Minutes of the Monetary Policy Meeting

on June 14 and 15, 2004
(English translation prepared by the Bank's staff based on the Japanese original)

July 16, 2004
Bank of Japan

A Monetary Policy Meeting of the Bank of Japan Policy Board was held in the Head Office of the Bank of Japan in Tokyo on Monday, June 14, 2004, from 1:59 p.m. to 3:50 p.m., and on Tuesday, June 15, from 8:59 a.m. to 11:30 a.m.¹

Policy Board Members Present Mr. T. Fukui, Chairman, Governor of the Bank of Japan
Mr. T. Muto, Deputy Governor of the Bank of Japan
Mr. K. Iwata, Deputy Governor of the Bank of Japan
Mr. K. Ueda
Mr. T. Taya
Ms. M. Suda
Mr. S. Nakahara
Mr. H. Haru
Mr. T. Fukuma

Government Representatives Present Mr. Y. Yamamoto, Senior Vice Minister of Finance, Ministry of Finance²
Mr. H. Tsuda, Deputy Vice Minister for Policy Planning and Coordination, Ministry of Finance³
Mr. T. Ito, Senior Vice Minister for Economic and Fiscal Policy, Cabinet Office²
Mr. T. Omori, Deputy Director General for Economic and Fiscal Management, Cabinet Office³
Reporting Staff Mr. E. Hirano, Executive Director (Assistant Governor)⁴
Mr. M. Shirakawa, Executive Director
Mr. A. Yamamoto, Executive Director
Mr. Y. Maehara, Adviser to the Governor, Policy Planning Office
Mr. H. Yamaguchi, Adviser to the Governor, Policy Planning Office
Mr. S. Uchida, Senior Economist, Policy Planning Office
Mr. H. Nakaso, Director-General, Financial Markets Department
Mr. H. Hayakawa, Director-General, Research and Statistics Department
Mr. K. Momma, Deputy Director-General, Research and Statistics Department
Mr. A. Horii, Director-General, International Department
Secretariat of the Monetary Policy Meeting Mr. K. Akiyama, Director-General, Secretariat of the Policy Board
Mr. T. Takei, Adviser to the Governor, Secretariat of the Policy Board
Mr. K. Murakami, Deputy Director, Secretariat of the Policy Board
Mr. S. Shimizu, Senior Economist, Policy Planning Office
Mr. K. Masaki, Senior Economist, Policy Planning Office

The minutes of this meeting were approved by the Policy Board at the Monetary Policy Meeting held on July 12 and 13, 2004 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.
Messrs. Yamamoto and Ito were present on June 15.
Messrs. Tsuda and Omori were present on June 14.
Mr. Hirano was present on June 15.

I. Summary of Staff Reports on Economic and Financial Developments⁵

A. Money Market Operations in the Intermeeting Period

The Bank conducted market operations in accordance with the guideline decided at the previous meeting on May 19 and 20, 2004.⁶ The outstanding balance of current accounts at the Bank moved at around the 31-35 trillion yen level.

B. Recent Developments in Financial Markets

The weighted average of the uncollateralized overnight call rate was generally 0.001 percent against the background of the Bank's provision of ample liquidity. Interest rates on term instruments remained stable at low levels. Recently, however, yields on treasury bills (TBs) and financing bills (FBs) were rising slightly, and interest rates on Euroyen futures were also rising, particularly on contracts with distant delivery months.

In the Japanese government bond (JGB) market, the yield on ten-year JGBs in the secondary market had risen to the 1.8-1.9 percent level, reflecting the rise in Japanese stock prices and an improved perception of the economy in view of domestic and overseas economic indicators. Very recently, interest rates on instruments with medium-term maturities, such as those on two-year JGBs, had been rising, in addition to those on instruments with longer-term maturities. As for factors behind fluctuations in yields on JGBs, to which market participants paid close attention, it seemed that price developments had recently started to be regarded as a factor behind the rise in interest rates, in addition to developments in economic activity, stock prices, and overseas interest rates. So far, in comparison with the time when interest rates rose in 2003, there had neither been any major change in the yield differentials between JGBs and yen interest rate swaps, nor had implied volatility increased sharply. The yield differentials between JGBs and corporate bonds in the secondary market remained essentially unchanged on the whole.

The Nikkei 225 Stock Average recovered to the level at the beginning of May and was currently moving around 11,500 yen, reflecting relatively strong economic indicators in Japan and a rebound in U.S. stock prices. Investment trends by investor category showed that individual investors and trust banks were net buyers of Japanese stocks. Foreign investors, who were net sellers of Japanese stocks in May, had turned net buyers again recently, and market participants' view was that foreign investors would continue to take a positive attitude toward investing in Japanese stocks.

The yen had appreciated to around 109-110 yen against the U.S. dollar, reflecting buying of the yen by market participants adjusting their positions.

C. Overseas Economic and Financial Developments

The U.S. economy continued to show balanced growth. Final demand components such as household spending and business fixed investment had been increasing steadily. Production and corporate profits had been increasing and the employment situation was clearly on an improving trend. The inflation rate was rising very moderately. As for indicators of the expected rate of inflation, figures in various surveys and the yield differentials between inflation-indexed and conventional Treasuries were increasing in line with the recent rise in gasoline prices.

In the euro area, exports recovered at a moderate pace reflecting the economic expansion in the United States and Asia, and business confidence improved moderately due partly to the halt in the appreciation of the euro. However, the recovery in production had stagnated and consumer confidence had remained at a low level. The momentum for economic recovery therefore remained weak. The rate of year-on-year increase in consumer prices rose in May, especially for energy prices.

East Asian economies continued to expand steadily. In China, both domestic and external demand continued to expand strongly, but the growth rate in production in heavy industry and fixed asset investment was slowing recently although it was still at a high level. The growth rate of monetary indicators and banks' lending was also slowing somewhat. The rate of year-on-year increase in consumer prices was accelerating, but with food excluded it had remained at more or less the same level for the past few months. In the NIEs and ASEAN countries, exports and production were on an uptrend, especially in IT-related goods. The rate of year-on-year increase in consumer prices in these countries was rising moderately, partly reflecting their economic recovery and the rise in crude oil prices.

In U.S. financial markets, market participants had factored in a rise in the federal funds rate of 0.25 percentage point in June and of over 1 percentage point in total by the end of 2004. In the euro area, the majority of market participants expected that monetary policy would remain unchanged for the remainder of 2004. Long-term interest rates in the United States stayed within a certain range, and those in Europe rose moderately. Stock prices in the United States and Europe rose reflecting market expectations of further economic expansion.

In financial markets in emerging economies, a depreciation of the currencies and fall in prices of stocks and bonds that had been observed widely in early May had come to a halt. In some economies, however, currencies continued to depreciate and the yield differentials between their sovereign bonds and U.S. Treasuries continued to widen, due to factors peculiar to each economy.

D. Economic and Financial Developments in Japan

1. Economic developments

Exports had been increasing steadily, reflecting the expansion of overseas economies, particularly those of the United States and East Asia, although the pace of increase had slowed compared to the rapid increase in the January-March quarter of 2004. Imports continued to increase with the recovery in the domestic economy, particularly those of IT-related goods and capital goods and parts.

According to the Financial Statements Statistics of Corporations by Industry, Quarterly, business fixed investment continued a steady uptrend on average, although it increased by only 0.6 percent in the January-March quarter on a quarter-on-quarter basis, after the sharp rise of 6.3 percent in the previous quarter. By industry and size, investment by small and medium-sized manufacturing firms, which surged in the October-December quarter of 2003, maintained a high level. Investment by small and medium-sized nonmanufacturing firms had recently increased, particularly in the service industry. With regard to leading indicators of business fixed investment, machinery orders from manufacturing firms increased significantly in April, while those from nonmanufacturing firms were nearly flat.

Corporate profits continued to improve steadily based on data for firms of all sizes in all industries, according to the Financial Statements Statistics of Corporations by Industry, Quarterly. A breakdown showed that profits of large manufacturing firms, which had recovered ahead of other categories of firms, continued to increase gradually, and the recovery trend in profits of nonmanufacturing firms and small and medium-sized manufacturing firms was becoming clearer. Thus, the recovery in corporate profits seemed to be spreading to a wider range of firms.

Private consumption continued to show some positive movements overall: the index of living expenditure posted a sharp rise in April, according to the Family Income and Expenditure Survey, although individual sales indicators were mixed. Indicators for consumer sentiment continued to be on a recovery trend as a whole.

Reflecting these developments, the growth rate of production increased again in April. Production rose by 2.5 percent from the average for the January-March quarter, after showing a quarter-on-quarter increase of only 0.5 percent in that quarter. It was expected to increase steadily in the April-June quarter, based on the production forecast index and anecdotal information. Inventories had been nearly flat as a whole in April, although each type of goods was showing different movements. A breakdown showed that inventories in materials industries had been declining recently, reflecting the fact that production was somewhat restrained due partly to firms' efforts to pass on the rise in raw materials prices. On the other hand, intended accumulation of inventories for electronic parts had become clear.

As for the employment and income situation, indicators related to job offers continued to improve. An uptrend in the number of employees in the Labour Force Survey was gradually becoming clear, and the year-on-year change in the number of regular employees in the Monthly Labour Survey became positive in April. Wages were still decreasing gradually in terms of the average per person, mainly due to the rise in the proportion of part-time workers, whose wages were relatively low. However, the decline in household income was coming to a halt.

With regard to international commodity prices, prices of nonferrous metals such as copper remained high. Crude oil prices had risen substantially since late April, against the background of increasing uncertainty about the Middle East. The view persisted that crude oil prices would remain at high levels for some time, although their rise seemed to have come to a halt recently. Japan's terms of trade were deteriorating, due to the depreciation of the yen as well as the high crude oil prices. Domestic commodity prices also continued to rise, due partly to the high crude oil prices.

Domestic corporate goods prices had been rising, due to the strengthening of commodity prices at home and abroad and to the improvement in supply and demand conditions. The domestic corporate goods price index for May rose by 1.1 percent year on year, but the pace of increase compared to the level of three months earlier slowed slightly. By stage of demand, the rise in materials prices was being passed on in intermediate goods prices, but hardly any of it had been passed on in final goods prices, particularly consumer goods prices. With regard to the outlook, domestic corporate goods prices were likely to continue increasing, as the effects of the recent rise in crude oil prices were expected to emerge in the near future.

The year-on-year rate of decline in consumer prices (excluding fresh food, on a nationwide basis) was larger in April than in March, registering a decline of 0.2 percent. This was partly because medical costs had stopped exerting upward pressure on a year-on-year basis. Consumer prices were basically projected to continue falling slightly on a year-on-year basis, although the rise in crude oil prices was expected to exert upward pressure to some extent.

2. Financial environment

The rate of decline in lending by private banks had been on a slightly diminishing trend with monthly fluctuations smoothed out. Financial institutions were making clearer their stance of increasing the amount outstanding of loans by setting interest rate margins more flexibly. In terms of types of loans, although the increase in housing loans was particularly noticeable in 2003, recently the slowing rate of decline in loans to firms was contributing to the slowdown in the decline in overall lending by private banks. The rate of decline in loans to firms had been slowing for both large and small to medium-sized firms since the turn of 2004. It was worth noting that the year-on-year change in the amount of new loans for business fixed investment had recently turned positive. With regard to excess/shortage of funds in the corporate sector, firms' excess funds were decreasing, as demand for funds for business fixed investment and operations increased. Overall, the pace of decline in credit demand in the private sector was becoming somewhat moderate.

Lending rates continued to be at extremely low levels on the whole. Recently, both long- and short-term lending rates had declined somewhat.

With regard to financing through capital markets, the issuing environment for CP and corporate bonds remained favorable, as credit spreads were stable at low levels. In this situation, the amount outstanding of CP and corporate bonds issued continued to be above the previous year's level. The amount of funds raised through equity financing decreased, partly due to somewhat weak stock prices in May.

The financial positions of firms continued to improve. The lending attitude of financial institutions as perceived by firms was also on an improving trend.

The year-on-year growth rate of the monetary base was at the 7.0-8.0 percent level. That of the money stock (M2+CDs) was 2.0 percent in May. The recent increase in the growth rate of the money stock seemed to reflect the slight slowdown in the decrease in funds raised by the private sector.

5Reports were made based on information available at the time of the meeting.
6The guideline was as follows:
The Bank of Japan will conduct money market operations, aiming at the outstanding balance of current accounts held at the Bank at around 30 to 35 trillion yen.
Should there be a risk of financial market instability, such as a surge in liquidity demand, the Bank will provide more liquidity irrespective of the above target.

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

A. Economic Developments

On the state of Japan's economy, members said that many economic indicators released since the previous meeting were relatively strong, and agreed that the economy continued to recover and the increases in production and corporate profits were exerting positive effects on employment. As for the outlook, they expressed the view that it was becoming increasingly likely that the economy would continue to recover, gathering stronger momentum.

Some members noted the following points as background to the above assessment. First, overseas economies continued to expand. Second, in Japan, the increases in corporate profits and business fixed investment were spreading to a wider range of firms, and the employment situation was improving. And third, pressure on the economy arising from firms' structural adjustments was waning. One member expressed the view that although the Bank had so far retained the overall economic assessment of "moderate recovery," partly because the spread of the recovery to the household sector had been weak, it was now appropriate to remove the word "moderate" from the assessment, partly in view of the recent improvement in the employment situation. Most of the other members agreed with this view.

At the same time, most members expressed the view that, with regard to overseas economies, it would be necessary to carefully follow developments in the U.S. and Chinese economies and the effects of the rise in crude oil prices, in addition to geopolitical risks. With regard to the Japanese economy, it would be necessary to carefully examine how the current recovery spread to nonmanufacturing firms and the household sector. One member commented that fiscal consolidation was one of the important tasks to be tackled to enhance the sustainability of economic recovery, and remarked in relation to this that an excessive rise in inflationary expectations was not desirable.

With respect to overseas economies, many members agreed that the world economy was expanding steadily, particularly the economies of the United States and China.

As for the U.S. economy, some members expressed the view that it continued to show balanced growth, as the employment situation, which had been a focus of attention, was clearly on an improving trend. These members said that developments in prices and movements in financial markets reflecting them would require closer monitoring. A few members said that future developments in labor productivity would be a key factor for price developments. One of these members expressed the view that it was uncertain whether the inflation rate would remain low, given the expectations of a contraction in the output gap, of an increase in the expected inflation rate, and of an increase in unit labor cost. A different member said that attention should be paid to the possibility that an increase in unit labor cost, in addition to the effects of the rise in crude oil prices, might reduce corporate profits. Another member referred to the risk that high-yield bond markets and financial markets in emerging economies could become unstable due to market participants unwinding their positions in a situation where the low interest rate environment in the United States was being changed.

With regard to the Chinese economy, some members expressed the view that investment and production activities and the growth in monetary indicators seemed to be slowing due partly to the effects of measures taken so far to contain the overheating of the economy, and therefore the risk of overheating was subsiding somewhat. These members continued that it would be necessary to monitor whether such adjustments progressed smoothly.

Turning to domestic demand, some members said that business fixed investment was expected to increase, particularly for manufacturing firms. These members made the following points about the recently released indicators. First, investment seemed to have started increasing even at nonmanufacturing firms and small firms, according to the Financial Statements Statistics of Corporations by Industry, Quarterly. Second, shipments of capital goods were on a steady uptrend. And third, machinery orders, a leading indicator of business fixed investment, were increasing firmly, particularly those from manufacturing firms. These members commented that improvement in business sentiment as well as the fact that corporate profits and the ratio of profits to sales had both reached their highest level since the bursting of the bubble were the background of the increase in business fixed investment. One member, however, said that the spread of the increase in business fixed investment to a wider range of firms was yet to be fully confirmed, as machinery orders from nonmanufacturing firms remained nearly flat. A different member expressed the view that, when assessing the sustainability of the increase in business fixed investment, attention should be paid to the fact that investment in the manufacturing industry was concentrated in IT-related sectors, and to the risk that the rise in crude oil prices might have negative effects on corporate profits.

One member pointed out that, given the situation, the growth rate of production increased again in April. Production rose by 2.5 percent from the average for the January-March quarter of 2004. The member commented that production was expected to show a relatively steady increase in the April-June quarter, based on the production forecast index and anecdotal information. A few members said that inventories had been nearly flat as a whole and production was likely to continue growing. One of these members added that it was becoming clear that intended accumulation of inventories of electronic parts had started, and that developments in inventories of electronic parts should be monitored closely, although adjustment pressures on inventories were unlikely to intensify immediately, judging from strong domestic and external demand.

With regard to the household sector, some members noted that indicators related to labor market conditions such as the number of new job offers had been improving and an uptrend in the number of employees was becoming clear. These members said that the decline in household income was coming to a halt, referring to developments in wages such as the slowing of the rate of decline in regular payments compared with some time ago. One of these members commented that summer bonuses, particularly those paid by profitable manufacturers, were expected to increase, and this was likely to lead to a halt in the decline in wages as a whole.

Some members said that private consumption continued to show some positive movements recently, as seen for example, in sales of electrical appliances, the index of living expenditure in the Family Income and Expenditure Survey, and indicators of consumer sentiment. A few members referred to the declining trend of the share of labor in income distribution and emphasized that a sustainable increase in private consumption needed to be supported by increases in household income. In relation to this view, one member said that as improvement in household income became clear, private consumption could be expected to recover gradually in the near future.

With regard to prices, most members commented on developments in crude oil prices. These members said that although there had been a pause in the rise in crude oil prices recently, they were moving around the highest level marked during the Gulf Crisis in 1990. They continued that crude oil prices were likely to remain at high levels for a while, due partly to an increase in demand for crude oil worldwide, including in China and India, in addition to the continuing uncertainty about the Middle East. Many members said that domestic corporate goods prices continued to increase, reflecting the rise in international and domestic commodity prices, such as crude oil prices, and the improvement in overall supply and demand conditions. A few of these members said that the rise in materials prices had spread to a relatively large extent to intermediate goods.

As for consumer prices, the majority of members agreed that they continued to decline slightly. One member described the environment surrounding consumer prices as follows. First, supply and demand conditions in the macroeconomy were improving, but the improvement was not sufficient to push up prices. Second, the corporate sector had been absorbing the impact of the rise in materials prices to some extent with the decline in unit labor cost. And third, factors that had pushed up consumer prices year on year in 2003, such as the rise in rice prices, would wane in and after the summer of 2004. The member continued that consumer prices were basically projected to continue falling slightly. Another member added that firms had been absorbing the increase in costs with the quantitative effects of the increase in exports. The member also said that intensifying global competition with East Asian economies and the appreciating trend of the yen were also exerting downward pressure on consumer prices.

Many members including the above two members, however, said that price developments would require closer monitoring given the following factors. First, the rise in crude oil prices was expected to exert upward pressure on consumer prices through a rise in prices of petroleum products such as gasoline. And second, firms might take an aggressive stance of setting higher prices given the steady economic recovery. A few of these members said that the year-on-year change in consumer prices might become positive temporarily this summer due partly to the high crude oil prices.

One member said that the narrowing of the output gap was expected to exert upward pressure on prices and the year-on-year rate of change in consumer prices was expected to become positive on a sustainable basis in the near future. In response to this, another member commented that although the narrowing of the output gap should theoretically push up prices, it was difficult to measure the gap accurately and possible effects of changes in it on consumer prices had not been confirmed at present.

B. Financial Developments

Members discussed the recent rise in long-term interest rates in Japan in a situation where adjustments in stock prices and long-term interest rates were observed in many countries and regions against the background of growing market expectations of a rise in the federal funds rate in the United States.

Many members expressed the view that the recent rise in long-term interest rates in Japan reflected the rise in stock prices and the improved perception of the economy in view of domestic and overseas economic indicators. A few members added that it also partly reflected the rise in long-term interest rates overseas. One member said that interest rates on instruments with medium-term maturities had also started to rise, and market participants, particularly foreign investors, seemed to be starting to expect that deflation in Japan might be overcome in the foreseeable future. Some members said that in comparison with the summer of 2003, when interest rates surged, financial institutions seemed not to be rushing to sell JGBs, as seen in the fact that the yield differentials between JGBs and yen interest rate swaps and interest rate volatility were relatively stable. One member noted that the rise in interest rates was encouraging investors aiming for income gains, particularly institutional investors, to purchase bonds. Some members, however, said that attention should be paid to the recent rapid rise in long-term interest rates. One member added that since the pressure had been mounting in financial markets, interest rates were recently rising at a somewhat faster pace.

As for the outlook, one member said that it was unlikely that long-term interest rates would rise continuously, in view of the following factors: market confidence in the Bank's commitment to continue the quantitative easing policy; sluggishness in firms' demand for funds; the slightly declining trend of consumer prices; the continuing fall in land prices; and the government's stance on fiscal consolidation. Many members said that it was necessary to continue to closely monitor developments in financial markets and their effects on corporate financing and economic activity, because the markets were becoming somewhat nervous in a situation where the course of economic activity and prices and the low interest rate environment were changing slightly worldwide.

One member said that banks' lending had been declining gradually, as firms had been using their cash flow to repay their debts. A few members noted that financial institutions' lending stance was becoming more active and firms' excess funds were decreasing, and said that whether the slowdown in the pace of decline in banks' lending led to an increase in the money stock required close monitoring. A different member said that banks' loans related to real estate and real estate investment through investment funds seemed to be on an increasing trend, and the possible effects on land prices should be monitored carefully.

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

On the monetary policy stance for the immediate future, members agreed that, based on the assessment of the current economic and financial situation, it was appropriate to maintain the current guideline for money market operations with the target range of "around 30 to 35 trillion yen" for the outstanding balance of current accounts at the Bank.

Some members said that the money market had been extremely stable and demand for funds in the market was being sufficiently met. Many members said that financial market developments required careful monitoring because at present financial markets were becoming somewhat nervous, as seen in the rise in interest rates on Euroyen futures.

Some members expressed views on the effects of the Bank's monetary easing policy. One member said that the effects of monetary easing might be strengthening, because real short-term interest rates were on a downtrend reflecting the decline in downward pressure on prices. A different member said that, given the continuing economic recovery, the Bank's commitment to maintaining the quantitative easing policy based on the consumer price index (CPI) was becoming more significant. This member noted that the growth rate of both nominal and real GDP was increasing steadily in a situation where short-term interest rates remained at nearly zero percent, and this meant that the current easing policy was having stronger stimulative effects on the economy in terms of interest rates. This member added that the effects of monetary easing were thus likely to become stronger with the continuation of the current policy by the Bank.

Many members commented on how the Bank should communicate matters related to monetary policy to the public. Some members said that it was important for the Bank to explain that it would continue, as it had done to date, the quantitative easing policy in accordance with the current commitment based on the CPI. In relation to this point, a different member said that financial markets could become unstable due to possible changes in the price situation in the future. Thus, regarding the conditions in the commitment released in October 2003, the Bank should examine whether to further clarify the one stipulating that the Bank needed to be convinced that the prospective core CPI was not expected to register below zero percent. Against this view, one member argued that changing a condition of the commitment would not only impair the credibility of the Bank's monetary policy but also strengthen anxiety that policy action by the Bank might come too late, thereby causing instability in financial markets.

Some members noted the importance of reducing as much as possible the disparity between the Bank's and market participants' assessment of economic activity and prices by accurately communicating the Bank's thinking to the market with a sufficient understanding of the views in the market. One member added that the Bank should avoid presenting its evaluation of interest rate levels, and encourage the market to make its own evaluation based on available information.

IV. Remarks by Government Representatives

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

(1) The Japanese economy continued recovering steadily. However, deflation, albeit moderate, persisted. The most important issue that the economy faced remained overcoming the continuing deflation, and the government considered that the role of monetary policy remained vital. The government together with the Bank would make policy efforts aiming to overcome deflation swiftly, as stated in "Basic Policies for Economic and Fiscal Management and Structural Reform 2004," approved by the Cabinet on June 4, 2004.
(2) The Bank had clarified its commitment to continuing the quantitative easing policy and was determined to firmly maintain it. However, there were some changes in financial markets, such as a rise in interest rates.
(3) The government would like the Bank to continue conducting monetary policy flexibly, and to deliberate what kind of new measures the Bank could take so that market participants would continue to expect that the accommodative financial environment would be maintained for the time being in order to prevent unnecessary disruption in the markets.

The representative from the Cabinet Office made the following remarks.

(1) The Japanese economy continued recovering steadily with improvement in the corporate sector advancing. Attention should be paid, however, to the effects on both the domestic and overseas economies of, for example, developments in crude oil prices. The output gap had contracted due to the steady economic recovery, while the growth rate of the money stock was at low levels due partly to sluggish lending by banks. In this situation, domestic corporate goods prices were rising slightly reflecting the rise in materials prices. However, the price situation overall could be assessed as being still only halfway to overcoming deflation.
(2) The most important task for Japan's economy was to overcome deflation swiftly and achieve sustainable growth led by private demand. To this end, the Cabinet approved "Basic Policies for Economic and Fiscal Management and Structural Reform 2004" on June 4, 2004. In line with the basic policies, the government intended to further accelerate and expand structural reform measures in fiscal 2004, the final year of the intensive adjustment period. In addition, defining the two-year period of fiscal 2005-2006 as the "concentrated consolidation period," the government intended to ensure that deflation was overcome through its policy efforts together with the Bank and focus on consolidating the foundations for new growth. As a result of these efforts, the nominal growth rate in and after fiscal 2006 was projected to be around 2 percent or higher.
(3) The Bank was determined to firmly maintain the quantitative easing policy. In this regard, the government would like the Bank to implement more effective monetary policy, including measures that would lead to more effective provision of liquidity, continuing to communicate closely with the government. The government would also like the Bank to make further efforts to enhance the transparency of the conduct of monetary policy, giving due consideration to stabilization of market expectations, by, for example, presenting a path toward overcoming deflation.

V. Votes

Based on the above discussions, members considered that it was appropriate to maintain the current guideline for money market operations with the target for the outstanding balance of current accounts at the Bank at around 30 to 35 trillion yen.

To reflect this view, the chairman formulated the following proposal and put it to the vote.

The Chairman's Policy Proposal on the Guideline for Market Operations:

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

The Bank of Japan will conduct money market operations, aiming at the outstanding balance of current accounts held at the Bank at around 30 to 35 trillion yen.

Should there be a risk of financial market instability, such as a surge in liquidity demand, the Bank will provide more liquidity irrespective of the above target.

Votes for the proposal: Mr. T. Fukui, Mr. T. Muto, Mr. K. Iwata, Mr. K. Ueda, Mr. T. Taya, Ms. M. Suda, Mr. S. Nakahara, Mr. H. Haru, and Mr. T. Fukuma.
Votes against the proposal: None.

VI. Discussion on the Bank's View of Recent Economic and Financial Developments

Members discussed "The Bank's View" in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background"), and put it to the vote.

The Policy Board approved, by unanimous vote, "The Bank's View" for publication on June 15, 2004, and decided to publish the whole report on June 16, 2004.⁷

7The English version of the whole report was published on June 17, 2004.

VII. Approval of the Minutes of the Monetary Policy Meeting

The Policy Board approved unanimously the minutes of the Monetary Policy Meeting of April 28, 2004 for release on June 18, 2004.

Attachment
June 15, 2004
Bank of Japan

At the Monetary Policy Meeting held today, the Bank of Japan decided, by unanimous vote, to set the following guideline for money market operations for the intermeeting period:
The Bank of Japan will conduct money market operations, aiming at the outstanding balance of current accounts held at the Bank at around 30 to 35 trillion yen.