Minutes of the Monetary Policy Meeting
on January 19, 2001
(English translation prepared by the Bank's staff based on the Japanese original)
March 5, 2001
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 Friday, January 19, 2001, from 9:00 a.m. to 12:28 p.m., and from 1:32 p.m. to 4:08 p.m.1
Policy Board Members Present
Mr. M. Hayami, Chairman, Governor of the Bank of Japan2
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. S. Murakami, Senior Vice Minister, Ministry of Finance3
Mr. Y. Tamura, Deputy Vice Minister for Policy Planning and Coordination, Ministry of Finance4
Mr. T. Sakai, Senior Vice Minister, Cabinet Office5
Mr. Y. Kobayashi, Director General for Economic and Fiscal Management, Cabinet Office6
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, Chief Manager, Planning Division 1, Policy Planning Office
Mr. I. Yamashita, Director, Financial Markets Department
Mr. S. Murayama, Director, Research and Statistics Department
Mr. T. Yoshida, Senior Manager, Research and Statistics Department
Mr. E. Hirano, Director, International Department
Secretariat of the Monetary Policy Meeting
Mr. I. Yokota, Director, Secretariat of the Policy Board
Mr. T. Murayama, Advisor to the Governor, Secretariat of the Policy Board
Mr. S. Hida, Manager, Secretariat of the Policy Board
Mr. S. Uchida, 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 February 28, 2001 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. Hayami was absent from 9:00 a.m. to 10:38 a.m. to attend a meeting of the Ministerial Council which discussed issues including the Cabinet Office's Monthly Economic Report. During his absence, Mr. Fujiwara performed the duties of chairman pursuant to Article 16, Paragraph 5 of the Bank of Japan Law of 1997.
- Mr. Murakami was present from 9:00 a.m. to 12:28 p.m.
- Mr. Tamura was present from 1:32 p.m. to 4:08 p.m.
- Mr. Sakai was present from 9:00 a.m. to 12:28 p.m.
- Mr. Kobayashi was present from 1:32 p.m. to 4:08 p.m.
I. Summary of Staff Reports on Economic and Financial Developments7
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 December 15, 2000.8 The Bank continued to provide ample funds, taking into consideration the strong demand for funds at the turn of the year and the upcoming introduction of the real-time gross settlement (RTGS) system, in order to maintain stability in the overnight call rate. As a result, the overnight call rate was generally at 0.25 percent or slightly below, and the weighted average was 0.24 percent. From January 16, the Bank started to supply funds maturing beyond the end of the current fiscal year (March 31, 2001).
- 7Reports were made based on information available at the time of the meeting.
- 8The guideline was as follows: The Bank of Japan will encourage the uncollateralized overnight call rate to move on average around 0.25 percent.
B. Recent Developments in Financial Markets
In domestic financial markets, the yen, stock prices, and long-term interest rates declined further after the turn of the year.
Many market participants held the view that stock prices were too low and were unlikely to fall substantially from current levels although a significant rise was also unlikely before the fiscal year-end.
Long-term interest rates had declined to their lowest levels since May-June 1999. The yield curves of interest rate futures pointed to a further waning of the market's expectations of a rise in interest rates. Meanwhile, the Japan premium had been observed, albeit at a very low level, since the previous week.
The yen had recently depreciated further to ¥117-120 against the U.S. dollar reflecting the following: (1) uncertainty over Japan's economic outlook; (2) concern about a possible recurrence of financial system instability; and (3) remarks by officials of Japanese and U.S. authorities that had been interpreted by market participants as suggesting that they would tolerate a weak yen against the dollar.
C.Overseas Economic and Financial Developments
The slowdown in the U.S. economy was becoming clearer. In addition to a deceleration in business fixed investment, growth in retail sales had slowed rapidly toward the end of 2000, and consumer confidence had declined although it was still at a high level. Growth in production had slowed sharply toward the year-end, and inventories of some products were starting to accumulate. Meanwhile, the supply-demand balance in the labor market still remained tight, but there were some signs of an easing as was evident in the slower increase in the number of employees.
The Federal Open Market Committee (FOMC) lowered its target for the federal funds rate by 0.5 percentage point on January 3, 2001. Many market participants expected a further cut at the FOMC meeting at the end of January.
Although the expansion in the yield spreads between U.S. high-yield bonds and Treasury bonds was coming to a halt, they were still wide. U.S. stock prices were currently on the rise but were still highly volatile. The overall financial environment had stopped tightening, but it remained unstable.
Many market participants and economists in the United States expected that economic growth would slow significantly in the first half of 2001 but accelerate in the latter half, avoiding a significant slowdown taking the year as a whole. However, more information was necessary to determine the probability of this scenario materializing.
In the euro area, although there had been signs of a slowdown in production in Germany and France since the summer of 2000, the economy on the whole was firm as consumer confidence was improving partly due to a tax cut.
It had become clear that Asian economies had been slowing since autumn 2000, with exports and production slowing in both Korea and Taiwan, where information technology-related goods accounted for a large proportion of exports.
D. Economic and Financial Developments in Japan
1. Economic developments
Japan's economy continued to recover gradually, but the pace was slowing due to decelerating export growth.
With regard to final demand, business fixed investment was on an increasing trend. The recovery in private consumption continued to be weak as a whole, but there were some positive indicators. The pace of decline in public investment was slowing.
Net exports were declining due to a slowdown in exports and an increase in imports. Christmas sales in the United States had been generally lackluster and a decline in sales of personal computers was affecting Japan's exports of electronic parts and semiconductor manufacturing equipment. Furthermore, a decrease in automobile sales in the United States had forced some Japanese carmakers to consider revising their export plans downward.
Housing investment was declining gradually.
The increase in production was currently slowing mainly due to a slowdown in exports. Meanwhile, corporate profits continued to improve. Income conditions of households still remained severe, but employment conditions were on an improving trend and wages were slightly above the previous year's level.
As for the outlook, business fixed investment was expected to increase for a while, and public investment was likely to rise temporarily as a result of the supplementary budget passed by the Diet. Net exports were likely to decrease for a while, although this depended on developments in overseas economies. With lower external demand offsetting higher domestic demand, production in the January-March quarter was likely to be flat. Under these circumstances, continuation of the current economic recovery seemed to depend on whether the mechanism of income generation starting from the corporate sector would continue to operate.
In relation to this point, exporting firms were expected to be affected by a slowdown in exports. However, any downward revisions to corporate profits were likely to be limited since (1) electronic parts produced in Japan had been diversified, and (2) the weakness in the yen and in crude oil prices could help support corporate profits. Further, forecasts by private research institutes showed that corporate profits in fiscal 2001 were not expected to decrease. Therefore, it could be said, at the moment, that drastic adjustments, such as cancellations of major business fixed investment plans and cutting the number of workers, were unlikely. Developments in overseas economies, however, might exert further negative pressure on exports and production and thus required attention.
Given the continued weakness in stock prices, a widespread deterioration in corporate and household sentiment could negatively affect the economy.
The increase in these downside risks from the previous month could not be denied, and therefore they warranted close monitoring.
There were no major changes in price developments. Domestic wholesale prices and consumer prices were both weakening somewhat reflecting (1) a reduction in prices of electrical machinery, which was rapidly undergoing technological innovation, (2) a decrease in public utility charges, and (3) the streamlining of distribution channels. Overall, prices would most likely be somewhat weak for a while.
2. The financial environment
The effect of the weakness in stock prices warranted attention in assessing the recent financial environment. The key question was whether changes could be seen in (1) the lending attitude of financial institutions, (2) firms' direct borrowing from the market through, for example, issuance of corporate bonds and CP, and (3) overall corporate financing conditions, including (1) and (2).
An examination of these points showed the following. With regard to the first point, private banks' lending attitude remained broadly unchanged. They remained keen to increase lending to firms displaying good performance after carefully examining their creditworthiness.
On the second, there had been no marked changes in firms' conditions to borrow from the market. Issuance of corporate bonds had remained steady and CP issuance had increased, although in equity financing there had been some cases where firms had postponed public offerings of stocks or had reduced funds procurement.
Moreover, there had been no marked changes in various business surveys of the financial environment. On these grounds, it could be judged that the easiness in overall corporate financing conditions remained unchanged.
However, effects of developments in stock prices on firms' fund-raising conditions still warranted monitoring.
The monetary base in December 2000 decreased by 1.1 percent from a year earlier. The decline was caused by a significant increase in the amount outstanding in December 1999-January 2000 which was prompted by a surge in demand for cash and funds in current accounts at the Bank due to concerns about the Year 2000 problem. In fact, at about ¥68 trillion, the outstanding monetary base in December 2000 exceeded the average for the past twelve months of around ¥65 trillion.
Recently, money stock (M2+CDs) had been growing by about 2 percent year on year. Year-on-year growth in the January-March quarter of 2001 was likely to be about the same as that in the previous quarter.
As for firms' fund-raising costs, short-term rates had been broadly unchanged, but long-term rates had weakened somewhat reflecting developments in market rates.
II. Summary of Discussions by the Policy Board on Economic and Financial Developments
A. The Current Economic Situation
With regard to the current economic situation, the majority of members shared the judgment that economic indicators released since the previous meeting and anecdotal information showed that Japan's economy continued to recover gradually, but the pace was slowing due to decelerating export growth.
These members pointed out the following. First, the slowdown in overseas economies, such as the United States, had affected Japan's exports and production. Second, the market had become more cautious about the economic outlook as was evident in the decline of the yen, stock prices, and long-term interest rates. Third, economic indicators relating to business fixed investment, corporate profits, private consumption, and the employment and income situation were, however, generally consistent with the Bank's view that the economy was recovering gradually.
One member described the current economic situation as follows: (1) the economy was still on a moderate recovery track; (2) given the contrast between strong and weak sectors and the structural adjustment pressure the economy faced, the economic recovery so far was something of an achievement; (3) the economic recovery was currently unlikely to immediately push up corporate profits since prices were somewhat weak; (4) exports and production were slowing, and thus it seemed increasingly likely that the economy was taking a short rest or entering a temporary lull; and (5) at present, there was no sign of the economy deteriorating.
A few other members basically agreed with this member's view, namely, that it was increasingly likely that the economy was entering a temporary lull.
Next, members discussed each component of aggregate demand.
With regard to public investment, one member expressed the view that the year-on-year decline in the contracted value of public works had become smaller, and month on month this indicator had started to increase. This member continued that public investment was likely to start increasing on a year-on-year basis from this spring due to the implementation of the supplementary budget.
As for developments in exports, many members pointed out that (1) the slowdown in the U.S. economy had become clearer, and (2) East Asian economies such as Korea and Taiwan, whose economies depended heavily on exports of IT-related goods, were conspicuously slowing due partly to a slowdown in exports after a period of high economic growth. Moreover, they expressed the view that Japan's exports were currently slowing due to the deceleration in overseas economies.
One member remarked that the degree of slowdown in exports had so far been within firms' projections, but that net exports were likely to decrease further. Another member said that the slowdown in exports, mainly those of IT-related goods, seemed to have had a dampening effect on the view of the economy of electrical machinery manufacturers, who had been leading the current economic recovery. The member continued that the effects on the economy of such deterioration in corporate sentiment also warranted close attention.
The majority of members remarked that indicators such as machinery orders and construction starts (floor area) showed that business fixed investment remained on an uptrend, mainly in IT-related areas.
One member said that the uptrend in fixed investment was likely to continue at least for a while, given that various leading indicators remained on an increasing trend. This member pointed out, however, that (1) growth in machinery orders from electrical machinery manufacturers was slowing, and (2) the weakness in stock prices might have dampened corporate sentiment and firms' enthusiasm for new fixed investment plans.
Based on these discussions, the majority of members shared the view that at present there had been no change in the uptrend of corporate profits and business fixed investment, and the momentum for recovery prompted by the corporate sector was being maintained.
Next, members discussed developments in the household sector.
With regard to private consumption, the majority of members agreed that sales data generally showed mixed developments. Some of these members pointed out, however, that data on sales of passenger cars and electrical appliances and outlays for travel had been relatively firm since the previous meeting.
One member pointed out that (1) automobile sales in December had increased on a year-on-year basis for the third consecutive month, and (2) according to statistics compiled by the Nippon Electric Big-Stores Association (NEBA), sales of electrical appliances in November rose by 12 percent year on year, marking an increase for the twelfth consecutive month. A breakdown of the statistics showed that sales of all products had increased except for VCRs, word processors, and telephones, which were being replaced by DVD players, personal computers, and mobile phones. Sales of durable consumer goods could therefore be said to be generally recovering.
Further, this member expressed the opinion that although the contrast between popular and unpopular goods was deepening, it could be said that private consumption had returned to normal levels - that is, it was neither favorable nor stagnant - based on the following. First, the number of people who had traveled abroad during the late December to early January holiday period had hit a record high. Second, although sales at traditional retail stores, such as department stores and supermarkets, continue to be generally lower than a year earlier, sales at factory outlets and new clothing retailers' sales were robust. Third, the volume of aggregate supply of consumer goods had recovered to levels marked in 1996-97.
A different member said that although there had been scattered signs of improvement in sales statistics, it could not be said that private consumption on the whole was clearly heading toward recovery.
Many members maintained that the employment situation, the basis of private consumption, was improving.
One of these members said that (1) the ratio of job offers to applicants had continued to improve, and (2) the fact that the unemployment rate was not decreasing was probably due to people who had given up looking for jobs returning to the labor market as suggested by the increase in the total labor force participation ratio (the labor force as a proportion of total population aged 15 and over) since autumn 2000.
As an example of the improvement in the employment situation, a different member cited the fact that not only the number of regularly employed workers in the Monthly Labor Survey but also the number of employees in the Labor Force Survey had recently started to exceed the level of the previous year. This member continued that, because firms still had excess labor and thus remained under pressure to restructure, an issue economic policy had to address was improvement of the infrastructure of the labor market by enhancing the mobility of labor and fostering new industries.
As for the income situation, some members expressed the view that the employment and income situation on the whole was improving, pointing out that nominal wages had continued to increase slightly year on year.
One of these members, however, considered that a lack of recovery in households' net worth was restraining the propensity to consume: a fall in asset prices and the cumulative effect of decreased income - changes in stock - were offsetting the improvement in the employment and income situation - changes in flow.
Many members pointed out that growth in production was currently slowing reflecting the above deployments in final demand, especially the deceleration in export growth.
Some members expressed the view that production in the January-March quarter was likely to be broadly flat due mainly to a decrease in net exports. A few of these members said that the current economic recovery had been driven by an increase in corporate profits and fixed investment starting from an increase in production, and thus the effects of a possible leveling off in production on firms' profits and their fixed investment plans should be monitored vigilantly.
A different member said that the basic scenario for a self-sustained recovery was that the driving force of demand would shift gradually to domestic private demand from external demand, thereby providing continuity of support for production, but external demand had started to decelerate much earlier than had been expected. This member, however, also commented that domestic demand for products such as next-generation mobile phones, which could offset the slowdown in external demand, was gradually increasing.
A member who took a particularly cautious view on the economy judged that it had already started to deteriorate, giving the following reasons.
First, the coincident index in the Indexes of Business Conditions for November had fallen below 50 percent for the first time in 19 months to 42.9 percent, and the leading index was also likely to be revised to below 50 percent. Second, it was likely that more than half of the eleven indicators comprising the coincident index had reached their peaks before or in August 2000. Third, machinery orders showed that IT-related demand was on a downward trend and the achievement ratio was falling, and thus fixed investment was losing its momentum. Fourth, the realization ratio in the production index had been negative for the fifth consecutive month and the amendment ratio had also been negative for the third consecutive month. Fifth, the income situation had not necessarily improved, and the increase in sales of electrical appliances and outlays on travel was likely to be due to transient factors, such as the launch of satellite digital broadcasting and an increase in trips after the decline due to concerns about the Year 2000 problem. Therefore, it was unlikely that there would be a smooth shift of the driving force of the economy to consumption. This member expressed the view that the current recession, the Heisei recession, comprised three downturn phases and the economy was likely to be entering the third and last one.
Many members share the view that prices were weakening somewhat reflecting the following: the slow pace of economic recovery; a fall in prices of electrical machinery due to technological innovation; and the streamlining of distribution channels coupled with direct buying of products from foreign countries. Looking ahead, these members said that prices were likely to be somewhat weak for a while.
One member said that negotiations between suppliers and buyers on cuts in prices of materials and intermediate goods, which had started from major Japanese carmakers, were drawing to an end, and thus, it was likely that domestic wholesale prices would stop falling. This member expressed hope that this would underpin business sentiment.
B. Outlook for the Economy and Prices and Their Risks
With regard to the economic outlook, the majority of members shared the view that, although the pace of recovery was slowing, there were, at present, no factors that necessitated any change to the standard scenario in the "Outlook and Risk Assessment of the Economy and Prices" (hereafter, Outlook Report) released in October 2000.
Some member pointed out that (1) corporate profits and business fixed investment remained on an increasing trend and the momentum for recovery led by the corporate sector was being maintained, and (2) the employment and income conditions of households were improving, suggesting that the recovery led by the corporate sector was gradually affecting the household sector.
One member, however, remarked that (1) the economy was likely to show roughly zero growth in the first half of fiscal 2000 compared with the previous six months, given the downward revision to the July-September GDP data, and (2) against this background, growth in fiscal 2000 was likely fall below Policy Board members' forecasts in the Outlook Report if the economy remained in a lull for a while.
Members shared the view that, among the downside risks mentioned in the Outlook Report, two had increased further: (1) the risk arising from a slowdown in overseas economies, such as the U.S. and some East Asian economies; and (2) the risk arising from developments in financial markets at home and abroad.
A few members said that developments in business fixed investment and private consumption tend to lag behind those in the economy as a whole, and therefore, unless the above-mentioned risk factors diminished while fixed investment and consumption remained firm, the economy as a whole might eventually be negatively affected.
Based on these discussions, many members shared the view that the two risks mentioned above required even closer monitoring from the viewpoint of determining whether the momentum for economic recovery would be sustained.
Members next discussed the two risk factors.
Members first exchanged views on developments in overseas economies, particularly the U.S. economy and their effects on Japan's economy.
Many members were of the view that U.S. economic growth was likely to slow substantially in the first half of 2001 compared to the previous six-month period reflecting a shift to more moderate growth from the previous high rate of around 5 percent.
A few of these members expressed the opinion that the U.S. economy was still likely to make a soft landing because there was ample room for the U.S. authorities to take both fiscal and monetary policy measures.
On the other hand, a few other members remarked that, given the previous extremely rapid pace of expansion, once adjustment of the U.S. economy started, it might continue for longer and be more severe than expected. One of these members said the following points should be noted: (1) the low savings rate in the household sector; (2) an increase in debt; and (3) the large amount of stocks held by individual investors.
Some members summed up the situation as follows. There were no factors at this point that made it possible to definitely confirm or reject a scenario in which the U.S. economy would accelerate in the second half of 2001, after decelerating in the first half. Therefore, it should be judged that the future course of the U.S. economy remained highly uncertain.
One member who took a particularly cautious view of the U.S. economy noted the following. First, stock options, which were popular in the United States, would negatively affect both private consumption and corporate profits when stock prices were falling. Second, U.S. stock prices were unlikely to hit bottom until around 2003. Third, economic adjustments were unlikely to end in the first half of 2001, because the inventory adjustment already under way would eventually lead to adjustments in business fixed investment. And fourth, the California electric power crisis was affecting electricity procurement by IT-related firms, and the energy shortage was gradually inhibiting economic activity in the United States as a whole. Further, the composite leading indicators for November released by the OECD declined by 0.7 percent from the previous month, showing that the world economy as a whole was about to stall.
Some members commented that, even if developments in the U.S. economy were in line with the soft-landing scenario and its adjustments were completed in the first half of 2001, the effect of the slowdown in the U.S. economy on Japan and other East Asian economies still warranted attention.
Based on the above discussions, members shared the view that developments in the world economy, including that of the United States, still required careful monitoring.
Next, members discussed the implications of the developments in financial markets - the simultaneous fall in the yen, stock prices, and long-term interest rates and the risk posed to the economy by them.
Some members expressed the view that, while economic indicators of private consumption and business fixed investment were generally consistent with the view that the economy was recovering gradually, there was a distinct discrepancy between economic fundamentals and the performance of stock prices.
A few members explained the background to this discrepancy as follows. First, since there had been great expectations in stock markets at home and abroad, described as the "Internet bubble," their failure to be realized had had a large impact on market sentiment. And second, financial markets were extremely concerned about the possible magnitude of the slowdown in overseas economies and its effect on Japan's economy.
A few of these members said that market sentiment might have been damaged by a vicious circle starting from the markets' concern that structural problems, for example in the financial system, might reemerge due to the fall in stock prices, and this had made markets even more wary about the economic outlook.
One of these members further noted that corporate and household sentiment were being undermined by concern about the future of the pension and social security system, and uncertainty about the prospects for fiscal consolidation.
One member who had a particularly cautious view about stock prices said that stocks had not yet hit bottom and were likely to decline further in the medium term.
One member expressed the view that the current decline in stock prices was partly attributable to the worsening of the supply-demand balance. Thus, as long as effective controls to prevent insider trading were put into place, the liberalization of acquisition and holding by companies of their own stock, proposed by the Japan Federation of Economic Organizations (Keidanren), would be effective to stabilize the stock market because it would promote effective corporate reorganization and enable firms to buy back their own stocks sold in unwinding of cross-shareholdings.
A different member said in response that the formation of stock prices should basically be left to the market, and to revitalize the market, policies and corporate efforts to convey to the market a concrete message about how structural reform in Japan would proceed were indispensable. If any further measures were needed to revitalize the market, they would be ones that improve the market infrastructure so that a wider range of investors took part in the market, and that conformed with global practices, since the proportion of foreign investors was increasing.
Next, members exchanged views on how these developments in financial markets could affect the economy.
One member warned that there was a risk that the economy might be negatively influenced by developments in financial markets and be forced down into line with them. The member said that this could happen through (1) deterioration in household and corporate sentiment or (2) deterioration in corporate financing conditions as a result of tightening of banks' lending attitude or an increase in the credit risk premium.
On this basis, a few members including this member pointed out that (1) there had been no major changes in indicators measuring consumer confidence, and sales of consumer durables had been rather firm recently, and (2) banks' lending attitude and credit spreads showed that corporate financing conditions had not been affected notably by financial market developments.
One of these members said that the depreciation of the yen and the fall in long-term interest rates might be interpreted as the market's natural reaction to the deterioration in the economic outlook and had resulted in an easier financial environment. A different member added that the current degree of yen depreciation was a positive factor for Japan's economy and stock prices, and the depreciation was unlikely to cause major problems with foreign countries.
Some members, however, noted that there was a risk that continued stagnation in stock prices might trigger negative shocks such as renewed financial system instability and a tightening of banks' lending attitude.
Based on those discussions, many members shared the view that although the instability in foreign and domestic capital markets was not, at the moment, affecting the economy to an extent that necessitated a change to the standard scenario that the economy would continue to recover gradually, the effects of these developments required careful monitoring.
Many members pointed out the following. First, given the intensification of various downside risks, one could not deny the possibility that liquidity problems might emerge in financial markets toward the end of fiscal 2000. Second, a close examination of financial markets showed that there had been some small changes; for example, some firms had postponed equity financing plans and a marginal Japan premium had emerged. And third, if any disruption occurred in financial markets, it could hamper economic recovery. On this basis, a few members expressed the view that the Bank, as the central bank, should take preemptive measures to prevent these problems.
Many members noted that crude oil prices were currently considerably lower than in autumn 2000, suggesting that the risk of a surge in crude oil prices harming the economy was decreasing.
One member pointed out the following. First, OPEC was reducing its oil production as a medium- to long-term strategy to reduce the level of oil inventories in oil importing countries. Second, private oil companies were also minimizing their inventories. Third, insufficient maintenance work had been done at many oil refineries. And fourth, in such a situation, the volatility of oil prices was increasing. On this basis, this member expressed the view that, since the medium-term trend of oil prices had changed, oil prices were likely to move in the range of US$25-30 per barrel in the near future.
III. Summary of Discussions on Monetary Policy for the Immediate Future
Based on the above assessments of the economic and financial situation, members discussed the monetary policy stance for the immediate future.
Many members' view of the economic and financial situation was as follows. First, Japan's economy continued to recover gradually, but the pace was slowing due to decelerating export growth. Second, risk factors, such as a slowdown in overseas economies and developments in capital markets at home and abroad, were becoming more distinct. Third, prices were expected to be somewhat weak. And fourth, monetary conditions remained easy.
Based on the above view, the majority of members concurred that it was appropriate to maintain the current guideline for market operations in order to support the economic recovery by continuing the current accommodative monetary stance. Further, they shared the view that risk factors, such as developments in overseas economies and capital markets at home and abroad, required even closer attention.
Some of these members commented on the possibility of reducing interest rates.
One member said that the Bank should consider an interest rate cut if the above downside risks threatened the scenario of a gradual economic recovery. A different member said that the Bank should take measures in a flexible manner when and if anxiety over financial instability led to systemic risk, or concern emerged that the economy could deteriorate after the current temporary lull.
A different member mentioned that, from the viewpoint of conducting preemptive monetary policy, the current situation might justify a reduction of interest rates. This member, however, added that the scope for reducing the uncollateralized overnight call rate was very limited, and a further easing - for example, a return to the zero interest rate policy with its time frame effect or the introduction of quantitative easing - required careful examination beforehand. On this basis, this member said that, in the current situation where there had been slight but noteworthy changes in financial markets, it was inappropriate to defer policy action until liquidity problems actually occurred. Thus, this member supported the maintenance of the current guideline on condition that the Bank prepared measures to prevent such problems.
In addition, some members commented on overall economic policy including monetary policy.
One member said that, although there was a tendency to focus on stock prices, it was not only the stock market that had seen a marked change: long-term interest rates had declined from 1.6-1.7 percent to 1.5-1.6 percent, and the yen had fallen by over 5 percent against the U.S. dollar. This member remarked that the recent developments in markets were probably attributable to the uncertainty about the economic outlook shared by many market participants, rather than a short-term deterioration in the supply-demand balance of the stock market.
Based on this understanding, some members including this member expressed the view that it should be taken seriously that concerns about the economic outlook had not been dispelled despite the implementation of extensive fiscal and monetary measures to support the economy since the bursting of the economic bubble. These members continued that this was evidence that market participants at home and abroad were still concerned about Japan's structural problems, such as firms' and financial institutions' balance-sheet problems, and their ability to survive global competition.
These members said that it was essential to tackle structural problems and strengthen the supply side of the economy to completely remove the concern in the market and provide a long-term vision of Japan's economy.
One of these members stressed that the issues in Japan's economy that had to be addressed this year were the excess in capacity, debt, and employment and the nonperforming loans problem. This member said that (1) the private sector itself should make structural reform effort, (2) it was important that the government provide a clear vision for the future, in addition to making the utmost effort to provide a better environment by promoting deregulation and taking tax measures, and (3) while nonperforming loans should be disposed of by financial institutions themselves, the Bank should also make efforts to assess the situation in the financial industry accurately and advise and support the Financial Services Agency from the viewpoint of maintaining an orderly financial system. In addition, if necessary, an injection or re-injection of public funds into financial institutions should be considered before the end of March.
Many members commented on issued relating to ensuring stability in financial markets toward the fiscal year-end.
One member mentioned that (1) banks had started to procure funds maturing over the fiscal year-end, and (2) firms were increasingly concerned that banks' lending attitude might tighten toward the end of the fiscal year as a result of the sluggishness in stock prices. Therefore, it was important for the Bank to provide ample funds maturing beyond the fiscal year-end and take the utmost care in its market operations.
A different member said that recent developments in financial markets, such as the fall in stock prices reflecting increased anxiety about the economic outlook and the emergence of the Japan premium, were similar to those in the second half of 1998, although they differed substantially in magnitude. On this basis, this member expressed the opinion that the Bank might have room to consider taking measures to prevent problems arising from possible market instability.
Some other members expressed the view that there was a possibility that liquidity problems might emerge in the markets toward the fiscal year-end reflecting the markets' uncertainty about the future. These members continued that, the low availability of liquidity in 1997 and 1998 had negatively affected the economy by creating concerns about banks' liquidity and a credit crunch, and by promoting an expansion of risk premiums. The members said that a repetition of such a situation must be avoided.
Based on the above understanding, one member proposed that the Bank should examine whether it could further improve its ways of providing liquidity to the market, so that financial institutions would not face liquidity problems. Many members agreed with this proposal.
On the basis of the above discussions, the chairmen made the following remarks.
(1) Financial markets could receive some sort of shock toward the end of the fiscal year because two risks - a slowdown of the overseas economies and instability in capital markets at home and abroad - were increasing.
(2) Confusion in financial markets could hamper economic activity, negatively affecting the economic recovery and stifling structural reform. The central bank was responsible for ensuring financial market stability, and therefore, must make every effort to avoid such a situation.
It was also important for the Bank to ensure market stability to make sure that the current accommodative monetary policy was effective.
(3) Possible measures to improve provision of liquidity to the market with a view to ensuring the smooth functioning and stability of the financial market should be discussed at the next Monetary Policy Meeting.
The majority of members agreed with the chairman's remarks. The chairman therefore instructed the staff to examine the possible room for further improvements in the way liquidity was provided to the market, and report the results to the Policy Board by the next Monetary Policy Meeting. Members decided to discuss later how the chairman's instructions to the staff should be made public.
A different member advocated adopting monetary base targeting accompanied by a target for the rate of increase in the consumer price index (CPI) and raising current account balances at the Bank to achieve these targets.
The reasons were as follows. First, the Bank should act preemptively with bold new policy when domestic and overseas risks became more apparent. Second, the Bank's standard scenario in the Outlook Report, supported by many Board members, that the economy continued to recover gradually was failing to materialize, and thus it was necessary to accelerate economic growth to 1.5-2.0 percent, which this member believed was the potential growth rate of Japan, and maintain it at that level for a certain period of time. And third, unprecedentedly severe deflation was continuing, as evident in price indexes which had generally declined on a year-on-year basis.
IV. Remarks by Government Representatives
The representative from the Ministry of Finance made the following remarks.
(1) Japan's economy as a whole continued to improve moderately, with the momentum for a self-sustained recovery continuing, mainly in the corporate sector. However, the employment situation remained severe and private consumption was generally unchanged, indicating a delay in improvement in the household sector. Regarding prices, the CPI and the GDP deflator continued to decrease year on year despite the surge in crude oil prices, and the impact of the fall in prices on the economy required attention. With regard to the economic outlook, factors that required attention were increasing, examples being developments in the stock market and the slowdown of the U.S. economy. Recently, the U.S. Federal Reserve had cut interest rates in a timely manner. The effects on Japan's economy of this cut and of the factors mentioned above required monitoring.
(2) The Government compiled the "Policy Package for New Economic Development toward the Rebirth of Japan" in October 2000, and was striving to smoothly and steadily carry out the fiscal 2000 supplementary budget drawn up to implement the package. The fiscal 2001 budget was designed to achieve a self-sustained recovery of the economy through the following. First, it focused more closely on measures that would contribute to the establishment of a new foundation for the future development of Japan. And second, planned expenditure for public works projects was equivalent to that in the initial budget for fiscal 1999 and 2000. In addition, the Government would create a new taxation system relating to the reorganization of firms, and it would also introduce a new measure for a tax deduction on housing loans and continue a tax measure to promote investment by small and medium-sized enterprises. By steadily implementing all these measures, the Government would establish a new foundation for further development in the 21th century and give top priority to putting the economy on a self-sustained recovery track.
(3) The government would like to ask the Bank to conduct monetary policy appropriately - for example, by flexibly providing ample funds in the market giving due consideration to developments in the economy - harmonizing its actions with the Government's measures to achieve a full-scale economic recovery led by private demand.
The representative from the Cabinet Office made the following remarks.
(1) The state of the economy was just as described by the Ministry of Finance representative: the economy as a whole continued to improve moderately, although factors that gave cause for concern such as the U.S. economy and stock prices were becoming clearer.
(2) Against this background, the Government would aim to put the economy on a self-sustained recovery track by continuing to focus on economic recovery in its policy-making.
(3) The "Economic Outlook and Basic Policy Stance on Economic Management for Fiscal 2001," approved by the Cabinet on December 19, 2000, states that appropriate and flexible economic management should be pursued with emphasis on the following three points: (a) putting the economy on a self-sustained recovery track; (b) promoting structural reform of the economy in anticipation of future changes, and enhancing medium- to long-term growth by advancing the IT revolution; and (c) contributing to sustained development of the world economy by maintaining and reinforcing multilateral trade systems, and developing a regional framework for the Asia-Pacific region to promote cooperation at all levels. With implementation of these, together with a gradual improvement in the employment and income situation and a sustained upward trend in corporate profits, the economy was expected to continue growing driven by private demand, especially private consumption and business fixed investment. Real GDP growth was forecasted to grow around 1.7 percent in fiscal 2001.
(4) The Government would like to ask the Bank to continue conducting monetary policy that would contribute to economic recovery - for example, flexibly providing ample funds in the market giving due consideration to developments in financial markets, including the foreigh exchange market.
V. Votes
Based on the above discussion, the majority of members considered it appropriate to maintain the current guideline for market operations.
However, one member proposed setting targets for the rate of increase in the CPI and the growth rate of the monetary base, and expanding the monetary base to achieve these targets.
As a result, two policy proposals were submitted.
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 2002 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 15 percent annual growth of the monetary base (change from the average for the July-September quarter of 2000 to the average for the same quarter of 2001) 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 1).
The Bank of Japan will encourage the uncollateralized overnight call rate to move on average around 0.25 percent.
Votes for the proposal: Mr. M. Hayami, Mr. S. Fujiwara, Mr. Y. Yamaguchi, Mr. S. Taketomi, Mr. T. Miki, Ms. E. Shinotsuka, Mr. K. Ueda, and Mr. T. Taya.
Vote against the proposal: Mr. N. Nakahara.
Mr. Nakahara dissented for the following four reasons. First, it was likely that production had already peaked out and it was increasingly probable that business fixed investment would stall. Exports had also started to decrease reflecting the slowdown in the U.S. economy. Second, current policy measures were not sufficiently accommodative given that stock prices at home and abroad were plummeting. Third, the unprecedentedly serious deflation seemed to be persisting as the fall in prices was significant. And fourth, the Bank would be deficient in its accountability if it did not set a quantitative target as a policy goal.
VI. Discussion on the Chairman's Instructions to the Bank's Staff
Members discussed how and when the Bank should make public the chairman's instructions to the Bank's staff to examine the possible room for further improvements in the way liquidity was provided to the market and to report the results to the Policy Board by the next Monetary Policy Meeting.
Some members discussed the merits and demerits of announcing the fact that the chairman had given such instructions.
The view was put forward that in the current situation where financial markets were becoming somewhat unstable, one merit would be an improvement in market sentiment as a result of conveying the message that the Bank had started to consider improving the way it provided liquidity to the market. One drawback that was pointed out was that there was a risk that the Policy Board's thinking would not be fully understood by the market if the Bank simply announced the Governor's instructions. Contrary to the Board's intentions, it could initially create in the market excessively high expectations of specific measures, which could turn out to fall short of these expectations, causing a strong feeling of disappointment. It was also pointed out that the announcement could heighten anxiety that the Bank was seriously concerned about the possible emergence of liquidity problems in the financial system.
After examining both the merits and demerits carefully, the majority of members agreed that it was appropriate, considering current developments in financial markets, to announce the fact that the chairman had given the above instructions.
Members then discussed the way in which the announcement should be made.
One member said that there were two possible ways to announce the chairman's instructions. One was to release a public statement later in the day, and the other was for the Governor to make an announcement at a press conference scheduled two business days later on January 23. This member continued that an announcement through a public statement might be misunderstood by market participants, giving them the impression that the Bank was seriously concerned about specific financial system problems, and thus an announcement by the Governor at the press conference would be less risky.
Many other members, however, were of the opinion that from the viewpoint of maintaining market stability, it was preferable to make an announcement as promptly as possible. As for the risk associated with issuing a public statement, these members said that it could be overcome by making sure its wording would not create any misunderstandings.
Following these discussions, the chairman asked the staff to draft the public statement. The meeting was adjourned from 3:13 p.m. to 3:26 p.m. while the staff prepared the draft of the statement.
After the meeting resumed, members discussed the draft prepared by the staff and finalized it as the "Chairman's Instructions to the Bank's Staff" (Attachment 2). A vote was then taken on whether to make it public.
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.
Mr. Nakahara dissented for the following reasons. First, he was opposed to the current guideline of encouraging the uncollateralized overnight call rate to move on average around 0.25 percent. Second, the maintenance of a 0.25 percent call rate - assuming that he had accepted this policy guideline - would be sufficient to address problems that could emerge toward the end of the fiscal year, judging from the fact that the maintenance of a target call rate had been sufficient at the recent year-ends to deal with concerns about the Year 2000 problem and the introduction of the RTGS. And third, if the objective was to prevent an even more serious situation, it would be more effective to add a clause to the guideline for market operations explaining that the Bank would make ample provision of funds depending on the situation.
Ms. Shinotsuka said that it was necessary to examine possible room for further improvements in the way liquidity was provided and that she supported the idea. However, she dissented from the proposal because a mere announcement of the fact that the Governor had issued these instructions might not be enough to convey the Policy Board's thinking to the market and was likely to trigger speculation and cause misunderstanding.
Based on the result of the vote, it was decided that the "Chairman's Instructions to the Bank's Staff" would be released after the meeting.
VII. Discussion on the Bank's View of Recent Economic and Financial Developments
The Policy Board discussed "The Bank's View" of recent economic and financial developments, and put it to the vote. By majority vote, the Board decided to publish "The Bank's View" on January 22, 2001 in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background").9
Votes for the proposal: Mr. M. Hayami, Mr. S. Fujiwara, Mr. Y. Yamaguchi, Mr. S. Taketomi, Mr. T. Miki, Ms. E. Shinotsuka, Mr. K. Ueda, and Mr. T. Taya.
Vote against the proposal: Mr. N. Nakahara.
Mr. Nakahara dissented for the following reasons. First, the economy had already entered a stagnating phase and had started to deteriorate. Second, he did not agree with the statement on private consumption that "there are somewhat positive signs in some indicators." Third, it was inappropriate to judge that "inventories as a whole still remain at a low level" as the appropriate level for inventories might have fallen. And fourth, the Bank's view of income conditions was too optimistic.
- 9The original full text, written in Japanese, of the Monthly Report of Recent Economic and Financial Developments was published on January 22, 2001 together with the English version of "The Bank's View." The English version of "The Background" was published on January 23, 2001.
VIII. Approval of the Minutes of the Monetary Policy Meeting
The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of November 30 and December 15, 2000 for release on January 24, 2001.
Attachment 1
For immediate release
January 19, 2001
Bank of Japan
At the Monetary Policy Meeting held today, the Bank of Japan decided, by majority vote, to maintain the following guideline for money market operations for the inter-meeting period:
The Bank of Japan will encourage the uncollateralized overnight call rate to move on average around 0.25 percent.
Attachment 2
For immediate release
January 19, 2001
Bank of Japan
Chairman's Instruction to the Bank's Staff
On the basis of the discussions at the Monetary Policy Meeting of January 19, 2001, the Chairman of the Bank's Policy Board, Governor Hayami, issued the following instructions to its staff:
The domestic financial and capital markets have shown greater volatility against the background of recent developments in overseas economies as well as markets, as the end of the fiscal year draws nearer. In light of this, the staff will examine the possible room for further improvements in the way of liquidity provision to the market, with a view to ensuring the smooth functioning and stability of the financial market; report the results to the Policy Board by the next Monetary Policy Meeting.