Not to be released until 2:00 p.m.
Japan Standard Time on
Thursday, July 16, 2020.
.

Outlook for Economic
Activity and Prices
July 2020(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 (July 2020)
The Bank's View1
SummaryJapan's economy is likely to improve gradually from the second half of this year witheconomic activity resuming, but the pace is expected to be only moderate while the impactof the novel coronavirus (COVID-19) remains worldwide. Thereafter, as the impact
subsides globally, the economy is projected to keep improving further with overseas
economies returning to a steady growth path.

The year-on-year rate of change in the consumer price index (CPI, all items less freshfood) is likely to be negative for the time being, mainly affected by COVID-19 and the pastdecline in crude oil prices. Thereafter, it is expected to turn positive and then increase
gradually, since downward pressure on prices is projected to wane gradually along witheconomic improvement and the effects of the decline in crude oil prices are likely todissipate.

The projected growth rates and projected rates of increase in the CPI in this Outlook
Report are broadly within the range of the forecasts in the previous report.



The outlook for economic activity and prices provided in this Outlook Report is extremely
unclear, since it could change depending on the consequences of COVID-19 and themagnitude of their impact on domestic and overseas economies. It is based mainly on theassumptions that a second wave of COVID-19 will not occur on a large scale and that,while the impact of COVID-19 remains, firms' and households' medium- to long-term
growth expectations will not decline substantially and the smooth functioning of financial
intermediation will be ensured with financial system stability being maintained. However,these assumptions entail high uncertainties.

With regard to the risk balance, risks to both economic activity and prices are skewed tothe downside, mainly due to the impact of COVID-19.

"The Bank's View" was decided by the Policy Board at the Monetary Policy Meeting held on July 14 and15, 2020.
1

1

I. Current Situation of Economic Activity and Prices in Japan
Japan's economy has been in an extremely severe situation with the impact of COVID-19
remaining at home and abroad, although economic activity has resumed gradually.
Overseas economies have been depressed significantly, reflecting the impact of the
COVID-19 pandemic, although they have shown signs of heading toward a pick-up. In thissituation, exports and industrial production have declined substantially. Corporate profitsand business sentiment have deteriorated, and business fixed investment has been moreor less flat. With the continuing impact of COVID-19, the employment and income
situation has been weak. Although private consumption has decreased significantly,
mainly in services such as eating and drinking as well as accommodations, it has shown
signs of a pick-up recently. Housing investment has declined moderately. Meanwhile,
public investment has increased moderately. Financial

conditions havebeen

accommodative on the whole but those for corporate financing have remained less so, asseen in deterioration in firms' financial positions. On the price front, the year-on-year rateof change in the CPI (all items less fresh food, and the same hereafter) is at around 0
percent, mainly affected by the decline in crude oil prices. Inflation expectations have
weakened somewhat.

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, with economic activity resuming, is likely to improve gradually from thesecond half of this year through the materialization of pent-up demand and supported byaccommodative financial conditions and the government's economic measures. However,the pace of improvement is expected to be only moderate while the impact of COVID-19
remains worldwide. Thereafter, as the impact subsides globally, the economy is projected
to keep improving further with overseas economies returning to a steady growth path.
The COVID-19 pandemic has had a considerable impact on the global economy, alongwith the conduct of strict public health measures such as restrictions on going outside andsuspension of business and production activities. A phased lifting of these measures has
begun, mainly in countries where the spread of COVID-19 has almost subsided, but
economic activities of firms and households have remained constrained due to vigilanceagainst COVID-19. In this Outlook Report, which is based on the assumption that asecond wave of COVID-19 will not occur on a large scale, it is expected that, until
COVID-19 subsides globally, precautionary efforts made voluntarily by firms andhouseholds will continue to act as a force constraining economic activity, although it will2

wane gradually.2
Based on this assumption, as the impact of COVID-19 wanes, overseas economies arelikely to recover from being depressed significantly, partly supported by aggressive
macroeconomic policies, but the pace is expected to be only moderate. Japan's exports
are likely to increase gradually along with a recovery in overseas economies but remain
constrained for the time being. Inbound tourism consumption is expected to remain
subdued while entry restrictions continue.
Domestic demand is likely to see an increase in its level as the impact of COVID-19
wanes, but be only at a low level while it remains. Specifically, along with a resumption of
economic activity, household spending such as private consumption is expected to pickup from a significant decline through the materialization of pent-up demand as well as
supported by the government's economic measures and accommodative financial
conditions. However, the spending is likely to remain constrained while people continue tobe vigilant against COVID-19. Business spending, such as business fixed investment, is
expected to decrease, mainly in industries affected strongly by substantial declines inexports and consumption. Thereafter, it is likely to pick up as the impact of COVID-19
wanes.
Meanwhile, it is expected that the government's economic measures and accommodative
financial conditions will contribute to sustaining businesses and retaining employees,
thereby preventing firms' and households' medium- to long-term growth expectations inJapan from declining substantially. Thus, as the impact of COVID-19 subsides globally
thereafter, it is likely that exports will continue to increase on the back of growth inoverseas economies and that household and business spending will return to a stable
increasing trend.

B. Baseline Scenario of the Outlook for Prices
The year-on-year rate of change in the CPI is likely to be negative for the time being,
mainly affected by COVID-19 and the past decline in crude oil prices. With economic
activity remaining at a low level due to the impact of COVID-19, it is expected that pricesof goods and services that are sensitive to economic activity will be pushed down. Crude
oil prices, which declined significantly compared to a while ago, are projected to pushdown the CPI through energy prices. Under these circumstances, medium- to long-term

According to the global economic outlook released by various international organizations, it is assumed,
as a baseline scenario, that the economy will recover from the second half of 2020 after being pushed
down significantly in the first half of the year by the rapid spread of COVID-19. In that scenario, which isbased on the assumption that a second wave of COVID-19 will not occur on a large scale, an economic
recovery is expected to be only moderate since preventive measures, including voluntary ones, are likely
to continue to be taken until the COVID-19 pandemic subsides due to medical breakthroughs such as
development of effective medicines and vaccines.
2

3

inflation expectations are likely to continue weakening somewhat.
Thereafter, downward pressure on prices is projected to wane gradually along witheconomic improvement. In addition, the effects of the decline in energy prices are likely todissipate. Under these circumstances, the year-on-year rate of change in the CPI is
expected to turn positive and then increase gradually. Medium- to long-term inflation
expectations also are expected to rise again.

C. Financial Conditions
Looking at the financial conditions on which the above outlook is based, corporate
financing has been under stress, mainly against the background of a decline in sales thatreflects constrained economic activity due to the spread of COVID-19. In response to thissituation, the Bank, while pursuing "Quantitative and Qualitative Monetary Easing (QQE)with Yield Curve Control," has conducted various powerful monetary easing measuressince March with a view to supporting financing, mainly of firms, and maintaining stability
in financial markets.3 In addition, the government has conducted various measures tosupport financing, mainly of firms, through programs that provide loans guaranteed by thecredit guarantee corporations and that provide quasi-capital funds. In this situation, alongwith active efforts made by private financial institutions, the environment for externalfunding, such as bank borrowing and the issuance of CP and corporate bonds, hasremained accommodative. Owing to the Bank's and the government's measures, as wellas efforts made by private financial institutions together with those measures, it isexpected that financial conditions will remain accommodative and further downward
pressure on the real economy from the financial side will be avoided.4

III. Risks to Economic Activity and Prices
A. Risks to Economic Activity
Regarding the baseline scenario of the outlook for economic activity, it is necessary to pay
attention to the following three upside and downside risks in particular until the impact of
COVID-19 subsides.
The first is the impact of COVID-19 on domestic and overseas economies. There are
extremely high uncertainties over the consequences of COVID-19 and the magnitude of
their impact on domestic and overseas economies. Until effective medicines and vaccines
See "Enhancement of Monetary Easing in Light of the Impact of the Outbreak of the Novel Coronavirus(COVID-19)" released on March 16, 2020, "Enhancement of Monetary Easing" released on April 27, 2020,
and "Introduction of a New Fund-Provisioning Measure to Support Financing Mainly of Small andMedium-Sized Firms" released on May 22, 2020.
3

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.
44

are developed, it is highly unclear how the COVID-19 pandemic will evolve and how longit will take for it to subside. In particular, if a second wave of COVID-19 occurs on a large
scale, economic activity is likely to be constrained significantly again. In addition,
households' and firms' behavior at home and abroad is also uncertain, with people
continuing to voluntarily make precautionary efforts until COVID-19 subsides.
The second risk is firms' and households' medium- to long-term growth expectations. If
such expectations decline due to a shock caused by COVID-19 that pushes down theeconomy considerably, there is a risk that firms' and households' appetite for spending will
not increase easily even after COVID-19 subsides. On the other hand, medium- tolong-term growth expectations could increase if the issue of COVID-19 leads to, forexample, active use of information and communication technology to prevent infection
and an undertaking of investment to meet new demand, thereby having positive effects on
economic activity such as further innovation.
The third risk is developments in the financial system. Although it is under severe stressdue to the impact of COVID-19, the Bank and the government have taken measuresaggressively, with a view to supporting financing, mainly of firms, and maintaining stability
in financial markets. In addition, financial institutions have considerable resilience in termsof both capital and liquidity. In this situation, the financial system has maintained stabilityon the whole. However, if COVID-19 has a larger impact than expected, there is a risk that
deterioration in the real economy will affect financial system stability, thereby exerting
further downward pressure on the real economy. Although this risk is judged as not
significant at this point, it is necessary to pay close attention to future developments.

B. Risks to Prices
If the aforementioned risks to economic activity materialize, prices also are likely to beaffected accordingly.
Risks that are specific to prices are as follows. The first is uncertainties over firms'
price-setting behavior amid the impact of COVID-19 on both the demand and supply sidesof economic activity. A decrease in demand due to constrained economic activity is likely
to push down prices of goods and services that are sensitive to economic activity. On theother hand, there are uncertainties over how firms set prices if economic activity isconstrained also from the supply side, such as by limiting the number of customers toprevent infection. In addition, it is unclear how these circumstances will affect prices froma macro perspective.
The second is that 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, may lead prices to deviate either upward or downward fromthe baseline scenario. In particular, since crude oil prices have been highly volatile, it is5necessary to pay attention to the effects on the CPI exerted through energy prices.

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 for the outlook. The
year-on-year rate of change in the CPI is likely to increase gradually toward achieving theprice stability target, although it will take time. For the time being, prices are expected tobe pushed down with economic activity remiaining at a low level due to the impact of
COVID-19, and medium- to long-term inflation expectations also are likely to weakensomewhat. Thereafter, prices are expected to increase gradually since downward
pressure on them is projected to wane gradually along with economic improvement. In
addition, medium- to long-term inflation expectations also are likely to rise again.
The second perspective involves an examination of the risks considered most relevant tothe conduct of monetary policy. The outlook for economic activity and prices is extremely
unclear, since it could change depending on the consequences of COVID-19 and themagnitude of their impact on domestic and overseas economies. This outlook is based
mainly on the assumptions that a second wave of COVID-19 will not occur on a large
scale and that, while the impact of COVID-19 remains, firms' and households' medium- tolong-term growth expectations will not decline substantially and the smooth functioning offinancial intermediation will be ensured with financial system stability being maintained.
However, these assumptions entail high uncertainties. With regard to the risk balance,risks to both economic activity and prices are skewed to the downside, mainly due to theimpact of COVID-19. When examining financial imbalances from a longer-term
perspective, prolonged downward pressure on financial institutions' profits could create arisk of a gradual pullback in financial intermediation, given the existing factors -- such as
the prolonged low interest rate environment, the declining population, and excess savingsin the corporate sector -- as well as the recent impact of COVID-19. 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, mainly because financial institutions have sufficient capital bases, it isnecessary to pay close attention to future developments.
As for the conduct of monetary policy, the Bank will continue with "QQE with Yield Curve
Control," aiming to achieve the price stability target of 2 percent, as long as it is necessary
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

6

for maintaining that target in a stable manner. It will continue expanding the monetarybase until the year-on-year rate of increase in the observed CPI (all items less fresh food)exceeds 2 percent and stays above the target in a stable manner.
The Bank will continue to support financing, mainly of firms, and maintain stability infinancial markets through (1) the Special Program to Support Financing in Response to
the Novel Coronavirus (COVID-19), (2) an ample provision of yen and foreign currency
funds without setting upper limits mainly by purchasing Japanese government bonds(JGBs) and conducting the U.S. dollar funds-supplying operations, and (3) active
purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts(J-REITs).
For the time being, the Bank will closely monitor the impact of COVID-19 and will not
hesitate to take additional easing measures if necessary, and also it expects short- andlong-term policy interest rates to remain at their present or lower levels.

7

(Appendix)
Forecasts of the Majority of the Policy Board Members
y/y % chg.
(Reference)
Excluding the effectsof the consumption
tax hike and policies
concerning theprovision of freeeducation

Real GDP

CPI (all items lessfresh food)Fiscal 2020

-5.7 to -4.5[-4.7]-0.6 to -0.4[-0.5]-0.7 to -0.5[-0.6]

Forecasts made in April 2020

-5.0 to -3.0

-0.7 to -0.3

-0.8 to -0.4

Fiscal 2021

+3.0 to +4.0[+3.3]+0.2 to +0.5[+0.3]

Forecasts made in April 2020

+2.8 to +3.9

0.0 to +0.7

Fiscal 2022

+1.3 to +1.6[+1.5]+0.5 to +0.8[+0.7]

Forecasts made in April 2020

+0.8 to +1.6

+0.4 to +1.0

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 he or she attaches 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. In the April Outlook Report, each Policy Board member made their forecasts as a range and submitted two
figures (i.e., the highest and lowest figures) within the range of 1.0 percentage point at most. The forecasts of the
majority of the Policy Board members were shown as a range excluding four figures -- namely, the two highest
figures and two lowest figures among the forecasts of the nine members. Thus, it should be noted that thedefinition of the forecasts of the majority of the Policy Board members in the April Outlook Report is different fromthat in the July Outlook Report.
4. 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.
5. The direct effects of the October 2019 consumption tax hike on the CPI for fiscal 2020 are estimated to be 0.5
percentage point. In addition, based on a specific assumption, the direct effects of policies concerning theprovision of free education on the CPI for fiscal 2020 are estimated to be around minus 0.4 percentage point.

8Policy Board Members' Forecasts and Risk Assessments(1) Real GDP
5.0y/y % chg.

y/y % chg.

5.0

4.0

4.0

3.0

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

-5.0

-6.0
FY
2014

2015

2016

2017

2018

2019

2020

2021

2022

-6.0
2023

(2) CPI (All Items Less Fresh Food)
2.0

y/y % chg.

y/y % chg.

2.0

1.0

1.0

0.0

0.0

-1.0

-1.0

-2.0
2014
FY

2015

2016

2017

2018

2019

2020

2021

2022

-2.0
2023

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 he or she attaches the highest probability. The risk balance assessed by each Policy Board
member is shown 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 theupside," and ▼ indicates that a member assesses "risks are skewed to the downside."
3. The CPI figure for fiscal 2015 excludes the direct effects of the April 2014 consumption tax hike.

9The Background6
I. Current Situation of Economic Activity
and Its Outlook
A. Economic Developments
Japan's economy has been in an extremely
severe situation with the impact of COVID-19
remaining

at

home

and

abroad,althougheconomic activity has resumed gradually.

Chart 1: Real GDP
15s.a., ann., q/q % chg.

10
5

The real GDP growth rate for the January-March0quarter of 2020 registered negative growth for two
consecutive quarters, marking minus 0.6 percent
on a quarter-on-quarter basis and minus 2.2-5

Private demand
Public demand
Net exports-10

Real GDP

percent on an annualized basis (Chart 1). This is
attributable to the fact that components such asprivate consumption and exports declined, due

-15
CY 11

12

13

14

15

16

17

18

19 20

Source: Cabinet Office.

mainly to the impact of the spread of COVID-19.
Since April, COVID-19 has brought about aconsiderable

declineinaggregate

demandthrough the following three channels: (1) a decline

Chart 2: Labor Market Conditions
7

6

1.6

Active job openings-to-applicants ratio(right scale)

1.4
5

1.2

tourism demand (i.e., services exports); and (3) adecine in domestic private consumption, due

1.0

4

mainly to self-restraint from going outside andbusiness restrictions. In reflection of the decline in

1.8

Unemployment rate (left scale)in goods exports reflecting a depression inoverseas economies; (2) a decline in inbounds.a., ratios.a., %

0.8
3
0.6

aggregate demand, labor demand has weakened
significantly. The unemployment rate and active

2
CY 05

job openings-to-applicants ratio have deteriorated,

Sources: Ministry of Internal Affairs and Communications; Ministry of Health, Labour andWelfare.

and the number of employed persons has turned
to a clear decline (Charts 2 and 3). Under thesecircumstances, the output gap -- which captures
the utilization of labor and capital -- narrowed
6"The Background" provides explanations of "The Bank's View"
decided by the Policy Board at the Monetary Policy Meeting heldon July 14 and 15, 2020.

10

0.4
07

09

11

13

15

17

19

within positive territory for the January-March
quarter, reaching almost 0 percent (Chart 4). The

Chart 3: Labor Force Participation and
Employment

gap seems to have continued to narrow and70

become significantly negative for the April-June

69

quarter, given the deterioration in the diffusion

68

indices (DIs) related to employment and businessfixed investment in the June 2020 Tankan(Short-Term Economic Survey of Enterprises ins.a., mil. persons
Labor force participants
Employed persons

67
66
65

Japan).

64
63

With regard to the outlook, Japan's economy islikely to remain in a severe situation for the time

62
CY 05

07

09

11

13

15

17

19

Source: Ministry of Internal Affairs and Communications.

being due to the impact of COVID-19 at home andabroad. Subsequently, with a phased resumptionof economic activity, the economy is likely to
improve gradually from the second half of thisChart 4: Output Gap
8%reversed, DI ("excessive" - "insufficient"), % points
Output gap (left scale)-40

year through the materialization of pent-up

6

demandandaccommodative

4

financialconditions

government's

2-10

economic measures.7 Specifically, with regard to00

goods exports, a significant decline has been-2

10

observed recently, mainly for automobile-related

-4

20

-6

30

supported
and

by
the

goods. However, such exports are expected tostop declining and turn to a pick-up in the second
half of this year. Thereafter, as the impact of
COVID-19 wanes worldwide, goods exports arelikelytoincrease,

supported

also

by

the

materialization of pent-up demand and a recovery
in production. Inbound tourism demand, which is
a component of services exports, is expected to7

Based on the Emergency Economic Measures to Cope with theNovel Coronavirus (COVID-19) -- with a project size of around117.1 trillion yen and fiscal spending of around 48.4 trillion yen -decided by the Cabinet in April 2020, the first supplementarybudget for fiscal 2020 was approved by the Diet. In reflection of
the expansion in the areas where the state of emergency was
declared and the period of that state being prolonged, the second
supplementary budget -- with a project size of around 117.1 trillion
yen and fiscal spending of around 72.7 trillion yen -- also wasapproved by the Diet.

11

-8
CY 85

-30
-20

Tankan factor utilizationindex (right scale)

40
90

95

00

05

10

15

20

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

remain subdued while entry restrictions continue.
Private consumption decreased significantly in
the April-June quarter, affected by the declarationof a state of emergency. It is projected to pick up
from that bottom, but the pace will likely be quite
moderate due to vigilance against COVID-19 andthe need to ensure social distancing. The
employment and income situation is projected toremain under downward pressure for the time
being, reflecting weak labor demand stemmingfrom a decline in domestic and overseas demand.
However, the employment adjustment subsidies,
which have been expanded in response to thecurrent situation, are expected to halt job cuts,
and income support measures such as special
cash payments are likely to underpin disposable
income. Business fixed investment is expected toturn to a downtrend against the background of adecline in corporate profits and increasing
uncertainties over the future. However, withfinancial conditions remaining accommodative
owing to the Bank's and the government's
measures to support financing, mainly of firms, aswell as efforts made by financial institutions
together with those measures, it is unlikely that
adjustments in capital stock will be significant,since many medium- to long-term investment
projects will continue to be undertaken. Thus,business fixed investment is expected to increaseagain after the impact of COVID-19 subsides.
Meanwhile, government spending is projected tosteadily increase reflecting the progress inconstruction

relatedtorestoration

andreconstruction following natural disasters, as wellas to national resilience. Thereafter, it is expected
to be at a relatively high level.

12

From a somewhat long-term perspective, as theChart 5: Potential Growth Rate

impact of COVID-19 subsides globally, Japan's

5

economy is projected to keep improving further

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

4

with overseas economies returning to a steady3

growth path.

2
1

Reflecting these developments in demand both athome and abroad, Japan's economic growth rate0

is expected to register significant negative growth-1

for fiscal 2020; however, the economy is likely to

-2
FY 85

mark relatively high growth for fiscal 2021, duepartly to the materialization of pent-up demand
and the hosting of the Olympic Games, and thencontinue to grow firmly for fiscal 2022 on the backof an improvement in overseas economies.

Meanwhile, the potential growth rate is likely todecline in the short run. This is because thefollowing is projected: (1) a decline in total factor
productivity (TFP), mainly due to measuresagainst COVID-19 and to labor hoarding; (2) adowntrend in working hours due to temporary
store closures and shorter operating hours; and(3) a deceleration in growth of capital stockreflecting a decline in business fixed investment(Chart 5). Thereafter, the potential growth rate is
expected to be at a low level for a while but risemoderately toward the end of the projection
period. This is based on the projection that, (1)while the TFP growth rate will turn to a moderateincrease due to adaptation to a "new lifestyle,"advances in digital transformation, and a resultant
improvement in efficiency of resource allocation,(2) working hours will stop declining, and (3) thegrowth of capital stock will accelerate cyclically.
However, there is a possibility that COVID-19 willbring about a structural change in people's

13

90

95

Source: Bank of Japan.
Note: Based on staff estimations.

00

05

10

15

working styles and firms' business processes that
does not follow the past trend, and thus the output
gap and the potential growth rate, which are
estimated based on a specific assumption
regarding trends, should be interpreted with more
latitude than usual.

Details of the outlook for each fiscal year are as
follows. In fiscal 2020, the economic growth rate
is likely to decline significantly in the April-Junequarter due to the impact of COVID-19 at home
and abroad, and then pick up moderately throughthe second half of the fiscal year. Exports, mainlyof automobile-related goods, have declined
significantly of late due to a substantial decreasein overseas demand and a resultant increase ininventory

adjustments.

However,

they

are

expected to pick up moderately through thesecond half of the fiscal year on the back of the
progress in inventory adjustments and a rise inoverseas demand that reflects the resumption of
economic activity. Meanwhile, inbound tourism
demand, which is a component of services
exports, is likely to remain subdued for a while,reflecting a significant decline in the number of
inbound visitors due to entry restriction measures.
Private consumption seems to have decreased
significantly in the April-June quarter, mainly inservices such as eating and drinking as well as
accommodations, reflecting self-restraint fromgoing outside and business restrictions under thedeclaration of a state of emergency. Thereafter,with businesses reopening, it is expected to pickup through the second half of the fiscal year,
backed by income support measures such as
special cash payments. However, it seems
inevitable that the pace of a pick-up in private
consumption will be only moderate given that14

people will continue to be vigilant against
COVID-19 and to ensure social distancing.
Business fixed investment is likely to turn to adowntrend,

with

an

increasing

numberof

non-urgent projects, mainly regarding machinery
investment, being postponed due to the decline incorporate profits and increasing uncertainties
over the future. Meanwhile, although expenditureon temporary facilities accompanying the hostingof the Olympic Games has been postponed tofiscal 2021, government spending is expected tocontinue increasing moderately due to expansion
such as in construction related to restoration andreconstruction following natural disasters, as wellas to national resilience.

In fiscal 2021, as the impact of COVID-19 wanes
worldwide and the growth rates of overseas
economies rise clearly, an improving trend inJapan's economy is expected to become evident.
This is likely to be supported by accommodative
financial conditions, the effects of various demand
stimulus measures, the materialization of pent-up
demand, and an improvement in sentiment thatreflects the hosting of the Olympic Games. Amid a
recovery in overseas economies, exports are
expected to increase firmly, supported by thematerialization of pent-up demand and therecovery inproduction. As

theCOVID-19

continues

wane,

to

impactofprivateconsumption is likely to increase moderately,supported by a pick-up in employee income, theeffects of various demand stimulus measures,andOlympic

corporate

Games-related

profits

improving,

demand.

Withbusiness

fixed

investment is expected to increase, albeit withsome time lag, pushed up by undertaking
postponed investment projects and an increase in15

IT-related investment to set up teleworking
systemsandremoteservices.

Meanwhile,

government spending is likely to be at a high levelon the back of disaster-related reconstruction,
river

flood

controlenhancements,

andprojects,

infrastructure

Olympic

Games-related

expenditure.

In fiscal 2022, the economy is expected tocontinue growing firmly, led by increases inexports and business fixed investment that reflect
an improvement in overseas economies. Exports
are likely to continue increasing clearly, reflecting
an improvement in overseas economies. In thissituation, corporate profits are expected to follow
their improving trend. Regarding business fixed
investment, machinery investment is likely to seean acceleration in its growth pace, and IT-related
investment as well as research and development(R&D) investment for growth areas also are likely
to continue increasing. Private consumption is
expected to continue increasing moderately, witha virtuous cycle from income to spending
operating.

Meanwhile,

Games-related

although

expenditure

will

Olympic

have

been

completed, government spending is likely to be atahighlevel,

maintenance

due

and

partlytoreplacement

demandoffordecaying

infrastructures.

16

B. Developments in Major Expenditure
Items and Their Background
Government Spending
Public investment has increased moderately(Chart 6). The amount of public construction
completed, which is a coincident indicator, has
followed its moderate uptrend since early 2019.

Chart 6: Public Investment
25
24

23

s.a., ann., tril. yens.a., ann., tril. yen

Public construction completed (nominal, left scale)
Public investment (real, right scale)

32
31

30

The value of public works contracted, as well as

22

29

orders received for public construction, both of

21

28

which are leading indicators, have been on a20

27

moderate

fluctuations,19

26

reflecting the progress in construction related to

18

25

restoration and reconstruction following natural

17

24

disasters, as well as to national resilience.8 As for

16

23

uptrend,albeitwiththe outlook, public investment is expected toincrease steadily, reflecting the progress ininfrastructure-related construction, and then be ata relatively high level from fiscal 2021 onward,
mainly supported by Olympic Games- andinfrastructure-related construction.9

Overseas Economies
Overseas economies have been depressedsignificantly,

reflectingtheimpactofthe

COVID-19 pandemic, although they have shown8

In view of the three-year emergency response plan for disasterprevention, disaster mitigation, and building national resilience
decided by the Cabinet in December 2018 -- with a total projectsize of around 7 trillion yen -- measures to maintain functions,such as of important infrastructure, are to be implemented
intensively over three years from fiscal 2018 through fiscal 2020.
9

It is assumed that public investment will be pushed up by theComprehensive Economic Measures to Create a Future with
Security and Growth -- with a project size of around 26.0 trillion
yen and fiscal spending of around 13.2 trillion yen -- which was
decided by the Cabinet in December 2019, mainly led byconstruction related to restoration and reconstruction following
natural disasters as well as to flood control.

17

15
22
CY 09 10 11 12 13 14 15 16 17 18 19 20
Sources: Cabinet Office; Ministry of Land, Infrastructure, Transport and Tourism.
Note: The figure for 2020/Q2 is that for April.

signs of heading toward a pick-up (Chart 7). 10
Economic activity resumed first in China, where
the spread of COVID-19 subsided earlier than any
other places. Subsequently, resumption has been

Chart 7: Overseas Economies
1064States, since the strict public health measures,2such as restrictions on going outside and0suspension in business and production activities,-2

have been lifted gradually, mainly in areas where-4

the spread has almost subsided. The Global PMI-6shows that business sentiment has shown signs-8

the resumption of economic activity (Chart 8).
That said, private consumption and business
fixed

investment

have

been

depressed

IMF
projection

8

observed in European countries and the Unitedof heading toward a pick-up recently, reflecting

y/y % chg.

Overseas total
Advanced economies
Emerging and commodity-exporting economies

-10
CY 85

90

95

00

05

significantly in many economies due to vigilance

Chart 8: Global PMI

against COVID-19, a global deterioration in the60

employment situation, and a decline in corporate

55

profits.

10

15

20

Sources: IMF; Ministry of Finance.
Note: Figures are the weighted averages of real GDP growth rates using countries' sharein Japan's exports as weights. Annual GDP growth rates are from the "World
Economic Outlook (WEO)" as of April 2020 and the "WEO update" as of June 2020.
Advanced economies consist of the United States, the euro area, and the United
Kingdom. Emerging and commodity-exporting economies consist of the rest of theworld economy.

s.a., DI

50
45

Looking at developments by major region, the40

Chinese economy has picked up due to the35

emergence

aggressive

30

Manufacturing

macroeconomic policies and the materialization of

25

Services

pent-up

20
CY 07

of

the

effectsofdemand. The U.S. andEuropeaneconomies have been depressed significantly,
although there have been some signs of heading
towardapick-up.

Emerging

andcommodity-exporting economies other than China
have plunged with COVID-19 continuing to
spread.

09

11

13

15

17

19

Source: IHS Markit (© and database right IHS Markit Ltd 2020. 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."

Chart 9: Effective Exchange Rates
160

CY 2010=100

140

Yen
appreciation

120

Yen
depreciation

100

With regard to the outlook, as the impact of80

COVID-19 wanes, overseas economies are likely
60
Real effective exchange rate

40

Nominal effective exchange rate

10

With regard to the impact of COVID-19 on developments inoverseas economies, see Box 1.

20
CY 80

85

90

95

00

05

10

15

Source: BIS.
Note: Figures are based on the broad index of the "Effective Exchange Rate."Those prior to 1994 are calculated using the narrow index.

18

20

to recover from being depressed significantly,
pushed up by the materialization of pent-up
demand and the recovery in production, as wellChart 10: Real Exports and Real Imports
120s.a., CY 2015=100

s.a., % of real GDP

10

as supported by aggressive macroeconomic

1108policies taken by each country and region. That100

6said, the pace of recovery is expected to be only

90

4moderate

made

80

2

voluntarily by firms and households will continue

70

0

since

precautionary

efforts

to act as a force constraining economic activity.

60-2

Real trade balance (right scale)Real exports (left scale)50-4Real imports (left scale)

There are extremely high uncertainties over theoutlook for overseas economies, since it couldchange depending on the consequences of
COVID-19 and the magnitude of their impact on
those

economies.

In

fact,

the

number

of

40
CY 05

-6
07

09

11

13

15

17

19

Sources: Bank of Japan; Ministry of Finance; Cabinet Office.
Note: Based on staff calculations. Figures for 2020/Q2 are April-May averages.

Chart 11: Real Exports by Region
130s.a., 2015/Q1=100

s.a., 2015/Q1=100

130

120

120

economies, such as Central and South America

110

110

as well as India, and in the United States.

100

100

confirmed cases is still increasing in emerging

90

90
China <19.1>

Exports and Imports

80

Exports have declined substantially with overseas

70

economies being depressed significantly (Chart

60
60
CY 15 16 17 18 19 20 15 16 17 18 19 20

10). By region, exports to advanced economies
such as the United States and the European
Union (EU) have declined substantially, mainly for
automobile-related goods, with the impact of strict

United States <19.8>

NIEs, ASEAN, etc.
<34.6>

EU <9.7>

Other economies<16.8>

80
70

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 2019.
Figures for 2020/Q2 are April-May averages.
2. "EU" does not include the United Kingdom for the entire period.

Chart 12: Real Exports by Type of Goodss.a., 2015/Q1=100

s.a., 2015/Q1=100120

public health measures taken by each economy

120

remaining (Chart 11). Regarding exports to

110

110

emerging economies, those to China have picked

100

100

90

90

decreased significantly. By goods, exports of80

80

automobile-related

70Intermediate goods<19.8>

IT-related goods<20.4>

70

60

Motor vehicles andrelated goods <24.1>

Capital goods<17.6>

60

up, whereas those to the NIEs and the ASEAN
countries

as

well

as

other

goods

regions

have

have

declined

substantially against the background of a rapid
decline in global automobile sales, mainly in the
United States and Europe, and of the resultant
inventory adjustments (Chart 12). Exports of

19

50
50
CY 15 16 17 18 19 20 15 16 17 18 19 20
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 2019.
Figures for 2020/Q2 are April-May averages.

capital goods have continued to decline clearly,
mainlyforconstruction

metalworking
machines,machineryreflectingaandglobalpostponement of business fixed investment,
although they have been firm for semiconductor
production equipment. On the other hand,
IT-related exports have declined recently, mainlyfor parts for on-board equipment for motor
vehicles and parts for smartphones, but the
decline has been relatively small, supported byfirm developments in parts for data centers and in
those related to personal computers. Exports ofintermediate goods have been more or less flat,with an increase in exports of chemicals to China
offset by a decline in those of iron and steel,mainly to the NIEs and the ASEAN countries.

It is likely that exports will be at low levels for thetime being, mainly for automobile-related goods,
but will stop declining and then head toward a
pick-up as the impact of COVID-19 wanes
worldwide.

By

goods,

exports

ofautomobile-related goods are expected to be at
low levels for the time being but start picking up
gradually, reflecting a recovery in automobile
sales in the United States and China, as well as
progress in the inventory adjustments. Capital
goods exports are likely to remain on their
downtrend for a while, mainly for machine tools
for automobile-related goods and construction
machines for the resources industry. The uptrend
in IT-related exports is likely to become evident
gradually on the back of continuing firm demandfor parts for data centers and for those related topersonal computers, as well as increasing
demand for parts for 5G-related equipment.

20

Looking at the outlook for exports relative to theworld trade volume, they are likely to increase.

Chart 13: World Trade Volume and RealGDP of the World Economy

This is based on the projection that (1) the world20

trade volume will return to its uptrend and (2)15Japan's share of exports in world trade also will

10

pick up, reflecting a recovery in exports ofautomobile-related goods and capital goods(Charts 13 and 14).11 The growth in the world
trade volume is expected to remain negative on

y/y % chg.

50
-5an annual basis for the time being due to the-10

impact of COVID-19, but will likely stop declining,-15

reflecting a recovery in production activity of

-20
CY 05

manufacturing firms on a global basis, and thenhead toward a pick-up gradually. Thereafter, thegrowth in the world trade volume is expected to

Trade volume
Real GDP

07

09

11

13

15

17

19

Sources: CPB Netherlands Bureau for Economic Policy Analysis; IMF, etc.
Notes: 1. Figures for the trade volume are those for real imports.
The figure for 2020/Q2 is the percentage change from the April-June 2019average to April 2020.
2. Real GDP of the world economy is based on staff calculations using GDP
shares of world total GDP from the IMF as weights.

accelerate. This is based on the projection that (1)IT-related exports will be firm as a trend, (2)downwardpressureonautomobile

sales,

Chart 14: Japan's Share of Exports inWorld Trades.a., %

stemming from the impact of COVID-19, will wane,

5.8

and (3) business fixed investment, which had

5.6

been postponed because of high uncertainties,

5.4

will be undertaken gradually. On the other hand,

5.2Japan's share of exports in world trade is likely to

5.0

be at a low level for the time being, reflecting

4.8

declines in automobile-related goods and capital

4.6

goods, in which Japan has a comparative

4.4

advantage, but pick up thereafter on the back of a

4.2

recovery in global demand for business fixed

4.0
CY 05

investment and in global automobile sales.

07

09

11

13

15

17

19

Source: CPB Netherlands Bureau for Economic Policy Analysis.
Note: Japan's share of exports in world trade is obtained by dividing Japan's real exports
by world real imports (2010 prices). The figure for 2020/Q2 is that for April.

Imports decreased in the January-March quarterdue to the impact of the spread of COVID-19 in
China, but have picked up recently, mainly for
consumer goods -- such as personal computers,
mobile phones, and masks -- reflecting a

11

The world trade volume is calculated by adding up real imports
in each country.

21

resumption of production activity in China (Chart
10). Imports are likely to be under downward

Chart 15: Current Accountpressure stemming from weak production activity

30

in Japan for the time being, but an uptrend is20

expected to become evident thereafter, reflecting

10

the resumption of domestic economic activity.

s.a., ann., tril. yen

0-10

External Balance-20

The nominal current account surplus has declined(Chart 15). Looking

at thebreakdownofdevelopments in the current account balance, thenominal trade balance has marked a relatively-30

Trade balance
Services balancePrimary income balance
Secondary income balance
Current account-40
CY 09 10 11 12 13 14 15 16 17 18 19 20
Source: Ministry of Finance and Bank of Japan.
Note: Figures for 2020/Q2 are April-May averages.

large deficit, due mainly to a significant decline ingoods exports. The services balance also hasmarkeda

deficit,reflectingasignificant

deterioration in the travel balance that is due to aChart 16: Number of Inbound Visitors
35s.a., ann., mil. persons

decline in inbound tourism demand. On the other

30

Othershand, the primary income balance has maintained

25

ASEAN

a relatively large surplus, supported mainly by theinterest income from past securities investment.

20

North America and Europe
NIEs
China

15
10

Meanwhile, the number of inbound visitors (on a5seasonally adjusted annualized basis) recently
has dropped sharply from last year's level, which
exceeded 30 million, to roughly tens of thousands,
mainly as a result of the tightening of entry
restriction measures that reflects the COVID-19
pandemic (Chart 16). As a result of thesedevelopments, travel receipts have declined
significantly.

Althoughtravelpayment

hasdecreased due to a smaller number of departuresthat is attributable to the tightening of travel
restrictions,

the

net

travelbalancehasdeteriorated since the impact of the decline inreceipts is larger than that in payment.

22

0
CY 09 10 11 12 13 14 15 16 17 18 19 20
Source: Japan National Tourism Organization (JNTO).
Note: North America and Europe consist of the United States, Canada, the United Kingdom,France, and Germany. Figures for 2020/Q2 are April-May averages.

Industrial Production
Industrial production has declined substantiallyamid a considerable decline in exports (Chart 17).
By major industry, transport equipment production

Chart 17: Industrial Production
120s.a., CY 2015=100

Production

has decreased significantly. This is attributable toa substantial decline in production of parts related

Inventories

110

to automobiles that reflects a rapid decline inglobalautomobile

sales

and

the

resultant100

inventory adjustments, as well as to a decline inproduction of parts related to aircraft. The

90

production decline in transport equipment also
has led to a significant decline in relevant
industries such as iron and steel, as well as
nonferrous metals. Although the production ofsemiconductor
remained

firm,

production

equipment

has

that

machinery(i.e.,"general-purpose,of

production,

80
CY 05

07

09

11

13

15

17

19

Source: Ministry of Economy, Trade and Industry (METI).
Notes: 1. Shaded areas indicate recession periods.
2. The production figures for 2020/Q2 and Q3 are calculated based on METI
projections for June and July 2020.
The inventories figure for 2020/Q2 is that for May.

andbusiness-oriented machinery" in the Indices ofIndustrial Production) has declined, mainly for

Chart 18: Shipments-Inventories Balance40

y/y % chg.

% points

40

metalworking

30

30

machinery. On the other hand, a decline in the20

20

production of electronic parts and devices has

1010

been relatively small, since demand for parts for00data centers and for those related to personal

-10

-10

computers-20

construction

machineshas

increased

andfirmlywhile

theproduction of parts for on-board equipment for
motor vehicles and parts for smartphones has

Shipments - Inventories(right scale)-30

Production (left scale)declined. Meanwhile, the shipments-inventories

-40
CY 05

balance (i.e., the year-on-year rate of change inSource: Ministry of Economy, Trade and Industry.
Note: The production figure and the shipments figure for 2020/Q2 are April-May
averages. The inventories figure for 2020/Q2 is that for May.

shipments minus that in inventories) recently has
deteriorated to a relatively large degree, due
mainly to developments in transport equipment
production (Chart 18).

Industrial production is likely to be at a low level
for the time being, due to a depression inoverseas economies stemming from the impact of
COVID-19 and to inventory adjustments. However,

23

-20
-30
-40

07

09

11

13

15

17

19

it is expected to bottom out and then head towarda pick-up as the impact of COVID-19 wanes
worldwide and inventory adjustment progresses.

Chart 19: Corporate Profits
7

Ratio of current profits to sales

Thereafter, with overseas economies continuing

6

to grow steadily, the uptrend in industrial

5

production is expected to become evident
gradually, supported by the materialization ofs.a., %

Ratio of operating profits to sales

4pent-up demand and the recovery in production

3

from the decline brought about by COVID-19.

2
1
0
CY 05

Corporate Profits
Corporate profits have deteriorated due to theimpact of COVID-19. According to the Financial
Statements Statistics of Corporations by Industry,
Quarterly (FSSC), the ratios of profits to sales for
all industries and enterprises declined from lastyear, reflecting the effects of the slowdown inoverseas economies and the consumption tax
hike, and the downtrend became evident for theJanuary-March quarter, pushed down also by the
impact of COVID-19 (Chart 19). 12 Recently,
corporate profits have been supported by an
improvement in the terms of trade due to thedecline in crude oil prices and by various income
support measures. However, since the impact of
the sales decline due to decreases mainly inexports
corporate

andprivateprofits

consumption

seem

to

have

is

large,

declinedsignificantly, also taking into account deteriorationin business sentiment, as described below.

12

As for the FSSC, since the response rate for the January-Marchsurvey declined due to the impact of COVID-19, the Ministry of
Finance extended the deadline of the survey by around 2 months
and accordingly decided to release the revised figures on July 27,
2020.

24

07

09

11

13

15

17

19

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 exclude "pure holding companies."
3. Shaded areas indicate recession periods.

Business sentiment has deteriorated, reflecting adecline in domestic and overseas demand.
According to the DI for business conditions in theJune 2020 Tankan, that for all industries andChart 20: Business Conditions
60

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

All industries"Favorable"

40

Manufacturing
Nonmanufacturing

enterprises has declined substantially in negative
territory, reflecting the impact of COVID-19 (Chart20). By industry, the DI for the manufacturing

20"Unfavorable"

0

sector has continued to deteriorate significantly ina wide range of industries, mainly for automobiles
as well as iron and steel. With regard to the DI forthenonmanufacturingsector,thosewell as services for individuals have continued tosignificantly,

mainlyagainst-40

foraccommodations, eating and drinking services, as
deteriorate

-20

the

-60
CY 90

95

00

05

10

15

20

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

background of self-restraint from going outsideand holding events, as well as of businessrestrictions.

Chart 21: Coincident Indicators ofBusiness Fixed Investment
95
90

Corporate profits are likely to be under strong
downward pressure for the time being due to the85

impact of COVID-19. Thereafter, however, with80

the impact waning worldwide, they are expected75

to gradually return to their improving trend,s.a., ann., tril. yens.a., CY 2015=100
Private nonresidential investment(SNA, real, left scale)
Domestic shipments and imports ofcapital goods (right scale)
Private construction completed(nonresidential, real, right scale)90
80

pent-up demand.

60
CY 05

Business fixed investment has been more or lessflat (Chart 21). Excluding IT-related goods, suchas personal computers, that have been firm,
mainly reflecting an increase in working from
home, the aggregate supply of capital goods -- acoincident indicator of machinery investment -has shown some weakness on the whole due to a
and

70
60
07

09

11

13

15

17

19

Sources: Cabinet Office; Ministry of Economy, Trade and Industry; Ministry of Land,
Infrastructure, Transport and Tourism.
Notes: 1. The figure for domestic shipments and imports of capital goods for 2020/Q2 isthe April-May average. The figure for private construction completed for2020/Q2 is that for April.
2. Real private construction completed is based on staff calculations using priceindices in the "Construction Cost Deflators."

Business Fixed Investment

exports

130

100

70

demand supported also by the materialization of

in

140

110

65

decline150

120

reflecting a recovery in domestic and overseas

rapid

160

increasing

uncertainties over the future. Private construction

25completed(nonresidential)--acoincident

indicator of construction investment -- has been

Chart 22: Leading Indicators of Business
Fixed Investment

more or less flat, albeit remaining at a high level.

13s.a., ann., tril. yen
Machinery orders (private sector,
excluding volatile orders)

12Construction starts (private,
nonresidential, estimatedconstruction costs)

11

A declining trend in machinery orders -- a leading
indicator of machinery investment -- has become
evident recently, pushed down by a decline in thegrowth rates of overseas economies since last

10
9
8

year and an increase in uncertainties due to7

COVID-19 (Chart 22). Construction starts (in6terms of planned expenses for private and

5
CY 05

nonresidential construction) -- a leading indicatorof construction investment -- have been more or

07

09

11

13

15

17

19

Sources: Cabinet Office; Ministry of Land, Infrastructure, Transport and Tourism.
Notes: 1. Volatile orders: orders for ships and orders from electric power companies.
2. Figures for 2020/Q2 are April-May averages.

less flat on the whole, since the number offactories and stores has decreased while that ofwarehouses, such as logistics facilities, has

Chart 23: Planned and Actual Business
Fixed Investment

increased.

fixed

20

investment plan in the June Tankan, business

15

Tankan (actual)

fixed investment (on the basis close to GDP

10

Tankan (planned investment in current fiscal year
as of the June survey of each year)

Lookingatthebusinessdefinition; business fixed investment -- including
software and R&D investments, but excluding
land purchasing expenses -- in all industries andenterprises including financial institutions andy/y % chg.
Private nonresidential investment (SNA, nominal)

5
0

-5

holding companies, etc.) is expected to remain-10

positive on an annual basis for fiscal 2020.

-15

However, the rate of increase was the lowest

-20
FY 05

since fiscal 2009 among past figures for the June
surveys (Chart 23).

As for the outlook, with downward pressure on
corporate profits remaining and uncertainties over
COVID-19 continuing to be high, business fixed
investment is likely to turn to a downtrend, mainly
for automobiles -- which are affected largely by aglobal decline in demand -- and for eating anddrinking services as well as accommodations -- ofwhich financial positions have deteriorated due to

26

07

09

11

13

15

17

19

Sources: Bank of Japan; Cabinet Office.
Note: The Tank an figures include software and R&D investments and exclude landpurchasing expenses (R&D investment is not included until the December 2016
survey). The figures are for all industries including financial institutions and holding
companies, etc. (figures up to the March 2020 survey exclude holding companies,etc.).

the effects of a decline in domestic services
consumption. That said, it is assumed that an
adjustment in capital stock will not be as

Chart 24: Medium- to Long-Term RealGDP Growth Forecasts
2.5

y/y % chg.

significant as what was observed at the time of
the global financial crisis. This is because many of

Economists

2.0

Firms

the medium- to long-term projects, such as R&D
and IT-related investments, are likely to continue
to be undertaken, while it is expected that
accommodative

financialconditions

will

1.5

1.0

be

maintained owing to aggressive measures to

0.5

support financing taken by the Bank and thegovernment, thereby preventing firms' growth
expectations from declining substantially (Charts
24 and 25). 13 From a somewhat long-term
perspective, with the impact of COVID-19 waning
worldwide, business fixed investment is likely to

0.0
CY 06

08

10

12

14

16

18

20

Sources: Cabinet Office; JCER, "ESP Forecast Survey."
Notes: 1. The horizontal axis represents the time the surveys were conducted.
2. The forecasts of economists are taken from the "ESP Forecast Survey" and are
the averages of the 2-to-6-year-ahead growth rate forecasts in the June andDecember surveys of each year. The latest figure is for June 2020.
3. The forecasts of firms are the fiscal year averages of firms' forecasts for the
next five years in the "Annual Survey of Corporate Behavior" conducted in
January of each year. Figures are for listed firms in all industries.

return to a moderate uptrend, with some time lag
from

an

improvement incorporate

profits.

Specifically, it is expected to be led mainly by (1)IT-investment that is related to telework andChart 25: Capital Stock Cycles
10

e-commerce,

and

(3)

software

and

11

5
10

03

13

04

17

14

06

12

15

0

07

R&D

investments for growth areas.

Investmentcapital stock
ratio at theend of FY
201905

remote services, (2) construction investment in
logistics facilities reflecting an expansion inbusiness fixed investment, y/y % chg.

18 1.5%

16
1%

-5

08
0.5%
FY 2019-10

Employment and Income Situation

09
Expected
growth rate: -2%

With the continuing impact of COVID-19, theemployment and income situation has been
weak.

On the employment side, labor demand has
weakened significantly due to the impact of
COVID-19. According to the Labour Force Survey,
the year-on-year rate of change in the number of13

See Box 2 for features of firms' behavior that has been affectedby COVID-19.

27

-15
10.0

10.5

11.0

0%

-1%

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.

employees has been negative recently for the firsttime since the end of 2012 due to a clear decline
mainly in the number of non-regular employees

Chart 26: Employee Income
4such as part-time and temporary workers (Chart

226). The rate of decline in the number of0

employed persons for the April-May period has
accelerated, which reflects a decrease in the

-2

also

-4

self-employed and family workers. With regard to-6

number
labor

of

not

marketonly

employees

conditions,

the

but
activejob

openings-to-applicants ratio has declined clearly,reflecting a significant decrease in job openings(Chart 2). The employment conditions DI in the
Tankan shows that the perception of labor
shortage has diminished substantially on they/y % chg.

Total cash earnings
Number of employees
Employee income

Real employee income-8

09 10 11 12 13 14 15 16 17 18 19 20
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 are based on continuing observations following thesample revisions of the "Monthly Labour Survey."
4. Real employee income is based on staff calculations using the CPI (lessimputed rent).

whole, as seen in the DIs for accommodations as

Chart 27: Labor Force Participation Rate

well as eating and drinking services having turned

63

to

a

net

"excessive."

Reflecting

s.a., %

thesedevelopments, the unemployment rate has risen

62

to around 3 percent recently, but the rise has
been constrained compared with the decline in
the number of employed persons. This is because

6160

those who lost their jobs have refrained fromseeking new ones due to vigilance against

59

COVID-19 and the effects of school closures,
thereby being temporarily out of the labor force.
Thus, the labor force participation rate has
declined recently, mainly for seniors and women

58
CY 05

07

09

11

13

15

17

19

Source: Ministry of Internal Affairs and Communications.
Note: The figure for 2020/Q2 is the April-May average.

(Chart 27). Meanwhile, looking at the number ofChart 28: Number of Employed Persons
not at Work and Unemployed Persons

employed persons in detail, the number of

7

employed persons whose working hours were

6

zero in the last week of each month (i.e.,"employed persons not at work") spiked for thes.a., mil. persons

Employed persons not at work
Unemployed persons

5

April-May period. This indicates that potential

4

employment adjustments have remained strong

3(Chart 28).

2
1
0
CY 05

07

09

11

13

15

Source: Ministry of Internal Affairs and Communications.

28

17

19

As for the outlook, the number of employees is
expected to follow a decreasing trend for the time
being with employment adjustments remaining,

Chart 29: Nominal Wages
2y/y % chg.

mainly in the services industry, such as eating anddrinking as well as accommodations, and in the0

automobile industry, both of which are largely
affected by a decrease in demand. That said, the-2Special cash earnings(bonuses, etc.)
Non-scheduled cash earnings

decline in the number of employees will likely beconstrained

compared

economic

activity.

with

This

is

the

depressed

because-4
Scheduled cash earnings

theemployment adjustment subsidies, which havebeen expanded in response to the current
situation, are expected to somewhat halt job cuts,
and because the Bank's and the government's
measures to support financing are expected tohelp prevent firms from going bankrupt anddiscontinuing their businesses. From a somewhat
long-term perspective, the number of employees
is likely to stop declining and turn to a pick-up as
the impact of COVID-19 wanes, partly supportedby the government's measures to stimulate
demand.

On the wage side, the year-on-year rate ofchange in total cash earnings per employee has
shown a relatively large decline recently, pushed
down by the rate of decline in non-scheduled
cash earnings having accelerated and the rate ofchange in scheduled cash earnings having turned
negative (Chart 29).14 Looking at developments innominal wages in detail, the year-on-year rate ofchange in scheduled cash earnings of full-time
employees, which had been positive thus far, hasturned slightly negative, pushed down by anincreasing number of "employed persons not at
14

Wages in the Monthly Labour Survey are assessed on the basisof continuing observations, which are less affected by the sample
revisions.

29

Total cash earnings-6
09 10 11 12 13 14 15 16 17 18 19 20
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 are based on continuing observations following thesample revisions.

work" (Chart 30). 15 That in scheduled cash
earnings of part-time employees also has beenclearly negative, mainly reflecting a significant

Chart 30: Scheduled Cash Earnings
2

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

decline in working hours. In addition to theunderlying downward pressure brought about byworking-stylereforms,

non-scheduled

y/y % chg.

1

Contribution of full-time employees
Scheduled cash earnings

hours

worked have declined recently due to the impact

0of COVID-19, leading to a significant decline in
non-scheduled cash earnings.

-1-2

With regard to the outlook for wages, scheduled
cash earnings of full-time employees are likely tobe pushed down by the number of "employedpersons not at work" remaining high, although theyear-on-year rate of change in base pay was
positive as a result of this year's annual springlabor-management wage negotiations. In addition,scheduled cash earnings of part-time employees
are projected to decline, since deterioration inlabor market conditions and the decline in working
hours are expected to exert downward pressure.
The rate of change in special cash earnings(bonuses) also will likely register relatively large
negative growth for the time being, in line withdeterioration in corporate profits with some timelag. Under this situation, the year-on-year rate ofchange in total cash earnings per employee isprojected to be clearly negative on the whole forthe time being. Thereafter, it is likely to return to amoderate increasing trend, on the back of atightening

of

labor

marketconditions

andimprovement in corporate profits, both reflecting
an economic improvement.
15

The Labor Standards Act stipulates that employers shall pay totheir employees allowances for absence from work that areequivalent to 60 percent or more of the employees' average
wages. If the amount of allowance is less than the average wage,
the year-on-year rate of change in scheduled cash earnings will bepushed down accordingly.

30

09 10 11 12 13 14 15 16 17 18 19 20
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 are based on continuing observations following thesample revisions.

In light of the aforementioned employment andwage conditions, employee income is projected to
decline clearly for the time being. Thereafter, it islikely to return to a moderate increasing trend,

Chart 31: Labor Share57

s.a., %

s.a., %

55

hoarding by firms and wage stickiness. As for theoutlook, however, the share is likely to turn to amoderate decreasing trend, with the growth in76

Labor share(FSSC, right scale)reflecting an economic improvement. The labor
share has risen significantly of late, due to labor

80

Labor share(SNA, left scale)

53

72

51

68

49

64

nominal GDP rising (Chart 31).
47
CY 94

Household Spending
Privateconsumption

decreasedsignificantly,

60
98

02

06

10

14

18 20

Sources: Cabinet Office; Ministry of Finance.
Notes: 1. Labor share (SNA) = compensation of employees / nominal GDP ×100
2. The labor share (FSSC) is based on the "Financial Statements Statistics ofCorporations by Industry, Quarterly (FSSC)" and excludes "finance andinsurance." Figures from 2009/Q2 exclude "pure holding companies."
3. Labor share (FSSC) = personnel expenses / (operating profits + personnel
expenses + depreciation expenses) ×100
4. Shaded areas indicate recession periods.

mainly in services such as eating and drinking aswell as accommodations, but has shown signs ofa pick-up recently.

Chart 32: Private Consumption
110s.a., CY 2011=100

105

The Consumption Activity Index (CAI, travel
balance adjusted) -- which is calculated by100

combining various sales and supply-side statistics
from

the

viewpointofgauging

Japan's

consumption activity in a comprehensive manner-- declined significantly for the October-December
quarter of 2019 due to the effects of theconsumption tax hike and natural

disasters. 16

Subsequently, the CAI for the January-March
quarter of 2020 registered a decline for two
consecutive quarters due to the impact of
COVID-19. That for the April-May period declined
further, reflecting the effects of the declaration of astate of emergency and the expansion in theareas where it was declared (Charts 32 and 33).
Based

on

varioussources,

such

as

16

Regarding the CAI, see the Bank's research paper "Revision of
the Consumption Activity Index to Address the 2008 SNA and
Improve Accuracy" published in April 2018.

31

95

90

Consumption Activity Index (travel balanceadjusted, real)
Consumption of households excluding imputed
rent (SNA, real)
Disposable income, etc. (SNA, real)85
CY 09 10 11 12 13 14 15 16 17 18 19 20
Sources: Bank of Japan; Cabinet Office, etc.
Notes: 1. The Consumption Activity Index is based on staff calculations.
Figures for the Consumption Activity Index (travel balance adjusted) exclude
inbound tourism consumption and include outbound tourism consumption.
The figure for 2020/Q2 is the April-May average.
2. The figure for consumption of households excluding imputed rent for 2020/Q2
is based on staff calculations using the "Synthetic Consumption Index" (April).
3. "Disposable income, etc." consists of disposable income and "adjustment forthe change in pension entitlements." Real values are obtained using thedeflator of consumption of households.

high-frequency indicators, statistics published byindustry organizations, and anecdotal information

Chart 33: Consumption Activity Index(CAI, Real)

from firms, although consumption activities are

5s.a., q/q % chg.

still at a low level, it seems to be gradually
heading toward a pick-up from June along withthe resumption of economic activity.

0

17

-5

Looking at private consumption by type, durable
goods

increased

temporarily

for

the

Services-10

Nondurable goods
Durable goods

January-March quarter since the effects of theconsumption tax hike and natural disasters
waned. However, they decreased again for the
April-May period due to the intensifying effects ofConsumption Activity Index-15
CY 09 10 11 12 13 14 15 16 17 18 19 20
Sources: Bank of Japan, etc.
Notes: 1. Based on staff calculations. The Consumption Activity Index is adjusted for thetravel balance. Figures for the components are not adjusted for the travel balance.
Figures for 2020/Q2 are April-May averages.
2. Nondurable goods include goods classified as "semi-durable goods" in the SNA.

temporary store closures and self-restraint fromgoing outside (Chart 34). Specifically, automobile
sales declined substantially, mainly reflecting theeffects of a decline in the number of customers

Chart 34: Consumption of Durable Goods
6s.a., ann., mil. unitss.a., CY 2011=100

140

visiting dealerships and supply-side constraints
on imported parts, both of which are due to the

130
5
120

impact of COVID-19. However, the sales havestarted to pick up recently. Sales of household

110

4

100

electrical appliances declined through April due tothe effects of shorter operating hours of stores

90

have picked up, mainly led by personal computers,
businesses normalizing gradually. With regard to
nondurable goods, the rates of increase in foodand daily necessities have decelerated, due partly
to the shift to dining-out. On the other hand,
clothes have picked up in reflection of businesses
reopening, although they declined mainly against
the background of fewer people going outside andoftemporarystore

closures.

Services

consumption has declined substantially, mainly17

Box 3 outlines the impact of COVID-19 on developments inprivate consumption to date, using high-frequency data.

32

2
CY 10

80

New passenger car registrations(including small cars with engine
sizes of 660cc or less, left scale)
Sales of household electricalappliances (real, right scale)3

and temporary closures. To date, however, they
televisions, and white goods, on the back of store

150

70
60
50

11

12

13

14

15

16

17

18

19 20

Sources: Japan Automobile Dealers Association; Japan Light Motor Vehicle andMotorcycle Association; Ministry of Economy, Trade and Industry; Ministry ofInternal Affairs and Communications.
Note: Figures for real sales of household electrical appliances are based on staff
calculations using the retail sales index of machinery and equipment in the"Current Survey of Commerce" and the price index of related items in the CPI.

for selective expenditures of services such as
dining-out and accommodations (Chart 35). This
reflects

self-restraint

from

going

outside,temporary store closures, and shorter operating

Chart 35: Consumption of Services
140s.a., CY 2011=100

120

hours, all of which are due to the impact of
COVID-19. With regard to dining-out, fast foodhas been supported mainly by demand for

100

80

take-out and delivery services, and the number of
diners seems to have somewhat picked up
recently with the state of emergency lifted.

60
Total number of overnight guests(excluding inbound visitors)

40
Sales in the food services industry

However, izakaya (Japanese-style bars) andchain restaurants have remained at low levels.
Bothoverseas

anddomestic

travelhave

remained weak to a considerable degree with the

20
CY 10

11

12

13

14

15

16

17

18

19 20

Sources: Japan Tourism Agency; Japan Foodservice Association, "Market Trend Surveyof the Food Services Industry."
Note: Figures for the "total number of overnight guests (excluding inbound visitors)" in2010 are calculated using those of accommodation facilities with more than nine
employees.

continuing impact of COVID-19.

Chart 36: Confidence Indicators Related to
Private Consumption
Looking at confidence indicators related to private
consumption, the Consumer Confidence Index

60

s.a.

50

and the DI of the Economy Watchers Survey
deteriorated significantly in April due to the impact
of COVID-19 but have turned to a pick-up since

40
30

May, reflecting a lift of the state of emergency
20(Chart 36).

10

Improved

Worsened

Consumer Confidence Index

Economy Watchers Survey (household activity)

In the outlook, private consumption is likely toremain at a low level for the time being, mainly forservices consumption. However, along with aphased reopening of businesses, it is expected topick up moderately, supported by various income
support measures. A variety of demand stimulus
measures also are projected to encourage thematerialization of pent-up demand, mainly fordining-out

andtravel,withtheimpactof

COVID-19 waning. That said, the pace of apick-up in private consumption will likely be quite
moderate, mainly because (1) the operation rates,
mainly for dining-out and services for individuals,

33

0
CY 05

07

09

11

13

15

17

19

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

will be lower than before due to the need toensure social distancing, and (2) people willcontinue to avoid crowds due to vigilance against
COVID-19. If households and firms adapt to aChart 37: Average Propensity to Consume
88s.a., %
Consumption Activity Index divided
by disposable income, etc.

86

Private consumption divided
by disposable income, etc.

"new lifestyle" and new goods and services areinnovated,theincreasing

trend

in

privateconsumption is likely to become evident gradually,

84
82

partly supported by an improvement in the80

employment and income situation.

78

The propensity to consume is expected to show asignificant decline temporarily, reflecting (1) asharp drop in private consumption and (2) an

76
CY 05

07

09

11

13

15

17

19

Sources: Bank of Japan; Cabinet Office, etc.
Notes: 1. The Consumption Activity Index is adjusted for the travel balance. Based onstaff calculations.
2. Private consumption is consumption of households excluding imputed rent.
3. "Disposable income, etc." consists of disposable income and "adjustment forthe change in pension entitlements."

increase in disposable income due to various
incomesupportmeasures.

Thereafter,thepropensity is likely to recover as economic activity
normalizes. However, it will likely remain at a

Chart 38: Housing Investment
24s.a., ann., tril. yens.a., ann., mil. units

1.4

somewhat low level compared with the past

22

Private residential investment(SNA, real, left scale)

1.3

average, mainly due to a rise in concern over20

Housing starts(right scale)

1.2

future developments (Chart 37).

1.1
18

1.0
16
0.9

Housing investment has decreased moderately

14(Chart 38). The number of housing starts -- a

12

0.8
0.7

leading indicator of housing investment -- hasdeclined recently due to the effects of the

10
CY 05

consumption tax hike and COVID-19. As for the

Sources: Cabinet Office; Ministry of Land, Infrastructure, Transport and Tourism.
Note: The figure for 2020/Q2 is the April-May average.

outlook, housing investment is likely to continue
decreasing moderately for the time being, partly
due to weakness in the employment and income
situation and increasing uncertainties over the
future. However, it is expected to bottom out
thereafter and then turn to a pick-up, supported
by an improvement in the employment andincome situation and accommodative financial
conditions.

34

0.6
07

09

11

13

15

17

19

II. Current Situation of Prices and Their
Outlook
Developments in Prices
The rate of change in the producer price index(PPI, adjusted for the effects of seasonal changes

Chart 39: Inflation Indicators
y/y % chg.

in electricity rates) has declined significantly on aquarter-on-quarter basis, reflecting developments

Less fresh foodLess fresh food and energyof change in the services producer price index

as for advertising services, hotels, as well as
sales space and hotel rental (Chart 39). This ismainly against the background of increasingpressure stemming from cost cuts in response todeterioration in corporate profits and of the effects
of a decrease in demand for travel as well as

20/Q1

20/Q2

0.5

0.6

0.6

-0.2

0.2

0.2

-0.5

0.8

0.7

0.3

0.6

0.4

0.1

Adjusted figure

exchange rates (Chart 39). The year-on-year rate

registered relatively large negative growth, such

19/Q4

Consumer Price Index (CPI)in international commodity prices and foreign(SPPI, excluding international transportation) has

19/Q3

0.6

Adjusted figure
Producer Price Index (q/q % chg.)

-0.9

-0.1

-0.4

-2.4

Services Producer Price Index

0.5

0.4

0.2

-1.0

GDP deflator

0.6

1.2

0.9

0.2

0.7

0.7

Domestic demand deflator

Sources: Ministry of Internal Affairs and Communications; Bank of Japan; Cabinet Office.
Notes: 1. Adjusted figures exclude the effects of the consumption tax hike and policies
concerning the provision of free education. The figures from 2020/Q2 onward
are based on staff estimations, and exclude the effects of measures such as
free higher education introduced in April 2020.
2. Figures for the Producer Price Index are adjusted for the hike in electric power
charges during the summer season.
3. Figures for the Services Producer Price Index exclude internationaltransportation.
4. Figures for the Producer Price Index and the Services Producer Price Index
exclude the effects of the consumption tax hike.
5. Figures for the CPI and the Services Producer Price Index for 2020/Q2 areApril-May averages.

eating and drinking because of the impact of
COVID-19.

Chart 40: CPI (less fresh food)4

The year-on-year rate of change in the CPI (ally/y % chg.
Effects of the consumption tax hikes
and free education policies
Items other than energy

3

items less fresh food) has decelerated recently,
mainly due to the effects of the decline in energy
prices, and is at around 0 percent (Charts 39 andEnergy2
CPI (less fresh food)140). On the other hand, that in the CPI (all items
less fresh food and energy) has been in the rangeof 0.0-0.5 percent recently, albeit with fluctuations.

0-1

Looking at the breakdown of developments in the
year-on-year rate of change in the CPI (all items
less fresh food and energy, excluding the effectsof the consumption tax hikes and policies
concerning the provision of free education), therate of change in general services has been
negative and the rate of increase in administeredprices has narrowed (Chart 41). By item, the rateof decline has been relatively large in some items

35-2
CY 1 4

15

16

17

18

19

20

Source: Ministry of Internal Affairs and Communications.
Notes: 1. Energy consists of petroleum products, electricity, and gas, manufactured &piped.
2. Figures for the "effects of the consumption tax hikes and free education
policies" from April 2020 onward are based on staff estimations, and include theeffects of measures such as free higher education introduced in April 2020.

that have been affected strongly by COVID-19,
such as those related to travel. That said, at least
for now, a reduction in prices that aims at
stimulating demand does not seem to be

Chart 41: CPI (less fresh food and energy)
1.5y/y % chg.

1.0

observed for a wider range of items.18
0.5

The year-on-year rate of change in the GDP

0.0
Goods
General services (less house rent)House rent (private and imputed rent)
Administered prices
CPI (less fresh food and energy)

deflator has been at around 1 percent on thewhole due to a rise in the domestic demand-0.5

deflator and to a decrease in the import deflator
stemming from the decline in crude oil prices(Chart 39). The year-on-year rate of change in thedomestic demand deflator has been in the rangeof 0.5-1.0 percent, mainly led by the private-1.0
CY 1 4

15

16

17

18

19

20

Source: Ministry of Internal Affairs and Communications.
Notes: 1. Administered prices (less energy) consist of "public services" and "water
charges."
2. The CPI figures exclude the effects of the consumption tax hikes and policies
concerning the provision of free education. The figures from April 2020 onward
are based on staff estimations, and exclude the effects of measures such as
free higher education introduced in April 2020.

consumption deflator that is partly affected by thetax hike.

Chart 42: Inflation Rate and Output Gap
8y/y % chg.

%

Output gap (left scale)

6

Environment surrounding Prices3

CPI (less fresh food and energy,
right scale)4

In the outlook for prices, the main factors that

4

2

2

1

0

0

and register a relatively large negative figure for-2-1

the time being, mainly because of a rise in the-4-2

unemployment rate, a decline in working hours,-6-3

and a decrease in capital utilization rates, all of

-8
CY 85

determine inflation rates are assessed as follows.
First, the output gap is likely to deteriorate clearly

which are due to the impact of COVID-19 (Charts
4 and 42). Thereafter, as the impact of COVID-19
wanes, the output gap is projected to continue
improving and return to a positive trend since theeconomic growth rate is expected to exceed its
potential.

18

Box 4 analyzes features of recent developments in prices under
the impact of COVID-19.

36

-4
90

95

00

05

10

15

20

Sources: Ministry of Internal Affairs and Communications; Bank of Japan.
Notes: 1. The CPI figures exclude the effects of the consumption tax hikes and policies
concerning the provision of free education. The figures from 2020/Q2 onward
are based on staff estimations, and exclude the effects of measures such as
free higher education introduced in April 2020.
The figure for 2020/Q2 is the April-May average.
2. The output gap is based on staff estimations.

Second,medium-tolong-term

inflation

expectations have weakened somewhat (Charts
43 and 44). With regard to the outlook, suchexpectations are likely to continue to do so for theChart 43: Inflation Expectations (Survey)
2.5y/y, ann. avg., %Market participants (QUICK, 2 to 10 years ahead)
Economist 1 (6 to 10 years ahead)
Economist 2 (7 to 11 years ahead)
Households (Over the next 5 years)
Firms (5 years ahead)

2.0

time being, since actual inflation that includes theeffects of the decline in energy prices is expected

1.5

to be negative, as described below. Thereafter,
however, as

theeconomy improves, such

1.0

expectations are projected to rise again on theback of an increase in actual prices and the Bank
pursuing monetary easing through its strong
commitment to achieving the price stability target.

The third factor is developments in import prices.
The CPI is likely to be pushed down by the past

0.5

0.0
CY 05

2.5 %

a decline in prices for petroleum products for the

2.0time being, and thereafter through declines,

1.5

0.0

pressure on the CPI are expected to waneasomewhat

long-term

perspective.

13

15

17

19 20

0.5

-0.5

from

11

1.0

(Chart 45). That said, the effects of downward
gradually

09

Chart 44: Inflation Expectations (BEI)

significant decline in crude oil prices, first throughmainly in electricity charges, with some time lag

07

Sources: Bank of Japan; QUICK, "QUICK Monthly Market Survey (Bonds)";
JCER, "ESP Forecast"; Consensus Economics Inc., "Consensus Forecasts."
Notes: 1. Figures for the economist 1 are from the "Consensus Forecasts." Figures forthe economist 2 are from 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.
3. Figures for firms are "Outlook for General Prices (Tank an, all industries andenterprises, average)."

-1.0
-1.5
Old (10 years)-2.0

Old (longest)-2.5

New (10 years)

-3.0
-3.5
CY 05

07

09

11

13

15

17

19

20

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

Chart 45: International Commodity Prices
140

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

120
100
80
60
40

20
Crude oil (Dubai)

0
CY 05

07

09

Sources: Nikkei Inc.; Bloomberg.

37

11

13

Copper15

17

19

Outlook for Prices
The year-on-year rate of increase in the CPI (allitems less fresh food and energy) is likely to
decelerate within positive territory for the time
being. In detail, (1) the rates of decline in charges
for hotels and package tours to overseas are
expected to accelerate in the short run, reflecting
a fall in travel demand at home and abroad. In
addition, (2) the rates of increase in the CPI items
that are sensitive to economic activity, such as
food products, durable goods, clothes, anddining-out, will likely decelerate gradually, albeit
with some time lag. Moreover, (3) mobile
phone-related prices (i.e., prices of and charges
for mobile phones) are projected to continue toshow some weakness, reflecting an intensifying
competitiveness in the industry.19

As for the outlook from a somewhat long-term
perspective, the year-on-year rate of increase in
the CPI (all items less fresh food and energy) is
expected to accelerate gradually. This is based on
the projection that, with the impact of COVID-19
waning and the output gap improving, the rates ofchange in the CPI items, such as charges forhotels and services related to culture andrecreation, are expected to turn to an increase on
the back of demand stimulus measures under thegovernment's economic measures and of thehosting of the Olympic Games. Thereafter, theyear-on-year rate of increase in the CPI (all items
less fresh food and energy) is likely to accelerate
further through the end of the projection periodwith (1) the output gap continuing to improve and(2) medium- to long-term inflation expectations
19

The waning effects of the consumption tax hike also are likely topush down the year-on-year rate of change in the CPI.

38

rising

throughforward-looking

both

the

adaptive

expectation

and

the

formation

Chart 46: Phillips Curve4

mechanisms (Chart 46).

CPI (less fresh food and energy), y/y % chg.
1983/Q1-2013/Q1

3

2013/Q2-2020/Q1
2020/Q2

2

Under these circumstances, the year-on-year rateof change in the CPI (all items less fresh food) is1

likely to be negative for the time being, mainly0

because the rate of decline in energy prices is-1

expected to accelerate, such as for electricity as-2well as manufactured and piped gas charges,
reflecting the past significant decline in crude oil
prices. Thereafter, the year-on-year rate ofchange in the CPI (all items less fresh food) islikely to turn positive and accelerate gradually
through the end of the projection period, since theeffects of the decline in energy prices are
expected to wane and the year-on-year rate ofincrease in the CPI (all items less fresh food andenergy) is projected to accelerate.

39

B

A

C

A:1983/Q1-2013/Q1
y = 0.38x + 0.7
B:1983/Q1-1995/Q4
y = 0.22x + 1.6
C:1996/Q1-2013/Q1
y = 0.24x - 0.1

2013/Q2-3-7 -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 exclude the effects of the consumption tax hikes and policies
concerning the provision of free education. The figures from 2020/Q2 onward
are based on staff estimations, and exclude the effects of measures such as
free higher education introduced in April 2020.
The figure for 2020/Q2 is the April-May average.
2. The output gap is based on staff estimations.

III. Financial Developments in Japan
Financial Conditions
Financial conditions have been accommodativeon the whole but those for corporate financing
have remained less so, as seen in deterioration infirms' financial positions.20

Chart 47: Yield Curves
1.2

%

1.0

April 24, 2020

0.8

July 14, 2020

0.6

Under "QQE with Yield Curve Control," the yield

0.4

curve for JGBs has been in line with the current

0.2

guideline for market operations, in which the0.0

short-term policy interest rate is set at minus 0.1
percent and the target level of 10-year JGB yields
is around zero percent (Chart 47). That is, theyields for relatively short maturities have been in

-0.2
-0.4
0 1 2 3 4 5 6 7 8 9 10 15 20
year

30

40

residual maturity

Source: Bloomberg.

slightly negative territory and the 10-year JGB
yields have been at around 0 percent. As abackground to this, the Bank has conducted

Chart 48: Bank Lending Rates and Issuance
Yields for CP and Corporate Bonds

further active purchases of both JGBs and2.0

treasury discount bills (T-Bills) with a view to

1.8

maintaining stability in the bond market and1.6

stabilizing the entire yield curve at a low level,

1.4

taking into account the impact on the market of
the increase in the amount of issuance of JGBs

%

1.2
1.0

0.8

and T-Bills in response to the government's

0.6

emergency economic measures. Meanwhile, the0.4

20-year JGB yields have been in the range of

0.2

0.0-0.5 percent.

0.0
CY 05

Firms' funding costs have been hovering at low
levels, with issuance rates in the market -- whichrose mainly for CP -- turning to a decline, partly
due to the effects of the Bank's monetary easing
measures (Chart 48). Issuance rates for CP
20

See Box 5 for Japan's financial conditions under the impact of
COVID-19 and responses made by the Bank and the government
to support financing, mainly of firms.

40Bank lending rates (short-term)
Bank lending rates (long-term)
CP (3-month)
Corporate bonds (AA)

07

09

11

13

15

17

19

20

Sources: Bank of Japan; Japan Securities Depository Center; Capital Eye;I-N Information Systems; Bloomberg.
Notes: 1. Figures for issuance yields for CP up to September 2009 are the averages for
CP (3-month, rated a-1 or higher). Those from October 2009 are the averages
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 and issuance yields for corporate bonds show
6-month backward moving averages.

showed a significant rise in April, but declined
after the Bank announced that it would increase

Chart 49: Lending Attitude of Financial
Institutions as Perceived by Firms

purchases of CP and have been at low levels

40

recently.

Meanwhile,

the

DI

for

issuance

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

Large enterprises

30

Small enterprises

conditions for CP in the June Tankan has declined,
since the proportion of firms answering that such20

conditions are "easy" decreased, due partly to a10

temporary rise in the issuance rates. Issuance0

rates for corporate bonds, which had risen-10

somewhat, have declined to date, and are at
extremely low levels. Meanwhile, lending rates-20(the average interest rates on new loans and-30
CY 95 97 99 01 03 05 07 09 11 13 15 17 19 20

discounts) have been at around historical low
levels.

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

Chart 50: Financial Position
With regard to the availability of funds for firms,

40

the DI in the Tankan for financial institutions'30

DI ("easy" - "tight"), % points
Large enterprises
Small enterprises

lending attitudes as perceived by firms suggests
that

such

attitudes

haveremained

20

49).

10

Specifically, the proportion of firms answering that0accommodative

on

the

whole

(Chartfinancial institutions' lending attitudes are "severe"-10

has remained small for both large and small firms.
Meanwhile, although the DI for large firms has
declined somewhat against the background of asmaller proportion perceiving their attitudes as"accommodative," thatfor smallfirms hasincreased marginally. As a background against
these developments, there have been various
measures taken by the Bank and the government
to support financing, mainly of firms, as well as
efforts made by financial institutions together withthose measures. On the other hand, with regard
to corporate financing, the DI for firms' financial
positionsintheTankanhas

deteriorated

regardless of firm size, mainly reflecting a decline
in sales due to the impact of COVID-19 (Chart
50).

41

-20

-30
CY 95 97 99 01 03 05 07 09 11 13 15 17 19 20
Source: Bank of Japan.
Note: Based on the Tank an. All industries. There is a discontinuity in the data in December
2003 due to a change in the survey framework.

Firms' demand for funds has increased, mainlyreflecting a decline in sales and the need toChart 51: Amount Outstanding of Bank
Lending, CP, and Corporate Bonds

secure funds, both of which are due to the impact

16of COVID-19. Under these circumstances, the14year-on-year rate of increase in the amount
6.5 percent, registering the highest increase in

6
42

amount outstanding of CP and corporate bonds0

has been at a relatively high level that exceeds 10-2

direct financing.

CP and corporate bonds

10

8

percent, mainly due to active funding throughLending by domestic commercial banks

12

outstanding of bank lending has been at aroundabout 30 years (Chart 51). That in the aggregate

y/y % chg.

-4
-6
-8
CY 05

07

09

11

13

15

17

19

20

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 period.

The year-on-year rate of increase in the monetarybase has been at around 6 percent, and its
amount outstanding as of end-June was 565
trillion yen, of which the ratio to nominal GDP was
103 percent.21 The year-on-year rate of increasein the money stock (M2) has been in the range of
7.0-7.5 percent, pushed up mainly by an increasein bank lending and fiscal factors (Chart 52).

Chart 52: Money Stock8monthly avg., y/y % chg.

7
M2

6

M3

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

21

It is assumed that the figure for nominal GDP is unchanged fromthe January-March quarter of 2020.

42

Developments in Financial Markets
With regard to developments in global financial
markets, tension has abated due to aggressive

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

fiscal and monetary policies taken in each country

6 %and region, as well as to signs of a resumption of

Japan

5

economic activity, mainly in advanced economies.
Stock prices have increased in many countries

4

and regions. Long-term interest rates rose3

temporarily on the back of an improvement in2

market sentiment and an increase in the issuanceof government bonds due to an expansion in
fiscal spending. However, they have been more orless flat, mainly against the background of thecentral bank of each country and region having
conducted aggressive purchases of government
bonds while pursuing monetary easing. That said,
the markets have remained nervous, as seen in
the volatility of stock prices staying relatively highamid a situation of developments in domestic andoverseas economies being highly unclear.

Yields on 10-year government bonds in the UnitedStates increased temporarily, mainly on the backof a resumption of economic activity, economic
indicators that reflect it, and an increase inissuance of government bonds. However, theyields have been more or less flat, due mainly tothe purchases of government bonds by theFederal Reserve and increased speculation thatpolicy interest rates will remain low for a
prolonged period (Chart 53). Yields on 10-year
government

bonds

in

Germany

increased

temporarily, mainly reflecting the resumption of
economic activity and speculation over anincrease in issuance of government bonds, buthave been more or less flat with the European
Central Bank (ECB) purchasing government
bonds.

43

United States
Germany

10-1
CY 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Source: Bloomberg.

With regard to the LIBOR-OIS spreads for major
currencies, those for the U.S. dollar havenarrowed, mainly because prime money market

Chart 54: LIBOR-OIS Spreads
4.0

%

3.6

Yen

funds (MMFs) -- the major providers of U.S.

3.2

U.S. dollar

dollars -- have been providing more funds

2.8

compared to a while ago (Chart 54). The

2.4

LIBOR-OIS spreads for the euro also have

2.0
1.6

narrowed somewhat. Meanwhile, those for the

1.2

yen have remained at low levels. Partly due to the

0.8

provision of a large amount of U.S. dollars

0.4

throughtheU.S.

dollarfunds-supplying

operations conducted by the central bank of eachcountry and region, including the Bank of Japan,

Euro

0.0
-0.4
CY 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Source: Bloomberg.
Note: LIBOR-OIS spreads are LIBOR (3-month) minus yields on overnight index
swaps (3-month).

premiums for U.S. dollar funding through thedollar/yen foreign exchange swap market havedeclined and been at relatively low levels recently

Chart 55: Dollar Funding Premiums throughForeign Exchange Swaps
3.2(Chart 55).

%

2.8

U.S. dollar/yen

2.4

Euro/U.S. dollar

2.0Regarding the stock market, stock prices in the

1.6

United States have risen on the back of

1.2

aggressive fiscal and monetary policies taken in

0.8

each country and region and an improvement in

0.4

investors' risk sentiment that reflects signs of a

0.0

resumption of economic activity, mainly in-0.4

advanced economies (Chart 56). That said, the-0.8
CY 07 08 09 10 11 12 13 14 15 16 17 18 19 20

market has remained nervous; U.S. stock prices

Source: Bloomberg.
Note: U.S. dollar funding rate from yen or euro minus 3-month dollar LIBOR.

declined temporarily to a relatively large degree,
due mainly to vigilance against a resurgence ofChart 56: Selected Stock Prices
monthly avg., Jan. 2007=100

COVID-19, and volatility in the market has been240

relatively high. Stock prices in Europe and Japan220

have moved in line with those in the United

200

Europe (EURO STOXX)States.

180

Emerging countries (MSCI)Japan (Nikkei 225 Stock Average)
United States (S&P500)

160
140

In the J-REIT market, prices have increased

120
100

somewhat due to an improvement in investors'

80

risk sentiment that reflects signs of a resumption

60

of economic activity (Chart 57). That said, the40
CY 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Source: Bloomberg.
Note: Figures for emerging countries are based on the MSCI Emerging Markets Index
No t calculated in the local currencies.

44

pace of increase has been moderate, due partly
to cautious views regarding the impact of
COVID-19, such as on hotels and commercial
facilities.

Chart 57: Selected REIT Indices140

monthly avg., Jan. 2007=100
Japan (TSE REIT Index)

120

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

100

In foreign exchange markets, the yen has been
more or less flat against the U.S. dollar (Chart 58).
It has depreciated against the euro, albeit withfluctuations,mainlyreflecting

increasing

expectations that economic activity will besupported by fiscal and monetary policies in the

80
60

40
20
CY 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Source: Bloomberg.

Euro area.

Chart 58: Yen/U.S. Dollar and Yen/Euro
180

yen/U.S. dollar, yen/euro, monthly avg.

170

Yen/U.S. dollar

160

Yen/euro

150
140
130
120
110
100
90
80

Yen
depreciation
Yen
appreciation

70
CY 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Source: Bloomberg.

45

(Box 1) Developments in Overseas Economies under the COVID-19 Pandemic

Although economic activity has started to resume,
mainlyin

COVID-19

countries
has

where

almostthespreadsubsided,ofChart B1-1: China's Industrial Production
and Investment in Fixed Assets

overseas

15

economies have been depressed significantly

10with the impact of COVID-19 remaining. This box

0y/y % chg.

5

examines developments in overseas economies-5

under the pandemic, looking first at those in-10

Industrial production (real)Industrial production, high-techindustry (real)Industrial production, automobile
industry (real)Investment in fixed assets(nominal)-15

China thus far, where the economy has been

-20

picking up, and then turning to those in Europe

-25
-30

and the United States.

-35
Jan. 19

Apr.

July

Oct.

Jan. 20

Apr.

Source: CEIC.
Note: Based on staff calculations.

In China, economic activity plunged from late
January due to the impact of the spread ofChart B1-2: China's Nominal Retail Salesof Consumer Goods

COVID-19. Subsequently, however, there has

30

been progress in the resumption of economic

20

activity, and the economy has been picking up

10with the spread subsiding domestically. Industrial
production recently has recovered to above last
year's level, mainly led by the high-tech andautomobile-relatedindustries,

assupplyconstraints such as labor shortage and supply
chain disruptions eased, and partly reflecting therecovery in production from the decline brought
about by COVID-19 (Chart B1-1). Investment in
fixed assets also has recovered to above last
year'slevel,

macroeconomic

supported
policiesbybyaggressivetheChineseauthorities, including their efforts to speed up the
implementation of key infrastructure projects.
Retail sales have been recovering to last year's
level due to favorable online sales and thematerialization of pent-up demand, although therecovery in eating and drinking services has been
lagging

somewhatbehind,mainlydue

tovoluntary efforts made by firms and households to46

y/y % chg.

0
-10

-20

Total retail sales of consumer
goods
Online retail sales (physical goods)-30

Automobile sales-40

Catering services revenue-50
Jan. 19

Apr.

July

Oct.

Jan. 20

Apr.

Source: CEIC.
Note: Based on staff calculations. Figures for automobile sales are based on theaggregate for enterprises (units) with revenues above certain threshold amounts
only.

prevent infections (Chart B1-2).

Chart B1-3: Electricity Consumption andMobility Trends in Europe
6

TurningtoEurope,economic

activitywasy/y % chg.

pre-COVID-19 level=100

120

0

100

-6

80

-12

60

depressed significantly from mid-March, as seen
in electricity consumption falling substantiallybelow last year's level, mainly affected by the
spread of COVID-19 and the resultant closure of
workplaces and restrictions on going outside(Chart B1-3). Subsequently, with COVID-19
subsiding, economic activity has been showing
signs of heading toward a pick-up, as seen in a
deceleration in the year-on-year rate of decline inelectricity consumption as strict public healthmeasures have been eased.

employment situation will stop deteriorating. In
Germany, France, and Italy, the number of firms
increasedforsubsidiessharplyforthroughshort-time

work

April

has

but

decreased significantly since May (Chart B1-4).

In the United States, economic activity wasdepressed significantly from mid-March, affectedby the spread of COVID-19 and strict publichealth measures, as indicated, for example, by
the Weekly Economic Index (WEI) released by
the Federal Reserve Banks -- which aggregateshigh-frequency

data

on

variouseconomic

activities -- falling well below last year's level(Chart B1-5). In terms of employment, theunemployment rate for April has risen to thehighest

level

since

1940

40
Electricity consumption (left scale)
Mobility trends for workplaces (right scale)

-24

20

20/Late Early
Feb. Mar.

Apr.

May

June

Sources: Bloomberg; Google LLC "Google COVID-19 Community Mobility Reports".
https://www.google.com/covid19/mobility/ Accessed: July 15, 2020.
Notes: 1. The chart shows the simple averages for Germany, France, Italy, Spain, andthe United Kingdom.
2. Figures for mobility trends for workplaces refer to the aggregate number of
persons going to their workplace. The median value for the corresponding daysof the week for the period from January 3 to February 6 (i.e., before theoutbreak of COVID-19) is used for reference and set to 100.

Under thesecircumstances, there have been signs that theapplying-18(ChartB1-6).

Subsequently, although COVID-19 has not yet
subsided in the United States as a whole,automobile sales and consumption of services
such as eating and drinking have turned to anincrease, mainly on the back of the easing of strict

47

Chart B1-4: Labor Market Indicators
Related to Short-Time Work in Europe
10
9
8
7
6
5
4
3
2
1
0

change from CY 2019 average, time

mil. persons

March 2020
May

April
June

50
45

40
35
30

25
20
15

10
5
0

Germany(left scale)France(left scale)Italy(right scale)

Sources: Haver; DARES.
Note: Figures for Germany and France are the notifications of short -time workers. Figures for
Italy are the number of authorized hours under the main short -time work scheme, theWages Guarantee Fund. The latest figure for Italy is that for May 2020.

public health measures and U.S. government
cash payments to households. Under these

Chart B1-5: High-Frequency Indicators for
the United Statescircumstances, the rate of decline in the amount

3

of

0

100

-3

90

-6

80

card

transactions

relatedtoconsumerspending has slowed, and economic activity, as
seen in the WEI, has been improving. On they/y % chg.

pre-COVID-19 level=100

110

-9

70

employment side, with support from the U.S.

-12

60

government's-15

continuing,

PaychecktheProtection

number of

Programemployees

has

50

Weekly Economic Index (left scale)
Mobility trends for workplaces (right scale)Credit and debit card spending (right scale)

-18

40

increased since May on the back of progress in-21
Feb. 22 Mar. 21

the resumption of economic activity, and the

Sources: Haver; Opportunity Insights; Google LLC "Google COVID-19 Community
Mobility Reports". https://www.google.com/covid19/mobility/ Accessed: July 15,
2020.
Notes: 1. Figures for mobility trends for workplaces refer to the aggregate number of
persons going to their workplace. The median value for the corresponding daysof the week for the period from January 3 to February 6 (i.e., before theoutbreak of COVID-19) is used for reference and set to 100.
2. Figures for credit and debit card spending are seasonally adjusted. The
average for the period from January 4 to 31 (i.e., before the outbreak of COVID19) is used for reference and set to 100.

unemployment rate has turned to a decline.

Apr. 18

May 16

June 1330
July 11Thus, there are signs of a pick-up in Europe andthe United States, but the level of economic
activities is still clearly below that seen before theChart B1-6: Labor Market Indicators for theUnited States

outbreak of COVID-19. It should be noted that it

6will take time for overseas economies to recovers.a., m/m chg., mil. personss.a., %

0

15
12

to the level seen before the outbreak, partly

Nonfarm payroll
employment (left scale)because precautionary efforts made voluntarily by-6firms and households will continue to act as a

-12

6

-18

3

force constraining economic activity. In addition,

9

Unemployment rate(right scale)as seen in the number of confirmed cases still
increasing in emerging economies -- such as-24

Central and South America as well as India -- andSource: Haver.

in the United States, there are extremely highuncertainties

over

the

consequencesof

COVID-19 and the magnitude of their impact onoverseas economies, and thus close attention
should continue to be paid.

48

0
20/ Jan.

Feb.

Mar.

Apr.

May

June

(Box 2) Firms' Behavior Affected by COVID-19

This box outlines the recent changes in firms'
behavior due to the impact of COVID-19 byexamining firms' stance on business fixed

Chart B2-1: Earned Surplus and InterestBearing Debt
1,200

amount outstanding, tril. yen%

50Interest-bearing debt (left scale)investment and employment.

Earned surplus (left scale)

1,000

Capital adequacy ratio (right scale)

40

800

The business fixed investment plan for fiscal 2020

600

30

shows that the investment has been relatively
steady for both large firms as well as small andmedium-sized firms despite facing a significant

400
20

200

decline in their profits (Chart 23). This is largely
attributable to the fact that downward pressure

0
FY-end 94

from the financial side has not intensified. Such

Source: Ministry of Finance.
Notes: 1. Based on the "Financial Statements Statistics of Corporations by Industry,
Annually." Excluding "finance and insurance."
2. Interest-bearing debt = borrowings from financial institutions + borrowings fromothers + bonds

pressure has been constrained by (1) financial
conditionsoffirms,

especially

large

10
98

02

06

10

14

18

ones,

becoming more sound since the global financial
crisis and (2) the Bank's and the government's

Chart B2-2: Developments in Cash andDeposits

measures to support financing, as well as active

250

amount outstanding, tril. yen%

13

Cash and deposits (left scale)efforts made by financial institutions together with200

those measures.

Since the global financial crisis, firms in Japan

Ratio to total assets (right scale)

12

150

11

100

10

50

9

have continued to avert risks and prioritize
improvement

in

their

financial

positions.

Specifically, they have increased their capital
adequacy ratios by actively repaying their loans(Chart B2-1). For firms that have made their
repayments, they also have increased theon-hand liquidity ratios, mainly by saving a large
amount of their profits in the form of cash anddeposits (Chart B2-2). As a result, in Japan, there
seems to be a considerable number of firms,
mainly large ones, that have adequate financial
capacity to undertake necessary investment for
growth areas even when they are faced with

49

0
FY-end 94

8
98

02

06

10

14

Source: Ministry of Finance.
Note: Based on the "Financial Statements Statistics of Corporations by Industry,
Annually." Excluding "finance and insurance."18

unexpected severe stress, as in the current
situation.

Chart B2-3: Lending Attitudes of Financial
Institutions and Business Fixed Investment
1. Large Enterprises
30

Compared

with

large

firms,

thefinancialcapacities of small and medium-sized firms are% pointss.a., ann., tril. yen
Business fixed investment (left scale)Lending attitudes of financial institutions(DI "accommodative" - "severe," right scale)

28

40
30

26

limited. That said, mainly through effectively
interest-free and unsecured loans, financial
institutions have been actively responding to meet

20
24
10
22

0

firms' increasing demand for funds, and thisseems to have eased, to a certain degree,pressure that reduces business fixed investment
by small and medium-sized firms. In fact, looking
at the DI in the Tankan for financial institutions'lending attitudes -- that is highly correlated tobusiness

fixed

investment

reportedintheFinancial Statements Statistics of Corporations byIndustry,

Quarterly,

mainly

for

small

and

20

-10

18
CY 04

08

10

12

14

16

18

20

2. Small and Medium-Sized Enterprises
24% pointss.a., ann., tril. yen

2220

B2-3). The active lending stance of financial

18

Lending attitudes of financial institutions(DI "accommodative" - "severe," right scale)

30
20
10

16

fixed investment conducted mainly by small andmedium-sized firms, many of which have limited

12

constraints. The correlation between the DI for

10
CY 04

institutions'lending

attitudes

andbusiness fixed investment can be examined byusing a simple vector auto-regression (VAR)
model consisting of the following five variables:(1) the macroeconomic uncertainty index, (2) the
Indices of Industrial Production, (3) TOPIX, (4) theDI for financial institutions' lending attitudes, and(5) business fixed investment. 22 The results
suggest that the deterioration in the DI has a

22

The macroeconomic uncertainty index is based on staff
calculations by aggregating the variance of forecast errors of thetime-series models related to various macroeconomic indicators.

50

0

14

access to capital markets and are facing liquidity
financial

40

Business fixed investment (left scale)at the time of the global financial crisis (Chart
institutions seems to have supported business-20
06

Sources: Ministry of Finance; Bank of Japan.
Notes: 1. Figures for business fixed investment are based on the "Financial Statements
Statistics of Corporations by Industry, Quarterly," excluding software
investment, and are for all industries excluding "finance and insurance" and"goods rental and leasing." Large enterprises are defined as enterprises with acapitalization of 1 billion yen or more.
2. Figures for the lending attitudes of financial institutions are based on the
Tank an and are for large enterprises.

medium-sized firms -- it has maintained its
considerably accommodative level compared with

50

-10
-20
06

08

10

12

14

16

18

20

Sources: Ministry of Finance; Bank of Japan.
Notes: 1. Figures for business fixed investment are based on the "Financial Statements
Statistics of Corporations by Industry, Quarterly," excluding software
investment, and are for all industries excluding "finance and insurance" and"goods rental and leasing." Small and medium-sized enterprises are defined asenterprises with a capitalization of less than 1 billion yen.
2. Figures for the lending attitudes of financial institutions are based on the
Tank an and are for small enterprises.

statisticallybusinesssignificant
fixed

negative

investmentby

impact

on

small

and

medium-sized firms, and the impact could bemuch larger than that on large firms (Chart B2-4).
The net "accommodative" for the DI for financial

Chart B2-4: Financial Conditions andBusiness Fixed Investment
1. Response of Business Fixed Investment to a
Negative 1% Point Shock to Lending Attitudesof Financial Institutions (Manufacturing)
1.0

institutions' lending attitudes as perceived by

0.5

small and medium-sized firms in the June Tankan

0.0

has been roughly at the same level as last quarter,

deviation from trend, %-0.5

which indicates that it is unlikely that businessfixed investment by those firms will be pushed-1.0

down from the financial side.

-1.5

Large enterprises-2.0

Small and medium-sizedenterprises

Looking at the employment side, firms' stance on
employment has receded significantly due to theimpactof

COVID-19,

but

the

degreeofdeterioration in that stance has been somewhat-2.5
0 quarters 4

8

12

16

20

2. Response of Business Fixed Investment to a
Negative 1% Point Shock to Lending Attitudesof Financial Institutions (Nonmanufacturing)
1.0

deviation from trend, %limited thus far compared with the pace ofdepression in economic activity. Due to the

0.5

impact of COVID-19, the employment conditions

0.0

DI in the Tankan shows that the perception of

-0.5

labor

shortagehasdiminished

and

the

-1.0

unemployment rate has been under upward
pressure. However, at this point, both the DI and-1.5

Large enterprises

the unemployment rate have not deteriorated as-2.0

Small and medium-sizedenterprises

much as they did at the time of the global financial-2.5

crisis (Chart B2-5). By industry, the DIs foraccommodations as well as eating and drinking
services, both of which have been directly
affectedby COVID-19, haveturnedtoasignificant net "excessive" to date. However, theDIs for many of the other industries, including
construction as well as transport and postal
activities, have remained a net "insufficient"(Chart B2-6). Firms seem to be somehow trying toretain their employees mainly through furloughs,while

makingactiveuseofemployment

adjustment subsidies, which have been expanded
significantly as part of the government's current

51

0 quarters 4

8

12

16

20

Sources: Ministry of Economy, Trade and Industry; Bloomberg; Ministry of Finance; Bankof Japan, etc.
Notes: 1. The VAR model (three-period lag) is estimated using the following fivevariables: Macroeconomic Uncertainty Index, IIP, TOPIX, the DI for lending
attitudes of financial institutions (Tank an), business fixed investment ("Financial
Statements Statistics of Corporations by Industry, Quarterly"). The estimation
period is 1994/Q1-2020/Q1. Shocks are identified by Cholesky decomposition,
where variables are orderd as above.
2. The shaded area and the broken lines indicate the 90 percentile bands.

economic measures, and of the financing support
by financial institutions (Chart B2-7). This isprobably against the background of (1) the
prolonged labor shortage that continued toconstrain business activities before the outbreakof COVID-19 and (2) the projection that the
declining trend in the working-age population willcontinue in the long run.

Chart B2-5: Unemployment Rate and
Employment Conditions
It is necessary to pay attention to the point that

6.0

the aforementioned firms' stance on business5.5

fixed investment and employment could change

5.0

substantially depending on developments in
COVID-19.

In

particular,

firms'

stanceon

DI ("excessive" - "insufficient"), % pointss.a., %

20
Firms' forecast

if

the

following

happens,

mainly

0
4.0
-10
3.5
-20

3.0

Unemployment rate (left scale)

COVID-19 on a large scale: medium- to long-term

2.5

Employment conditions (right scale)growth expectations decline significantly as the

2.0
CY 06

08

reflecting the occurrence of a second wave of

impact of COVID-19 expands or lasts by morethan expected, and financial conditions tighten,

10

4.5

spending has a risk of becoming extremely
cautious

30

-30
-40

10

12

14

16

18

20

Sources: Ministry of Internal Affairs and Communications; Bank of Japan.
Notes: 1. The figure for the unemployment rate for 2020/Q2 is the April-May average.
2. Figures for employment conditions are based on the Tank an and are for all
enterprises.
3. Shaded areas indicate recession periods.

triggered by, for example, fluctuations in the
global financial and capital markets.

Chart B2-6: Employment Conditions byIndustry
DI ("excessive" - "insufficient"), % points

Considering/Applying for
employment adjustment
subsidies

Excessive
2020/Q2

2020/Q3
forecasts

Insufficient

40.7
34.8

39.4

Putting employees on leave
28.4

Reducing/Postponing hiringof regular workers andreducing the number of
dispatched workers

2020/Q1
2019/Q4
Construction

Source: Bank of Japan.
Note: Figures are based on the Tank an and are for all enterprises.

Transport & Postal activities

Services for businesses

Retailing

Wholesaling

Services for individuals

Accommodations,
Eating & Drinking services

Manufacturing

All industries

30
20
10
0
-10
-20
-30
-40
-50
-60
-70

Chart B2-7: Measures Related to Employment
and Recruitment in Response to COVID-19

31.8
26.3

Considering/Implementing
employee reduction0

3.9

June 2020 survey

4.3

April 2020 survey

10
20
30
40
50
multiple answers allowed, %Source: Japan Chamber of Commerce and Industry, "LOBO survey."
Notes: 1. Figures are for firms who responded that their business was affected due to theoutbreak of COVID-19.
2. The survey period of the April 2020 survey was from April 14 to 20 and that of
the June 2020 survey from June 15 to 19.

52

(Box 3) Impact of COVID-19 on Private Consumption

This box provides an overview of the impact of
COVID-19ondevelopments

inprivateconsumption to date, using high-frequency data.

Lookingbackatdevelopments

in

the

Consumption Activity Index (CAI) from January
this year -- that is, before the impact of COVID-19
materialized -- through May shows that a
downward trend was already evident for Marchand the CAI declined further for the April-May
period due to the impact of the declaration of astate of emergency, registering a substantial fallof about 15 percent compared with January

Chart B3-1: Developments in theConsumption Activity Index (Real)
2
0
-2
-4
-6
-8
-10
-12
-14
-16
-18
-20

s.a., change from Jan. 2020, %Services <51.5>
Nondurable goods <39.1>
Durable goods <9.4>
Consumption Activity Index(travel balance adjusted)

Jan. 2020

Feb.

Mar.

Apr.

May

Sources: Bank of Japan, etc.
Notes: 1. Based on staff calculations. Figures for the Consumption Activity Index (travel
balance adjusted) exclude inbound tourism consumption and include outboundtourism consumption. Figures for the components are not adjusted for the travel
balance.
2. Nondurable goods include goods classified as "semi-durable goods" in the
SNA.
3. Figures in angular brackets show the weights in the Consumption Activity Index.

(Chart B3-1). By type, services consumption saw
the largest decrease, since self-restraint fromgoing outside and temporary store closures led

Chart B3-2: Developments in Goods
Consumption (Real)directly to the decline in sales, and this decrease4

in services consumption accounts for about 80 to

2s.a., change from Jan. 2020, %90 percent of the decline in private consumption
that

has

happenedsince

January.

Goods0

consumption registered a considerable decline for-2

the April-May period compared with January. This-4

is attributable to a significant impact of the sales-6

decline in automobiles and clothes due to thedecrease in the number of customers visiting
dealerships and stores, although the steadydemand for food and daily necessities thatreflects people spending more time at home has
underpinned goods consumption to a certain
extent (Chart B3-2).

Lookingatthebreakdownofservices

consumption, there has been a notable decline inselective expenditures for services that areconsidered

non-urgent,

such

as

dining-out,

53

-8
-10

Other goods <16.2>
Clothes <4.3>

Food and beverages <18.6>
Automobiles <3.6>
Household electrical appliances <5.8>

Consumption Activity Index for goods <48.5>

Jan. 2020

Feb.

Mar.

Apr.

May

Sources: Bank of Japan, etc.
Notes: 1. Based on staff calculations. Figures are not adjusted for the travel balance.
2. Figures in angular brackets show the weights in the Consumption Activity Index.

entertainment, and accommodations (Chart B3-3).
On a daily basis, mobility trends for "retail andChart B3-3: Developments in Services
Consumption (Real)recreation" based on smartphone location data by

5

Google are quite similar to developments in

0s.a., change from Jan. 2020, %selective expenditures for services in the Family
Income and Expenditure Survey.23 This suggests-5

that the decrease in people going outside due to-10

self-restraint has directly led to a decline in-15

selective expenditures for services (Chart B3-4).

Accommodations <1.7>-20

Consumption of services other than thoseclassified as selective expenditures (categorized

Other services <33.0>-25Services for amusement
and hobbies <4.7>
Food services <12.1>

Consumption Activity Index for services <51.5>

as "other services" in Chart B3-3) has also

-30

Jan. 2020

decreased considerably, mainly for spending on
medical services, ceremonial occasions, and

Feb.

Mar.

Apr.

May

Sources: Bank of Japan, etc.
Notes: 1. Based on staff calculations. Figures are not adjusted for the travel balance.
2. Figures in angular brackets show the weights in the Consumption Activity Index.

cram schools. This indicates that people's
vigilance against COVID-19 has exerted strong
downwardpressure

not

only

on

selective

expenditures for services but also on the overall

Chart B3-4: Mobility Trends and Selective
Expenditures for Services
100

consumption of face-to-face services, including
50

fundamental expenditures for services.

Thus, the spread of COVID-19 has brought aboutchange from baseline, %change from baseline, %Selective expenditures for services(Family Income and Expenditure Survey, left scale)
Mobility trends for "retail and recreation"(Google, right scale)

50

25

0

0

-50

-25

a significant decline in private consumption on thewhole. At the same time, however, it has led to-100Feb. 1/20 Mar. 1

the creation of demand for new goods andSources: Ministry of Internal Affairs and Communications;
Google LLC "Google COVID-19 Community Mobility Reports".
https://www.google.com/covid19/mobility/ Accessed: July 15, 2020.
Notes: 1. The baseline is the median on the corresponding day of the week during the 5week period from January 3 to February 6, 2020.
2. Figures for selective expenditures for services are the sum of expenditure on
public transportation, recreational services (accommodation services, etc.), andmeals outside the home. The latest figure is for May 31.
3. Figures for mobility trends for "retail and recreation" are mobility trends forplaces such as restaurants, shopping centers, and theme parks. The latest
figure is for July 10.

services in some areas despite precautionary
efforts by firms and households. For example, interms of dining-out, demand for take-out anddelivery services has expanded rapidly of lateamid the situation of stricter self-restraint fromgoing outside. On this point, fast food, which has
its advantage in take-out and delivery services,
has been relatively firm since March, althoughdining-out as a whole has dropped considerably

23

Google releases changes in mobility by type of place for eachcountry and region. "Retail and recreation" includes places suchas restaurants, cafes, shopping centers, theme parks, museums,
libraries, and movie theaters. Grocery stores and drugstores areincluded in a category labeled "grocery and pharmacy."

54-50
Apr. 1

May 1

June 1

July 1

(Chart B3-5). In addition, the rapid expansion in
teleworking and in taking online classes from

Chart B3-5: Developments in Sales in the
Food Services Industry

home has led to an increase in demand for20

personal computers for home-use. The fact thats.a., change from Jan. 2020, %0

people are spending more time at home also has
led to an increase in demand for televisions andwhite goods such as high-performance air

-20
-40

Total salesconditioners. As a result, although sales ofhousehold electrical appliances fell in April due totemporary store closures and shorter operating

Fast food restaurants-60

Chain restaurants-80

Pubs and izakaya(Japanese-style bars)

hours, they have picked up to date, led bypersonal computers, televisions, and white goods(Chart B3-6).

-100
Jan. 2020

Feb.

Mar.

Apr.

May

Source: Japan Foodservice Association, "Market Trend Survey of the Food Services
Industry."
Note: Based on staff calculations using data compiled by the Japan Foodservice
Association.

Although sufficient hard data for developmentsfrom June to date are not yet available, various
sources, such as high-frequency indicators,
statistics published by industry organizations, andChart B3-6: Sales of Household Electrical
Appliances (METI POS)
80

% chg. from the same week of the previous year

60

anecdotal information from firms, suggest that it ishighly likely that consumption activities have beenheading toward a pick-up moderately on the40
20

whole. In particular, the number of people going
out,

which

is

strongly

correlatedwithdevelopmentsinselective

expenditure

for

0
-20

services, has picked up moderately since thesecond half of May, when the state of emergency
was lifted gradually, and downward pressure on
services consumption seems to have eased todate. However, amid a situation of vigilanceagainstCOVID-19

persisting,thenighttime

population of selected downtown areas -- which
has high correlation with developments in dining
at restaurants in the evening and in izakaya(Japanese-style bars) that comprise services
consumption of dining-out -- has been fairly slow
to return to the previous level (Chart B3-7). In thissituation, the pace of a pick-up in domestic travel,in particular long-distance travel, also seems to55-40
Jan. 6/20 Feb. 3 Mar. 2

Apr. 6 May 4 June 1

Source: Ministry of Economy, Trade and Industry (METI).
Note: The horizontal axis shows the starting date of each week. The latest figure is for the
week of June 29 to July 5.

have been considerably slow, mainly reflecting
requests for self-restraint from travelling acrossprefectures that continued until June 18. On theother hand, regarding goods consumption, (1)sales of household electrical appliances havepicked up to date, partly due to the provision of
special cash payments, and (2) clothing sales
also have picked up with businesses reopening
gradually (Chart B3-6). However, (3) growth indemand for food and daily necessities, whichmake up a large share of consumption, hasslowed, partly due to the shift to dining-out (Chart
B3-8). Thus, the overall increase in goods
consumption seems to have been only small.

Chart B3-7: Number of Visits to
Restaurants
y/y % chg.

120
100
80
60
40
20
0
-20
-40
-60
-80
-100
Feb. 1/20 Mar. 1

Number of visits to restaurants(TableCheck)
Nighttime population of selected
downtown areas in Tokyo (Agoop)

Apr. 1

May 1

June 1

July 1

Sources: TableCheck Inc.; Agoop Corp.
Notes: 1. Figures for the number of visits to restaurants show the number of visits per
restaurant, and are for about 4,500 restaurants that have installed thereservation and customer management system for restaurants provided by
TableCheck Inc. The latest figure is for July 12.
2. Figures for the nighttime population of selected downtown areas in Tokyo show
the aggregate population between 20h-24h within a 500 m radius centered on
Ginza, Shinjuku, and Roppongi stations. The figures for 2019 are estimatedusing data for the aggregate population within the 900 m x 900 m square areas
centered around the same stations. The latest figure is for July 12.

Chart B3-8: Sales at Supermarkets(Nikkei CPINow)20

weekly avg. of daily y/y % chg.

15

10

5

0

-5
Jan. 7/20 Feb. 4 Mar. 3

Apr. 7 May 5 June 2

July 7

Source: NOWCAST, Inc.
Note: The horizontal axis shows the starting date of each week. The latest figure is for the
week of July 7 to 13.

56

(Box 4) Impact of COVID-19 on Price Changes

This box examines the impact of COVID-19 on
recent price developments, while focusing on the
differences in price changes by item.

Chart B4-1: Price Changes by Item
1. Hotel Charges and Charges for Package Tours
to Overseas
20

y/y % chg.

15

The year-on-year rate of change in the CPI (allitems less fresh food) for January this year, which

105

was before the outbreak of COVID-19, was 0.8
percent and that for May was minus 0.2 percent,0

indicating a decline of 1.0 percentage point (Chart-540). The decline in the CPI was largely-10

CPI hotel charges
CPI charges for package tours to overseas

attributable to the decline in energy prices, suchas those of petroleum products (i.e., gasoline),pushing down the CPI by about 0.6 percentage-15
Jan. 18

July

Jan. 19

July

Jan. 20

Source: Ministry of Internal Affairs and Communications.
Note: The CPI figures exclude the effects of the consumption tax hike.

point. It also was affected by a decline in the

2. Water Charges and Tutorial Fees

items that have relatively large weights in the CPI,2

y/y % chg.

mainly reflecting the direct impact of COVID-19(Chart B4-1). Such items include (1) travel-related

1services such as charges for hotels and for
package tours to overseas, (2) water charges,0which declined due to a reduction and exemption
by the local governments for those who havedifficulty paying them, and (3) tutorial fees, which-1
CPI water charges-2

declined reflecting an introduction of online
classes.24

CPI tutorial fees (junior high school)-3
Jan. 18

July

Jan. 19

July

Jan. 20

Source: Ministry of Internal Affairs and Communications.
Note: The CPI figures exclude the effects of the consumption tax hike.

24

The decline in the CPI from April also is attributable to theprovision of free higher education and a reduction in the
mandatory auto insurance premium, both of which were decided
before the outbreak of COVID-19.

57

Variouscore

indicatorsforcapturingtheunderlying trend in the CPI show the following

Chart B4-2: Measures of Underlying
Inflation (1)developments. 25 The rate of increase in the

1.2

trimmed mean, which is relatively susceptible to

1.0
0.8

changes in prices of items that have large weights

0.6

in the CPI, has decelerated, mainly reflecting

0.4

developments in the aforementioned items (Chart

0.2
0.0

B4-2).26 On the other hand, the rates of increase-0.2

in the median and the mode, which are less-0.4

susceptible to developments in prices of items

y/y % chg.

-0.6

Trimmed mean

-0.8
Weighted medianwith large weights since these indicators are-1.0

calculated by treating the effects of each CPI item

-1.2
CY 07

equally, have been in the range of 0.0-0.5 percent

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 and policies concerning the provision of free education. The CPI figuresfrom April 2020 onward are based on staff estimations and exclude the effects ofmeasures such as free higher education introduced in April 2020.

recently, suggesting that there has been no

09

11

13

15

17

19

particular change in the underlying trend (Chart
B4-3). 27 The share of price-increasing items
minus the share of price-decreasing items has
maintained its relatively high level thus far, andChart B4-3: Measures of Underlying
Inflation (2)1.0y/y % chg.

the share of price-decreasing items alone has not
risen significantly (Chart B4-4).

0.5

0.0

-0.5

Median
Mode

-1.0
CY 07

09

11

13

15

17

19

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 and policies concerning the provision of free education. The CPI figuresfrom April 2020 onward are based on staff estimations and exclude the effects ofmeasures such as free higher education introduced in April 2020.

25

The examinations of the following indicators are based on the
CPI excluding the effects of the consumption tax hikes andpolicies concerning the provision of free education.
26

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 weighted median isthe average of the inflation rates of the items at around the 50
percentile point of the cumulative distribution in terms of weight.
27

The median is the average of the inflation rates of the items of
the price change distribution. The mode is the inflation rate withthe highest density in the price change distribution.

58

Looking at the price change distribution based on
the weight of each item, the items for which prices
have seen large declines have increased theirChart B4-4: Diffusion Index of Price Changes
80% points%

90

Diffusion index (left scale)

Share of increasing items (right scale)share to some extent lately, reflecting the60

aforementioned declines in prices of certain items

40

70

due to the impact of COVID-19 (Chart B4-5[1]).

20

60

0

50

-20

40

this year to date (Chart B4-5[2]). Thus, the

-40

30

shapes of these distributions imply that the

-60
CY 07

On the other hand, the distribution based on the80

Share of decreasing items (right scale)number of items shows that there has been no
significant change in the shape since the start ofdecline in the year-on-year rate of change in the
CPI to date can be explained mostly by the
decline in prices of some items that are affected
strongly by COVID-19.

Although firms reduced their prices to stimulate
demand during the deflationary period in the past,
such price-setting behavior is not observed widely

20
09

11

13

15

17

19

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
whose 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 and policies concerning the provision of free education.
The CPI figures from April 2020 onward are based on staff estimations and exclude
the effects of measures such as free higher education introduced in April 2020.

Chart B4-5: Price Change Distribution
1. Based on the Weight of Items
35

share of the weight of items, %30January 2020

factors behind this. The first factor is that, despite25

May 2020

a rapid depression in overseas economies, there

20

at this point. The following can be considered as

has not been a sudden appreciation of the yen,

15

and thus downward pressure on prices of durable
goods and food products, which are sensitive to10developments in the foreign exchange rates, has

5

not intensified significantly (Chart B4-6). These0developments are contrary to those observed
immediately after the global financial crisis, when
the declines in prices of these items pushed down
the overall CPI due to a sudden appreciation of
the

yen.

Second,

since

the

government's

large-scale income support measures have firmly
supported households' disposable income, theirpreference to cut back on spending has notincreased

as

much

as

it

did

duringthedeflationary period in the past. A third factor isthat, under the "new lifestyle," a decline in

59

-8

-6

-4

-2

0

2

4

6

8

y/y % chg.
Source: Ministry of Internal Affairs and Communications.
Note: Based on staff calculations using the CPI less fresh food, energy and house rent
(private and imputed rent) excluding the effects of the consumption tax hike andpolicies concerning the provision of free education. The figure for May 2020 isbased on staff estimations and excludes the effects of measures such as freehigher education introduced in April 2020.

productivity (i.e., a decline in customers to which
services can be provided with the same input) is

2. Based on the Number of Items
35

share of the number of items, %inevitable for firms in the services industry, such

30

January 2020

as dining-out as well as culture and recreation, in

25

May 2020

view of avoiding crowds, and thus those firms

20

cannot reduce their prices for the purpose of
stimulating demand. Since developments in the15

CPI slightly lag behind the business cycle, it is10

necessary to wait a little longer until more data5

become available to examine these factors.

0
-8

-6

-4

-2

0

2

4

6

8

y/y % chg.
Source: Ministry of Internal Affairs and Communications.
Note: Based on staff calculations using the CPI less fresh food, energy and house rent
(private and imputed rent) excluding the effects of the consumption tax hike andpolicies concerning the provision of free education. The figure for May 2020 isbased on staff estimations and excludes the effects of measures such as freehigher education introduced in April 2020.

Chart B4-6: Inflation Rate and Exchange
Rate
1. Durable Goods Prices and Exchange Rate6y/y % chg.

yen/U.S. dollar, monthly avg.
Yen depreciation

4

Yen appreciation

160
150

2

140

0

130

-2

120

-4

110

-6

100

-8

90

-10

CPI durable goods (left scale)

80

-12

Yen/U.S. dollar (right scale)

70

-14
CY 91

60
94

97

00

03

06

09

12

15

18

Sources: Ministry of Internal Affairs and Communications; Bloomberg.
Note: The CPI figures exclude the effects of the consumption tax hikes. The figure for2020/Q2 is the April-May average.

2. Food Products Prices and Exchange Rate
8y/y % chg.

yen/U.S. dollar, monthly avg.
Yen depreciation
Yen appreciation

6

160

150
140

4
130
2

120

0

110

-2

100
90

-4
-6
-8
CY 91

CPI food products (left scale)80

Yen/U.S. dollar (right scale)

70
60

94

97

00

03

06

09

12

15

18

Sources: Ministry of Internal Affairs and Communications; Bloomberg.
Note: The CPI figures exclude the effects of the consumption tax hikes. The figure for2020/Q2 is the April-May average.

60

(Box 5) Japan's Financial Conditions under the Impact of COVID-19

COVID-19 has been exerting stress on financing
such as of firms, mainly through a decline in sales

Chart B5-1: Major Measures to Support
Corporate Financing

due to constrained economic activity. In this-- Provision of effectively interest-free andunsecured loans to SMEs mainly through
JFC and private financial institutions

situation, the Bank, in cooperation with thegovernment, has actively made responses tosupport financing, mainly of firms. This box
examines developments in Japan's financial

Japanese
Government-- Provision of crisis response loans to
medium-sized and large companies throughDBJ and the Shoko Chukin Bank-- Programs by the credit guarantee corporations
such as the Safety Net Guarantees
Nos.4 and 5 and the Crisis-Related Guarantee

conditions under the impact of COVID-19, as wellas the policy effects.

-- Equity support mainly through subordinatedloans and capital injections-- Special Funds-Supplying Operations
in response to COVID-19

Financial

positions,mainlyoffirms,

have

deteriorated in Japan, regardless of firm size, due

1. Fund-provisioning against private debt
pledged as collateral

Bank of Japan

mainly to the sales decline that reflects the impact

2. Fund-provisioning against eligible loans
such as interest-free and unsecuredloans based on the aforementioned
government's measure<Special
Program>of COVID-19 (Chart 50). In response to thissituation, the government and the Bank have-- Increase in purchases of CP and corporate
bonds

taken aggressive measures to support financing,
mainly of firms (Chart B5-1). The government has
provided effectively interest-free and unsecuredloans mainly to small and medium-sized firms
throughgovernment-affiliatedandprivatefinancial institutions. It also has provided crisis

Chart B5-2: Firms' Financial Positions
and Their Perceptions of Lending
Attitudes of Financial Institutions
35

Financial positions "tight"

response loans to medium-sized and large firms

30through government-affiliated financial institutions.

25

Since this March, with regard to the Special

proportion, %Lending attitudes "severe"

20

Program to Support Financing in Response to theNovel Coronavirus (COVID-19), the Bank has

15

increased purchases of CP and corporate bonds

10

as well as established and strengthened the5Special Funds-Supplying Operations to Facilitate
Financing in Response to the Novel Coronavirus(COVID-19), which

is a

new measure toencourage lending by financial institutions. This
operation includes a scheme in which the Bank
provides funds to private financial institutions onfavorable terms for the loans that they make tosmall and medium-sized firms as well as sole

61

0
CY 85

90

95

00

Source: Bank of Japan.
Note: Based on the Tank an. All enterprises.

05

10

15

20

proprietors, mainly by making use of theChart B5-3: Domestic Funding Environment

government's programs to support financing. In

1. Issuance Spread for CP (Rated a-1)

cooperation with the government's measures, this1.4 %serves to encourage active efforts by private

1.2

COVID-19(March 2020)

1.0

Global financial crisis(September 2008)

financial institutions.
0.8

Under these various measures taken by the Bankand the government, financial institutions' lending

0.6
0.4

attitudes have remained at their accommodative
levels (Charts B5-2 and 49). What is unique to the

0.2

current situation in particular is that, compared

0.0-12 -10 -8 -6 -4 -2
monthswith the past phase of being under stress, there isa smaller proportion of firms answering that
financial

institutions'lending

attitudes

0

2

4

6

8 10 12Sources: Bank of Japan; Japan Securities Depository Center; Bloomberg.
Notes: 1. The issuance spread is calculated as the issuance yield for CP
minus the yield on 3-month T-Bills.
2. Month 0 is indicated in the legend for each event.

are"severe." In fact, the year-on-year rate of increasein bank lending has been at around 6.5 percent,

2. Issuance Spread for Corporate Bonds (Rated A)

1.4%

registering the highest growth in about 30 years.

1.2

COVID-19(March 2020)

In addition, issuance spreads for CP and

1.0

Global financial crisis(September 2008)

corporate bonds expanded temporarily but have

0.8

narrowed of late, suggesting that issuanceconditions have remained favorable, even when

0.6

compared with those under the global financial

0.4

crisis (Chart B5-3). Under these circumstances,

0.2

funding by the private sector has maintained its
high growth, with the amounts outstanding ofbank lending, CP, and corporate bonds all
contributing to the increase (Chart B5-4). The DI
for financial positions of small and medium-sized
firms, which had deteriorated rapidly comparedwith the past shocks, has shown a rise in negative
territory recently (Chart B5-5).

Thus, on the back of various measures taken by
the Bank and the government, the environment
for

external

fundinghasremained

accommodative, and thus the liquidity has been
supported from the financial side. In addition, the62

0.0-12 -10 -8 -6 -4 -2
months024

6

8 10 12Sources: Capital Eye; I-N Information Systems.
Notes: 1. The issuance spread is calculated as the issuance yield for corporate
bonds minus the yield on JGBs with the same maturity.
2. Month 0 is indicated in the legend for each event.

government has conducted support measuresthat take into account the solvency problem.
Specifically, it has enhanced programs that

Chart B5-4: Private Sector Funding
7

5

corporations and established programs to supply

4

capitalthrough3

government-affiliated financial institutions and2

some entities (Chart B5-1).

1

quasi-capital

funds

CP

6

provide loans guaranteed by the credit guarantee
andy/y % chg.
Corporate bonds
Lending by domestic commercial banks
Total

0
-1

-2

That said, there are extremely high uncertainties
over the consequences of COVID-19 and theirimpact on the economy. If COVID-19 has a larger-3
CY 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Sources: Bank of Japan; Japan Securities Depository Center; Japan Securities
Dealers Association; I-N Information Systems.
Note: Figures for lending by domestic commercial banks include those forlending to local governments.

impact than expected, there is a risk that
deterioration in the real economy will affectfinancial system stability, thereby exerting further

Chart B5-5: Financial Positions of Smalland Medium-Sized Firms

downward pressure on the real economy. This

20

risk is judged as not significant at this point, since

10

(1)

financial

institutions

haveconsiderable

resilience in terms of both capital and liquidity, (2)DI ("improved" - "worsened"), % points
COVID-19 (March 2020)
Great East Japan Earthquake (March 2011)
Global financial crisis (September 2008)0-10

firms have maintained robust financial bases on
the whole, and (3) the Bank and the government
have made policy responses. However, it is

-20
-30

necessary to pay close attention to future-40

developments.

-50-60-10 -8months

-6

-4

-2

0

2

4

6

8

Source: Japan Chamber of Commerce and Industry.
Notes: 1. Based on the LOBO survey. The survey includes sole proprietors.
2. Month 0 is indicated in the legend for each event.

63

10