of the Monetary Policy Meeting
The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of February 28, 2002 for release on April 16, 2002.
Attachment
For immediate release
April 11, 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.