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Minutes of the Monetary Policy Meeting

on April 27, 2000
(English translation prepared by the Bank staff based on the Japanese original)

June 15, 2000
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, April 27, 2000, from 9:00 a.m. to 1:23 p.m. 1

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. S. Taketomi
Mr. T. Miki
Mr. N. Nakahara
Ms. E. Shinotsuka
Mr. K. Ueda
Mr. T. Taya

Government Representative Present
Mr. T. Haraguchi, Deputy Vice Minister for Policy Coordination, Ministry of Finance
Mr. T. Komine, Director-General of the Research Bureau, Economic Planning Agency

Reporting Staff
Mr. I. Kuroda, Executive Director
Mr. M. Matsushima, Executive Director
Mr. S. Nagata, Executive Director
Mr. I. Yamashita, Director, Financial Markets Department
Mr. S. Murayama, Director, Research and Statistics Department
Mr. E. Hirano, Director, International Department
Mr. N. Inaba, Advisor to the Governor, Policy Planning Office
Mr. M. Amamiya, Chief Manager, Planning Division 1, Policy Planning Office
Mr. T. Yoshida, Senior Manager, Research and Statistics Department 2

Secretariat of the Monetary Policy Meeting
Mr. K. Koike, Director, Secretariat of the Policy Board
Mr. T. Murayama, Advisor to the Governor, Secretariat of the Policy Board
Mr. H. Tanaka, Chief Manager, Planning Division 2, Policy Planning Office 3
Mr. S. Hida, Manager, Secretariat of the Policy Board
Mr. S. Uchida, Senior Economist, Policy Planning Office
Mr. S. Shimizu, Senior Economist, Policy Planning Office
Mr. J. Iwasaki, Manager, Financial Markets Department 4

  1. The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on June 12, 2000 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.
  2. Mr. Yoshida was present from 9:37 a.m. to 1:23 p.m.
  3. Mr. Tanaka was present from 9:00 a.m. to 9:27 a.m.
  4. Mr. Iwasaki was present from 9:00 a.m. to 9:27 a.m.

I. Approval of the Minutes of the Monetary Policy Meeting Held on March 24, 2000

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of March 24, 2000 for release on May 2, 2000.

II. Decision on Principles Regarding Revisions to Bill Purchasing/Selling Operations

A. Staff Proposal

The Bank's staff proposed the following revisions to bill purchasing operations in view of the planned change in the settlement of funds to real-time gross settlement (RTGS), which would become the sole mode for funds transfers between current accounts held at the Bank. Under the revised system, first, the Bank would conduct bill purchasing operations directly with counterparties, such as financial institutions, instead of through tanshi companies (money market broker-cum-dealers). And second, such operations, which were at present conducted only at the head office and the Osaka and Nagoya branches, would take place at the head office and all branches. The revisions were aimed at (1) ensuring smooth market operations following the introduction of RTGS, under which the transfer of funds between the Bank and tanshi companies and between tanshi companies and financial institutions would not be simultaneous but would take place separately, and (2) further utilizing the debt obligations of private corporations and providing funds to a wider range of financial institutions by making financial institutions with accounts at the Bank's branches eligible for bill purchasing operations. The staff also proposed that bill selling operations be conducted directly with counterparties instead of going through tanshi companies.

The staff proposed the Bank decide the principles for the revisions and start buying and selling bills at the head office directly from counterparties, in line with the principles, before the introduction of RTGS. To this end, the principal terms and conditions for bill purchasing/selling operations should be established and necessary amendments should be made to the statement for conducting business.

B. Members' Discussion and Votes

Members unanimously approved the proposal and decided that the decision should be publicized.

III. Decision on a Revision to the Criteria for Selecting Counterparties for Market Operations Utilizing Japanese Government Bonds (JGBs)

A. Staff Proposal

The Bank's staff proposed revising the criteria for selecting counterparties for market operations involving outright purchases/sales of JGBs and JGB repo operations taking the opportunity of the second selection of counterparties for outright JGB purchases/sales. Under the proposal, a criterion would be added that eligible counterparties would be those that were participants in the book-entry system of Japanese government Securities (JGSs) who held their own custody account at the Bank. It was appropriate to revise the criteria to ensure smooth market operations as the JGS book-entry system was likely to become the main method of settling JGBs following the change in the taxation on the interest income from JGBs.

B. Members' Discussion and Votes

Members unanimously approved the proposal and decided that the decision should be publicized.

IV. Summary of Staff Reports on Economic and Financial Developments 5

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 10, 2000. 6The overnight call rate was stable at around 0.02 percent, even on April 17 when Japanese stock prices plunged. The market seemed to be paying less attention to the size of the daily excess/shortfall of reserves, for which the Bank had stopped announcing its projection one and a half months earlier.

Interest rates on term instruments rose temporarily, reflecting heightened expectations of an early termination of the zero interest rate policy triggered by comments by the Bank's Governor at a press conference on April 12. However, they later fell since market expectations of an early termination declined after the plunge in Japanese stock prices and the release of the G-7 communiqué.

  1. 5Reports were made based on information available at the time of the meeting.
  2. 6The guideline was as follows: "The Bank of Japan will flexibly provide ample funds and encourage the uncollateralized overnight call rate to move as low as possible."

B. Recent Developments in Foreign Exchange Markets and Overseas Economic and Financial Conditions

1. Developments in foreign exchange markets

The yen had stayed in a narrow range against the U.S. dollar since the middle of April despite nervousness in the market after comments by the Bank's Governor, the G-7 communiqué, and the plunge in stock prices in Japan and the United States. The euro fell sharply in the middle of April to a historical low reflecting the fact that the G-7 communiqué did not mention concern about the weakness in the euro, and also that there was political instability in parts of the euro area.

2. Overseas economic and financial developments

After the plunge in stock prices in the United States, stock indexes with many high-tech stocks in the United States, Germany, and Korea fell about 30-40 percent from their peaks for this year before recovering slightly. Among these countries, stock prices in the United States recovered at the fastest pace, showing that market participants had confidence in the fundamentals of the U.S. economy.

Developments in U.S. prices, which caused the drop in stock prices, showed that the core consumer price index (CPI excluding food and energy prices) rose noticeably. Rises were especially notable in the prices of services; in addition to the rise in transportation service prices due to higher fuel prices, the cost of other services such as medical care, rented accommodation, and hotel services started to rise reflecting an increase in demand for services.

C. Economic and Financial Developments in Japan

1. Economic developments

Economic indicators released in the intermeeting period, such as the contracted value of public works orders, trade statistics, sales at department stores, and indexes of industrial production, offered no grounds for changing the Bank's view on the economy decided at the previous meeting.

The contracted value of public works orders increased substantially in March, reflecting an increase in orders based on the second supplementary budget for fiscal 1999.

Real exports (seasonally adjusted) increased by 4.9 percent in the January-March quarter from the previous quarter, confirming the uptrend driven mainly by goods related to information technology (IT) and capital goods. Over the same period, real imports remained almost unchanged from the previous quarter. They declined briefly in early 2000, reflecting the high level of inventories of components that had been prepared to cope with possible Year 2000 problems, before recovering due mainly to a rise in imports of IT-related goods, and consumer goods such as apparel from China and ASEAN countries.

The business fixed investment plans of large companies for fiscal 2000, shown in the Business and Investment Survey of Incorporated Enterprises conducted by the Economic Planning Agency (EPA), were in line with the results of the March Tankan (Short-Term Economic Survey of Enterprises in Japan). The EPA's survey showed that the manufacturing sector planned to increase fixed investment by 3.3 percent, and the nonmanufacturing sector planned to cut it by 2.3 percent.

Economic indicators related to private consumption remained weak in general, although they had recovered somewhat from the end of 1999. Retail sales statistics for March showed that sales of household electric appliances were firm while sales at chain stores and department stores were falling due partly to sluggish sales of apparel. Outlays on travel (seasonally adjusted) rose by 7.0 percent in February from the previous month. Consumer confidence continued to improve as evident in data such as the consumer sentiment index.

As for prices, the corporate service price index (CSPI) rose 0.4 percent in March from a month earlier due partly to an increase in advertising fees.

The preliminary industrial production index (seasonally adjusted) for March, which was released on the day of the meeting (April 27), fell by 1.0 percent from the previous month. The decline was exaggerated by the higher-than-usual level for February, which was boosted by the leap day. Production indexes of most sectors, especially electric machinery, were higher than the surveyed firms' previous forecasts for March. As a result, the overall index (seasonally adjusted) for the January-March quarter rose by 2.8 percent from the previous quarter.

2. Financial developments

Japanese stock prices fell sharply in reaction to the plunge in U.S. stock prices. Since then, the Nikkei 225 Stock Average had been weak due to a change in its components. However, TOPIX (Tokyo Stock Price Index), which had been little influenced by the change in the components of the Nikkei average, had recovered to its level before the plunge in U.S. stocks.

In the intermeeting period, the money market remained stable. Yields of Euro-yen futures rose in response to comments by the Bank's Governor at the press conference on April 12. They then fell following the plunge in stock prices and the release of the G-7 communiqué.

The number of corporate bankruptcies in March surpassed 1,700 for the first time since June 1998, about two years earlier. The gradual upward trend since the middle of 1999 was continuing. The two main characteristics of this trend were as follows. First, the number of small-scale bankruptcies was increasing. And second, an increasing number of firms were failing for reasons attributable to a stagnant economy such as sluggish sales, cumulative deficits, and difficulties in collecting accounts receivable. However, credit research institutions analyzed recent corporate failures as attributable more to the effects of major firms' restructuring and of progress in structural reform of the economy than to a worsening of the economic situation.

V. Summary of Discussions by the Policy Board on Economic and Financial Developments

A. The Current Economic Situation and the Economic Outlook

Members mainly focused on assessment of economic indicators released since the previous meeting on April 10. They generally agreed that there were no significant factors to change their evaluation of the economic situation at the previous meeting.

One member remarked that exogenous demand, such as public investment and net exports, was having a positive effect on the economy as had been projected by the Bank.

A few members expressed the view that economic indicators for March, such as industrial production, suggested that production was continuing to increase. One of these members considered that this increase was an important factor that would support the current uptrend in corporate profits.

Members shared the view that the recovery in business fixed investment was confirmed by the Business and Investment Survey of Incorporated Enterprises for March and reports on the state of regional economies by the General Managers of the Bank's branches at a meeting in April. One member expressed the view that the excess debt of manufacturers had decreased in the accounting period ending on March 31, and this was reflected in the Tankan survey's results for business fixed investment. This member added that some nonmanufacturers were still burdened with excess debt and were behind in structural adjustment, and there continued to be a pronounced contrast in performance between firms. A few members, including this member, however, said that the economy was currently recovering despite structural adjustment pressure, and expressed the view that it would be wrong to think that deflationary concern would not be dispelled until structural adjustment was completed. Another member said that structural policy measures should be employed to deal with structural problems. One member commented that, although corporate profits seemed to be increasing, the basis for the increase was still fragile. This member concluded that one should be careful not to overestimate the degree of improvement in corporate profits and the effect on business fixed investment should be assessed cautiously.

One member was of the opinion that the remaining point that needed to be examined was to what extent the recovery in the corporate sector was spreading to the household sector. Many members expressed views on this point.

Members generally agreed that various statistics related to private consumption showed mixed developments overall. A few members said that, in order to accurately assess the momentum for a self-sustained recovery in private demand it was important not only to (1) study statistics on retail sales and consumer spending, but also to (2) confirm that household income and the propensity to consume would not deteriorate any further. On this point, some members remarked that indicators related to consumer confidence had been improving, and this confirmed that the propensity to consume would not deteriorate any further. A few members expressed the hope that household income would gradually improve against the backdrop of increased corporate activity and an improvement in corporate profits. As no particular factors that would affect judgment on the employment and income situation had emerged since the previous meeting, some members remarked that developments in wages and salaries, including summer bonus payments, would need to be watched. One of these members commented that one could not pin too much hope on summer bonus payments considering the fact that (1) bonus payments for civil servants were expected to decrease year on year, and (2) the number of workers in the private sector was decreasing from the previous year. In response to this, another member remarked that given that scheduled cash earnings had stopped falling and corporate profits had increased, the decline in summer bonus payments was expected to be smaller than last year's and this might confirm that the income situation had stopped deteriorating. Another member commented that, bearing in mind the fact that the income situation and the propensity to consume had stabilized to a certain extent, one should examine whether consumption, which was currently showing mixed developments, would stop deteriorating and its downside risks would subside.

One member expressed a more cautious view on the economic outlook than other members based on the following. First, the indexes of business conditions suggested that there was a possibility of the economy entering a recession in or after this autumn. Second, the relationship between the composite indexes and GDP suggested that, in the present recovery phase, aggregate demand had not been strong enough to meet the increase in production. Third, crude oil prices were likely to firm and increase gradually from the autumn; furthermore, if demand became very strong when the production capacity of OPEC members was limited, it was doubtful whether OPEC would be capable of supplying enough oil to meet demand. Fourth, there was a possibility that the drought in the United States would worsen and become a risk factor, and thus developments would need to be watched carefully over the coming three months. And fifth, with the implementation of a law facilitating business reorganization, it was likely that the number of bankruptcies would increase.

B. Financial Developments

On the financial front, many members referred to the developments in stock prices in Japan and the United States. Some members, referring to the recovery of stock price indexes other than the Nikkei 225 Stock Average to levels before the plunge in New York stocks, expressed the view that stock prices in Japan were firm compared with those in the United States and Europe. The Nikkei 225's movement had been affected by a recent change in its components. One of these members said that, when evaluating the Nikkei 225 Stock Average, for continuity, upward adjustments should be made in price levels for the time being.

With regard to stock prices in the United States, one member remarked that they were likely to be volatile for a while, and attentive monitoring would be required. Another member said that adjustments in U.S. stocks might be desirable and that one should react calmly to such adjustments. This was because they could be regarded as part of the process toward sustainable economic growth without inflation, although they were often considered to be a downside risk to the economy. However, this member added that such adjustments would not always be gradual, and there was thus a possibility that U.S. stock prices would remain volatile for a while.

One member referred to the relationship between adjustments in global stock prices and exchange rates. This member remarked that if the fall in U.S. stock prices was followed by falls in stock prices of other countries, it was unlikely that exchange rates would move significantly. However, if Japanese stock prices were stable compared with U.S. stock prices, adjustments in exchange rates might occur. On these grounds, this member pointed out that it was important to watch global stock prices and exchange rates together.

One member stated that technical analysis of Japanese and U.S. stock prices, long-term interest rates in Japan, and the dollar-yen exchange rate indicated the following. First, Nasdaq stock prices were likely to plunge if they dropped below the level they closed at on April 14. Second, the Dow Jones Industrial Average was approaching its ceiling, and movements in the coming month would be crucial. Third, the Nikkei 225 Stock Average had dipped below its near-term support level and continued close monitoring was required. Fourth, from a medium-term perspective, movements of long-term interest rates were gradually becoming confined to a narrow range and therefore their direction should be watched. And fifth, the dollar-yen exchange rate was moving within 101-112 yen, but if it broke out of this range, it might move sharply in one direction.

VI. Summary of Discussions on Monetary Policy for the Immediate Future

Based on the above assessment of the economic and financial situation, members discussed the monetary policy stance for the immediate future.

One member considered that deflationary concern had been dispelled, and stated that the overnight call rate target should therefore be raised to 0.25 percent.

In response to this, the majority of members expressed the following view. The economy was steadily approaching a situation where it could be said that deflationary concern had been dispelled, and was at a stage where close attention had to be paid to how the recovery in the corporate sector was spreading to the household sector. In the intermeeting period, however, no new factors that could confirm the latter point had been observed.

On this basis, with regard to monetary policy for the immediate future, the majority of members considered that this time it was appropriate to continue the zero interest rate policy.

Before reaching the above decision, members discussed issues related to termination of the zero interest rate policy.

Members discussed the meaning of termination of the zero interest rate policy. One member commented that, although some outside the Bank argued that the zero interest rate policy should be continued for a long period of time to boost the economy to a level that significantly exceeded its potential growth rate, it would be more effective to fine-tune monetary policy in accordance with economic developments to achieve a steady economic recovery. The reasons for this were as follows. With the economy undergoing structural adjustment, it would be difficult to immediately achieve and sustain economic growth that exceeded the potential growth rate. And if the zero interest rate policy was maintained for a long period of time in an attempt to boost growth, its negative side effects, which were currently not apparent, could gradually increase to a significant level.

Another member commented on risks that could arise from a delay in terminating the zero interest rate policy. As always in conducting monetary policy, attention should be paid to the risk of inflation. The risk of the zero interest rate policy exerting negative side effects also required attention, although it was less crucial. With regard to the former risk, this member and a different member commented that, at this point, the risk that deflationary concern would be rekindled due to an early termination of the policy outweighed the risk of inflation. They cautioned, however, that inflation rate forecasts diverged greatly depending on underlying assumptions.

The member who commented on the two risks also examined the three often cited negative side effects of the zero interest rate policy. The first was that, under the zero interest rate policy, the money market seemed to have contracted and was not functioning properly. On this point, the member expressed the following view. It could be said that the money market as a whole had not contracted substantially since ordinary deposits were being used as a substitute for call money. Furthermore, interest rates were being determined based on a variety of information, and thus the money market was not suffering any serious malfunctions. The second was that the longer the zero interest rate policy was continued, the greater the shock would be to the market when the policy was actually terminated. The member said that this seemed unlikely to be true because market participants were responding to economic developments and thus interest rates would rise in line with improvement in the economy. The third was that the zero interest rate policy was delaying structural adjustment. The member was of the opinion that termination of the policy and a slight increase in the overnight call rate target would make little difference to the pace of structural adjustment. Another member commented that, although it was true that the zero interest rate policy was distorting income distribution and causing moral hazard, one should not overemphasize these points since interest rates would remain extremely low even after the policy was terminated.

On these grounds, the above members concluded that the Bank should continue examining the strength of the recovery in private demand using data, in line with its commitment to continue the zero interest rate policy until deflationary concern had been dispelled.

Members also discussed how the Bank should communicate with the market. One member reiterated the member's intention expressed at the previous meeting to assess the economic and financial situation with a stance leaning toward terminating the zero interest rate policy. The member said that this stance would widen the range of options from just continuing or terminating the zero interest rate policy, and thus the flexibility of monetary policy would be enhanced. The member elaborated on this point in relation to conveying the Bank's view to the market as follows. The Bank had maintained the zero interest rate policy for the past 14 months, but was gradually seeing an improvement in the state of the economy. Taking a forward-looking stance on the basis of this improvement, it could be considered that the time for a change in monetary policy might be approaching. It should also be noted that there were some outside the Bank who were against terminating the current policy. By explicitly informing the market in advance through, for example, the minutes of Monetary Policy Meetings, that there was a stance leaning toward terminating the policy, the market could be prepared for likely policy changes, and at the same time, the Bank could better foresee the market's reaction. In response to this view, a few members remarked that the Bank had been conveying its assessment of the economic situation effectively through the Monthly Report of Recent Economic and Financial Developments and the minutes, and thus there was no need to express this kind of stance.

A different member commented that, in addition to guiding the market's view to converge with the Bank's, it was important to examine from the market's standpoint the reasons for the discrepancy between the Bank's view and the market's. In relation to this, another member pointed out that, in projecting changes in monetary policy, some market participants seemed to attach greater importance to political developments and the outcome of international meetings than to assessments of the economy. The member added that the Bank should continue to make use of various opportunities to explain its view to the public, and make clear that monetary policy decisions were based on the assessment of the economic situation and price developments made at Monetary Policy Meetings.

One member commented that it was important to consider how to explain the Board's thinking when the zero interest rate policy was terminated in order to alleviate any shocks to the market--in particular, how to explain effectively that monetary policy was still extremely easy even after the policy was terminated, and whether to give an explanation of the direction of monetary policy after termination. Another member expressed reservations with regard to the latter point on the grounds that it was unusual for the Bank to indicate the future direction of monetary policy, although it was doing so at present by making a commitment to maintain the zero interest rate policy until deflationary concern had been dispelled. Furthermore, the direction of monetary policy would be conveyed sufficiently through, for example, the minutes of Monetary Policy Meetings.

Meanwhile, one member advocated adopting monetary base targeting accompanied by a target for the rate of increase in the CPI, and increasing current account balances at the Bank to achieve these targets.

The reasons for the proposal were as follows. First, according to the International Monetary Fund's World Economic Outlook for 2000, the expected growth rate of the world economy was 4.2 percent while that of Japan was 0.9 percent, which was the lowest among industrialized countries. Thus, efforts should be made to accelerate the economic growth rate as much as possible as there were hardly any inflationary risks. Second, the CPI was below the previous year's level, and the rate of decline in the GDP deflator had expanded year on year. Third, Japanese stocks seemed to be growing increasingly unstable. Fourth, the yen seemed to be poised for a rise after Golden Week (the period from late April to early May that includes several national holidays). And fifth, the Bank should present a target for price increases to fulfill its responsibility as a central bank. The member also commented that many members had stressed that the zero interest rate policy was a very powerful policy since it shared certain characteristics of quantitative easing and inflation targeting. Therefore, attention should be paid to the possibility that negative effects could arise when the policy was terminated.

VII. Remarks by Government Representatives

The representative from the Ministry of Finance made the following remarks.

  1. (1) Japan's economy continued to improve moderately due to the effects of various policy measures and of the economic recovery in Asia. Signs of a self-sustained recovery of the economy were gradually appearing as seen in the positive movements in corporate activities. The recovery in aggregate demand, however, remained weak. Given this situation, the Government had been implementing fiscal measures in order to realize a full-scale recovery of the economy. The Government would promptly implement the budget for fiscal 2000, which had been passed by the Diet, to realize a smooth shift in the driving force for an economic recovery from public to private demand and to achieve a full-scale economic recovery led by private demand.
  2. (2) Given Japan's critical fiscal condition, as seen in the fact that the fiscal 2000 budget relied on debt for 38.4 percent of revenues, to achieve an ideal economy and society in the 21st century the Government considered it essential to implement necessary measures for fiscal reform when the economy was back on a full-fledged recovery path. However, as the economy remained in a severe situation, the Government would continue to place top priority on steering the economy toward a recovery.
  3. (3) The Government would like to ask the Bank to continue implementing monetary policy appropriately and in a timely manner, harmonizing its actions with the Government's measures to ensure a recovery of the economy--for example, by flexibly providing ample funds in the market giving due consideration to developments in financial markets, including the foreign exchange markets.

The representative from the Economic Planning Agency made the following remarks.

  1. (1) The Government's assessment of the economy, explained in its Monthly Economic Report, consisted of three main points. First, Japan's economy remained in a severe situation; for example, the recovery in aggregate demand was weak and the employment situation was severe. Second, however, the economy continued to improve moderately, as seen in the increase in production and improvement in corporate sentiment. And third, the economy had started to show signs of a self-sustained recovery, and this was especially evident in the corporate sector, where business fixed investment was recovering. Given this economic situation, the Government considered it vital to realize a smooth shift in the driving force for the economy from public to private demand and achieve a full-scale economic recovery, and to strongly promote structural reform.
  2. (2) The Government would like to ask the Bank to continue implementing monetary policy appropriately and in a timely manner to ensure a recovery of the economy--for example, by flexibly providing ample funds in the market giving due consideration to developments in financial markets, including the foreign exchange market.

VIII. Votes

Based on the above discussion, the majority of members considered it appropriate to continue the zero interest rate policy.

However, one member proposed changing the guideline for money market operations back to that employed before the adoption of the zero interest rate policy on February 12, 1999. Another member proposed adopting quantitative targeting accompanied by a target for the rate of increase in the CPI.

As a result, three policy proposals were put to the vote.

Ms. Shinotsuka proposed the following as the guideline for money market operations for the intermeeting period ahead:

The Bank of Japan will encourage the uncollateralized overnight call rate to move on average around 0.25 percent.

Regardless of the above target for the call rate, the Bank of Japan will provide more ample funds, if judged necessary, to maintain the stability of the financial markets.

The proposal was defeated with one vote in favor, eight against.

Mr. Nakahara proposed the following as the guideline for money market operations for the intermeeting period ahead:

The Bank of Japan will aim at realizing a 0.5 to 2.0 percent annual increase in the CPI (excluding perishables) in the October-December quarter of 2001 as a medium-term target of price stability. In achieving this target, the Bank will raise the average balance of current accounts at the Bank in the intermeeting period ahead to about 7 trillion yen, and by continuing to increase the amount thereafter, induce approximately 10 percent annual growth of the monetary base (change from the average for the July-September quarter of 1999 to the average for the same quarter of 2000) to realize quantitative easing (expansion of the monetary base).

Regardless of the above target for the monetary base, the Bank will provide ample funds should there be a risk that financial markets might destabilize, for example, should demand for liquidity surge.

The proposal was defeated with one vote in favor, eight against.

To reflect the majority view, the chairman formulated the following proposal.

Chairman's Policy Proposal:

The guideline for money market operations in the intermeeting period ahead would be as follows, and publicized by the attached statement(see Attachment).

The Bank of Japan will flexibly provide ample funds and encourage the uncollateralized overnight call rate to move as low as possible.

Votes for the proposal: Mr. M. Hayami, Mr. S. Fujiwara, Mr. Y. Yamaguchi, Mr. S. Taketomi, Mr. T. Miki, Mr. K. Ueda, and Mr. T. Taya.

Votes against the proposal: Mr. N. Nakahara and Ms. E. Shinotsuka.

Ms. Shinotsuka dissented for the following reasons. First, the risk of the economy falling into a deflationary spiral that existed when the zero interest rate policy was introduced had subsided, and it could be considered that deflationary concern had been dispelled. Second, termination of the zero interest rate policy would not hinder business fixed investment as firms' cash flow was increasing. And third, the longer the zero interest rate policy was continued, the more difficult it would be to terminate it. Moreover, concerns about the negative side effects of this policy were increasing.

Mr. Nakahara voted against the chairman's proposal on the following grounds. First, the current economic conditions suggested that the policy measures presently employed were likely to lose their effectiveness in the near future. Second, it was extremely rare for a central bank to make a commitment to maintain a certain interest rate level for a long time, and if the Bank was to continue the policy, it should release statistical projections for prices and the economic growth rate. And third, under the zero interest rate policy, the only options were to continue or discontinue it, and thus it was not possible to fine-tune policy in response to developments in the economy.

Attachment

For immediate release

April 27, 2000
Bank of Japan

At the Monetary Policy Meeting held today, the Bank of Japan decided, by majority vote, to maintain its"zero interest rate policy" to assure permeation of the effects of monetary easing.

The guideline for money market operations in the inter-meeting period ahead is as follows:

The Bank of Japan will flexibly provide ample funds and encourage the uncollateralized overnight call rate to move as low as possible.