Unformatted text preview: gust meeting, he proposed 0.25 per cent. On both occasions his proposal was defeated, with 1 vote in favour and 8 against.16 On 9 September 1998, the Bank of Japan decided to lower the policy interest rate (the uncollateralised overnight call rate) to, on average, around 0.25 per cent.17 However, negative growth was recorded in the second half of 1998, and the Bank finally decided to adopt the ZIRP in February 1999. Stage 2. ZIRP, lifting ZIRP and return to ZIRP: February 1999March 2001
The statement of the monetary policy decision on 12 February 1999 read as follows:
The Bank of Japan will provide more ample funds and encourage the uncollateralized overnight call rate to move as low as possible. To avoid excessive volatility in the shortterm financial markets, the Bank of Japan will, by paying due consideration to maintaining market function, initially aim to guide the above call rate to move around 0.15%, and subsequently induce further decline in view of the market developments (Bank of Japan, Announcement of the Board decision, 12 February 1999). This was the beginning of the ZIRP. It was clear that the economy was in a very weak state. At the time it was thought that GDP had recorded five consecutive
16. In the description of discussions in the minutes, individual names are not disclosed. However, the name of the Board member who proposed a vote and the names of those who voted in favour and against are disclosed. So, in the case relating to 18 votes, one can guess who expressed the minority opinion in the discussion prior to the vote. By this process of deduction, we know that Mr Nakahara has been consistently the dove, and Professor Shinotsuka the hawk. 17. Mr Nakahara voted with the majority in favour of the proposal, but Professor Shinotsuka voted against, insisting that the interest rate should not be lowered. 232 Takatoshi Ito quarters of negative growth since 1997:Q4. (In later revisions to the GDP data, the consecutive quarters of negative growth disappeared.18) No additional actions were taken between February 1999 and the fall of 1999. From the summer to the fall of 1999, output remained basically flat. The government and business circles started to voice their concern regarding deteriorating conditions and called for the Bank of Japan to adopt a more aggressive monetary policy, dubbed quantitative easing. Just before the 21 September 1999 meeting of the Policy Board, some press speculated that the Board would decide to take some actions, most likely non-sterilised intervention in the foreign exchange market in cooperation with the Ministry of Finance. The market regarded non-sterilised intervention as a signal by the Bank of Japan for further action. The Policy Board reacted strongly to the press speculation. The Board issued its statement at the conclusion of the meeting. At the time, the Governors press conference was scheduled only two days after the Board meeting, so that the immediate response itself was a message. In the announcement, the Board emphasised that monetary policy would not respond to exchange rate movements and that nonsterilised intervention was not a useful policy. The Board strongly warned that the press was greatly mistaken in engaging in speculative reporting before the meeting: In the past few days, the market has substantially fluctuated by speculations on monetary policy. What should be clear is that the conduct of monetary policy is exclusively decided by majority vote at the Monetary Policy Meeting, a regular meeting of the Policy Board. It is never the case that our policy is determined in advance or in consultation with outside bodies. We would like to emphasize this point (Bank of Japan, On the current monetary policy, 21 September 1999). The comment seemed to show the irritation and frustration that was felt by the Board. Any prior reporting of the expected decision was considered to be a challenge to independence. The Board successfully extinguished any expectation in the market that policy would accommodate the desires of the government or the markets. Any doubt about independence was thus clearly erased. However, such a strong statement might also have indicated a sense of insecurity on the part of the new Bank of Japan. The Banks assertion of its righteousness, and its shutting out of any external suggestions, prompted increased calls for accountability. The Board took the view that the exchange rate was one of the variables that should be monitored, but that monetary policy should not respond to exchange rate movements per se.19 The Board then explained that non-sterilised intervention
18. In spring 1999, the growth rate for the five quarters from 1997:Q4 to 1998:Q4 was estimated as negative. The current estimates for the same period are 0.7, 1.0, 1.1, 0.8 and 0.1 per cent. 19. The foreign exchange rate in itself is not a direct objective of monetary policy. One of the precious lessons we learned from the experience of policy operations during the bubble peri...
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