Not to be released until 2:00 p.m.
Japan Standard Time on
Wednesday, January 24, 2024.
.

Outlook for Economic
Activity and Prices
January 2024

(English translation prepared by the Bank's staff based on the Japanese original)

Please contact the Bank of Japan at the address below in advance to request
permission when reproducing or copying the content of this document forcommercial purposes.
Secretariat of the Policy Board, Bank of Japan
P.O. Box 30, Nihonbashi, Tokyo 103-8660, Japan
Please credit the source when quoting, reproducing, or copying the content of thisdocument.

Outlook for Economic Activity and Prices (January 2024)
The Bank's View1
SummaryJapan's economy is likely to continue recovering moderately for the time being, supported
by factors such as the materialization of pent-up demand, although it is expected to beunder downward pressure stemming from a slowdown in the pace of recovery in overseas
economies. Thereafter, as a virtuous cycle from income to spending gradually intensifies,
Japan's economy is projected to continue growing at a pace above its potential growth
rate.



The year-on-year rate of increase in the consumer price index (CPI, all items less freshfood) is likely to be above 2 percent through fiscal 2024, due to factors such as the effects,
albeit waning, of a pass-through to consumer prices of cost increases led by the past risein import prices and a waning of the effects of the government's economic measures
pushing down CPI inflation of the previous year. As for fiscal 2025, the rate of increase is
projected to decelerate owing to dissipation of these factors. Meanwhile, toward the end of
the projection period, underlying CPI inflation is likely to increase gradually towardachieving the price stability target, as the output gap turns positive and as medium- tolong-term inflation expectations and wage growth rise. The likelihood of realizing thisoutlook has continued to gradually rise, although there remain high uncertainties overfuture developments.

Comparing the projections with those presented in the previous Outlook for Economic
Activity and Prices (Outlook Report), the projected real GDP growth rate is somewhat
lower for fiscal 2023 and somewhat higher for fiscal 2024. The projected year-on-year rateof increase in the CPI (all items less fresh food) for fiscal 2024 is lower, mainly due to theeffects of the recent decline in crude oil prices.



Concerning risks to the outlook, there are extremely high uncertainties surrounding
Japan's economic activity and prices, including developments in overseas economic
activity and prices, developments in commodity prices, and domestic firms' wage- andprice-setting behavior. Under these circumstances, it is necessary to pay due attention todevelopments in financial and foreign exchange markets and their impact on Japan's
economic activity and prices.

With regard to the risk balance, risks to both economic activity and prices are generally
balanced. In terms of prices, it should be noted that, mainly due to the experience of
prolonged low growth and deflation, the behavior and mindset based on the assumptionthat wages and prices will not increase easily have taken hold in society. Considering this,
it is important to closely monitor whether a virtuous cycle between wages and prices will
intensify.

"The Bank's View" was decided by the Policy Board at the Monetary Policy Meeting held on January 22
and 23, 2024.
1

1

I. Current Situation of Economic Activity and Prices in Japan
Japan's economy has recovered moderately. The pace of recovery in overseas
economies has slowed. Although exports and industrial production have been affected by
the developments in overseas economies, they have been more or less flat. Corporate
profits and business sentiment have improved. In this situation, business fixed investment
has been on a moderate increasing trend. The employment and income situation has
improved moderately. Private consumption has continued to increase moderately, despite
being affected by price rises. Housing investment has been relatively weak. Public
investment has been more or less flat. Financial conditions have been accommodative.
On the price front, the negative contribution of energy prices to the year-on-year rate ofincrease in the CPI (all items less fresh food) has been relatively large, partly due to thegovernment's economic measures. That said, the rate of increase in the CPI has been in
the range of 2.0-2.5 percent recently, mainly on the back of the fact that, despite waning,
the effects of a pass-through to consumer prices of cost increases led by the past rise inimport prices have remained, and services prices have increased moderately. Inflation
expectations have risen moderately.

II. Baseline Scenario of the Outlook for Economic Activity and Prices in Japan
A. Baseline Scenario of the Outlook for Economic Activity
Japan's economy is likely to continue recovering moderately for the time being, supportedby the materialization of pent-up demand, as well as by factors such as accommodative
financial conditions and the government's economic measures, although it is expected to
be under downward pressure stemming from a slowdown in the pace of recovery inoverseas economies. Thereafter, pent-up demand and the effects of the economic
measures are projected to wane, but Japan's economy is expected to continue growing at
a pace above its potential growth rate as a virtuous cycle from income to spending
gradually intensifies in the overall economy.
Comparing the projections with those presented in the previous Outlook Report, theprojected real GDP growth rate for fiscal 2023 is somewhat lower, mainly reflecting theactual data showing that the rate of change in business fixed investment has been lower
than was previously projected. The projected growth rate for fiscal 2024 is somewhat
higher.
In the household sector, employment is likely to continue rising, but the pace of increaseis projected to moderate gradually. This is because it will become more difficult for labor
supply to increase, with labor force participation of women and seniors having advanced
to a high degree thus far. That said, these developments will lead to an increasedtightening of labor market conditions during the course of the economic recovery. In thissituation, wage growth is expected to increase as a trend, partly reflecting price rises, and2

employee income is projected to continue increasing. Against this backdrop, althoughprivate consumption is expected to be affected by the price rises, it is projected to keepincreasing moderately for the time being. This is because pent-up demand is likely tomaterialize, partly supported by household savings that had accumulated as a result of
pandemic-related restrictions, and because factors such as improvement in consumer
sentiment, which mainly reflects the rise in wage growth, are expected to provide support.
Private consumption is also projected to be underpinned by the government's measures,such as (1) those to reduce the household burden of higher gasoline prices, electricity
charges, and gas charges, (2) benefit payments to low-income households, and (3) cuts
in income tax and inhabitant tax. Thereafter, although private consumption is likely to beaffected by a slowdown in the materialization of pent-up demand and a waning of thepositive contribution of the government's various measures, it is expected to keepincreasing moderately, supported by the rise in employee income.
In the corporate sector, exports and production are projected to be more or less flat for thetime being, affected by the slowdown in the pace of recovery in overseas economies.
Subsequently, they are likely to return to an uptrend, mainly due to moderate growth inthese economies, albeit with variation across countries and regions, and to a pick-up in
global demand for IT-related goods. Meanwhile, inbound tourism demand, which iscategorized under services exports, is expected to continue increasing. Corporate profits
are likely to keep improving, as it is projected that they will be pushed up for the time
being by factors such as progress in the pass-through of past high raw material costs toselling prices, and thereafter by a moderate increase in domestic and external demand. In
this situation, as accommodative financial conditions provide support, business fixed
investment is likely to continue on an increasing trend, including investment to address
labor shortages, digital-related investment, research and development (R&D) investment
related to growth areas and decarbonization, and investment associated withstrengthening supply chains. Toward the end of the projection period, it is expected to beunder cyclical adjustment pressure stemming from the accumulation of capital stock, butinvestment to address labor shortages and investment that is not necessarily responsive
to the business cycle, such as that related to decarbonization, are likely to increasesteadily.
Meanwhile, public investment is expected to be more or less flat, with expenditure related
to building national resilience continuing. Government consumption is expected to decline
temporarily in reflection of developments in expenditure related to COVID-19, and thengradually increase in reflection of an uptrend in healthcare and nursing care expenditures.
Looking at the financial conditions on which the above outlook is based, it is expected thatthey will remain accommodative as the Bank pursues Quantitative and Qualitative
Monetary Easing (QQE) with Yield Curve Control, and that this will support an increase in3

private demand.2 That is, the environment for external funding, such as bank borrowing
and the issuance of CP and corporate bonds, is projected to remain accommodative. In
this situation, firms' financial positions are likely to follow an improving trend along with theeconomic recovery.
The potential growth rate is expected to rise moderately. 3 This is mainly because
productivity is likely to increase due to advances in digitalization and investment in humancapital, and because capital stock growth is projected to accelerate due to a rise inbusiness fixed investment. These developments are likely to be encouraged by thegovernment's various measures and by accommodative financial conditions.

B. Baseline Scenario of the Outlook for Prices
The year-on-year rate of increase in the CPI (all items less fresh food) is likely to be above
2 percent through fiscal 2024, due to factors such as the effects, albeit waning, of apass-through to consumer prices of cost increases led by the past rise in import prices
and a waning of the effects of the government's economic measures pushing down CPI
inflation of the previous year. As for fiscal 2025, the rate of increase is projected todecelerate owing to dissipation of these factors. Meanwhile, toward the end of the
projection period, underlying CPI inflation is likely to increase gradually toward achieving
the price stability target, as the output gap turns positive and as medium- to long-term
inflation expectations and wage growth rise.
Comparing the projections with those presented in the previous Outlook Report, theprojected year-on-year rate of increase in the CPI (all items less fresh food) for fiscal 2024
is lower, mainly due to the effects of the recent decline in crude oil prices.
The outlook for the CPI (all items less fresh food) depends on the assumptions regarding
crude oil prices and the government's economic measures. Crude oil prices are assumed
to decline moderately toward the end of the projection period with reference, for example,
to developments in futures markets. The government's measures to reduce the householdburden of higher gasoline prices, electricity charges, and gas charges are expected topush down the year-on-year rate of change in the CPI (all items less fresh food) for fiscal
2023. For fiscal 2024 and 2025, on the other hand, they are projected to push up the rates
due to a waning of the effects of those measures pushing down CPI inflation of each

Each Policy Board member makes their forecasts taking into account the effects of past policy decisions
and with reference to views incorporated in financial markets regarding the future conduct of policy.
2

Under a specific methodology, Japan's recent potential growth rate is estimated to be in the range of
0.5-1.0 percent. However, the rate should be interpreted with considerable latitude. This is because theestimate is subject to change depending on the methodologies employed and could be revised as the
sample period becomes longer over time. In addition, there are particularly high uncertainties in thecurrent phase over how COVID-19 will affect the trends in productivity or labor supply.
3

4

previous year.4 In this regard, looking at the CPI (all items less fresh food and energy) -which is not directly affected by fluctuations in energy prices -- the year-on-year rate ofincrease is likely to decelerate, due to a gradual waning of the effects of the pass-throughto consumer prices of cost increases led by the past rise in import prices, andsubsequently be at around 2 percent toward the end of the projection period.
The main factors that determine underlying inflation are assessed as follows. The output
gap, which captures the utilization of labor and capital, has followed an improving trend.
Based on the aforementioned outlook for economic activity, the gap is likely to widen
moderately within positive territory toward the end of the projection period, albeit at a
gradually slowing pace. Under these circumstances, labor market conditions are expected
to tighten, partly due to a deceleration in the pace of increase in labor force participation of
women and seniors, and upward pressure on wages is projected to intensify. This is likely
to put upward pressure on personnel expenses on the cost side and contribute to anincrease in households' purchasing power.
Medium- to long-term inflation expectations have risen moderately. The December 2023
Tankan (Short-Term Economic Survey of Enterprises in Japan) shows that the diffusionindex (DI) for output prices is lower than a while ago but has remained at a high level, andthat figures for firms' inflation outlook for general prices have declined somewhat for the
short term but have remained at high levels for the medium to long term. Given that theformation of inflation expectations in Japan is largely adaptive, the increase in inflation
seen thus far has brought about a rise in households' and firms' medium- to long-term
inflation expectations. In this situation, firms' behavior has shifted more toward raising
wages and prices. Regarding the outlook, inflation expectations are expected to risemoderately toward the end of the projection period, with continued improvement in the
output gap and changes in firms' wage- and price-setting behavior and inlabor-management wage negotiations. Under these circumstances, a virtuous cycle
between wages and prices is projected to intensify through achievement of wage
increases that reflect price rises and through a pass-through of wage increases to selling
prices.
Considering the above assessments, underlying CPI inflation is likely to increase
gradually toward achieving the price stability target. Taking account, for example, ofchanges in firms' wage- and price-setting behavior and of the stance among labor andmanagement toward wage negotiations, the likelihood of realizing this outlook has
The Comprehensive Economic Measures to Completely Break Free from Deflation were decided by the
Cabinet in November 2023. As part of these measures, the government decided to continue withmeasures to reduce the burden of higher gasoline prices through April 2024. It also decided thatmeasures to reduce the burden of higher electricity and gas charges will remain effective for charges onthese types of energy consumed through May 2024. Assuming that these measures to reduce thosevarious burdens will not be extended and will be phased out, the year-on-year rates of increase in the CPI(all items less fresh food), mainly for fiscal 2024, will be pushed up by a waning of the effects of thesemeasures pushing down CPI inflation of each previous year.
45

continued to gradually rise, although there remain high uncertainties over future
developments.

III. Risks to Economic Activity and Prices
A. Risks to Economic Activity
Regarding the aforementioned baseline scenario of the outlook for economic activity, themain upside and downside risks that require attention are as follows.
The first is developments in overseas economic activity and prices and in global financial
and capital markets. Although inflationary pressure has remained on a global basis,
inflation rates in the United States and Europe are lower than a while ago. In this situation,
overseas central banks have continued to conduct tight monetary policy, but some haveapparently signaled future policy interest rate reductions. On this point, it is expected in
the baseline scenario that inflation rates around the world will decline gradually and thatoverseas economies will continue to grow moderately, albeit with variation acrosscountries and regions. There is also a possibility that, if inflationary pressure wanes further,moves to reduce policy interest rates will strengthen and affect these economies. On theother hand, there is a risk of inflation rates staying elevated through wage increases,
mainly in advanced economies. In addition, since the policy interest rate hikes byoverseas central banks to date have been rapid, there are high uncertainties over how
these hikes will affect their real economies and financial systems with a time lag. Taking
these risks into account, it is necessary to pay due attention to developments in financial
and foreign exchange markets and their impact on Japan's economic activity and prices.
Meanwhile, depending on the course of the situation surrounding Ukraine, downward
pressure on overseas economies, particularly the euro area, could heighten. In addition,
regarding the Chinese economy, there are high uncertainties surrounding the future paceof pick-up, as adjustment pressure has remained in the labor and real estate markets.
The second risk is developments in import prices, particularly those of commodities,
including grains. While prices of grains and other commodities had declined on the whole-- albeit with fluctuations -- after reaching their peak around the middle of 2022, attention
continues to be warranted on the risk that these prices will fluctuate significantly due togeopolitical factors, such as those concerning Ukraine and the Middle East. Furthermore,in the medium to long term, there are extremely high uncertainties surrounding, forexample, efforts by countries around the world toward addressing climate change. Given
that Japan is an importer of commodities such as energy and grains (e.g., wheat), a rise inthese prices due to supply factors puts greater downward pressure on the economy
through an increase in import costs, as this rise is not accompanied by an expansion inexternal demand or an increase in exports. If the terms of trade were to deteriorate again,
this could squeeze corporate profits and households' real income, leading business fixed6

investment and private consumption to deviate downward from the baseline scenario
through more cautious spending behavior of firms and households. Moreover, with
progress in the pass-through of the rise in import prices to consumer prices, if wage
increases were to be limited, this could further strengthen households' defensive attitudes
toward spending and push down the economy. On the other hand, if prices ofcommodities, including grains, decline, the economy could deviate upward.
The third risk considered from a somewhat long-term perspective is firms' andhouseholds' medium- to long-term growth expectations. It is expected that factors such as
moves toward digitalization, which reflect the experience of COVID-19 and intensifying
labor shortages, and progress on efforts with a view to decarbonization and on labormarket reform will change Japan's economic structure and people's working styles.
Furthermore, the heightened geopolitical risks could change the trend of globalization,
which has supported the growth of the global economy to date. Depending on how firms
and households react to these changes, their medium- to long-term growth expectations,the potential growth rate, and the output gap could go either up or down.

B. Risks to Prices
If the aforementioned risks to economic activity materialize, prices also are likely to beaffected. In addition, it is necessary to pay attention to the following two risks that are
specific to prices.
The first is high uncertainties over firms' wage- and price-setting behavior, which could
exert either upward or downward pressure on prices. In the current inflationary phase,with Japan's economy following a recovery trend and against the backdrop of high raw
material costs, many firms have raised prices while giving consideration to price setting bycompetitors. While the effects of the pass-through of the past rise in import prices to
consumer prices have been gradually waning, this pass-through could continue for longer
than expected and lead prices to deviate upward from the baseline scenario, depending
on how much upward pressure will be exerted by raw material costs and on how firms'
inflation expectations will develop. In addition, with labor market conditions tightening, it ispossible that firms will further shift their wage-setting behavior toward raising wages, inview of factors such as recruitment and retention. Under these circumstances, there is apossibility that both wages and prices will deviate upward from the baseline scenario to agreater extent than can be explained by changes in the output gap, as moves to reflect
not only price developments in wage setting but also wage developments in price setting
become more widespread than expected. On the other hand, with inflation decelerating,medium- to long-term inflation expectations could decline through the mechanism ofadaptive inflation expectations formation, and this could affect firms' price-setting behavior.
In addition, although the wage growth rate agreed in the annual spring labor-management
wage negotiations last year was significantly higher than in the previous year, if the7behavior and mindset based on the assumption that wages and prices will not increase
easily remain deeply entrenched, there is a risk that moves to increase wages will notstrengthen as much as expected and prices will deviate downward from the baseline
scenario.
The second risk is future developments in foreign exchange rates and internationalcommodity prices, as well as the extent to which such developments will spread to importprices and domestic prices. This risk may lead prices to deviate either upward or
downward from the baseline scenario. There are high uncertainties over, for example, theoutlook for the global economy, and this could lead to significant fluctuations ininternational commodity prices. Including the possibility of inflation rates staying elevatedon a global basis and of fluctuations in foreign exchange markets, how these factors willaffect Japan's prices requires due attention.

IV. Conduct of Monetary Policy
In the context of the price stability target, the Bank assesses the aforementioned
economic and price situation from two perspectives and then outlines its thinking on the
future conduct of monetary policy.5
The first perspective involves an examination of the baseline scenario of the outlook. The
year-on-year rate of increase in the CPI is likely to be above 2 percent through fiscal 2024
and then decelerate in fiscal 2025. Meanwhile, toward the end of the projection period,
underlying CPI inflation is expected to increase gradually toward achieving the pricestability target, as the output gap turns positive and as medium- to long-term inflation
expectations and wage growth rise. The likelihood of realizing this outlook has continued
to gradually rise, although there remain high uncertainties over future developments.
The second perspective involves an examination of the risks considered most relevant tothe conduct of monetary policy. There are extremely high uncertainties, both upside anddownside, surrounding Japan's economic activity and prices, and it is necessary to pay
due attention to developments in financial and foreign exchange markets and their impact
on economic activity and prices. With regard to the risk balance, risks to both economic
activity and prices are generally balanced. In terms of prices, it should be noted that,mainly due to the experience of prolonged low growth and deflation, the behavior andmindset based on the assumption that wages and prices will not increase easily havetaken hold in society. Considering this, it is important to closely monitor whether a virtuous
cycle between wages and prices will intensify.

As for the examination from two perspectives in the context of the price stability target, see the Bank's
statement released on January 22, 2013, entitled "The 'Price Stability Target' under the Framework for the
Conduct of Monetary Policy."
5

8

Examining risks on the financial side, overheating has not been seen in asset markets
and financial institutions' credit activities. Japan's financial system has maintained stabilityon the whole. Although attention is warranted on, for example, the impact of the tighteningof global financial conditions, the financial system is likely to remain highly robust on thewhole, even in the case of an adjustment in the real economy at home and abroad and inglobal financial markets, mainly because Japanese financial institutions have sufficient
capital bases. When examining financial imbalances from a longer-term perspective, if
downward pressure on financial institutions' profits, such as from low interest rates, thedeclining population, and excess savings in the corporate sector, becomes prolonged, this
could create a risk of a gradual pullback in financial intermediation. On the other hand,under these circumstances, the vulnerability of the financial system could increase, mainly
due to the search for yield behavior. Although these risks are judged as not significant at
this point, it is necessary to pay close attention to future developments.
As for the conduct of monetary policy, with extremely high uncertainties surrounding
economies and financial markets at home and abroad, the Bank will patiently continue
with monetary easing while nimbly responding to developments in economic activity andprices as well as financial conditions. By doing so, it will aim to achieve the price stability
target of 2 percent in a sustainable and stable manner, accompanied by wage increases.
The Bank will continue with QQE with Yield Curve Control, aiming to achieve the pricestability target, as long as it is necessary for maintaining that target in a stable manner. It
will continue expanding the monetary base until the year-on-year rate of increase in theobserved CPI (all items less fresh food) exceeds 2 percent and stays above the target in astable manner. The Bank will continue to maintain the stability of financing, mainly of firms,
and financial markets, and will not hesitate to take additional easing measures ifnecessary.

9(Appendix)
Forecasts of the Majority of the Policy Board Members
y/y % chg.
Real GDP

CPI (all items lessfresh food)(Reference)
CPI (all items lessfresh food and energy)

Fiscal 2023

+1.6 to +1.9[+1.8]+2.8 to +2.9[+2.8]+3.7 to +3.9[+3.8]

Forecasts made in October 2023

+1.8 to +2.0[+2.0]+2.7 to +3.0[+2.8]+3.5 to +3.9[+3.8]

Fiscal 2024

+1.0 to +1.2[+1.2]+2.2 to +2.5[+2.4]+1.6 to +2.1[+1.9]

Forecasts made in October 2023

+0.9 to +1.4[+1.0]+2.7 to +3.1[+2.8]+1.6 to +2.1[+1.9]

Fiscal 2025

+1.0 to +1.2[+1.0]+1.6 to +1.9[+1.8]+1.8 to +2.0[+1.9]

Forecasts made in October 2023

+0.8 to +1.2[+1.0]+1.6 to +2.0[+1.7]+1.8 to +2.2[+1.9]

Notes: 1. Figures in brackets indicate the medians of the Policy Board members' forecasts (point estimates).
2. The forecasts of the majority of the Policy Board members are constructed as follows: each Policy Board
member's forecast takes the form of a point estimate -- namely, the figure to which they attach the highest
probability of realization. These forecasts are then shown as a range, with the highest figure and the lowest figure
excluded. The range does not indicate the forecast errors.
3. Each Policy Board member makes their forecasts taking into account the effects of past policy decisions and withreference to views incorporated in financial markets regarding the future conduct of policy.

10Policy Board Members' Forecasts and Risk Assessments(1) Real GDP
3.0y/y % chg.

y/y % chg.

3.0

2.0

2.0

1.0

1.0

0.0

0.0

-1.0

-1.0

-2.0

-2.0

-3.0

-3.0

-4.0

-4.0

-5.0
FY
2017

2018

2019

2020

2021

2022

2023

2024

2025

-5.0
2026

(2) CPI (All Items Less Fresh Food)
4.0

y/y % chg.

y/y % chg.

4.0

3.0

3.0

2.0

2.0

1.0

1.0

0.0

0.0

-1.0
FY
2017

2018

2019

2020

2021

2022

2023

2024

2025

-1.0
2026

Notes: 1. The solid lines show actual figures, while the dotted lines show the medians of the Policy Board
members' forecasts (point estimates).
2. The locations of, △, and ▼ in the charts indicate the figures for each Policy Board member's forecasts

to which they attach the highest probability. The risk balance assessed by each Policy Board member isshown by the following shapes:

indicates that a member assesses "upside and downside risks as

being generally balanced," △ indicates that a member assesses "risks are skewed to the upside," and ▼indicates that a member assesses "risks are skewed to the downside."

11

The Background6
I. Current Situation of Economic Activity
and Its Outlook
A. Economic Developments
Japan's economy has recovered moderately.

Chart 1: Real GDP
1. Level
580

Real GDP rose for three consecutive quarters,s.a., ann., tril. yen

560

registering 0.9 percent on a quarter-on-quarter
basis for the April-June quarter of 2023 and 3.6
percent on an annualized basis (Chart 1). It thendecreased

for

the

registeringminus

July-September

quarter,

0.7

onpercentaquarter-on-quarter basis and minus 2.9 percent

540
520
500
480

on an annualized basis. Relative to the previous
quarter, private consumption slightly declined and

460
CY 08

10

12

14

16

18

20

22

business fixed investment decreased. Meanwhile,
net exports were unchanged and, owing todissipation of the effects of large-scale projects,
public investment was more or less flat. The
output gap -- which captures the utilization oflabor and capital -- remained on an improving
trend, although it was slightly negative for the
July-September quarter, which reflects the fact
that

the

capacity

utilization

rate

for

the

manufacturing industry declined somewhat (Chart
2).

Monthly indicators and high-frequency data sincethensuggestthat

Japan's

economyhascontinued on a recovery trend. In the corporate
sector, although exports and production havebeen affected by a slowdown in the pace of

6"The Background" provides explanations of "The Bank's View"
decided by the Policy Board at the Monetary Policy Meeting heldon January 22 and 23, 2024.

12

2. Annualized Quarterly Growth Rates.a., ann., q/q % chg.

30
25
20
15
10
5
0
-5
-10
Private demand-15
Public demand-20
Net exports-25
Real GDP-30-35
CY 13 14 15 16 17 18 19 20 21 22 23
Source: Cabinet Office.

recovery in overseas economies, they have been
more or less flat. Corporate profits and business

Chart 2: Output Gap
inverted, DI ("excessive" - "insufficient"), % points%

sentiment have improved. In this situation,

8

business fixed investment has been on a6

moderate increasing trend, and the business fixed4

investment plans for fiscal 2023 in the December

2-102023 Tankan indicate that investment is expected00

to see a clear rise. In the household sector, the-210employment and income situation has improved-4

20

moderately. Under these circumstances, private-630

consumption

-8
CY 85

has

continued

toincreasemoderately, despite being affected by price rises.
In sum, although Japan's economy has been
affected by the slowdown in the pace of recovery
in overseas economies, a virtuous cycle fromincome to spending has been operating in boththe corporate and household sectors.

Japan's economy is likely to continue recoveringmoderately for the time being, supported by thematerialization of pent-up demand, as well as byfactorssuch

conditions

and

as

accommodative

financial

thegovernment's

economic

measures, although it is expected to be under
downward pressure stemming from the slowdown
in the pace of recovery in overseas economies.7
Thereafter, pent-up demand and the effects of theeconomic measures are projected to wane, but
Japan's economy is expected to continue growing
at a pace above its potential growth rate as thevirtuous cycle from income to spending graduallyintensifies in the overall economy. Comparing the
projections with those presented in the previous
7

The government formulated additional measures toward
overcoming price increases in March 2023 and theComprehensive Economic Measures to Completely Break Free
from Deflation in November. The implementation of the budget
based on these measures is expected to mainly push up
government consumption and private consumption, and thereby
support economic activity.

13

Output gap (left scale)

-40
-30

Tankan factor utilizationindex (right scale)

-20

40
90

95

00

05

10

15

20

Source: Bank of Japan.
Notes: 1. Figures for the output gap are staff estimates.
2. The Tankan factor utilization index is calculated as the weighted average of the
production capacity DI and the employment conditions DI for all industries andenterprises. The capital and labor shares are used as weights. There is a
discontinuity in the data for December 2003 due to a change in the survey
framework.
3. Shaded areas denote recession periods.

Outlook Report, the projected real GDP growthrate for fiscal 2023 is somewhat lower, mainly

Chart 3: Potential Growth Rate

reflecting the actual data showing that the rate of

5change in business fixed investment has been

4

lower

3

than

was

previously

projected.

They/y % chg.
Total factor productivity
Capital input
Labor input
Potential growth rate

projected growth rate for fiscal 2024 is somewhat
2higher.
1
0

The potential growth rate seems to have been in-1

the range of 0.5-1.0 percent recently with amoderate increase in the growth rate of totalfactor productivity (TFP), although a downtrend inworking hours reflecting working-style reforms, forexample, has continued (Chart 3). As for theoutlook, the potential growth rate is expected torise moderately. This is based on the projection
that, although there will be less room for thenumber of employed persons to increase, (1) TFP
will continue to grow, mainly on the back ofadvancesindigitalization

andaresulting

improvement in efficiency of resource allocation,
as well as an expansion in investment in humancapital, (2) the decline in working hours will cometo a halt in reflection of the diminishing effects ofworking-style reforms, and (3) growth in capitalstock will accelerate. These developments arelikely to be encouraged by the government's
variousmeasuresandbyaccommodative

financial conditions. However, in terms of labor, it
is highly uncertain what kind of working style willtake hold going forward, given the experience of
COVID-19 and with demographic changes. In
addition, in the corporate sector, it is expectedthat factors such as moves toward digitalization,
which reflect the experience of COVID-19 andlabor shortages, and progress on efforts with aview to decarbonization will change Japan's
economic and industrial structures; however,

14

-2
FY 85

90

95

Source: Bank of Japan.
Note: Figures are staff estimates.

00

05

10

15

20

there remain high uncertainties over the extent ofadvancement and sustainability of innovation andsectoral reallocation of production factors, both ofwhich aim at adapting to changes in the economic
and industrial structures. It is also possible thatthe heightened geopolitical risks and other factors
will have a significant impact on corporate
behavior. Under these circumstances, the output
gap and the potential growth rate, which are
estimated based on a specific assumption
regarding trends, should be interpreted with somelatitude.

Details of the outlook for each fiscal year are as
follows. In the second half of fiscal 2023, Japan's
economyislikelytocontinuerecoveringmoderately, supported by the materialization ofpent-up demand, as well as by factors such asaccommodative financial conditions and thegovernment's economic measures, although theimpact of the slowdown in the pace of recovery inoverseas

economies

isexpected

to

exert

downward pressure on Japan's economy. Goods
exports are projected to be more or less flat
despite being affected by the slowdown, mainly
because IT-related demand is likely to headtoward a pick-up. Inbound tourism demand, whichis categorized under services exports, is expected
to

keep

increasing.

With

corporate

profits

improving, business fixed investment is projected
to continue on an increasing trend, mainly on theback of accommodative financial conditions. In
the household sector, employment is likely to riseon the back of a recovery in economic activity andwage growth is expected to remain relatively high.
Due to these factors, nominal employee income islikelytokeeprising. Moreover,downwardpressure on households' real income stemming15

from high prices is expected to ease. This will
likely occur due to the effects of the government's
economic measures and a waning of the effects
of a pass-through to consumer prices of cost
increases led by the past rise in import prices.
Against this backdrop, private consumption is
projected to keep increasing moderately due tofactors such as pent-up demand, which is partly
supportedbyhouseholdsavings

that

hadaccumulated as a result of pandemic-related
restrictions. Government spending is expected to
decline, reflecting a reduction in expenditure
related to COVID-19, although it is likely to besupported by progress in construction related tobuilding national resilience and by an uptrend in
healthcare and nursing care expenditures.

In fiscal 2024, Japan's economy is expected tocontinue growing at a pace above its potential
growth rate, partly due to the effects of thegovernment's economic measures, with overseas
economies

growing

moderately

andaccommodative

financialconditions

being

maintained.

overseas

economies

grow

As

moderately, albeit with variation across countries
and regions, goods exports are likely to see amoderate increase. Inbound tourism demand is
projected to keep increasing. Business fixed
investment is expected to continue on an
increasing trend, including investment to address
labor

shortages,

investment

relateddigital-related
togrowthinvestment,
areas

and

decarbonization, and investment associated withstrengthening supply chains. In the household
sector, nominal employee income is likely tocontinue increasing steadily. This is because
wage growth is expected to remain relatively high,although it will gradually become more difficult for16

labor supply to increase, with labor force
participation of women and seniors having
advanced to a high degree thus far. Moreover,factors such as cuts in income tax and inhabitant
tax by the government are projected to push up
disposable income. In this situation, private
consumption is likely to continue increasing
moderately,
projected

althoughtopent-up

gradually

demandwane.

isGovernment

spending is expected to turn to a moderateincrease on the back of progress in construction
related to building national resilience and an
uptrendinhealthcare

andnursingcare

expenditures.

In fiscal 2025, although pent-up demand is
expected to diminish, domestic and external
demand is projected to continue increasing.
Goods exports are likely to increase moderately,with overseas economies continuing to grow.
Inbound tourism demand is projected to keepincreasing. Business fixed investment is also
expected to continue increasing, mainly forinvestment to address labor shortages andinvestment

relatedto

growthareas

anddecarbonization; however, the pace of increase is
projected to slow somewhat, partly because it islikely to be pushed down by adjustment pressure
on capital stock. Although pent-up demand islikelytodiminish,privateconsumptionisprojected to continue increasing moderately, with
the income situation continuing to improve,
supportedby wagespendingisincreases. Government

expectedtokeepincreasing

moderately on the back of an uptrend in
healthcare and nursing care expenditures.

17

B. Developments in Major Expenditure
Items and Their Background
Government Spending
Public investment has been more or less flat

Chart 4: Public Investments.a., ann., tril. yens.a., ann., tril. yen(Chart 4). While construction based on the24

government's

23

29

22

28

completed -- a coincident indicator of public

21

27

investment -- has been more or less flat, partly

20

26

economic

measures,including

30

construction related to building national resilience,has progressed, the amount of public construction

due to dissipation of the effects of large-scale

19

projects. The value of public works contracted

25
Public construction completed(nominal, left scale)and orders received for public construction -- both

18

of

17
CY 13 14 15 16 17 18 19 20 21 22 23

which

are

leading

indicatorsofpublicinvestment -- declined, mainly due to thedissipation of the effects of large-scale projects;
subsequently, they have been more or less flat.

As for the outlook, public investment is likely to
see a slight lowering in its level for the time being,
mainly due to the dissipation of the effects oflarge-scale

projects.

Subsequently,

publicinvestment is expected to be more or less flat,with expenditure related to building national
resilience continuing.8 Government consumption
is projected to see a temporary lowering in its
level due to a reduction in expenditure related to
COVID-19,

such

as

regarding

vaccination.

Thereafter, however, government consumption is
likely to return to an increasing trend, reflecting an

8

The five-year acceleration measures for building national
resilience with a project size of about 15 trillion yen were decided
by the Cabinet in December 2020. In these measures, public
investment projects for disaster prevention, disaster mitigation,and building national resilience are to be implemented intensively
over five years from fiscal 2021 through fiscal 2025. The
government's economic measures decided by the Cabinet inNovember 2023 also include efforts to implement the acceleration
measures.

18

24

Public investment (real, right scale)

Sources: Cabinet Office; Ministry of Land, Infrastructure, Transport and Tourism.
Note: The figure for 2023/Q4 is the October-November average.

23

uptrendinhealthcare

andnursing

care

Chart 5: Overseas Economies

expenditures.

10y/y % chg.
IMF
projections

8

Overseas Economies

64

The pace of recovery in overseas economies has

2

slowed (Chart 5). By region, the U.S. economy0

has been firm, mainly led by private consumption,-2

Overseas total

although it has been affected by policy interest-4

Advanced economies

rate hikes. European economies have kept

-6

Emerging and commodity-exporting
economies

slowing moderately as they have continued to beaffected by factors such as policy interest rate
hikes. The Chinese economy has remained on amoderate slowing trend, mainly owing to the

-8
CY 90

95

00

05

10

15

20

25

Sources: IMF; Ministry of Finance.
Note: Figures are the weighted averages of real GDP growth rates using countries' sharein Japan's exports as weights. The real GDP growth rates are compiled by the IMF,
and the rates from 2023 onward are its projections in the October 2023 World
Economic Outlook (WEO). Figures for advanced economies are those for theUnited States, the euro area, and the United Kingdom. Figures for emerging andcommodity-exporting economies are those for the rest of the world.

effects of a slowdown in external demand andadjustments in the real estate market, but signs ofa pick-up have been observed in some aspects,

Chart 6: Global PMI

such as private consumption. Emerging and60

commodity-exporting economies other than China

55

have improved moderately on the whole, as signs

50

of a pick-up have been seen in exports. Among45

those in Asia, which are closely related to Japan's

40

economy, the ASEAN economies have improved
moderately, as domestic demand has continued
to improve and exports have started to bottom out.
The

NIEs

economies

have

also

improved

moderately, on the back of a pick-up in exports,
mainly led by IT-related goods, although the paceof

improvement

decelerated.9

indomestic

demandhas

Looking at the Global PMI to see

the current situation for the global economy,
figures for the services industry have beensomewhat above 50 -- the break-even point
between

improvement

anddeteriorationinbusiness conditions -- but are lower than a whileago; figures for the manufacturing industry havebeen somewhat below 50 (Chart 6). The world9

Box 1 examines the recent pick-up in global IT-related demandand its background.

19s.a., DI

35
30
Manufacturing

25
20
CY 08

Services

10

12

14

16

18

20

22

Source: Copyright © 2024 by S&P Global Market Intelligence, a division of S&P Global
Inc. All rights reserved.
Note: Figures for manufacturing are the J.P.Morgan Global Manufacturing PMI. Figures
for services are the J.P.Morgan Global Services Business Activity Index.

trade volume has started to bottom out despite
being affected by the slowdown in the pace ofrecovery in overseas economies, mainly because
inventory

adjustmentsforintermediate

andChart 7: World Trade Volume
140s.a., CY 2010=100130IT-related goods have progressed (Chart 7).
120
110

As for the outlook, the pace of recovery inoverseas economies is projected to remain slow
for the time being. By region, the U.S. economy is100
90

likely to continue to be firm. The Chinese
economy is projected to gradually move out of its
slowing phase due to policy support. European

80
CY 08

10

12

14

16

18

20

22

Source: CPB Netherlands Bureau for Economic Policy Analysis.
Note: Figures for the world trade volume are those for world real imports. The figure for2023/Q4 is that for October.

economies are expected to remain on a slowing
trend.

Emerging

andcommodity-exporting

Chart 8: Effective Exchange Rates

economies other than China are likely to continue

200

improving moderately with external demand180

picking up.

160

CY 2020=100
Yenappreciation
Yen
depreciation

140
120

Thereafter, overseas economies are projected to100

grow moderately, albeit with variation across80

countries and regions.

60
Real effective exchange rate

40

Nominal effective exchange rate

20
CY 80

Exports and Imports

85

90

95

00

05

10

15

20

Source: BIS.
Note: Figures are based on the broad effective exchange rate indices. Figures prior to
1994 are calculated using the narrow indices.

Although exports have been affected by theslowdown in the pace of recovery in overseas
economies, they have been more or less flat
(Chart 9). By region, exports to the U.S. economy

Chart 9: Real Exports and Imports
120s.a., CY 2020=100

s.a., % of real GDP

8Real trade balance (right scale)

110

Real exports (left scale)

6

Real imports (left scale)have been on an uptrend, mainly led byautomobile-related goods (Chart 10). Those toEuropean and other economies have been at high

100

4

90

2

80

0

70

-2

levels, also mainly led by automobile-related
goods. Exports to the Chinese economy havebottomed out. Those to the NIEs, the ASEAN
economies, and some other Asian economies
have also bottomed out, against the backgroundof progress in global adjustments for IT-related

20

60
CY 08

-4
10

12

14

16

18

20

22

Sources: Bank of Japan; Ministry of Finance; Cabinet Office.
Note: Based on staff calculations. Figures for 2023/Q4 are October-November averages.

goods. By goods, exports of automobile-related
goods have been on an uptrend, with supply-side
constraints

forsemiconductors

used

in

Chart 10: Real Exports by Region
130s.a., 2018/Q1=100

s.a., 2018/Q1=100

130

120

120

110

110

100

100

more or less flat, mainly because they have been

90

90

supported by high levels of order backlogs and8080exports of semiconductor production equipment

70

70

have bottomed out. Exports of IT-related goods

60

have bottomed out with progress in adjustments

50

United States <18.6>

for electronic parts, such as semiconductors.

40

EU <9.5>

automobiles generally having dissipated (Chart
11). Exports of capital goods overall have been

Meanwhile, those of intermediate goods havebeen at relatively low levels, mainly reflecting
weakness in the Chinese real estate market.

30
CY

18 19 20 21 22 23

China<19.4>
NIEs, ASEAN, etc.
<37.1>
Other economies<15.4>

60
50
40
30

18 19 20 21 22 23

Sources: Bank of Japan; Ministry of Finance.
Notes: 1. Based on staff calculations. Figures in angular brackets show the share of eachcountry or region in Japan's total exports in 2022. Figures for 2023/Q4 are
October-November averages.
2. Figures for the EU exclude those for the United Kingdom for the entire period.

Chart 11: Real Exports by Type of Goods
Exports are projected to be more or less flat for130

the time being with the pace of recovery in120

overseass.a., 2018/Q1=100

s.a., 2018/Q1=100
Intermediate
goods <21.8>
Motor vehicles andrelated goods <20.5>

130

120
110

remaining

slow.

110

economies

grow

100

100

moderately, albeit with variation across countries

90

90

and regions, exports are likely to return to an

80

80

uptrend.

70

economies

Subsequently,

as

these

Imports have been more or less flat, albeit withfluctuations (Chart 9). They are expected to follow
a moderate uptrend on the back of developments

70

60

IT-related goods<20.2>

60

50

Capital goods<17.5>

50

40
CY 18 19 20 21 22 2340
18 19 20 21 22 23

Sources: Bank of Japan; Ministry of Finance.
Note: Based on staff calculations. Figures in angular brackets show the share of eachtype of goods in Japan's total exports in 2022. Figures for 2023/Q4 are OctoberNovember averages.

in demand induced by increases in domestic

Chart 12: Current Accountdemand and exports.

50s.a., ann., tril. yen

40

External Balance30

The nominal current account surplus has been ata high level (Chart 12). The trade balance deficit
has been small, marking a clear decrease
compared to a while ago. Despite a surplus in thetravel balance, which reflects a recovery in
inbound tourism demand (Chart 13), the services

20
10
0
-10

-20
-30

Trade balance
Services balancePrimary income balance
Secondary income balance
Current account balance-40
CY 13 14 15 16 17 18 19 20 21 22 23
Source: Ministry of Finance and Bank of Japan.
Note: Figures for 2023/Q4 are October-November averages.

21

balance has remained on a slight deficit trend, as
payments for digital-related services have been at

Chart 13: Number of Inbound Visitors

high levels, albeit with fluctuations. Meanwhile,35

the primary income balance surplus has remained30

at a high level.

25s.a., ann., mil. persons
Europe, the United States, and other regions
ASEAN
NIEs

China

20

The nominal current account balance is likely to15

follow a moderate improving trend. This is based

10on the projection that (1) the primary income

5balance surplus will increase moderately, (2) the
trade balance deficit will decline moderately due

0
CY 13 14 15 16 17 18 19 20 21 22 23

to factors such as an increase in goods exports,

Source: Japan National Tourism Organization (JNTO).
Note: Figures for Europe, the United States, and other regions include seasonal
adjustment errors.

and (3) the services balance deficit will decrease
due to an increase in inbound tourism demand. In

Chart 14: Savings-Investment Balanceterms of the savings-investment balance, overall

100

excess savings in Japan's economy are projected80

to follow a moderate expanding trend, because60

the fiscal balance is likely to improve at a pacethat somewhat exceeds the pace of decline inexcess savings in the private sector (Chart 14).

4-quarter backward moving avg., ann., tril. yen
Excess savings

Excess investment

40
20
0
-20
-40

Household sector-60

Corporate sector

Industrial Production-80

Although industrial production has been affected-100
CY 13 14 15 16 17 18 19 20 21 22 23

by the slowdown in the pace of recovery inoverseas economies, it has been more or less flat
(Chart 15). By major industry, production ofGeneral government
Domestic savings-investment balance

Source: Bank of Japan.

Chart 15: Industrial Production
140s.a., CY 2020=100"transport equipment" has been on an uptrend,with supply-side constraints for semiconductors
used in automobiles generally having dissipated.

Production

130

Inventories

120

Although production of semiconductor production
equipment has seen a lowering in its levelcompared to a while ago, that of "general-purpose,

110
100

production, and business-oriented machinery"
overall has been more or less flat, as it has been
supported by high levels of order backlogs.
Productionofinformationand"electricalmachinery,communication

andelectronics

22

90
80
CY 08

10

12

14

16

18

20

22

Source: Ministry of Economy, Trade and Industry.
Notes: 1. Shaded areas denote recession periods.
2. The production figure for 2023/Q4 is the October-November average. The
inventories figure for 2023/Q4 is that for November.

equipment" has also been more or less flat,
mainly because production of white goods has
picked up while that of lithium-ion batteries usedinautomobiles

has

been

relatively

Chart 16: Indicators Related to Corporate
Profits
1. Sales and Current Profits
400s.a., tril. yens.a., tril. yen

30

weak.

Production of "electronic parts and devices" has

380

25

bottomed

360

20

340

15

out

adjustments.

withprogress

Meanwhile,ininventory

productionof"chemicals (excluding medicine)" has been at alow level, mainly reflecting weakness in the

320

10

Chinese real estate market.

Sales (left scale)300

5Current profits(right scale)Industrial production is projected to be more orless flat for the time being. Subsequently, it is

280
CY 08

0
10

12

14

16

18

20

22

Source: Ministry of Finance.
Notes: 1. Based on the Financial Statements Statistics of Corporations by Industry,
Quarterly. Excluding "finance and insurance."
2. Figures from 2009/Q2 onward exclude pure holding companies.
3. Shaded areas denote recession periods.

likely to return to an uptrend, reflecting a pick-up
2. Contribution to Changes in Terms of Tradein global demand for IT-related goods and other30

developments in domestic and external demand.

y/y % chg.

20

Corporate Profits

10

Corporate profits have improved. According to the0

Financial Statements Statistics of Corporations byIndustry, Quarterly (FSSC), current profits for allindustries and enterprises for the July-September
quarter of 2023 increased for four consecutive
quarters (Chart 16). 10 Operating profits havebeen pushed up mainly by progress in the
pass-through of cost increases to selling prices, arecovery in the flow of people due to that ineconomic activity, and a recovery in automobile
production

stemming

fromawaningofsupply-side constraints. Moreover, non-operating
profits have been pushed up by foreign exchange
gains due to the yen's depreciation and by anincrease in interest received from overseas. By
industry and firm size, current profits of large
manufacturers have increased, mainly due to a

10

The FSSC figures here exclude "finance and insurance" andpure holding companies.

23-10
Commodity prices, etc.

-20

Exchange rates
Terms of trade

-30
CY 08

10

12

14

16

18

20

22

Source: Bank of Japan.
Notes: 1. The contribution of changes in commodity prices, etc. is calculated using changes
in export/import price indexes on a contract currency basis. The contribution ofchanges in exchange rates is calculated using the difference between
export/import price indexes on a yen basis and those on a contract currency basis.
2. Terms of trade = Export price index on a yen basis / Import price index on a yen basis

rise in revenue for the transportation equipment
industry, which reflects the recovery in automobile

Chart 17: Business Conditions

production

60

stemming

from

the

waningofsupply-side constraints. Current profits of small

DI ("favorable" - "unfavorable"), % points
All industries

40

Manufacturingand medium-sized manufacturers have also risen,
mainly because of progress in the pass-through of
cost increases to selling prices for food and otherNonmanufacturing

200items. As for nonmanufacturers, current profits oflarge firms have increased, mainly due to a rise inrevenue for the transportation industry, which-20"Favorable"-40"Unfavorable"

reflects the recovery in the flow of people and intravel demand. Those of small and medium-sized
nonmanufacturers have also increased, mainly
owing to a rise in revenue for the retail tradeindustry, which reflects the recovery in the flow ofpeople.

Business sentiment has improved. According to
the December Tankan, the DIs for businessconditions have improved for all firm size
categories

in

both

manufacturingandnonmanufacturing (Chart 17). By industry, the DI
for manufacturing has improved, particularly forsmall

firms,

which

had

seen

a

delay inimprovement. This is mainly due to the progressin the pass-through of cost increases to selling
prices and the recovery in automobile production.
Looking at industries where the DIs have
improved, that for transportation machinery has
continued to do so due to a waning of the effectsof supply-side constraints, and this has led to
improvement in the DIs for relevant industries
such as iron and steel, as well as nonferrous
metals.

Inaddition,theprogressinthepass-through of cost increases to selling prices
and a pause in high raw material costs have
improved the DIs for basic materials (e.g., "pulpand paper" and "ceramics, stone, and clay") in

24

-60
CY 90

95

00

05

10

15

20

Source: Bank of Japan.
Notes: 1. Based on the Tankan. All enterprises. There is a discontinuity in the data for
December 2003 due to a change in the survey framework.
2. Shaded areas denote recession periods.

particular. Turning to industries where the DIs
havedeteriorated,subduedsemiconductor-related

demandinvestment

for

Chart 18: Coincident Indicators ofBusiness Fixed Investment

has

95

s.a., ann., tril. yens.a., CY 2015=100

contributed to pushing down business conditions
for some firms in business-oriented machinery,
and the DI for lumber and wood products has

120

90

110

85

deteriorated, reflecting weakness in housing
starts. With regard to nonmanufacturing, the DIs
have continued to improve for a wide range of

100
80
90
75

Private nonresidential investment(SNA, real, left scale)
Domestic shipments and imports ofcapital goods (right scale)
Private construction completed(nonresidential, real, right scale)industries, particularly those related to private
consumption. This is due to the recovery ineconomic activity and to the progress in the
pass-through of cost increases to selling prices.
On the other hand, a rise in personnel expenses
has contributed to deterioration in the DI for
services for businesses.

Regarding the outlook for corporate profits, they
are likely to keep improving, as it is projected thatthey will be pushed up for the time being by
factors such as progress in the pass-through ofpast high raw material costs to selling prices, andthereafter by a moderate increase in domestic
and external demand.

Business Fixed Investment
Business fixed investment has been on amoderate increasing trend (Chart 18). The
aggregate supply of capital goods -- a coincident
indicator

ofmachineryinvestment

--

has

increased moderately, due to firm demand for
digital- and labor saving-related capital goods,
although investment in semiconductor production
equipment is lower than a while ago. Despite
progress in, for example, construction of logistics
facilities and urban redevelopment projects,
private construction completed (nonresidential) --

25

130

70
65
CY 08

80

70
60

10

12

14

16

18

20

22

Sources: Cabinet Office; Ministry of Economy, Trade and Industry; Ministry of Land,
Infrastructure, Transport and Tourism.
Notes: 1. Figures for 2023/Q4 are October-November averages.
2. Figures for real private construction completed are based on staff calculations
using the construction cost deflators.

a coincident indicator of construction investment-- has been relatively weak recently, partly due toChart 19: Leading Indicators of Business
Fixed Investment

dissipation of the effects of large-scale projects,

13

with

12

Machinery orders (private sector, excluding
volatile orders)

11

Construction starts (private, nonresidential,
estimated construction costs)

moves

to

postpone

investment being

observed against the background of factors suchas high construction material prices.

s.a., ann., tril. yen

10
9Machinery orders -- a leading indicator of8machinery investment -- have remained at

7

relatively high levels, although they have seen a6lowering in their levels compared to a while ago

5
CY 08

(Chart 19). By industry, orders by the automobile
and"general-purpose,

production,andbusiness-oriented machinery" industries havebeen on an increasing trend. On the other hand,orders by the manufacturing industry overall havebeen pushed down as those by the "electricalmachinery" and "information and communicationelectronics equipment" industries have remained
relatively weak and the effects of large-scale
projects in some industries have dissipated. With
regard to orders by the nonmanufacturing industry,digital- and labor saving-related investments havefollowed an uptrend, albeit with fluctuations
stemming from large-scale projects, and orders
for projects that had been postponed due to
COVID-19 have been seen in industries such astransportation. Construction starts (in terms ofplanned expenses for private and nonresidential
construction) -- a leading indicator of construction
investment

--

have

increased,albeitwithfluctuations. This is mainly due to an uptrend inconstruction of logistics and other facilities and toestablishment of new factories. Looking at thebusiness fixed investment plans in the December
Tankan, business fixed investment (on the basis
close to GDP definition; business fixed investment-- including software and R&D investments but

26

10

12

14

16

18

20

22

Sources: Cabinet Office; Ministry of Land, Infrastructure, Transport and Tourism.
Notes: 1. Volatile orders are orders for ships and orders from electric power companies.
2. Figures for 2023/Q4 are October-November averages.

excluding land purchasing expenses -- for allindustries and enterprises including financial

Chart 20: Planned and Actual Business
Fixed Investment

institutions) shows a year-on-year rate of increase20

of 12.6 percent for fiscal 2023 (Chart 20). This

15

indicates that, as with the previous survey in

10

September, investment is likely to increase clearly.

5

In sum, although some indicators have been
relatively weak, firms have maintained an active
stance toward business fixed investment.

y/y % chg.

0
Private nonresidential
investment (SNA, nominal)-5

Tankan (actual)-10

Tankan (planned investment in current
fiscal year as of the December surveyof each year)-15

In this situation, business fixed investment is
expected to continue on an increasing trend,
mainly on the back of improvement in corporate

-20
FY 08

10

12

14

16

18

20

22

Sources: Bank of Japan; Cabinet Office.
Notes: 1. The Tankan figures include software and R&D investments and exclude landpurchasing expenses. R&D investment is not included before the March 2017
survey. The figures are for all industries including financial institutions.
2. The figure for private nonresidential investment for fiscal 2023 is the 2023/Q2Q3 average.

profits and accommodative financial conditions.
Toward the end of the projection period, suchinvestment is projected to continue increasing,partly due to a rise in investment that is not

Chart 21: Capital Stock Cycles
10business fixed investment, y/y % chg.

necessarily responsive to the business cycle,
although the pace of increase is likely to slow,
reflecting cyclical adjustment pressure stemming

5
​

04

​

10
12

0

15
​
​
21 06

from the accumulation of capital stock (Chart 21).
Specifically, investment that is expected to be

​

-5
​

undertaken during the projection period includes(1) investment induced by the increase inlabor shortages and IT-related investment todigitalize business activities; (3) construction
investment in logistics facilities, resulting fromexpanding e-commerce, and in offices andcommercial

facilities

due

to

redevelopment

projects; (4) investment in growth areas and toaddress

environmental

issues,suchasdecarbonization; and (5) semiconductor-related
investment that is mainly aimed at strengthening
supply chains and that also reflects government
support.

27

​
​

​

1.5%

19

1%

20
FY 2023

-10

0.5%

0%
09
Expected
growth rate: -2%

domestic and external demand; (2) labor-saving
and efficiency-improving investment to address

Investmentcapital stock
ratio at theend of FY
2022

05

-15
9.5

-1%

10.0 10.5 11.0 11.5 12.0 12.5 13.0

investment-capital stock ratio at the end of the previous fiscal year, %Source: Cabinet Office.
Note: Each broken line represents the combination of the rate of change in business fixed
investment and the investment-capital stock ratio at a certain expected growth rate. The
figure for fiscal 2023 is the 2023/Q2-Q3 average.

Employment and Income Situation
Chart 22: Number of Employed Persons
The employment and income situation has

68s.a., mil. personss.a., CY 2019=100

105

improved moderately.
67

100

66

95

65

90

Regarding the number of employed persons, thatof regular employees has been on a moderate
uptrend, albeit with fluctuations, mainly in the64

Employed persons(left scale)
Regular employees(right scale)
Non-regular employees(right scale)medical, healthcare, and welfare services industry
and in the information and communicationsindustry, which have faced a severe labor
shortage (Chart 22). With economic activity
normalizing,thenumberofnon-regular

63
62
CY 08

85

80
75

10

12

14

16

18

20

22

Source: Ministry of Internal Affairs and Communications.
Note: Figures for regular employees and non-regular employees prior to 2013 are basedon the "detailed tabulation" in the Labour Force Survey. Figures for 2023/Q4 are
October-November averages.

employees has risen moderately, mainly in thewholesale and retail trade as well as theface-to-face services industries. Total hours

Chart 23: Unemployment Rate and Labor
Force Participation Rate

worked per employee have been more or less flat

7

Labor force participation rate(right scale)663

conditions, the unemployment rate has been at a
low

level

(Chart23).

The

activejob

openings-to-applicants ratio has been somewhat

62
5
61
4

weak recently, despite being at a high level, partly
reflecting the normalization of economic activity(Chart24).

Meanwhile,

the

labor

60

3

59

force

participation rate has been on a moderate uptrend,
particularly for women, when fluctuations are

2
CY 08

58
10

12

14

16

18

20

22

Source: Ministry of Internal Affairs and Communications.

smoothed out (Chart 23).

Chart 24: Job Openings-to-Applicants
Ratio
With regard to the outlook for the number of
employees, regular employees are likely toincrease moderately, mainly in industries withlabor shortages, such as medical, healthcare, andwelfare services, information and communications,and construction. Non-regular employees, mainlyin the face-to-face services industry, are likely tocontinue increasing along with the recovery ineconomic activity. However, the pace of increase

2.6

s.a., ratio
Active job openings-toapplicants ratio

2.2

New job openings-toapplicants ratio

1.8
1.4
1.0
0.6
0.2
CY 08

10

12

14

16

Source: Ministry of Health, Labour and Welfare.

28

64

Unemployment rate (left scale)when fluctuations due to the number of weekdays
are smoothed out. With regard to labor markets.a., %

s.a., %

18

20

22

in the number of overall employees is projected todecelerate, partly because it will become moredifficult for labor supply to increase, reflecting
factors such as demographic changes, with labor

Chart 25: Nominal Wages
3y/y % chg.
Special cash earnings (bonuses, etc.)
Non-scheduled cash earnings
Scheduled cash earnings
Total cash earnings

2

force participation of women and seniors having
advanced to a high degree thus far. Under thesecircumstances,theunemployment

rate

is

expected to follow a moderate declining trend on
the back of the recovery in economic activity.

increased

moderately,reflecting

0-1

On the wage side, nominal wages per employee
have

1

the

recovery in economic activity and the results oflast year's annual spring labor-management wage
negotiations (Chart 25). 11 , 12 The year-on-year
rate of change in scheduled cash earnings has
continued to increase moderately (Chart 26).

-2
13/Q1

2.5

of last year's annual spring labor-management

0.0

3.5-4.0

percent

recently,

as

labor

marketconditions have remained tight and minimum
wages have been raised. Non-scheduled cash
earnings have continued to increase moderately
in reflection of the recovery in economic activity.
Special cash earnings (bonuses) have also kept
rising moderately on the back of improvement incorporate profits.
11

Wages in the Monthly Labour Survey are assessed on the basisof continuing observations, which are less susceptible tofluctuations due to sample revisions.
12

Box 2 examines the current environment surrounding wages
and firms' wage-setting behavior.

29

Contribution of the share of part-time employees, etc.

Scheduled cash earnings

0.5

employees has accelerated to the range of

23/Q1

y/y % chg.

1.5changes in working hours -- reflecting the results

hourly scheduled cash earnings for part-time

21/Q1

Contribution of part-time employees

1.0

growth. The year-on-year rate of increase in

19/Q1

2.0

albeit with fluctuations that are due mainly towage negotiations, which showed high wage

17/Q1

Chart 26: Decomposition of Developments
in Scheduled Cash Earnings

Looking at the breakdown, the rate for full-time
employees has accelerated to around 2 percent --15/Q1

Source: Ministry of Health, Labour and Welfare.
Notes: 1. Q1 = March-May, Q2 = June-August, Q3 = September-November,
Q4 = December-February.
2. Figures from 2016/Q1 onward are based on continuing observations following
the sample revisions.

Contribution of full-time employees

-0.5

-1.0
13/Q1

15/Q1

17/Q1

19/Q1

21/Q1

23/Q1

Source: Ministry of Health, Labour and Welfare.
Notes: 1. Q1 = March-May, Q2 = June-August, Q3 = September-November,
Q4 = December-February.
2. Figures from 2016/Q1 onward are based on continuing observations following
the sample revisions.

With regard to the outlook for wages, the rate ofincrease in scheduled cash earnings is likely toChart 27: Employee Income

continue increasing firmly, in reflection of price4

y/y % chg.

rises and with labor market conditions continuing
to be tight. Non-scheduled cash earnings are2

expected to increase moderately, reflecting therecovery in economic activity. Special cash

0earnings (bonuses) are likely to keep rising withcorporate profits continuing to improve. Taking allof these factors into account, the rate of increasein nominal wages per employee is projected togradually accelerate.

In light of the aforementioned employment andwage conditions, employee income has improvedin nominal terms (Chart 27). In real terms, theyear-on-year rate of change in employee income
has been negative in reflection of price rises, but
the rate of decline has remained on a slowing
trend due to a combination of a decline in inflationand improvement in nominal income. With regard
to the outlook, nominal employee income is likely
to continue to see a clear increase in reflection ofan acceleration in nominal wage growth. Under
these circumstances, the year-on-year rate of
decline in real employee income is projected tofollow a decelerating trend. Thereafter, the rate ofchange is likely to gradually turn positive.

Household Spending
Private consumption has continued to increase
moderately, despite being affected by price rises.

The Consumption Activity Index (CAI, travel
balance adjusted) -- which is calculated by
combining various sales and supply-side statistics

30

Total cash earnings
Number of employees
Employee income
Real employee income

-2

-4
13/Q1

15/Q1

17/Q1

19/Q1

21/Q1

23/Q1

Sources: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs andCommunications.
Notes: 1. Q1 = March-May, Q2 = June-August, Q3 = September-November,
Q4 = December-February.
2. Employee income = Total cash earnings (Monthly Labour Survey) × Numberof employees (Labour Force Survey)
3. Figures from 2016/Q1 onward are based on continuing observations following
the sample revisions of the Monthly Labour Survey.
4. Figures for real employee income are based on staff calculations using the CPI(less imputed rent).

from

the

viewpointofgauging

Japan's

consumption activity in a comprehensive manner--

declinedslightlyonaveragefortheChart 28: Real Private Consumption
120

October-November period of 2023 relative to the115

July-September quarter (Charts 28 and 29). 13

110

This is the result of a combination of factors, such105

as the impact of price rises, dissipation of the100some production sites. Looking at subsequentdevelopments
variousinprivateconsumption

sources,suchasindicators,

statistics

fromhigh-frequency

publishedbyindustryorganizations, and anecdotal information fromfirms, although households' thriftiness that reflects
price rises has grown, consumption seems to

100

75

85

temperatures than in normal years, and issues at

105

80
CY 13 14 15 16 17 18 19 20 21 22 23

winterhigher

110

80

90

relatively

115

Consumption Activity Index(travel balance adjusted, right scale)previous quarter, sluggish sales of autumn and
to

120

95

95

due

125

Consumption of households(excluding imputed rent, leftscale)
Disposable income, etc.
(SNA, left scale)positive effects of hot weather seen in theclothess.a., CY 2015=100

s.a., CY 2015=10090
85

Sources: Bank of Japan; Cabinet Office, etc.
Notes: 1. Figures for the Consumption Activity Index (CAI) are based on staff
calculations. The CAI figures (travel balance adjusted) exclude inbound tourism
consumption and include outbound tourism consumption. The figure for2023/Q4 is the October-November average.
2. "Disposable income, etc." consists of disposable income and adjustment for thechange in pension entitlements (using annual and quarterly estimates), and realvalues are obtained using the deflator of consumption of households.

Chart 29: Consumption Activity Index(CAI, Real)115

s.a., 2018/Q1=100

s.a., 2018/Q1=100

Nondurable goods<40.5>

110

115
110

have continued on a moderate uptrend, partly

105

supported by the improvement in the income

100

100

situation (Chart 30). There is also a view that95

95

demand for dining-out and travel from late

9090

December through early January, as well as New

85

85

Year sales, were firm.

8080Services <50.7>

75

By type, consumption of durable goods has been
at a relatively high level (Chart 29). Specifically,thenumberofnewpassenger

cars

sold

75

Durable goods <8.9>

70
CY 18 19 20 21 22 23 18 19 20 21 22 23

Chart 30: Consumption Developments
Based on Credit Card Spending

production decline at an automaker due to issues

50

at production sites for parts; however, it has been

40

chg. from baseline, %

30

Total
Retail (excluding energy)
Services (excluding energy)
Energy20

semiconductors used in automobiles generally

10having dissipated. Sales of household electrical0

appliances have remained weak, albeit with

70

Sources: Bank of Japan, etc.
Notes: 1. Based on staff calculations. Figures in angular brackets show the weights in the
CAI. Figures for 2023/Q4 are October-November averages.
2. Nondurable goods include goods classified as semi-durable goods in the SNA.

decreased for November 2023, affected by a

at a high level, with supply-side constraints for

105

-10
-20
-30
-40

13

Regarding the CAI, see the Bank's research paper "Revision of
the Consumption Activity Index to Capture Recent Changes inConsumption Patterns" released in July 2021.

31

-50
-60
CY 20

21

22

23

Source: Nowcast Inc./ JCB, Co., Ltd., "JCB Consumption NOW."
Notes: 1. Figures are from the reference series in JCB Consumption NOW, which takechanges in the number of consumers into account. The baseline is the averagefor the corresponding half of the month for fiscal 2016 through fiscal 2018.
2. Figures for the total and for services exclude telecommunications, and figures
for energy consist of those for fuel, electricity, gas, heat supply, and water.
Based on staff calculations.

fluctuations; sales of air conditioners seem tohave declined recently due to relatively highChart 31: Mobility Trends in Downtown
Areas

temperatures. Turning to nondurable goods,

160

consumption of beverages and food, clothes, and140

other items has followed a decreasing trend, due

120

to factors such as the impact of high prices, adecline caused by the dissipation of the positiveeffects of hot weather seen in the previous quarter,

Jan. 2020=100, 7-day backward moving avg.
CY 2024
CY 2023
CY 2020
CY 2019100
80

and the sluggish sales of autumn and winter60

clothes.

40
20Services consumption has increased moderately
as a trend in reflection of the recovery in the flow0Jan. 1 Mar. 1 May 1

July 1 Sept. 1 Nov. 1

Source: Agoop Corp.
Notes: 1. Figures are the sum of the differences in the number of visitors between 9 p.m.
and 4 a.m. on the following day in 53 downtown areas.
2. The latest figure is the average for January 14-20.

of people and the materialization of pent-up
demand, although the pace of increase has
slowed (Charts 29, 30, and 31). Despite being

Chart 32: Confidence Indicators Related to
Private Consumption

affected by factors such as price rises, dining-out

60

s.a.

has also been on a moderate increasing trend.
Domestic travel has been at a relatively high level,reflecting a recovery in travel demand. Overseas

50
40

travel has seen a pause in recovery recently.
30
20

Improved

Looking at confidence indicators related to private
consumption, the Consumer Confidence Index
has improved again recently, particularly in termsof consumer perception of "overall livelihood,"
mainly because the pace of price rises has
moderated compared to a while ago (Chart 32).
The Economy Watchers Survey -- which asks
firms for their views on the direction of theeconomy -- shows that the current economic
conditions DI (household activity-related) has
been somewhat above the threshold value of 50,
mainly reflecting the materialization of pent-up
demand and a rise in inbound tourism demand,
although concern over the impact of price rises
has contributed to pushing down the DI.

32

Consumer Confidence Index

10
Worsened

0
CY 08

10

Economy Watchers Survey(household activity)

12

14

16

18

20

22

Source: Cabinet Office.
Note: Figures for the Economy Watchers Survey are those for the current economic
conditions DI.

Regardingtheoutlook,although

privateconsumption is expected to be affected by pricerises, it is projected to keep increasing moderately,
partly supported by household savings that had

Chart 33: Average Propensity to Consume
105s.a., %

100

accumulated as a result of pandemic-related
restrictions, withnominalemployeeincomecontinuing to improve. Private consumption is95

90

also likely to be underpinned by the government's
measures, such as (1) those to reduce thehousehold burden of higher gasoline prices,8580

electricity charges, and gas charges, (2) benefit
payments to low-income households, and (3) cuts
in income tax and inhabitant tax. From the middleof the projection period, private consumption is

75
CY 08

10

12

14

16

18

20

22

Source: Cabinet Office.
Note: Average propensity to consume = Consumption of households / Disposable income, etc.
"Disposable income, etc." consists of disposable income and adjustment for thechange in pension entitlements (using annual and quarterly estimates).

expected to continue increasing moderately as
employeeincomekeeps

improving.

The

propensity to consume is likely to first remain at a

Chart 34: Housing Investment

level that somewhat exceeds the average level24

seen before the pandemic, partly due to thewithdrawals of household savings that had
accumulated as a result of pandemic-relateds.a., ann., tril. yens.a., ann., mil. units

1.1

22

1.0

20

restrictions (Chart 33). Thereafter, it is expected
to gradually return to the average level seen

1.2

0.9
18
0.8

before the pandemic.

Private residential investment(SNA, real, left scale)16

Housing starts(right scale)

Housing investment has been relatively weak

14
CY 08

(Chart 34). The number of housing starts -- a

Sources: Cabinet Office; Ministry of Land, Infrastructure, Transport and Tourism.
Note: The figure for 2023/Q4 is the October-November average.

leading indicator of housing investment -- hasfollowed a downtrend that reflects a rise in
housing prices. Housing investment is likely tofollow a moderate declining trend in reflection of
the rise in housing prices and demographic
developments, although accommodative financial
conditions are expected to provide support.

33

0.7
0.6

10

12

14

16

18

20

22

II. Current Situation of Prices and Their
Outlook
Developments in Prices
With the impact of past high commodity prices
waning, the quarter-on-quarter rate of change in

Chart 35: Inflation Indicators
y/y % chg.

the producer price index (PPI, adjusted for theeffects of seasonal changes in electricity rates)
has been at around 0 percent (Chart 35). The
year-on-year rate of increase in the services

23/Q1 23/Q2 23/Q3 23/Q4
Consumer Price Index (CPI)
Less fresh foodExcluding temporary factors

3.5

3.3

3.0

2.5

3.6

3.3

2.9

2.1

3.5

4.2

4.3

3.8

excludingExcluding temporary factors

3.6

4.3

4.2

3.4

international transportation) has remained on an

Producer Price Index (q/q % chg.)

0.5

-0.2

-0.1

0.2

Services Producer Price Index

1.7

2.1

2.3

2.4

GDP Deflator

2.3

3.8

5.3

3.2

2.7

2.6

producer

price

index

(SPPI,

accelerating trend, mainly on the back of therecovery in economic activity and a rise inLess fresh food and energy

Domestic demand deflator

Sources: Ministry of Internal Affairs and Communications; Bank of Japan; Cabinet Office.
Notes: 1. Figures for the producer price index (PPI) are adjusted for the hike in electric
power charges during the summer season. Figures for the services producer
price index (SPPI) exclude international transportation.
2. The CPI figures excluding temporary factors are staff estimates and exclude
mobile phone charges and the effects of travel subsidy programs.
3. The figure for the SPPI for 2023/Q4 is the October-November average.

personnel expenses.

The negative contribution of energy prices to theyear-on-year rate of increase in the CPI (all items
less fresh food) has been relatively large, partly
due to the government's economic measures(Chart 36). That said, the rate of increase in the
CPI has been in the range of 2.0-2.5 percent
recently, mainly on the back of the fact that,
despite waning, the effects of the pass-through toconsumer prices of cost increases led by the pastrise in import prices have remained, and services
prices have increased moderately.

The rate of increase in the CPI (all items lessfresh food and energy, excluding temporary
factors such as the effects of the government's
domestic

traveldiscount

program)has

decelerated steadily, mainly because the impactof the previous year's price hikes has dissipated

34

Chart 36: CPI (Less Fresh Food)y/y % chg.

4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
CY 18

Mobile phone charges
Effects of travel subsidy programs
Effects of the consumption tax hike andfree education policies
EnergyExcluding the above factors
CPI (less fresh food)

19

20

21

22

23

Source: Ministry of Internal Affairs and Communications.
Notes: 1. Figures for energy consist of those for petroleum products, electricity, and gas,manufactured & piped.
2. Figures for the "effects of the consumption tax hike and free education policies"
from April 2020 onward are staff estimates and include the effects of measures
such as free higher education introduced in April 2020.

(Chart 37).14 Specifically, as for goods, the rates
of increase in prices of a wide range of items havedecelerated as the impact of the previous year's
price hikes has dissipated. The rate of change inoverall general services prices has been more orChart 37: CPI (Excluding Temporary Factors)
4.5

y/y % chg.
Goods

4.0

General services (less housing rent)

3.5

Housing rent (private and imputed rent)

3.0

Administered prices

less flat. This is because, while the rate of

2.5increase for hotel charges has remained on an

2.0

accelerating trend, the rates for items such as

1.5

dining-out and housework-related services (e.g.,

1.0

servicesand0.5

maintenance) have decelerated as the impact of0.0

the previous year's price hikes has dissipated.

-0.5
CY 18

relatedtohousing

repairs

Although hikes in railway fares and otheradministered prices have been observed, theyear-on-year

rate

of

changeinoverall

CPI (less fresh food and energy)

19

20

21

22

23

Source: Ministry of Internal Affairs and Communications.
Notes: 1. Administered prices (less energy) consist of "public services" and "water
charges."
2. The CPI figures are staff estimates and exclude mobile phone charges and theeffects of the consumption tax hike, policies concerning the provision of freeeducation, and travel subsidy programs.

administered prices has been flat recently, mainly
due to dissipation of the effects of the previous

Chart 38: Various Measures of Core
Inflation

year's hikes in fire and earthquake insurance

3.5

premiums.

3.0

y/y % chg.
Trimmed mean
Weighted median

2.5

Mode

2.0

The indicators for capturing the underlying trend

1.5

in

1.0

the

CPI

have

exhibitedthefollowingdevelopments (Chart 38).15,16 The trimmed mean

0.5
0.0

-0.5
-1.0
-1.5
CY 08
14

The CPI figures excluding temporary factors are calculated by
excluding (1) the effects of the consumption tax hike and policies
concerning the provision of free education, (2) the effects of travelsubsidy programs, and (3) mobile phone charges from the CPI (allitems less fresh food) and the CPI (all items less fresh food andenergy).
15

The trimmed mean is calculated by excluding items that belong
to a certain percentage of the upper and lower tails of the pricechange distribution (10 percent of each tail) in order to eliminate
the effects of large relative price changes. The mode is the
inflation rate with the highest density in the price change
distribution. The weighted median is the average of the inflation
rates of the items at around the 50 percentile point of the
cumulative distribution in terms of weight. All three indicators arecalculated using data for each CPI item that excludes the effectsof the consumption tax hikes, policies concerning the provision offree education, and travel subsidy programs.

35

10

12

14

16

18

20

22

Sources: Bank of Japan; Ministry of Internal Affairs and Communications.
Note: Based on staff calculations using the CPI excluding the effects of the consumption
tax hikes, policies concerning the provision of free education, and travel subsidy
programs. The CPI figures from April 2020 onward are staff estimates and exclude
the effects of measures such as free higher education introduced in April 2020.

of the year-on-year rate of change in the CPI has
been at around 2.5 percent as the impact of theprevious year's price hikes has dissipated. The
mode and the weighted median, which are lessChart 39: Diffusion Index of Price Changes
100% points%
Diffusion index (left scale)
Share of increasing items (right scale)
Share of decreasing items (right scale)

80
60

100
90
80

susceptible to developments in certain CPI items,

40

70

have been at around 2.5 percent and around 1.5

2060

percent, respectively. Looking at the year-on-year

050

price changes across all CPI items (less fresh

-20

40

-40

30

-60

20

-80

10

food), the share of price-increasing items minus
the

share

of

price-decreasing

items

has

decreased slightly (Chart 39).

-100
CY 08

Meanwhile, the year-on-year rate of change in thedomestic demand deflator has been at around 2.5
percent (Chart 35). By component, the private
consumption deflator has been at around 3
percent on a year-on-year basis. The rates ofincrease in such deflators as for business fixed
investment have remained at high levels despite
slowing somewhat. The year-on-year rate ofchange in the GDP deflator has been in the rangeof 5.0-5.5 percent recently; specifically, the rate ofincrease in the domestic demand deflator has
remained

relatively

highdespiteslowing

somewhat, while the rate of change in the importdeflator has been negative, mainly reflecting awaning of the effects of past high crude oil prices.

Environment Surrounding Prices
In the outlook for prices, the main factors that
determine inflation rates are assessed as follows.

16

In this report, the mode is defined as the inflation rate with thehighest density in the distribution that is estimated parametricallyby fitting a normal inverse Gaussian distribution to the observed
price change distribution in each period. It should be noted that,with dispersions of the observed distributions increasing, the fit of
the normal inverse Gaussian distribution has deteriorated recently.
Therefore, estimates of this mode should be interpreted with somelatitude.

36

0
10

12

14

16

18

20

22

Sources: Bank of Japan; Ministry of Internal Affairs and Communications.
Note: The diffusion index is defined as the share of increasing items minus the share of
decreasing items. The share of increasing/decreasing items is the share of items
for which price indices increased/decreased from a year earlier. Based on staff
calculations using the CPI (less fresh food) excluding the effects of theconsumption tax hikes, policies concerning the provision of free education, andtravel subsidy programs. The CPI figures from April 2020 onward are staff
estimates and exclude the effects of measures such as free higher education
introduced in April 2020.

First, the output gap is projected to turn positiveand continue to expand moderately toward theend of the projection period, albeit at a gradually

medium-to10

y/y % chg.

%long-term

5

Output gap (left scale)84
CPI (less fresh food and energy,
right scale)6

slowing pace (Charts 2 and 40).

Second,Chart 40: Inflation Rate and Output Gap

3

4

2

2

1

0

0

-2

-1

-4

-2

-6

-3

inflation

expectations have risen moderately (Chart 41).
The December 2023 Tankan shows that theoutput prices DI is lower than a while ago but hasremained at a high level (Chart 42). It also showsthat figures for firms' inflation outlook for generalprices have declined somewhat for the short term

-8
CY 85

-4
90

95

00

05

10

15

Sources: Ministry of Internal Affairs and Communications; Bank of Japan.
Notes: 1. The CPI figures are staff estimates and exclude mobile phone charges and theeffects of the consumption tax hikes, policies concerning the provision of freeeducation, and travel subsidy programs.
2. Figures for the output gap are staff estimates.

but have remained at high levels for the medium

Chart 41: Inflation Expectations

to long term. Given that the formation of inflation

1. Survey

expectations in Japan is largely adaptive, theincrease in inflation seen thus far has brought

2.5y/y, ann. avg., %Market participants (QUICK, 2 to 10 years ahead)
Economists 1 (6 to 10 years ahead)
Economists 2 (7 to 11 years ahead)
Households (over the next 5 years)
Firms (5 years ahead)

2.0

about a rise in households' and firms' medium- tolong-term inflation expectations. In this situation,

20

1.5

firms' behavior has shifted more toward raising
wages and prices. Regarding the outlook, inflation

1.0

expectations are expected to rise moderately
toward the end of the projection period, with

0.5

continued improvement in the output gap andchangesinfirms'

behavior

and

in

wage-

and

price-setting

labor-management

wage

negotiations. Under these circumstances, avirtuous cycle between wages and prices is
projected to intensify through achievement ofwage increases that reflect price rises and

0.0
CY 05

07

09

11

13

15

17

19

21

23

Sources: Bank of Japan; QUICK, "QUICK Monthly Market Survey <Bonds>";
JCER, "ESP Forecast"; Consensus Economics Inc., "Consensus Forecasts."
Notes: 1. "Economists 1" shows the forecasts of economists in the Consensus Forecasts.
"Economists 2" shows the forecasts of forecasters surveyed for the ESP Forecast.
2. Figures for households are from the Opinion Survey on the General Public's Views
and Behavior, estimated using the modified Carlson-Parkin method for a 5-choicequestion.
3. Figures for firms show the inflation outlook of enterprises for general prices(all industries and enterprises, average) in the Tankan.

2. BEI
2.5

through a pass-through of wage increases to

2.0

selling prices.

1.5

%

1.0
0.5

0.0

Third, the year-on-year rate of change in the-0.5

import price index has remained negative, mainly

-1.0
-1.5

Old (10 years)-2.0

Old (longest)

commodities, particularly crude oil, are relatively-2.5

New (10 years)

lower than a while ago (Charts 43 and 44).

-3.0

reflecting

the

fact

that

prices

of

many

37

-3.5
CY 05

07

09

11

13

15

17

19

21

23

Source: Bloomberg.
Note: The BEI (break-even inflation) rate is the yield spread between fixed-rate
coupon-bearing JGBs and inflation-indexed JGBs. Inflation-indexed JGBs
issued since October 2013 are designated as "new," while the rest aredesignated as "old." Figures for "old (longest)" are calculated using yielddata for issue No. 16 of inflation-indexed JGBs, which matured in June 2018.

Looking at the final demand-intermediate demand(FD-ID) price indexes, the index for stage 1 of theChart 42: Output Prices

ID -- which shows developments in an upstream

50

stage of the production process -- has increased

40

Manufacturing

slightly recently, reflecting the rise in crude oil

30

Nonmanufacturing

prices last summer and the past depreciation of20

the yen (Chart 45). That for stage 2 of the ID has

10risen somewhat recently. On the other hand, theindexes for stages 3 and 4 of the ID, which show

DI ("rise" - "fall"), % points

0
-10
-20

developments in relatively downstream stages of-30

the production process, have remained more or-40

less flat. Given these developments, the upward-50
CY 74 78 82 86 90 94 98 02 06 10 14 18 22

pressure on the CPI stemming from the past risein import prices is expected to wane.17

Source: Bank of Japan.
Note: Based on the Tankan. All enterprises. There is a discontinuity in the data for
December 2003 due to a change in the survey framework.

Chart 43: International Commodity Prices
140

oil: $/bbl, copper: 100 $/t, monthly avg.

Meanwhile, the year-on-year rate of change inenergy prices (e.g., gasoline prices and electricity

Coppercharges) has remained negative. That in prices of100

petroleum products has been slightly positive,

80

since gasoline subsidies, which have made a

Crude oil (Dubai)

120

60

negative contribution to these prices, have been
reduced compared to the previous year.18 On the40

other hand, the rates of change in electricity and

20

0
CY 08
17

Regarding recent developments surrounding the CPI, Box 3
assesses the current situation of (1) the upward pressure of costs
led by the past rise in import prices and (2) moves to reflect wages
in selling prices.
18

Looking at the government's energy-related economic
measures, with regard to gasoline subsidies, it has introduced ameasure to provide subsidies to petroleum distributors andimporters as funds to contain a sharp rise in their selling prices
when the nationwide average for retail gasoline prices exceeds
the benchmark price (168 yen per liter). After gradually reducing
the subsidies from January 2023, the government revised themeasure and expanded the subsidies in early September, in
response to crude oil prices rising again. With regard to electricity
charges, through its measures to reduce the household burden,
electricity charges were cut by 7 yen per kilowatt-hour (roughly a
20 percent discount per month for typical households) for theperiod from February through September 2023, and have been cut
by 3.5 yen per kilowatt-hour since October (the months refer to thetiming at which electricity charges are calculated). Regarding
manufactured and piped gas charges, roughly similar measures toreduce the household burden have been introduced.

38

10

12

14

16

18

20

22

Sources: Nikkei Inc.; Bloomberg.

Chart 44: Import Price Index
60

y/y % chg.

50

Yen basis
Contract currency basis

40
30
20
10
0

-10
-20
CY 18

19

Source: Bank of Japan.

20

21

22

23

24

gas charges have been negative in reflection of
the government's measures to reduce theChart 45: FD-ID Price Indexes (AllCommodities)

household burden of higher energy prices and its

170

revisionenergy160

surcharges on electricity. As for the outlook, the150

year-on-year rate of change in energy prices is140

likely to remain negative in the short run. However,130

from February 2024 toward the beginning of fiscal

120

to

the

rate

of

renewable

2024, the rate of decline is expected to decelerate
to around 0 percent because it is projected thatthe effects of pushing down the rate of change
from the government's measures introduced lastyear to reduce the household burden of higher
electricity

and

gas

chargeswill

dissipate.

Subsequently, assuming that the government's
measures to reduce the household burden of
higher energy prices will be phased out, theyear-on-year rate of change in energy prices ishighly likely to register a relatively large positive
figure, mainly due to a waning of the effects of thegovernment's measures pushing down suchprices of the previous year.19 After the impact of
the rebound caused by the phasing out of thegovernment's measures dissipates, the rate is
projected to be slightly negative in light ofdevelopments in the futures market.

Outlook for Prices
Based

on

this

underlying

scenario,

theyear-on-year rate of increase in the CPI (all items
less fresh food and energy) is likely to decelerate,
due to a gradual waning of the effects of the19

As part of the economic measures decided by the Cabinet inNovember 2023, the government decided to continue withgasoline subsidies through April 2024. It also decided thatmeasures to reduce the burden of higher electricity and gas
charges will remain effective for charges on these types of energy
consumed through May 2024 (the charges will be calculated inJune).

39

CY 2015=100
ID index (stage 1)
ID index (stage 2)
ID index (stage 3)
ID index (stage 4)
FD index (excluding exports)

110
100
90
80
70
CY 15

16

Source: Bank of Japan.

17

18

19

20

21

22

23

pass-throughtoconsumerpricesofcostincreases led by the past rise in import prices.
Subsequently, the rate of increase is expected toChart 46: Phillips Curve5

1983/Q1-2013/Q1

be at around 2 percent toward the end of the

4

projection period, as the output gap continues to3

improve and as medium- to long-term inflation2

expectations and wage growth rise, accompanied1by changes in factors such as firms' wage- and0

price-setting behavior (Chart 46).

CPI (less fresh food and energy), y/y % chg.

2013/Q2-2023/Q3
2023/Q4

B
A

A:1983/Q1-2013/Q1
y = 0.40x + 0.6
B:1983/Q1-1995/Q4
y = 0.23x + 1.5
C:1996/Q1-2013/Q1
y = 0.24x - 0.1-1-2

2013/Q2CTakingaccountoftheaforementioned

developments in energy prices, the year-on-year
rate of increase in the CPI (all items less freshfood) is likely to be above 2 percent through fiscal
2024, due to factors such as the effects, albeit
waning, of the pass-through to consumer prices ofcost increases led by the past rise in import prices
and a waning of the effects of the government's
economic measures pushing down CPI inflationof the previous year. As for fiscal 2025, the rate ofincrease is projected to decelerate owing todissipation of these factors.

It should be noted that there are extremely highuncertainties surrounding this outlook. Specifically,
for the time being, there are high uncertainties
over the pace at which the upward pressure on
the CPI stemming from the rise in import prices
will wane. Moreover, it is extremely unclear
whether underlying inflation will increase with astronger linkage between wages and prices.

40-3-7 -6 -5 -4 -3 -2 -1 0

1

2

3

4

5

6

output gap (2-quarter lead, %)Sources: Ministry of Internal Affairs and Communications; Bank of Japan.
Notes: 1. The CPI figures are staff estimates and exclude mobile phone charges and theeffects of the consumption tax hikes, policies concerning the provision of freeeducation, and travel subsidy programs.
2. Figures for the output gap are staff estimates.

III. Financial Developments in Japan

Chart 47: Yield Curves

Financial Conditions

2.0

%

1.8

Financial conditions have been accommodative.

1.6
1.4
1.2
1.0

Under the framework of QQE with Yield Curve

0.8

Control,

0.6

the

Bank

has

conducted

market0.4

thePrevious Outlook Report(data as of October 30, 2023)

0.2

Latest (January 22, 2024)

guideline for conduct of yield curve control, for

0.0

operations

nimblyinaccordancewithwhich it decided to increase flexibility at the

-0.2

-0.4

October 2023 Monetary Policy Meeting. In thissituation, the shape of the yield curve forJapanese government bonds (JGBs) has been
consistent with the current guideline for market
operations, in which the short-term policy interest

0 1 2 3 4 5 6 7 8 910

15

years

20

30
residual maturity

Source: Bloomberg.

Chart 48: Bank Lending Rates and Issuance
Yields for CP and Corporate Bonds
2.0%
Bank lending rate (short-term)
Bank lending rate (long-term)
CP (3-month)
Corporate bonds (AA)1.8

rate is set at minus 0.1 percent and the target

1.6

level of 10-year JGB yields is around zero percent

1.4(Chart 47).

1.2
1.0
0.8

Firms' funding costs have been hovering atextremely low levels (Chart 48). Lending rates(the average interest rates on new loans anddiscounts) have remained at extremely low levels,with a pause in the rise in those for long-termloans. Issuance rates for CP have been at
extremely low levels. The rise in issuance rates
for corporate bonds has paused, reflecting
developments in their base rate.

0.6
0.4
0.2
0.0
CY05

07

09

11

13

15

17

19

21

23

Sources: Bank of Japan; Japan Securities Depository Center; Capital Eye;I-N Information Systems; Bloomberg.
Notes: 1. Figures for issuance yields for CP up through September 2009 are the averages
for CP (3-month, rated a-1 or higher). Those from October 2009 onward are theaverages for CP (3-month, rated a-1).
2. Figures for issuance yields for corporate bonds are the averages for domesticallyissued bonds launched on a particular date. Bonds issued by banks and securities
companies, etc. are excluded.
3. Figures for bank lending rates are 6-month backward moving averages.

Chart 49: Lending Attitudes of Financial
Institutions as Perceived by Firms
40

DI ("accommodative" - "severe"), % points

30

The DI in the Tankan for financial institutions'lending attitudes as perceived by firms suggests

20

that

remained

10accommodative on the whole (Chart 49). That for

0

such

attitudes

haveissuance conditions for CP has continued to show
net "easy" conditions. As suggested by the latter,
issuance conditions for CP and corporate bonds-10
Large enterprises-20

Small enterprises

-30
CY 95

00

05

10

15

20

Source: Bank of Japan.
Note: Based on the Tankan. All industries. There is a discontinuity in the data for
December 2003 due to a change in the survey framework.

41

have been favorable. The DI for firms' financial
positions in the Tankan suggests that they havebeen at favorable levels on the back of a recovery
ineconomic

activity

andprogressinChart 50: Firms' Financial Positions
1. By Firm Size
40

DI ("easy" - "tight"), % points

thepass-through of cost increases to selling prices(Chart 50).

Large enterprises

30

Small enterprises

20
10With a high level of demand for working capital0stemming from past high raw material costs, firms'-10

demand for funds has increased moderately on-20

the back of, for example, the recovery ineconomic activity as well as mergers andacquisitions of firms. In this situation, the

-30
CY 95

3.5 percent (Chart 51). That in the aggregate

05

10

15

20

2. By Industry

year-on-year rate of increase in the amountoutstanding of bank lending has been at around00

Source: Bank of Japan.
Note: Based on the Tankan. All industries. There is a discontinuity in the data for
December 2003 due to a change in the survey framework.

30

DI ("easy" - "tight"), % points

Manufacturing

20

Nonmanufacturing

amount outstanding of CP and corporate bonds
10

has been at around 1.5 percent.

0
-10
-20
-30
CY 95

00

05

10

15

20

Source: Bank of Japan.
Note: Based on the Tankan. All enterprises. There is a discontinuity in the data for
December 2003 due to a change in the survey framework.

Chart 51: Amounts Outstanding of Bank
Lending, CP, and Corporate Bonds
16

y/y % chg.

14

Lending by domestic commercial banks
CP and corporate bonds

12
10
8
6

4
2
0
-2
-4
-6
-8
CY 05

07

09

11

13

15

17

19

21

23

Sources: Bank of Japan; Japan Securities Depository Center;
Japan Securities Dealers Association; I-N Information Systems.
Note: Figures for lending by domestic commercial banks are monthly averages.
Figures for CP and corporate bonds are those at the end of the period.

42

The year-on-year rate of change in the monetarybase has been at around 8 percent. The amountoutstanding of the monetary base was 673 trillion
yen, of which the ratio to nominal GDP was 113

Chart 52: Money Stock10monthly avg., y/y % chg.

9
8

M2

The year-on-year rate of change in the7

M3

money stock (M2) has been in the range of

6

20

percent.

2.0-2.5 percent, as the amount outstanding ofbank lending has continued to increase and fiscal
spending has kept pushing the rate up (Chart 52).

5
4
3
2
1
0
-1
CY 98 00 02 04 06 08 10 12 14 16 18 20 22
Source: Bank of Japan.

20

The amount outstanding of the monetary base is as ofend-December 2023. Nominal GDP is the figure for the
July-September quarter of 2023.

43

Developments in Financial Markets
In

globalfinancialmarkets,

attentionhascontinued to be drawn to uncertainties over theoutlook for the global economy. However, market
sentiment has been at an improved level

Chart 53: 10-Year Government Bond Yields
in Selected Advanced Economies
6

%

Japan

5

compared to a while ago, reflecting diminished4

concern over prolonged monetary tightening in3

the United States and Europe.

2

United States
Germany

1

Yields on 10-year government bonds in the United0

States and Europe had declined significantly

-1
CY 18

through December 2023, with diminished concern
overissuessuchasprolonged

have risen somewhat in reflection of solid
economic indicators. Those in Japan havedeclined.

Premiums for U.S. dollar funding through thedollar/yen foreign exchange swap market havedeclined since December, due to dissipation of
the effects of pushing up the premiums from theseasonal tightening of supply and demandconditions for this funding in view of the year-end(Chart 54).

Stock prices in the United States and Europe

22

23

24

%

2.6
2.4
2.2
2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
CY 18

180

Those in Japan have risen considerably, mainly

19

20

21

22

23

24

start of 2018=100

160

due to increases in U.S. and European stock140

prices and to expectations of an inflow of funds

120

associated with the introduction of the new100

Account

Euro

Chart 55: Selected Stock Price Indicessubstantially in reflection of the significant
decreases in long-term interest rates (Chart 55).

Yen

Source: Bloomberg.
Notes: 1. U.S. dollar funding premiums are calculated as the difference between U.S.
dollar fundings rates (3-month) in the dollar/yen or euro/dollar foreign exchange
swap market and those in the money market.
2. The interest rates used for the calculation are as follows: for the yen, the OIS
rate; for the euro, the EONIA-referencing OIS rate before October 4, 2019,
and the €STR-referencing OIS rate thereafter; for the U.S. dollar, the OIS rate
before January 3, 2019, and the SOFR thereafter.

200

Savings

21

Chart 54: Dollar Funding Premiums throughForeign Exchange Swaps

have been more or less flat, after increasing

Individual

20

monetary

tightening (Chart 53). Subsequently, the yields

Nippon19

Source: Bloomberg.

Japan (Nikkei 225 Stock Average)
United States (S&P500)
Europe (EURO STOXX)Emerging markets (MSCI)(NISA)

program. Stock prices in emerging economies

80
60
CY 18

44

19

20

21

22

23

24

Source: Bloomberg.
Note: Figures for emerging markets are those for the MSCI Emerging Markets Index(local currency).

have slightly declined after seeing a rise,reflecting developments in U.S. and European
interest rates.

Chart 56: Stock Market Volatility (VIX)
100

%

90
80
70

Prices of Japan real estate investment trusts

60(J-REITs) have been more or less flat (Chart 57).

50
40

30

In foreign exchange markets, mainly because ofdevelopments in the yield differential between
Japan and the United States, the yen had

20
10
0
CY 18

19

20

21

22

23

24

Source: Bloomberg.

appreciated against the U.S. dollar but recently
has depreciated (Chart 58). The yen had also

Chart 57: Selected REIT Indicesappreciated against the euro but recently has

150

depreciated.

140

start of 2018=100
Japan (TSE REIT Index)

United States (S&P U.S. REIT Index)

130
120
110
100
90
80
70
60
CY 18

19

20

21

22

23

24

Source: Bloomberg.

Chart 58: U.S. Dollar/Yen and Euro/Yen
170

yen

160

U.S. dollar/yen

150

Euro/yen

140
130
120
110

Yen
depreciation

100

Yen
appreciation

90
CY 18

19

Source: Bloomberg.

45

20

21

22

23

24

(Box 1) The Recent Pick-Up in Global IT-Related Demand and Its Background

Global IT-related demand continued to be weakfrom the second half of 2022, after increasing

Chart B1-1: World Semiconductor
Demand (WSTS)

significantly due to factors such as restrictions on

170

going outside and an expansion of remote work160

during the COVID-19 pandemic. However, it has

150

picked up recently, as seen in semiconductor

140

shipments turning to an increase (Chart B1-1).

130s.a., bil. dollars
CY 2024
average

120

CY 2023
average

110

This seems to be largely attributable to a
fast-paced expansion of generative artificial
intelligence (AI) services. Along with advances in
the use of these services, there have been moves

World semiconductor shipments

100

Forecast as of Nov. 2023

90
CY 19

20

21

22

23

24

Notes: 1. Based on staff calculations using World Semiconductor Trade Statistics(WSTS) data.
2. The figure for 2023/Q4 is the October-November average.

to actively invest in AI servers, and demand forhigh-performancesemiconductors

and

other

components installed in these servers has been

Chart B1-2: Revenue of Major
Semiconductor Firms

growing rapidly. In fact, revenue of major

30

semiconductor firms with strong AI links has

20

recently

increased

markedly(ChartB1-2).

chg. from 2023/Q1, bil. dollars

10

Moreover, recent developments in IT-related
goods production in Asia show that the NIEs,

0

where many firms are engaged in manufacturing-10

AI-related

semiconductors,-20

have seen a clear increase in production of-30

high-performance

IT-related goods, unlike the ASEAN countries,
where firms tend to be engaged in the assemblyandtesting

processesinmanufacturing

semiconductors that are more general-purpose(Chart B1-3).

Meanwhile,

inventory adjustments for other

IT-related products have progressed on the whole,especiallyamongassemblers

ofpersonalcomputers (PCs) and smartphones, although theadjustments have been protracted in some

46

-40
CY 19

Semiconductor firms withstrong AI links
Other firms

20

21

22

23

Source: S&P Global Market Intelligence.
Note: Semiconductor firms with strong AI links here consist of 4 major firms engaged in
the design and manufacturing of semiconductors for AI servers, demand for which
has been growing rapidly in recent years, while other firms are 46 other major
semiconductor firms.

sectors (Chart B1-4). Under these circumstances,even when excluding firms with strong AI links,
revenue of major semiconductor firms has

Chart B1-3: IT-Related Production in
Asia
160

s.a., CY 2019=100

s.a., CY 2019=100

130bottomed out recently (Chart B1-2).

Regardingtheoutlook,participants

in

140

120

120

110

100

100

the

semiconductor industry and relevant parties haveexpressed the view that global IT-related demand

NIEs (left scale)80

is likely to continue picking up, driven by the
expansion of generative AI services (Chart B1-1).
However, the following two points warrant
attention.

First,

theAI-related

wholeprocessofhigh-performance

manufacturing
semiconductors

90

ASEAN (right scale)

60
CY 19

80
20

21

22

23

Sources: CEIC; IMF.
Notes: 1. Figures for 2023/Q4 are October-November averages.
2. Figures are the weighted averages of IT-related production indices for countries
and regions in Asia using their shares in global GDP as weights. Figures for the
NIEs are those for South Korea, Taiwan, and Singapore. Figures for ASEAN
are those for Thailand, Malaysia, and the Philippines.

Chart B1-4: Inventories of IT-Related
Firms

tends to be completed within a limited number of160

countries and regions, mainly for the purpose of140

preventing technology leaks and ensuring quality.

120

Therefore, there are high uncertainties over100

whether the recovery in IT-related demand on the

80back of the expansion of generative AI services

60

will widely spread across countries and regions.

40s.a., inventory days
Fabless semiconductor firms
Foundry firms
PC and smartphone EMS firms
Memory firms

20

The second point concerns demand for products
such as PCs and smartphones. The pace ofrecovery in this demand is expected to gradually
increase due to factors including replacement
demand for products purchased during the
pandemic and the introduction of new products.
That said, a full-fledged recovery in demand for
products such as PCs and smartphones could
take

time

work-related

owing
demandtodiminishing
and

to

a

remoteprolonged

replacement cycle.

47

0
CY 19

20

21

22

23

Source: S&P Global Market Intelligence.
Notes: 1. Fabless semiconductor firms here consist of 12 major firms engaged in thedesign and selling of logic ICs, foundry firms of 9 major foundries, PC andsmartphone EMS (electronics manufacturing services) firms of 9 major EMS
providers, and memory firms of 6 major firms engaged in memory production.
2. Inventory days are calculated by dividing the total end-of-period inventory by
the total cost of goods sold, multiplied by 365.

It

is

necessarydevelopments

intoclosely

globalmonitorIT-related

futuredemand,including developments in individual countries
and regions, those in different final products, andhow these developments will affect Japan's
economy.

48

(Box 2) Current Environment Surrounding Wages and Firms' Wage-Setting Behavior

Looking at the current environment surrounding
wages, labor market conditions have tightened
further and corporate profits have improved andChart B2-1: Employment Conditions DI-50

inverted, DI ("excessive" - "insufficient"), % points-40

registered a historical high.

Labor shortage-30

Manufacturing-20

Nonmanufacturing-10First, labor market conditions have tightened0more relative to the past as the Japanese

10

economy has continued to recover moderately.

20

The employment conditions DI in the Tankan

30

shows that an increasing number of firms has

40
CY 80

faced

labor

shortage,especiallyinnonmanufacturing, for which the DI has risen to ahigher level than in the pre-pandemic period(Chart B2-1). In this situation, labor mobility
seems to have been increasing gradually, as seenin, for example, the job markets rapidly growing
for full-time workers looking for their next job. As aresult, wages are highly likely to remain under
upward pressure for the time being. 21 Thisoutlook is underpinned, for example, by the factthat labor supply is widely expected to beconstrained mainly by the aging population in thelong run.

Second, corporate profits have improved due toprogress in the pass-through of cost increases to
output prices and the depreciation of the yen, in
addition to a recovery in economic activity.
According to the Financial Statements Statistics ofCorporations by Industry, Quarterly, current profits
based on all industries and enterprises have risen

21

See Box 2 of the January 2023 Outlook Report for discussion
on the outlook for labor market conditions.

49

85

90

95

00

05

10

15

20

Source: Bank of Japan.
Note: Based on the Tankan. All enterprises. There is a discontinuity in the data for
December 2003 due to a change in the survey framework.

in four consecutive quarters, reaching the highest
level since the April-June quarter of 1985, fromwhen comparable data are available (Charts 16

Chart B2-2: Ratio of Current Profits toSales

and B2-2). In this situation, labor share has been

12

declining recently (Chart B2-3). 22 As for thes.a., %
Large enterprises

10

Small enterprises

outlook, corporate profits are likely to continue
improving as the pass-through of past high raw

8material costs to output prices will progress for the

6time being, and thereafter domestic and external

4

demand will increase moderately.
2

The extent of improvement in corporate profitsvaries depending on factors such as the firm size
and industry. Consequently, there is a possibility,

0
CY 12 13 14 15 16 17 18 19 20 21 22 23
Source: Ministry of Finance.
Note: Based on the Financial Statements Statistics of Corporations by Industry, Quarterly.
Large enterprises are enterprises with a capitalization of 1 billion yen or more, whilesmall enterprises are enterprises with a capitalization of 10 million yen or more but
less than 100 million yen. Excluding "finance and insurance" and pure holding
companies.

for example, that it will not be easy for firms with alow level of corporate profits and a high level oflabor share to increase distribution to employees
through

wage

increases.

That

being

said,

analyzing matched microdata for enterprises that
responded to both the survey for the Financial
Statements Statistics of Corporations by Industry,

Chart B2-3: Labor Share
90s.a., %

85
80
75
70

Large enterprises

Quarterly and the Tankan survey shows that, in

65

Small enterprises

an environment where the perception of labor60

shortage is accelerating and an improvement in

55

profits through rises in output prices is seen, firms

50

tend to carry out relatively high wage increases,

45
CY 95

even if they have a higher labor share (Chart
B2-4). 23 Going forward, corporate profits are
expectedtoincrease

furtherandfirms'

wage-setting behavior is expected to change aslabor market conditions continue to tighten andfirms' active price-setting behavior takes hold.

22

Labor share generally moves in a countercyclical manner (inthe opposite direction) to economic fluctuations, as wages, whichis the numerator, tend to fluctuate less relative to the added value,
which is the denominator.
23

See Box 1 of the October 2023 Outlook Report for details of theannual spring labor-management wage negotiations in 2023.

50

00

05

10

15

20

Source: Ministry of Finance.
Notes: 1. Based on the Financial Statements Statistics of Corporations by Industry,
Quarterly. Excluding "finance and insurance."
2. Figures from 2009/Q2 onward exclude pure holding companies.
3. Shaded areas denote recession periods.

In view of the annual spring labor-management
wage negotiations in 2024, the Japanese Trade
Union Confederation (Rengo) and some industrial

Chart B2-4: Wage Increases at Enterprises
with a High Labor Share
2.0

y/y % chg.

unions have stated that they aim to achieve alarger increase in base pay than in 2023. 24
Although a majority of firms have not determined

1.5

their stance toward this year's wage negotiations
at this point, some firms, mainly among large
enterprises, have already announced larger base

1.0

pay increases than in 2023. The course of thewage negotiations warrants attention as labormarket conditions have continued to tighten and

0.5"Rise""Unchanged" "Insufficient"or "fall"corporate profits have been improving.
1. Changes in
output prices"Adequate"or"excessive"

2. Employment
conditions

Sources: Ministry of Finance; Bank of Japan.
Note: Wage increases here are the year-on-year percentage changes in labor costs per
employee in 2023/Q2. Figures are the medians of wage increases at enterprises
with a high labor share and are calculated by matching microdata for enterprisesthat responded to both the survey for the Financial Statements Statistics ofCorporations by Industry, Quarterly (wage increases) and the Tankan survey (theoutput prices DI and the employment conditions DI). Enterprises with a high labor
share are enterprises whose labor share falls into the top 50 percent in their sizegroup and industry.

24

The Rengo has set the following wage increase targets for theannual spring labor-management wage negotiations in 2024: morethan 3 percent for base pay and more than 5 percent for wages
including seniority- and performance-related wages (for the spring
2023 wage negotiations, the targets were respectively around 3
percent and around 5 percent).

51

(Box 3) Recent Developments Surrounding the CPI: Upward Pressure of
Costs Led by a Rise in Import Prices and Current Assessment of
the Linkage between Wages and Prices

The year-on-year rate of increase in the CPI (allitems less fresh food and energy) has decelerated
recently (Chart 37). Looking at the environment

Chart B3-1: Inflation Indicators
120

y/y % chg.

surrounding the CPI, the year-on-year rate ofchange in import prices has remained negative as

2. CPI

1. Upstream Costs

100

y/y % chg.

Import prices (leftscale)
Intermediate input
costs (right scale)

65Goods (lesspetroleumproducts)

4

Generalservicesinternational commodity prices have been at80

lower levels than a while ago (Chart B3-1). The

60

3

final demand-intermediate demand (FD-ID) price

40

2

20

1

0

0

indexes indicate that waning of upward pressureof costs has spread steadily from the upstream tocontribution to y/y chg., % points

4
3
2
1
0

the downstream stages of supply chains inbusiness-to-business (B to B) transactions (Chart45). Reflecting these developments, the pace ofincrease in input costs (intermediate input costs)
faced by firms that conduct business-to-consumer(B to C) transactions has further decelerated andthe year-on-year rate of increase in goods prices,which has been susceptible to the impact ofimport prices, has been slowing.

As shown above, upward pressure of costs led bypast rises in import prices has been decreasing
gradually.25 In this situation, whether the linkage
between wages and prices -- in particular, firms'
behavior of reflecting wage increases in selling
prices -- would strengthen and an active wageand price-setting behavior would spread among

25

International commodity prices have been stable on the whole,but developments differ across items and it is necessary tocarefully monitor their impact on the CPI. For example, crude oil
prices rose again in summer 2023; such rises could exert upward
pressure on the CPI again with a time lag, and this warrants
attention.

52

-20
CY 21

-1
22

23

-1
21

22

23

Sources: Ministry of Internal Affairs and Communications; Bank of Japan.
Notes: 1. Figures for import prices are on a yen basis. Intermediate input costs arecalculated by multiplying the intermediate input ratio of each sector in the 2015
Input-Output Tables for Japan by price data from the corporate goods priceindex or the services producer price index and then taking the weighted
average using consumption expenditure shares as weights.
2. In the right-hand chart, figures show the contribution to changes in the CPI (lessfresh food and energy). Figures are staff estimates and exclude mobile phonecharges and the effects of the consumption tax hike, policies concerning theprovision of free education, and travel subsidy programs.

firms has become increasingly important when
considering the outlook for price developments.26

Chart B3-2: Text Analysis of the Economy
Watchers Survey

An assessment of the current situation of the20%
percentage of comments containing
each phrase in comments mentioninga price increase or pass-throughlinkage between wages and prices is described
below.

15

CY 2022
CY 2023

10First, while many firms have maintained the viewthat "it is now possible to pass fluctuations in raw

5material costs on to selling prices, but it is difficult
to pass labor costs on to selling prices," moves toraise prices to obtain the source of wage
increases have been spreading gradually, mainly
among face-to-face services for which demand

0
Labor costs

Raw material costs

Source: Cabinet Office.
Notes: 1. Figures are calculated using comments regarding current economic conditions.
2. Figures for CY 2022 and CY 2023 are those for July-December 2022 and JulyDecember 2023, respectively.
3. Figures for labor costs are for comments that contain the phrases "jinken-hi" or"rōmu-hi" in Japanese, while those for raw material costs are for comments that
contain "genzairyō" or "genryō."

has recovered. On this point, firms' comments inthe Economy Watchers Survey show that the
number of firms that identified labor costs as one

Chart B3-3: CPI Items by Degree of Price
Volatilityof the reasons for price increases has increased

10slightly (Chart B3-2).

8y/y % chg.
Low-volatility items
Medium-volatility items
High-volatility items

6

4

Next, a quantitative analysis using time-series

2data shows that moves to reflect wages in selling0

prices have been spreading, albeit moderately. In-2Chart B3-3, the CPI items are classified into three-4groups, according to the degree of price volatility.
The chart shows that even the prices of"low-volatility items," which had shown little signof movements, have been rising moderately todate. Moreover, a look at three indicators; namely,(1) "low-volatility items" of this analysis, (2) thecontribution of wage factors to CPI changes,
estimated by using the relationship of pricedevelopments by the degree of price volatility,
import prices, the output gap, and wages, and (3)the trend in services prices -- where labor costs

26

See also Box 3 of the 2023 October Outlook Report for the
linkage between wages and prices.

53

-6
CY 83

87

91

95

99

03

07

11

15

19

23

Source: Ministry of Internal Affairs and Communications.
Notes: 1. The CPI items are classified into three groups based on their volatility using
long-term time-series data for the CPI (less fresh food).
2. The CPI figures are staff estimates and exclude mobile phone charges and theeffects of the consumption tax hikes, travel subsidy programs, policies
concerning the provision of free education, etc.

account for a high share of selling prices -- showsthat all of them have been increasing moderately

Chart B3-4: CPI and Scheduled Cash
Earnings

to date after remaining at around 0 percent for a5%

contribution to y/y % chg. in CPI less fresh food, % points

2.5

CPI (low-volatility items, left scale)long time (Chart B3-4).27

4
3

As explained, positive developments have been
spreading

graduallyinfirms'

wage-

2.0

Trend component of the CPI for
services (left scale)
Scheduled cash earnings of fulltime employees (left scale)Contribution of wage factors to
CPI changes (right scale)

2

1.5
1.0

and
1

0.5

0

0.0

price-setting behavior. It is important to determine
whether the linkage between wages and prices
would strengthen by continuously conducting
qualitative analyses, such as interviews with firms,
carefully, as well as by carrying out quantitative
analyses from various standpoints.

27

The approach is based on the following prior studies:

Kiley, M. T., "The Role of Wages in Trend Inflation: Back to the
1980s?" Finance and Economics Discussion Series (Washington:
Board of Governors of the Federal Reserve System), no.
2023-022 (2023).
Stock, J. H. and M. W. Watson, "Core Inflation and Trend Inflation,"
The Review of Economics and Statistics 98, no. 4 (2016):
770-784.

54

-1
CY 83

-0.5
87

91

95

99

03

07

11

15

19

23

Sources: Ministry of Internal Affairs and Communications; Ministry of Health, Labour andWelfare; Bank of Japan.
Notes: 1. Figures for low-volatility CPI items and scheduled cash earnings of full-time
employees are year-on-year percentage changes, while those for the trend
component of the CPI for services are the 6-quarter backward moving averagesof annualized quarter-on-quarter percentage changes.
2. Figures for scheduled cash earnings of full-time employees before 1994 arethose for regular employees. Moreover, figures from 2016/Q1 onward are basedon continuing observations following the sample revisions. The figure for2023/Q4 is the October-November average.
3. Figures for the contribution of wage factors to CPI changes are based on therelationship between the CPI and wages, estimated using a 4-variable VAR
model comprising import prices (yen basis), the output gap, wages (scheduled
cash earnings of full-time employees), and price indices for low-, medium-, andhigh-volatility items in the CPI. The estimates are obtained using 20-year rolling
regressions for low-, medium-, and high-volatility CPI items.
4. Figures for the trend component of the CPI for services are the composite of thesector-specific price trend for services and the common trend in services prices
and wages. The figures are estimated using category-level services prices andindustry-level scheduled cash earnings. The approach is based on Kiley (2023)
and Stock and Watson (2016).