Not to be released until 2:00 p.m.
Japan Standard Time on
Thursday, August 1, 2024.
.

Outlook for Economic
Activity and Prices
July 2024(English translation prepared by the Bank's staff based on the Japanese original)

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

Outlook for Economic Activity and Prices (July 2024)
The Bank's View1
SummaryJapan's economy is likely to keep growing at a pace above its potential growth rate, withoverseas economies continuing to grow moderately and as a virtuous cycle from income
to spending gradually intensifies against the background of factors such asaccommodative financial conditions.

The year-on-year rate of increase in the consumer price index (CPI, all items less freshfood) is likely to be at around 2.5 percent for fiscal 2024 and then be at around 2 percent
for fiscal 2025 and 2026. While the effects of a pass-through to consumer prices of cost
increases led by the past rise in import prices are expected to wane, the rate of increase is
projected to be pushed up through fiscal 2025 by factors such as a dissipation of theeffects of the government's measures pushing down CPI inflation. Meanwhile, underlying
CPI inflation is expected to increase gradually, since it is projected that the output gap will
improve and that medium- to long-term inflation expectations will rise with a virtuous cycle
between wages and prices continuing to intensify. In the second half of the projection
period, it is likely to be at a level that is generally consistent with the price stability target.

Comparing the projections with those presented in the previous Outlook for Economic
Activity and Prices (Outlook Report), the projected real GDP growth rate for fiscal 2024 issomewhat lower, mainly due to the impact of the statistical revision to the GDP figures forfiscal 2023. The projected year-on-year rate of increase in the CPI (all items less freshfood) for fiscal 2024 is lower, mainly because the government's measures will push downenergy prices; on the other hand, that for fiscal 2025 is somewhat higher due to adissipation of the effects of these measures.

Concerning risks to the outlook, there remain high uncertainties surrounding Japan's
economic activity and prices, including developments in overseas economic activity andprices, developments in commodity prices, and domestic firms' wage- and price-setting
behavior. Under these circumstances, it is necessary to pay due attention to developments
in financial and foreign exchange markets and their impact on Japan's economic activity
and prices. In particular, with firms' behavior shifting more toward raising wages and prices
recently, exchange rate developments are, compared to the past, more likely to affectprices.

With regard to the risk balance, risks to economic activity are skewed to the upside forfiscal 2025. Risks to prices are skewed to the upside for fiscal 2024 and 2025.

"The Bank's View" was decided by the Policy Board at the Monetary Policy Meeting held on July 30 and
31, 2024.
1

1

I. Current Situation of Economic Activity and Prices in Japan
Japan's economy has recovered moderately, although some weakness has been seen in
part. Overseas economies have grown moderately on the whole. Exports and industrial
production have been more or less flat. Corporate profits have improved and businesssentiment has stayed at a favorable level. In this situation, business fixed investment has
been on a moderate increasing trend. The employment and income situation has
improved moderately. Private consumption has been resilient despite the impact of pricerises and other factors. Housing investment has been relatively weak. Public investment
has been more or less flat. Financial conditions have been accommodative. On the pricefront, the year-on-year rate of increase in the CPI (all items less fresh food) has been ataround 2.5 percent recently, as services prices have continued to rise moderately,reflecting factors such as wage increases, although the effects of a pass-through toconsumer prices of cost increases led by the past rise in import prices have waned.
Inflation expectations have risen moderately.

II. Baseline Scenario of the Outlook for Economic Activity and Prices in Japan2
A. Baseline Scenario of the Outlook for Economic Activity
Japan's economy is likely to keep growing at a pace above its potential growth rate, withoverseas economies continuing to grow moderately and as a virtuous cycle from income
to spending gradually intensifies against the background of factors such asaccommodative financial conditions.
Comparing the projections with those presented in the previous Outlook Report, theprojected real GDP growth rate for fiscal 2024 is somewhat lower, mainly due to theimpact of the statistical revision to the GDP figures for fiscal 2023. The projected growth
rates for fiscal 2025 onward are more or less unchanged.
In the household sector, employment is likely to continue rising, but the pace of increaseis projected to moderate gradually. This is because it will become more difficult for labor
supply to increase, with labor force participation of women and seniors having advanced
to a high degree thus far. That said, these developments will lead to an increasedtightening of labor market conditions during the course of the economic recovery. In thissituation, wage growth is expected to increase as a trend, partly reflecting price rises, andemployee income is projected to continue increasing. Against this backdrop, for the time
being, although private consumption is expected to be affected by the price rises, it isprojected to increase moderately, mainly reflecting the rise in wage growth. Private
consumption is also projected to be underpinned, for the time being, by the government's

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.
22

initiatives such as the continuation of measures to reduce the household burden of higher
gasoline prices, emergency measures against higher electricity and gas charges, andcuts in income tax and inhabitant tax.
In the corporate sector, exports and production are likely to return to an uptrend, mainly
due to a pick-up in global demand for IT-related goods, as overseas economies continue
to grow moderately. Meanwhile, inbound tourism demand, which is categorized underservices exports, is expected to continue increasing. Corporate profits are likely to follow
an improving trend with a moderate increase in domestic and external demand. In thissituation, as accommodative financial conditions provide support, business fixed
investment is likely to continue on an increasing trend, including investment to address
labor shortages, digital-related investment, research and development (R&D) investment
related to growth areas and decarbonization, and investment associated withstrengthening supply chains.
Meanwhile, public investment is expected to be more or less flat. Government
consumption is expected to increase moderately in reflection of an uptrend in healthcare
and nursing care expenditures.
The potential growth rate is expected to rise moderately. 3 This is mainly because
productivity is likely to increase due to advances in digitalization and investment in humancapital, and because capital stock growth is projected to accelerate due to a rise inbusiness fixed investment. These developments are likely to be encouraged by thegovernment's various measures and by accommodative financial conditions.

B. Baseline Scenario of the Outlook for Prices
The year-on-year rate of increase in the CPI (all items less fresh food) is likely to be ataround 2.5 percent for fiscal 2024 and then be at around 2 percent for fiscal 2025 and2026. While the effects of a pass-through to consumer prices of cost increases led by thepast rise in import prices are expected to wane, the rate of increase is projected to bepushed up through fiscal 2025 by factors such as a dissipation of the effects of thegovernment's measures pushing down CPI inflation. Meanwhile, underlying CPI inflation
is expected to increase gradually, since it is projected that the output gap will improve andthat medium- to long-term inflation expectations will rise with a virtuous cycle between
wages and prices continuing to intensify. In the second half of the projection period, it islikely to be at a level that is generally consistent with the price stability target.

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

3

Comparing the projections with those presented in the previous Outlook Report, theprojected year-on-year rate of increase in the CPI (all items less fresh food) for fiscal 2024
is lower, mainly due to the effects of the government's measures to reduce the householdburden of higher gasoline prices and its emergency measures against higher electricity
and gas charges; on the other hand, that for fiscal 2025 is somewhat higher due to adissipation of the effects of these measures. The projected rate of increase in this CPI for
fiscal 2026 is more or less unchanged.
The outlook for the CPI (all items less fresh food) depends on the assumptions regarding
crude oil prices and the government's measures. Crude oil prices are assumed to decline
moderately toward the end of the projection period with reference, for example, todevelopments in futures markets. The government's measures to reduce the householdburden of higher gasoline prices, electricity charges, and gas charges had pushed down
the year-on-year rates of change in the CPI (all items less fresh food) up through fiscal
2023. For fiscal 2024 and 2025, the phasing out of these measures is projected to push
up the rates. Looking at the CPI (all items less fresh food and energy) -- which is notdirectly affected by fluctuations in energy prices -- the year-on-year rate of increase islikely to decelerate, due to a gradual waning of the effects of the pass-through toconsumer prices of cost increases led by the past rise in import prices, and subsequently
be at around 2 percent.
The main factors that determine underlying inflation are assessed as follows. The output
gap, which captures the utilization of labor and capital, has followed an improving trend,
albeit with fluctuations. Based on the aforementioned outlook for economic activity, thegap is likely to widen moderately within positive territory toward the end of the projection
period. Meanwhile, labor market conditions are expected to tighten to a greater extent
than can be explained by the changes in the output gap, partly due to a deceleration in thepace of increase in labor force participation of women and seniors, and upward pressure
on wages is projected to intensify. This is likely to put upward pressure on personnel
expenses on the cost side and contribute to an increase in households' purchasing power.
Medium- to long-term inflation expectations have risen moderately. The June 2024
Tankan (Short-Term Economic Survey of Enterprises in Japan) shows that firms' inflation
outlook for general prices has increased moderately. Given that the formation of inflation
expectations in Japan is largely adaptive, the increase in inflation seen thus far hasbrought about a rise in households' and firms' medium- to long-term inflation expectations.
Firms' behavior has shifted more toward raising wages and prices, and firm wage
increases that were higher than those seen in the previous year were achieved in thisyear's annual spring labor-management wage negotiations. In addition, moves to reflect
wage increases in selling prices have been strengthening. Regarding the outlook, inflation
expectations are expected to rise moderately, with continued improvement in the output
gap and changes in firms' wage- and price-setting behavior. Under these circumstances,4the virtuous cycle between wages and prices is projected to keep intensifying throughachievement of wage increases that reflect price rises and through a pass-through ofwage increases to selling prices.
Considering the above assessments, underlying CPI inflation is expected to increase
gradually, mainly reflecting the improvement in the output gap and the rise in medium- tolong-term inflation expectations; in the second half of the projection period, it is likely to be
at a level that is generally consistent with the price stability target. That said, there remain
uncertainties regarding this outlook, and it is necessary to carefully monitor factors suchas firms' wage- and price-setting behavior.

III. Risks to Economic Activity and Prices
A. Risks to Economic Activity
Regarding the aforementioned baseline scenario of the outlook for economic activity, themain upside and downside risks that require attention are as follows.
The first is developments in overseas economic activity and prices and in global financial
and capital markets. Inflation rates in the United States and Europe have followed adeclining trend, albeit with fluctuations, and some central banks have started to slightly
lower their policy interest rates. That said, inflationary pressure has remained on a global
basis and there is a risk of tight monetary policy being prolonged. Moreover, there areuncertainties over how past policy interest rate hikes by overseas central banks will affecttheir real economies and financial systems. Taking these risks into account, it isnecessary to pay due attention to developments in financial and foreign exchange
markets and their impact on Japan's economic activity and prices. Meanwhile, dependingon factors such as the course of the situation surrounding Ukraine and the Middle East,
downward pressure on overseas economies could heighten. In addition, regarding the
Chinese economy, there are high uncertainties surrounding the future pace of pick-up, as
adjustment pressure has remained in the labor and real estate markets, and it isnecessary to pay attention to how inventory adjustment pressure on some goods willaffect overseas economic activity and prices.
The second risk is developments in import prices, particularly those of commodities,
including grains. Attention continues to be warranted on the risk that prices of grains andother commodities will fluctuate significantly due to geopolitical factors, such as thoseconcerning Ukraine and the Middle East. Furthermore, in the medium to long term, there
are extremely high uncertainties surrounding, for example, efforts by countries around theworld toward addressing climate change. Given that Japan is an importer of commodities
such as energy and grains (e.g., wheat), a rise in these prices due to supply factors puts
greater downward pressure on the economy through an increase in import costs, as thisrise is not accompanied by an expansion in external demand or an increase in exports. If

5the terms of trade were to deteriorate again, this could squeeze corporate profits andhouseholds' real income, leading business fixed investment and private consumption todeviate downward from the baseline scenario through more cautious spending behaviorof firms and households. Moreover, with progress in the pass-through of the rise in importprices to consumer prices, households' defensive attitudes toward spending could
strengthen further, and this could push down the economy. On the other hand, if prices ofcommodities, including grains, decline, the economy could deviate upward.
The third risk considered from a somewhat long-term perspective is the impact of various
changes in the environment surrounding Japan on firms' and households' medium- tolong-term growth expectations and on Japan's potential growth rate. It is expected thatfactors such as the experience of COVID-19, intensifying labor shortages, and progresson efforts with a view to decarbonization and on labor market reform will change Japan's
economic structure and people's working styles. Intensifying labor shortages -- which arepartly due to demographic changes -- could accelerate labor-saving investment, such as
for digitalization. On the other hand, if such a substitution of labor with capital does not
sufficiently progress, there is a risk that supply-side constraints in some industries will
push down the growth rate. Furthermore, the heightened geopolitical risks could change
the trend of globalization, which has supported the growth of the global economy to date.

B. Risks to Prices
If the aforementioned risks to economic activity materialize, prices also are likely to beaffected. In addition, it is necessary to pay attention to the following two risks that are
specific to prices.
The first is high uncertainties over firms' wage- and price-setting behavior, which could
exert either upward or downward pressure on prices. While firms' behavior has shifted
more toward raising wages and prices, there remain uncertainties over the extent to whichmoves to reflect wage developments in selling prices will become widespread. It is
expected in the baseline scenario that the virtuous cycle between wages and prices willcontinue to intensify. However, given that firms, especially small and medium-sized firms,
have continued to report that it has been difficult to pass on their employees' higher wages
to their selling prices, the rise in selling prices could be limited. Since the behavior andmindset based on the assumption that wages and prices will not increase easily havetaken hold in Japanese society for a prolonged period, it is necessary to pay close
attention to whether moves to pass on increases in wages and other costs to selling
prices will weaken with the waning of the effects of the pass-through to consumer pricesof cost increases led by the past rise in import prices. On the other hand, moves to reflect
wages in selling prices could strengthen to a greater extent than expected, and upward
pressure on wages could intensify with labor market conditions tightening. In this situation,

6

there is also a possibility that both wages and prices will deviate upward from the baseline
scenario, accompanied by a rise in medium- to long-term inflation expectations.
The second risk is future developments in foreign exchange rates and internationalcommodity prices, as well as the extent to which such developments will spread to importprices and domestic prices. This risk may lead prices to deviate either upward or
downward from the baseline scenario. There are high uncertainties over, for example, theoutlook for the global economy, and this could lead to significant fluctuations ininternational commodity prices. In addition, with firms' behavior shifting more towardraising wages and prices recently, exchange rate developments are, compared to the past,
more likely to affect 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.4
The first perspective involves an examination of the baseline scenario of the outlook. The
year-on-year rate of increase in the CPI is likely to be at around 2.5 percent for fiscal 2024
and then be at around 2 percent for fiscal 2025 and 2026. Meanwhile, underlying CPI
inflation is expected to increase gradually, since it is projected that the output gap will
improve and that medium- to long-term inflation expectations will rise with the virtuous
cycle between wages and prices continuing to intensify. In the second half of the
projection period, it is likely to be at a level that is generally consistent with the pricestability target.
The second perspective involves an examination of the risks considered most relevant tothe conduct of monetary policy. There remain high uncertainties, both upside anddownside, surrounding Japan's economic activity and prices, and it is necessary to pay
due attention to developments in financial and foreign exchange markets and their impact
on economic activity and prices. With regard to the risk balance, risks to economic activity
are skewed to the upside for fiscal 2025. Risks to prices are skewed to the upside forfiscal 2024 and 2025.
Examining risks on the financial side, overheating has generally not been seen in asset
markets and financial institutions' credit activities, although a somewhat rapid rise in stock
prices was seen for a time and valuations of some properties seem to have been relatively
high in the real estate market. Japan's financial system has maintained stability on thewhole. In addition, even in the case of an adjustment in the real economy at home andAs 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."
47

abroad and in global financial markets, the financial system is likely to remain highlyrobust on the whole, mainly because Japanese financial institutions have sufficient capitalbases. Moreover, financial institutions' resilience to rises in yen interest rates has headed
toward improvement, mainly reflecting their portfolio rebalancing in securities investment.
When examining financial imbalances from a longer-term perspective, if downward
pressure on financial institutions' profits, such as from low interest rates, the declining
population, and excess savings in the corporate sector, becomes prolonged, this could
create a risk of a gradual pullback in financial intermediation. On the other hand, underthese 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 thispoint, it is necessary to pay close attention to future developments.
As for the conduct of monetary policy, while it will depend on developments in economic
activity and prices as well as financial conditions going forward, given that real interest
rates are at significantly low levels, if the aforementioned outlook for economic activity andprices will be realized, the Bank will accordingly continue to raise the policy interest rate
and adjust the degree of monetary accommodation. With the price stability target of 2
percent, it will conduct monetary policy as appropriate, in response to developments ineconomic activity and prices as well as financial conditions, from the perspective ofsustainable and stable achievement of the target.

8

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

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

Fiscal 2024

+0.5 to +0.7[+0.6]+2.5 to +2.6[+2.5]+1.8 to +2.0[+1.9]

Forecasts made in April 2024

+0.7 to +1.0[+0.8]+2.6 to +3.0[+2.8]+1.7 to +2.1[+1.9]

Fiscal 2025

+0.9 to +1.1[+1.0]+2.0 to +2.3[+2.1]+1.8 to +2.0[+1.9]

Forecasts made in April 2024

+0.8 to +1.1[+1.0]+1.7 to +2.1[+1.9]+1.8 to +2.0[+1.9]

Fiscal 2026

+0.8 to +1.0[+1.0]+1.8 to +2.0[+1.9]+1.9 to +2.2[+2.1]

Forecasts made in April 2024

+0.8 to +1.0[+1.0]+1.6 to +2.0[+1.9]+1.9 to +2.1[+2.1]

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

9Policy Board Members' Forecasts and Risk Assessments(1) Real GDP
4.0y/y % chg.

y/y % chg.

4.0

3.0

3.0

2.0

2.0

1.0

1.0

0.0

0.0

-1.0

-1.0

-2.0

-2.0

-3.0

-3.0

-4.0

-4.0

-5.0
FY
2018

2019

2020

2021

2022

2023

2024

2025

2026

-5.0
2027

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

y/y % chg.

y/y % chg.

4.0

3.0

3.0

2.0

2.0

1.0

1.0

0.0

0.0

-1.0
FY
2018

2019

2020

2021

2022

2023

2024

2025

2026

-1.0
2027

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

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

indicates that a member assesses "upside and downside risks as

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

10

The Background5
I. Current Situation of Economic Activity
and Its Outlook
A. Economic Developments
Chart 1: Real GDP
Japan's economy has recovered moderately,
although some weakness has been seen in part.

1. Level580

s.a., ann., tril. yen

560

The

real

GDP

growth

rate

for

the

October-December quarter of 2023 was 0.0
percent on a quarter-on-quarter basis and 0.1

540

520

percent on an annualized basis (Chart 1). It thenregistered

minus

0.7

percent

on

a

500

quarter-on-quarter basis and minus 2.9 percent
on an annualized basis for the January-March
quarter of 2024, resulting in negative growth forthe first time in two quarters. This is mainly
becauseprivateconsumption

andexports

decreased, partly due to the effects of asuspension of production and shipment at some
automakers.

Inaddition,business

fixed

investment declined somewhat following therelatively high growth in the previous quarter. The
output gap -- which captures the utilization oflabor and capital -- became slightly negative in
the January-March quarter, mainly because thecapacity utilization rate for the manufacturingindustry declined due to the effects of thesuspension of production and shipment at some
automakers (Chart 2).

Monthly indicators and high-frequency data sincethensuggestthat

Japan's

economyhas

5"The Background" provides explanations of "The Bank's View"
decided by the Policy Board at the Monetary Policy Meeting heldon July 30 and 31, 2024.

11

480
CY 09

11

13

15

17

19

21

23

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

30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
CY 14

Private demand
Public demand
Net exports
Real GDP

15

16

Source: Cabinet Office.

17

18

19

20

21

22

23

24

continued on a recovery trend, although someweakness has been seen in part. In the corporate

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

sector, exports and production have been more or8

less flat. Corporate profits have improved and6business sentiment has stayed at a favorable

4

level. In this situation, business fixed investment2-10

has been on a moderate increasing trend.

00Business fixed investment plans (in nominal-2

10

terms) in the June 2024 Tankan indicate that the-420year-on-year rate of change in investment for-630

fiscal 2023 was significantly positive and that the

-8
CY 85

rate of change in planned investment for fiscal
2024 is clearly positive. In the household sector,
the employment and income situation has
improved moderately. Under these circumstances,private consumption has been resilient despite
the impact of price rises and other factors.

Japan's economy is likely to keep growing at apace above its potential growth rate, withoverseas

economies

continuing

to

grow

moderately and as a virtuous cycle from income
to spending gradually intensifies against thebackground of factors such as accommodative
financial conditions. Comparing the projections
with those presented in the previous Outlook
Report, the projected real GDP growth rate forfiscal 2024 is somewhat lower. This is mainly
because the carry-over effect from the previous
year on GDP growth for fiscal 2024 has become
smaller due to the retroactive revision in the Quick
Estimate of Construction Investment.

The potential growth rate seems to have been in
the range of 0.5-1.0 percent recently, with amoderate increase in the growth rate of totalfactor productivity (TFP), although the downtrend

12

Output gap (left scale)

-40
-30

Tankan factor utilizationindex (right scale)

-20

40
90

95

00

05

10

15

20

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

in working hours reflecting working-style reforms,
for example, has continued (Chart 3). As for theChart 3: Potential Growth Rate

outlook, the potential growth rate is expected to5rise moderately. This is based on the projection

4

that, although there will be less room for the3y/y % chg.
Total factor productivity
Capital input
Labor input
Potential growth rate

number of employed persons to increase, (1) TFP
will continue to grow, mainly on the back of2

resulting1

improvement in efficiency of resource allocation,0

advancesindigitalization

andaas well as an expansion in investment in human-1

capital, (2) the decline in working hours will cometo a halt in reflection of the diminishing effects ofworking-style reforms, and (3) growth in capitalstock will accelerate. These developments arelikely to be encouraged by the government's
variousmeasuresandbyaccommodative

financial conditions.6

Details of the outlook for each fiscal year are as
follows. In fiscal 2024, Japan's economy isexpected to continue recovering moderately,
partly due to the effects of the government's
economic measures, with overseas economies
growing moderately and accommodative financial
conditions being maintained. Goods exports arelikely to see a moderate increase, as overseas
economies grow moderately. Inbound tourism

6

However, the output gap and the potential growth rate, which
are estimated based on a specific assumption regarding trends,
should be interpreted with some latitude. For example, in terms oflabor, it is highly uncertain what kind of working style will take holdgoing forward -- including among women and seniors -- given theexperience of COVID-19, that of wage and price increases, andwith demographic changes. In addition, in the corporate sector, it
is expected that factors such as moves toward digitalization, whichreflect the experience of COVID-19 and labor shortages, andprogress on efforts with a view to decarbonization will change
Japan's economic and industrial structures; however, there remainhigh uncertainties over the extent of advancement andsustainability of innovation and sectoral reallocation of production
factors, both of which aim at adapting to changes in the economic
and industrial structures.

13

-2
FY 85

90

95

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

00

05

10

15

20

demand is projected to keep increasing. Businessfixed investment is expected to continue on an
increasing

trend,

accommodative

mainlyfinancialontheconditions.

back

of

In

the

household sector, nominal employee income islikely to keep increasing. This is because
employment is likely to rise on the back of anincrease in domestic and external demand, andwage growth is expected to remain relatively highin reflection of the results of this year's annual
spring labor-management wage negotiations.
Moreover, the government's initiatives, such asmeasures to reduce the household burden of
higher energy prices and cuts in income tax andinhabitant

tax,

are

projected

to

push

up

disposable income. In this situation, private
consumption is expected to increase moderately,
despite being affected by high prices.

In fiscal 2025 and 2026, Japan's economy isexpected to grow at a pace above its potential
growth rate, with domestic and external demandrising. Goods exports are likely to increase
moderately, with overseas economies continuing
to grow. Inbound tourism demand is projected tokeep increasing. Business fixed investment isalso expected to continue increasing, mainly forinvestmenttoaddresslaborshortages,

digital-related investment, investment related to
growthareas

anddecarbonization,andinvestment associated with strengthening supply
chains.

In

thehouseholdsector,nominalemployee income is likely to keep rising steadily.
This is because wage growth is expected toremain relatively high as the linkage between
wages and prices strengthens further, although it
will gradually become more difficult for labor
supply to increase, with labor force participation of14

women and seniors having advanced to a highdegree

thus

far.

In

this

situation,

privateconsumption is projected to continue increasing
moderately.

15

B. Developments in Major Expenditure
Items and Their Background
Government Spending
Public investment has generally been more orless flat, albeit with fluctuations (Chart 4). Whileconstruction

based

economic

measures,relatedbuilding

26s.a., ann., tril. yens.a., ann., tril. yen

32

Public construction completed (nominal, left scale)thegovernment's

25

includingconstruction

24

30

resilience, has

23

29

22

28

21

27

albeit with fluctuations. The value of public works

20

26

contracted

19

25

to

on

Chart 4: Public Investment

national

progressed, the amount of public construction
completed -- a coincident indicator of public
investment -- has generally been more or less flat,andordersreceivedforpublicconstruction -- both of which are leading
indicators of public investment -- also have31

Public investment (real, right scale)

18
CY 14

24
15

16

17

18

19

20

21

22

23

24

Sources: Cabinet Office; Ministry of Land, Infrastructure, Transport and Tourism.
Note: The figure for 2024/Q2 is the April-May average.

generally been more or less flat, albeit withfluctuations.

As for the outlook, public investment is likely to be
more or less flat.7 Government consumption is
projected to continue increasing moderately,reflecting an uptrend in healthcare and nursing
care expenditures.

Chart 5: Overseas Economies
10y/y % chg.
IMF
projections

8
6
4
2

0

Overseas Economies-2

Overseas total

Overseas economies have grown moderately on-4Advanced economies

the whole (Chart 5). By region, the U.S. economy-6

Emerging and commodity-exporting
economies

has grown moderately, mainly led by private

-8
CY 90

consumption, although it has been affected by

7

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

16

95

00

05

10

15

20

25

Sources: IMF; Ministry of Finance.
Note: Figures are the weighted averages of real GDP growth rates using countries' sharein Japan's exports as weights. The real GDP growth rates are compiled by the IMF,
and the rates from 2024 onward are its projections in the April 2024 World
Economic Outlook (WEO) and the July 2024 WEO Update. Figures for advanced
economies are those for the United States, the euro area, and the United Kingdom.
Figures for emerging and commodity-exporting economies are those for the rest of
the world.

pastpolicyinterest

rate

hikes.

Europeaneconomies have started to bottom out. The
Chinese economy has improved moderately,

Chart 6: Global PMI
60

partly due to government support, despite

55

continued effects of adjustments in the real estate

50

market.

commodity-exporting45

economies other than China have improved

40

moderately on the whole, as signs of a pick-up

35

have been seen in exports. Among those in Asia,

30

Emerging

andwhich are closely related to Japan's economy, theASEAN economies have improved moderately, as
domestic demand has continued to improve andexports have bottomed out. The NIEs economies
also have improved moderately on the back of as.a., DI

Manufacturing

25

Services

20
CY 09

11

13

15

17

19

21

23

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

pick-up in exports, mainly led by IT-related goods,
although the pace of improvement in domestic
demand has decelerated.

Chart 7: Effective Exchange Rates
200

Looking at the Global PMI to see the current
situation for the global economy, figures for theservices industry have been clearly above 50, thebreak-even point between improvement anddeterioration in business conditions; figures forthe manufacturing industry have been somewhat

CY 2020=100
Yenappreciation

180

160

Yen
depreciation

140
120
100
80
60

above 50 (Chart 6).

Real effective exchange rate

40
20
CY 80

As for the outlook, overseas economies areprojected to keep growing moderately. Looking at
developments by region for the time being, theU.S. economy is likely to continue growing
moderately. European economies are expected topick up moderately. The Chinese economy isprojected to grow moderately as the effects ofpolicy measures emerge, although adjustmentpressure in the real estate market is likely toremain.

Emerging

andcommodity-exporting

economies other than China are likely to continue

17

Nominal effective exchange rate

85

90

95

00

05

10

15

20

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

improving moderately with external demandChart 8: Real Exports and Imports

picking up.

120s.a., CY 2020=100

s.a., % of real GDP

8Real trade balance (right scale)Real exports (left scale)

110

Exports and Imports
Exports have been more or less flat (Chart 8). By
region, exports to the U.S. economy have been at
relatively high levels, albeit with fluctuations

6

Real imports (left scale)

100

4

90

2

80

0

70

-2

(Chart 9). Those to European economies havedecreased recently, particularly of automobiles
and capital goods. Exports to the Chinese
economy have continued on a moderate pick-up
trend,

withan

increaseinexports

of

60
CY 09

-4
11

13

15

17

19

21

23

Sources: Bank of Japan; Ministry of Finance; Cabinet Office.
Note: Based on staff calculations.

semiconductor production equipment and othergoods.

Exports

to

the

NIEs,

the

ASEAN

economies, and some other Asian economies
have bottomed out against the background of
progress in global adjustments for IT-related

Chart 9: Real Exports by Region
130s.a., 2019/Q1=100

s.a., 2019/Q1=100

130

120

120

110

110

100

100

goods. By goods, exports of automobile-related

90

90

goods have increased slightly, as the effects of80

80

the suspension of production and shipment at

70

70

some automakers have been dissipating (Chart

6010). Exports of capital goods have been more or

50

United States <20.1>

less flat when fluctuations are smoothed out.

40

EU <10.3>

Exports of IT-related goods have bottomed out

30
CY

against the background of the progress in global
adjustments for IT-related goods. Meanwhile,
exports of intermediate goods have been at
relatively low levels, mainly due to a deteriorationin supply and demand conditions in global
markets.

China <17.6>

60

NIEs, ASEAN, etc.
<34.4>
Other economies<17.6>

50
40
30

19 20 21 22 23 24 19 20 21 22 23 24

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 2023.
2. Figures for the EU exclude those for the United Kingdom for the entire period.

Chart 10: Real Exports by Type of Goods
140s.a., 2019/Q1=100130Intermediate
goods <20.1>

120

Motor vehicles andrelated goods <24.4>

s.a., 2019/Q1=100

140
130
120

110

110

100

100

grow

90

90

moderately, exports are projected to return to an

80

80

uptrend, mainly due to a pick-up in global demand70

As

overseas

economies

continue

to60

for IT-related goods.

50
40
CY

IT-related goods<19.0>
Capital goods<16.8>

60
50
40

19 20 21 22 23 24 19 20 21 22 23 24

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 2023.

18

70

Imports have picked up (Chart 8). They are
expected to follow a moderate uptrend on theChart 11: Current Accountback of developments in demand induced by50

increases in domestic demand and exports.

40s.a., ann., tril. yen

30
20

External Balance

10

The nominal current account surplus has been ata high level (Chart 11). The trade balance deficit
has been small, marking a clear decrease
compared to a while ago. Despite a surplus in thetravel balance -- which reflects an increase in
inbound tourism demand due to factors such as a0
-10Trade balance
Services balancePrimary income balance
Secondary income balance
Current account balance

-20
-30

-40
CY 14 15 16 17 18 19 20 21 22 23 24
Source: Ministry of Finance and Bank of Japan.
Note: Figures for 2024/Q2 are April-May averages.

rise in the number of inbound visitors (Chart 12) -the services balance has remained on a slightdeficit trend, as payments for digital-related
services have been at high levels, albeit with

Chart 12: Number of Inbound Visitors
40s.a., ann., mil. persons
Europe, the United States, and other regions

fluctuations. Meanwhile, the primary income

35

balance surplus has remained at a high level.

30

ASEAN
NIEs
China

25

20

The nominal current account balance is likely to15

follow a moderate improving trend. This is based

10on the projection that the primary income balance
surplus will increase moderately, and that thetrade balance deficit will decline moderately due
to factors such as an increase in goods exports.
Meanwhile, the services balance is expected tobe more or less unchanged: while the rise in
inbound tourism demand will make a positive
contribution,

theincreaseinpayments

fordigital-related services will make a negative
contribution.

In terms of the savings-investment balance,
overall excess savings in Japan's economy are
projected to follow a moderate expanding trend,
because the fiscal balance is likely to improve at a19

50
CY 14 15 16 17 18 19 20 21 22 23 24
Source: Japan National Tourism Organization (JNTO).
Note: Figures for Europe, the United States, and other regions include seasonal
adjustment errors.

pace that somewhat exceeds the pace of decline
in excess savings in the private sector (Chart 13).

Chart 13: Savings-Investment Balance80

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

60

Industrial Production

40

Industrial production has been more or less flat

20(Chart 14). By major industry, production of0"transport equipment" has increased, as the-20

effects of the suspension of production and-40

shipment at some

automakers havebeen

dissipating. Production of "electrical machinery,
and information and communication electronics

Excess investment

Household sector
Corporate sector
General government-60

Domestic savings-investment balance

-80
CY 14

15

16

17

18

19

20

21

22

23

Source: Bank of Japan.

equipment" has picked up somewhat, as theimpact of the production decline in automobiles
has been dissipating. Despite a pause in demandChart 14: Industrial Production

for construction machinery and other items,

120

production of "general-purpose, production, and115

business-oriented machinery" has been more orless flat, reflecting signs of a pick-up in production

110

equipment.

105

Production of "electronic parts and devices" has100

picked up with progress in inventory adjustments.

95

ofsemiconductor

production

s.a., CY 2020=100

Meanwhile, production of "chemicals (excluding
medicine)" has been at a low level, mainly due toa deterioration in supply and demand conditionsin global markets.

Production

90
85
CY 09

Inventories

11

13

15

17

Source: Ministry of Economy, Trade and Industry.
Note: Shaded areas denote recession periods.

Industrial production is projected to return to an
uptrend, reflecting a pick-up in global demand for
IT-related goods and other developments indomestic and external demand.

Corporate Profits
Corporate profits have improved. According to the
Financial Statements Statistics of Corporations byIndustry, Quarterly, current profits for all industries
and enterprises for the January-March quarter of

20

19

21

23

24

2024 rose from the previous quarter, reaching thehighest level since the April-June quarter of 1985,
from when comparable data are available (Chart
15).

This

mainlyreflects

progressinChart 15: Indicators Related to Corporate
Profits
1. Sales and Current Profits
400s.a., tril. yens.a., tril. yen

thepass-through of cost increases to selling prices
and the increase in non-operating profits due to30

Sales (left scale)

380

25

Current profits(right scale)

360

20

340

15

320

10

300

5

the yen's depreciation. By industry and firm size,
current profits of large manufacturers haveincreased, despite the effects of the suspensionof production and shipment at some automakers,
mainly reflecting the progress in the pass-throughof cost increases to selling prices and the yen's
depreciation.

Current

profits

of

small

and

medium-sized manufacturers have decreased,

280
CY 09

0
11

13

15

17

19

21

23

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

reflecting factors such as the effects of the
2. Contribution to Changes in Terms of Tradesuspension of production and shipment at some
automakers. As for nonmanufacturers, current

30

y/y % chg.
Commodity prices, etc.

profits of large firms have decreased, mainly
because profitability in the electric and gas utilities
industry has deteriorated due to developments infuelprices.

Current

profitsofsmall

Exchange rates

Terms of trade

20

10

and

medium-sized nonmanufacturers have increased,0

mainly reflecting a rise in sales -- including thoseto inbound tourists -- in the retail trade and-10services industries.
-20
CY 09

Business sentiment has stayed at a favorable
level. The June Tankan shows that the diffusionindex (DI) for business conditions has remained
at a favorable level (Chart 16). By industry, the DI
for manufacturing has been more or less flat. The
DIs for "pulp and paper" and "ceramics, stone,
and clay" have improved, reflecting the progressin the pass-through of cost increases to selling
prices. The DIs for textiles (large enterprises) andchemicals also have improved, since profits haveincreased with the yen's depreciation. On theother hand, the DIs for "iron and steel" and "food

21

11

13

15

17

19

21

23

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

andbeverages"(largeenterprises)

have

deteriorated, reflecting a rise in raw material
prices. In addition, the DI for motor vehicles (large
enterprises) has deteriorated somewhat due toChart 16: Business Conditions
60

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

40

Manufacturing

the effects of the suspension of production andshipment at some automakers. With regard tononmanufacturing, the DIs have been more or

Nonmanufacturing

200less flat. The DI for transport and postal activities
has improved, reflecting the progress in the
pass-through of cost increases to selling prices-20"Favorable"-40"Unfavorable"

and a rise in inbound tourism demand. On theother hand, the DIs for "services for individuals"(large enterprises) and "accommodations as wellas eating and drinking services" have deteriorated,

-60
CY 90

95

00

05

10

15

20

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

reflecting labor shortages and a rise in personnel
expenses. In addition, consumers' increased
thriftiness due to price hikes has made a negative
contribution to the DI for retail trade.

Regarding the outlook, with a moderate rise indomestic and external demand, corporate profits

Chart 17: Coincident Indicators ofBusiness Fixed Investment

are likely to follow an improving trend, partly due

95

to the progress in the pass-through of costs.a., ann., tril. yens.a., CY 2020=100

130
120

90

increases to selling prices.

110

85

100
80

Business Fixed Investment

90

Business fixed investment has been on amoderate increasing trend (Chart 17). The

Private nonresidential investment(SNA, real, left scale)75

Domestic shipments and imports ofcapital goods (right scale)70

Private construction completed(nonresidential, real, right scale)aggregate supply of capital goods -- a coincident
indicator of machinery investment -- has risen
recently,

partlysemiconductor

becauseproduction

investmentinequipmenthasincreased and the effects of the suspension of
production and shipment at some automakers
have been dissipating. Although moves topostpone investment have been observed against
thebackgroundoffactors

such

as

high

22

65
CY 09

80
70

60
11

13

15

17

19

21

23

Sources: Cabinet Office; Ministry of Economy, Trade and Industry; Ministry of Land,
Infrastructure, Transport and Tourism.
Notes: 1. The figure for private construction completed for 2024/Q2 is the April-May
average.
2. Figures for real private construction completed are based on staff calculations
using the construction cost deflators.

construction material prices, private construction
completed(nonresidential)--acoincident

Chart 18: Leading Indicators of Business
Fixed Investment

indicator of construction investment -- has been

13

flat recently, as there has been progress in, for

12example, construction of logistics facilities and11

urban redevelopment projects.

s.a., ann., tril. yen
Machinery orders (private sector, excluding
volatile orders)Construction starts (private, nonresidential,
estimated construction costs)

10
9

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

7

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

5
CY 09

(Chart 18). By industry, although orders by the
manufacturing industry overall have been pushed
down by the dissipation of the effects oflarge-scale projects in some industries, orders by
the "electrical machinery" and "information andcommunication electronics equipment" industries
have been on an uptrend against the backgroundof the progress in global adjustments for
IT-related

goods.

nonmanufacturing

fromOrdersindustry

have

the

increased

moderately, albeit with fluctuations stemming fromlarge-scale

projects,

asdigital-

and

labor

saving-related investments have followed an
uptrend. Construction starts (in terms of planned
expensesforprivateandnonresidential

construction) -- a leading indicator of construction
investment -- have been on an uptrend recently,
partly due to the establishment of new factories
and

the

extension

constructionofofexisting

logistics

ones,

facilities

asandredevelopment projects have continued. Looking
at the business fixed investment plans (in nominal
terms) in the June Tankan, business fixed
investment (on the basis close to GDP definition;business fixed investment -- including software
and

R&D

investmentsbutexcludinglandpurchasing expenses -- for all industries and

23

11

13

15

17

19

21

23

Sources: Cabinet Office; Ministry of Land, Infrastructure, Transport and Tourism.
Notes: 1. Volatile orders are orders for ships and orders from electric power companies.
2. Figures for 2024/Q2 are April-May averages.

enterprises

includingfinancial

institutions)registered a year-on-year rate of increase of 9.9

Chart 19: Planned and Actual Business
Fixed Investment

percent for fiscal 2023 (Chart 19). The rates of

15change

10

in

both

manufacturing

andy/y % chg.

nonmanufacturing industries for fiscal 2023 weresignificantly positive. In addition, the reported rate

5

for fiscal 2024 of 10.8 percent indicates a0relatively high increase compared with past June

-5

Tankan surveys.

Business fixed investment is expected to continue
on an increasing trend, mainly on the back ofaccommodative financial conditions, as corporate

Private nonresidential
investment (SNA, nominal)-10

Tankan (actual)-15

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

-20
FY 09

11

13

15

17

19

21

23

Sources: Bank of Japan; Cabinet Office.
Note: The Tankan figures include software and R&D investments and exclude landpurchasing expenses. R&D investment is not included before the March 2017
survey. The figures are for all industries including financial institutions.

profits follow an improving trend. Specifically,
investment that is expected to be undertaken
duringtheprojection

periodincludes(1)

investment induced by the increase in domestic

Chart 20: Capital Stock Cycles
10business fixed investment, y/y % chg.

and external demand; (2) labor-saving andefficiency-improving investment to address labor
shortages and IT-related investment to digitalize

5
​

04

​
​

10
12

0

22
​

facilities,

resultingfromexpanding

-5

08

-10

and (5) semiconductor-related investment that ismainly aimed at strengthening supply chains andthat also reflects government support. Regarding
investment related to growth areas, such as
digitalization

andsemiconductors,

capitalaccumulation in these areas tends to be moderate
due to a relatively small existing capital stock andto short depreciation periods reflecting rapid
advances in technology (Chart 20).

24

1.5%

​

1%

0.5%

20

0%

09

investment in growth areas and to addressenvironmental issues, such as decarbonization;

18

​
​

e-commerce, and in offices and commercial
facilities due to redevelopment projects; (4)

​

14 ​

business activities; (3) construction investment in
logistics

FY 2023

Investmentcapital stock
ratio at theend of FY
2023

05

Expected
growth rate: -2%

-15
9.5

-1%

10.0 10.5 11.0 11.5 12.0 12.5 13.0

investment-capital stock ratio at the end of the previous fiscal year, %Source: Cabinet Office.
Note: Each broken line represents the combination of the rate of change in business fixed
investment and the investment-capital stock ratio at a certain expected growth rate.

Employment and Income Situation
The employment and income situation has
improved moderately.

Chart 21: Number of Employed Persons
68

Regarding the number of employed persons, thatof regular employees has been on a moderate
uptrend, albeit with fluctuations, mainly in theinformation and communications industry, which
has faced a severe labor shortage (Chart 21). The
number of non-regular employees has also been
on a moderate uptrend, albeit with fluctuations,mainly in the wholesale and retail trade as well as
the face-to-face services industries. With regards.a., mil. personss.a., CY 2019=100

105

67

100

66

95

65

90

64

Employed persons(left scale)
Regular employees(right scale)
Non-regular employees(right scale)

63
62
CY 09

85

80
75

11

13

15

17

19

21

23

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

to labor market conditions, the unemployment
rate has been at a low level (Chart 22). The active
job openings-to-applicants ratio, despite somefluctuations, has been more or less flat (Chart 23).
Meanwhile, the labor force participation rate has

Chart 22: Unemployment Rate and Labor
Force Participation Rate
7s.a., %

s.a., %

64

Unemployment rate (left scale)
Labor force participation rate(right scale)

663

been on a moderate uptrend, particularly for
women, when fluctuations are smoothed out

62
5(Chart 22).

61
4
60

With regard to the outlook for the number of

359

employees, regular employees are likely toincrease moderately, mainly in industries withlabor shortages, such as the information andcommunications industry. Non-regular employees,
mainly in the face-to-face services industry, areexpected to keep increasing along with the rise indomestic and external demand. However, the

2
CY 09

because it will become more difficult for labor

13

15

17

19

21

23

Source: Ministry of Internal Affairs and Communications.

Chart 23: Job Openings-to-Applicants
Ratio
2.6

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

2.2

pace of increase in the number of overall
employees is projected to decelerate, partly

58
11

New job openings-toapplicants ratio

1.8
1.4

supply to increase, reflecting factors such as
demographic

changes,

with

labor

force

participation of women and seniors having

1.0
0.6

advanced to a high degree thus far. Under these
0.2
CY 09

11

13

15

17

Source: Ministry of Health, Labour and Welfare.

25

19

21

23

circumstances,theunemployment

rate

is

Chart 24: Nominal Wages

expected to follow a moderate declining trend.

3

y/y % chg.
Special cash earnings (bonuses, etc.)
Non-scheduled cash earnings
Scheduled cash earnings
Total cash earnings

2

On the wage side, the year-on-year rate ofchange in nominal wages per employee has

1increased clearly, reflecting the recovery ineconomic activity and the results of this year's
annualspringlabor-management

wage

negotiations (Chart 24). 8 , 9 Looking at the
breakdown, the rate of increase in scheduled
cash earnings has accelerated clearly (Chart 25).
Specifically, the rate of increase for full-time
employees has accelerated to the range of

0

-1

-2
14/Q1

16/Q1

18/Q1

20/Q1

22/Q1

24/Q1

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

2.5-3.0 percent as their scheduled cash earnings
have gradually reflected the results of the annual
spring labor-management wage negotiations, inwhich the wage growth rate (the rate of base pay
increase) significantly exceeded last year's highrate. The year-on-year rate of increase in hourlyscheduled cash earnings for part-time employees
has continued to show high growth recently in therange of 3.5-4.0 percent, as labor market

Chart 25: Decomposition of Developments
in Scheduled Cash Earnings
3.0

y/y % chg.

2.5

1.0
0.5

wages have been raised. Non-scheduled cash

-0.5

earnings

-1.0
14/Q1

moderately.

The

year-on-year rate of change in special cash
earnings (bonuses) has continued on a moderate
uptrend, reflecting the improvement in corporate
profits.

With regard to the outlook for wages, the rate ofincrease in scheduled cash earnings is likely toaccelerate further through this summer, reflecting
8

Wages in the Monthly Labour Survey are assessed on the basisof continuing observations, which are less susceptible tofluctuations due to sample revisions.
9Box 1 outlines developments in thelabor-management wage negotiations this year.

annualspring26

Scheduled cash earnings

1.5

0.0

increased

Contribution of part-time employees

Contribution of full-time employees

2.0

conditions have remained tight and minimum
haveContribution of the share of part-time employees, etc.

16/Q1

18/Q1

20/Q1

22/Q1

24/Q1

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

the results of this spring's labor-management
wage negotiations. These earnings are projected
to continue increasing firmly from fiscal 2025, in

Chart 26: Employee Income
4y/y % chg.

reflection of price rises and with labor market
conditions continuing to be tight, due in part to a
slowdown in the pace of increase in labor force
participation

of

women

and

seniors.

Non-scheduled cash earnings are expected toincreasemoderately,reflecting

the

rise

in

domestic and external demand. Special cash
earnings (bonuses) are likely to keep rising withcorporate profits following an improving trend.
Taking all of these factors into account, the rate ofchange in nominal wages per employee isprojected to continue increasing clearly.

In light of the aforementioned employment andwage conditions, employee income has improved
clearly in nominal terms (Chart 26). In real terms,
the year-on-year rate of decline in employee
income has remained on a slowing trend due tothe combination of a decline in inflation and an
improvement in nominal income. With regard to
the outlook, nominal employee income is likely tocontinue to see a clear increase in reflection of anacceleration in nominal wage growth. Under
these circumstances, the year-on-year rate ofchange in real employee income is likely togradually turn positive despite the effects ofenergy prices.

Household Spending
Private consumption has been resilient despite
the impact of price rises and other factors.

27

2

0

-2

-4
14/Q1

Total cash earnings
Number of employees
Employee income
Real employee income

16/Q1

18/Q1

20/Q1

22/Q1

24/Q1

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

The Consumption Activity Index (CAI, travel
balance-adjusted) -- which is calculated byChart 27: Real Private Consumptions.a., CY 2015=100

s.a., CY 2015=100

combining various sales and supply-side statistics

120

from

Japan's

115

consumption activity in a comprehensive manner110-- increased slightly on average for the April-May

105

105

period of 2024 relative to the January-March

100

100

quarter, as automobile sales picked up (Charts 27

95

95

and 28).10 Looking at subsequent developments

90

in private consumption from various sources,

85

the

viewpointofgaugingsuch as high-frequency indicators, statistics
publishedbyindustryorganizations,andanecdotal information from firms, consumption
seems to have been resilient despite being
affected by price rises, partly due to the

125
120
115
110

90
85

Consumption of households (left scale)
Disposable income, etc. (SNA, left scale)
Consumption Activity Index (right scale)

80
CY 14

80
75

15

16

17

18

19

20

21

22

23

24

Sources: Bank of Japan; Cabinet Office, etc.
Notes: 1. Figures for the Consumption Activity Index (CAI) are based on staff
calculations. The CAI figures are travel balance adjusted; i.e., they exclude
inbound tourism consumption and include outbound tourism consumption. The
figure for 2024/Q2 is the April-May average.
2. Figures for consumption of households exclude imputed rent.
3. "Disposable income, etc." consists of disposable income and adjustment for thechange in pension entitlements, and real values are obtained using the deflatorof consumption of households.

improvement in the income situation (Chart 29).

Chart 28: Consumption Activity Index(CAI, Real)115

By type, consumption of durable goods hass.a., 2019/Q1=100

s.a., 2019/Q1=100
Nondurable goods<40.5>

110

115
110

picked up recently, as automakers that had

105

suspended

have

100

100

gradually resumed their activities (Chart 28).

95

95

Specifically, the number of new passenger cars

90

90

sold has increased after it decreased significantly

85

85

for the January-March quarter due to factors such

80

80

as the effects of the suspension of production and75

shipment

production

at

some

and

shipment

automakers.

Sales

of

household electrical appliances appear to havepicked up moderately recently, as those of air
conditioners have been favorable, reflecting hightemperatures.

Nondurable goods (e.g., "beverages and food"and "clothes") have followed a decreasing trend,
mainly reflecting the impact of high prices. Sales

10Regarding the CAI, see the Bank's research paper "Revision of
the Consumption Activity Index to Capture Recent Changes inConsumption Patterns" released in July 2021.

28

Services <50.7>

Durable goods <8.9>

105

75

70
70
CY 19 20 21 22 23 24 19 20 21 22 23 24
Sources: Bank of Japan, etc.
Notes: 1. Based on staff calculations. Figures in angular brackets show the weights in the
CAI. Figures for 2024/Q2 are April-May averages.
2. Nondurable goods include goods classified as semi-durable goods in the SNA.

of beverages and food at supermarkets and otherstores have been more or less flat, albeit with

Chart 29: Consumption Developments
Based on Credit Card Spending

fluctuations; in real terms, they appear to have50

declined40

moderately.

indications

that

However,

sales

of

there

are

beverages

haveincreased recently, reflecting high temperatures.
In addition, at department stores, consumption ofhigh-end goods by the wealthy has remained

chg. from baseline, %

30
20
10
0
-10
-20

favorable, partly due to the rise in stock prices in-30

the meantime.

-40

Total
Retail (excluding energy)
Services (excluding energy)
Energy

-50
-60
CY 20

Services consumption has increased moderately
as a trend, although the pace of increase has

21

22

23

24

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

slowed (Charts 28 and 29). Dining-out has also
been on a moderate increasing trend, despite aslowdown in the pace of increase due to theChart 30: Confidence Indicators Related to
Private Consumption

impact of high prices, the effects of changes in

60

consumers'

lifestyles,

andconstraints

on

s.a.

50

operating hours and the number of restaurants.
Domestic travel has been at a relatively high level,reflecting a recovery in travel demand. Overseas

40
30

travel has seen a pause in the recovery, with20

relatively high travel costs.

Improved

Consumer Confidence Index

10

Looking at confidence indicators related to private
consumption, the Consumer Confidence Index -which asks consumers for their views on theoutlook -- had continued to improve, mainlyreflecting expectations for an increase in nominal
income; however, it has recently deteriorated
somewhat compared to a while ago, reflecting
concern over higher prices due to such factors as
the yen's depreciation (Chart 30). The Economy
Watchers Survey -- which asks firms for theirviews on the direction of the economy -- shows
that

the

current

economic

conditions

DI(household activity-related) has been below the

29

0
CY 09

Economy Watchers Survey(household activity)

11

13

15

17

Worsened

19

21

23

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

threshold value of 50 recently, mainly reflecting
higher input costs due to such factors as the yen's
depreciation,

as

well

as

an

increasein

consumers' thriftiness owing to higher prices.

Chart 31: Average Propensity to Consume
105s.a., %

100
95

Regarding the outlook, for the time being,90

although private consumption is expected to beaffected by price rises, it is projected to increase
moderately, partly due to the effects of the

85
80

government's economic measures (e. g., cuts inincome tax and inhabitant tax) and with nominal
employeeincomecontinuing

toimprove.

Thereafter, private consumption is projected to

75
CY 09

11

13

15

17

19

21

23

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

continue increasing moderately as employee
income keeps improving. The propensity toconsume is likely to gradually return to theaverage level seen before the pandemic, albeit
with fluctuations due to the effects of theChart 32: Housing Investment
24s.a., ann., tril. yens.a., ann., mil. units

1.2
1.1

22

1.0

economic measures (Chart 31).

20
0.9
18
0.8

Housing investment has been relatively weak(Chart 32). The number of housing starts -- a

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

Housing starts(right scale)leading indicator of housing investment -- hasfollowed a downtrend that reflects a rise in

14
CY 09

housing prices. Housing investment is likely to

Sources: Cabinet Office; Ministry of Land, Infrastructure, Transport and Tourism.
Note: The figure for 2024/Q2 is the April-May average.

follow a moderate declining trend in reflection of
the rise in housing prices and demographic
developments, although accommodative financial
conditions are expected to provide support.

30

0.7
0.6

11

13

15

17

19

21

23

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

Chart 33: Inflation Indicators
y/y % chg.

of seasonal changes in electricity rates) has risen(Chart 33). This reflects factors such as moves topass on increases in raw material costs,
personnel expenses, and other costs to prices, as

23/Q3 23/Q4 24/Q1 24/Q2
Consumer Price Index (CPI)
Less fresh foodExcluding temporary factors

3.0

2.5

2.5

2.4

2.9

2.1

2.3

2.4

4.3

3.8

3.2

2.2

well as a scaling back of the government's

Excluding temporary factors

4.2

3.4

3.0

2.1

measures to reduce the household burden of

Producer Price Index (q/q % chg.)

-0.1

0.3

0.6

1.4

Services Producer Price Index

2.5

2.7

2.4

2.8

GDP Deflator

5.2

3.9

3.4

2.5

2.1

2.3

higherelectricity

and

gas

charges.

The

year-on-year rate of increase in the services
producer

priceinternational

index(SPPI,

transportation)has

excludingremained

relatively high at around 3 percent recently,

Less fresh food and energy

Domestic demand deflator

Sources: Ministry of Internal Affairs and Communications; Bank of Japan; Cabinet Office.
Notes: 1. Figures for the producer price index (PPI) are adjusted for the hike in electric
power charges during the summer season. Figures for the services producer
price index (SPPI) exclude international transportation.
2. The CPI figures excluding temporary factors are staff estimates and exclude
mobile phone charges and the effects of policies concerning the provision offree education and travel subsidy programs.

mainly on the back of the rise in personnel
expenses.

Chart 34: CPI (Less Fresh Food)y/y % chg.

The year-on-year rate of increase in the CPI (allitems less fresh food) has been at around 2.5
percent

recently,asservices

priceshave

continued to rise moderately, reflecting factors
such as wage increases, although the effects ofthe pass-through to consumer prices of cost
increases led by the past rise in import prices
have waned (Chart 34).

The rate of increase in the CPI (all items lessfresh food and energy, excluding temporary
factors such as the effects of the government's
domestic travel discount program) has remainedon a decelerating trend, as the pressure on firms
to pass on raw material cost increases to selling
prices has waned compared to a while ago,although moves to pass on personnel expenses

31

4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
CY 19

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

20

21

22

23

24

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

have been widely observed (Chart 35). 11
Specifically, as for goods, the rates of increase in
prices of a wide range of items have continued todecelerate as the impact of the previous year's
price hikes has dissipated and the pressure on

Chart 35: CPI (Excluding Temporary Factors)
4.5

y/y % chg.
Goods

4.0
General services (lesshousing rent)
Housing rent (private andimputed rent)
Administered prices

3.5
3.0

firms to pass on raw material cost increases has

2.5

waned compared to a while ago. With the waning

2.0

of such pressure, the rate of increase in general

1.5

servicesslightly,

1.0

particularly for items such as services related to

0.5

housing repairs and maintenance, although

0.0

moves to pass on personnel expenses to prices

-0.5
CY 19

priceshas

decelerated

have been observed. Such moves to pass on
personnel expenses have been spreading foritems including domestic help, tutorial fees,
lesson fees, and charges for massage. 12 The
year-on-year

rate

of

changeinoverallreflects offsetting factors -- while TV license

3.0

charges have been reduced, exerting downward

2.5

pressure

2.0

other

factors,

auto

insurance premiums and other prices have beenraised and nursing care and medical fees havebeen revised.

21

22

23

24

Chart 36: Various Measures of Core
Inflation
3.5

with

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 are staff estimates and exclude mobile phone charges and theeffects of the consumption tax hike, policies concerning the provision of freeeducation, and travel subsidy programs.

administered prices has been flat recently. This

together

CPI (less fresh food andenergy)y/y % chg.
Trimmed mean
Weighted median
Mode

1.5
1.0
0.5
0.0

-0.5
-1.0

The indicators for capturing the underlying trend
in

the

CPI

have

exhibitedthefollowingdevelopments (Chart 36). 13 , 14 , 15 The trimmed
11

The CPI figures excluding temporary factors are calculated by
excluding (1) the effects of the consumption tax hike and policies
concerning the provision of free education, (2) the effects of travelsubsidy programs, and (3) mobile phone charges from the CPI (allitems less fresh food) and the CPI (all items less fresh food andenergy).
12

Box 2 outlines services price revisions in April 2024.

13

The trimmed mean is calculated by excluding items that belong
to a certain percentage of the upper and lower tails of the pricechange distribution (10 percent of each tail) in order to eliminate
the effects of large relative price changes. The mode is the
inflation rate with the highest density in the price change
distribution. The weighted median is the average of the inflation
rates of the items at around the 50 percentile point of the

32

-1.5
CY 09

11

13

15

17

19

21

23

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

mean of the year-on-year rate of change in the
CPI has been at around 2 percent as the impactof the previous year's price hikes has dissipated.
The mode and the weighted median have been at

Chart 37: Diffusion Index of Price Changes
100% points%
Diffusion index (left scale)
Share of increasing items (right scale)
Share of decreasing items (right scale)

80
60

100
90
80

around 1.5 percent. Looking at the year-on-year

40

70

price changes across all CPI items (less fresh

2060food), the share of items whose prices have

050

increased minus the share of items whose prices

-20

40

-40

30

-60

20

-80

10

have decreased has remained on a decreasing
trend (Chart 37).

-100
CY 09

Meanwhile, the year-on-year rate of change in thedomestic demand deflator has been in the rangeof 2.0-2.5 percent (Chart 33). By component,
while the rate of increase in the private
consumption deflator has continued to decelerate,
the rates of increase in the business fixed
investment deflator and other deflators haveaccelerated somewhat. The rate of change in theimport deflator has turned positive, mainlyreflecting the past rise in crude oil prices and the
yen's depreciation. The year-on-year rate ofincrease in the GDP deflator has decelerated
somewhat; specifically, the rate of change in thedomestic demand deflator has been positive,
while the rise in the import deflator has exerted
downward pressure.

cumulative distribution in terms of weight. Each indicator is
calculated using data for each CPI item that excludes the effectsof the consumption tax hikes, policies concerning the provision offree education, and travel subsidy programs.
14

In this report, the mode is defined as the inflation rate with thehighest density in the distribution that is estimated parametricallyby fitting a normal inverse Gaussian distribution to the observed
price change distribution in each period. It should be noted that,with dispersions of the observed distributions increasing, the fit of
the normal inverse Gaussian distribution has deteriorated recently.
Therefore, estimates of this mode should be interpreted with somelatitude.
15

See Box 2 for inflationary pressure stemming from the linkage
between wages and prices, which has been explained in past
Outlook Reports and other publications by the Bank.

33

0
11

13

15

17

19

21

23

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

Chart 38: Inflation Rate and Output Gap

Environment Surrounding Prices

10y/y % chg.

%

5

In the outlook for prices, the main factors that8

4

determine inflation rates are assessed as follows.

63First, the output gap is likely to continue to widen

42

moderately within positive territory toward the end

2

1of the projection period (Charts 2 and 38).

0

0

-2

-1

-4

Second,medium-tolong-term

inflation

expectations have risen moderately (Chart 39).
The June Tankan shows that firms' inflation
outlookforgeneralpriceshas

increased

moderately. Given that the formation of inflation
expectations in Japan is largely adaptive, theincrease in inflation seen thus far has brought-6

CPI (less fresh food and energy, right scale)

-8
CY 85

90

-3
-4

95

00

05

10

15

20

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

Chart 39: Inflation Expectations
1. Survey
2.5y/y, ann. avg., %Market participants (QUICK, 2 to 10 years ahead)
Economists 1 (6 to 10 years ahead)
Economists 2 (7 to 11 years ahead)
Households (over the next 5 years)
Firms (5 years ahead)about a rise in households' and firms' medium- tolong-term inflation expectations. Firms' behavior-2

Output gap (left scale)

2.0

has shifted more toward raising wages and prices,and firm wage increases that were higher than

1.5

those seen in the previous year were achieved in
1.0

this year's annual spring labor-management wage
negotiations. In addition, moves to reflect wage
increasesinselling

priceshavestrengthening. Regarding the outlook, inflation
expectations are expected to rise moderately,with continued improvement in the output gap andchangesinfirms'

behavior.

Underwagethese

and

0.5

been

price-setting

circumstances,

the

0.0
CY 05

virtuous cycle between wages and prices is
projected

to

keep

intensifying

throughachievement of wage increases that reflect price

07

09

11

13

15

17

19

21

23

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

2. BEI
2.5

%

2.0
1.5

rises and through a pass-through of wage

1.0

increases to selling prices.

0.5

0.0
-0.5
-1.0

Third, the year-on-year rate of change in the-1.5

Old (10-year)

import price index has risen recently, mainly-2.0

Old (longest)-2.5

New (10-year)

reflecting the past rise in crude oil prices and the
yen's depreciation (Charts 41 and 42). Looking at

34

-3.0
-3.5
CY 05

07

09

11

13

15

17

19

21

23

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

the final demand-intermediate demand (FD-ID)
price indexes, the index for stage 1 of the ID --Chart 40: Output Prices

which shows developments in an upstream stage

50of the production process -- has increased

40

Manufacturing

recently, mainly reflecting the yen's depreciation

30

Nonmanufacturing

and the past rise in crude oil prices (Chart 43).

20

That for stage 2 of the ID has remained on a10

moderate uptrend. The indexes for stages 3 and 4of the ID, which show developments in relatively

0
-10
-20

downstream stages of the production process,-30

have risen slightly recently, as there have been

-40

moves to pass on the increases in raw material
costs, personnel expenses, and other costs toprices.

DI ("rise" - "fall"), % points-50
CY 74 78 82 86 90 94 98 02 06 10 14 18 22
Source: Bank of Japan.
Note: Based on the Tankan. All enterprises. There is a discontinuity in the data for
December 2003 due to a change in the survey framework.

Chart 41: International Commodity Prices
140

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

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

120

charges) had remained negative due to the100

government's measures to reduce the household

80burden of higher gasoline prices, electricity
charges, and gas charges. 16 However, it has

Copper60

turned positive, mainly reflecting the fact that40

discounts on electricity and gas charges have20

been reduced compared to the previous year andthat the rate of renewable energy surcharges on

Crude oil (Dubai)

0
CY 09

11

13

15

17

19

21

23

Sources: Nikkei Inc.; Bloomberg.

electricity has been raised. As for the outlook, therate of increase in energy prices is likely toChart 42: Import Price Index
60

y/y % chg.
Yen basis

16

Looking at the government's energy-related economic
measures, with regard to gasoline subsidies, it has introduced ameasure to provide subsidies to petroleum distributors andimporters as funds to contain a sharp rise in their selling prices
when the nationwide average for retail gasoline prices exceeds
the benchmark price (168 yen per liter). With regard to electricity
charges, through the government's measures to reduce thehousehold burden, electricity charges were cut by 7 yen perkilowatt-hour (roughly a 20 percent discount per month for typicalhouseholds) from February through September 2023, 3.5 yen perkilowatt-hour from October 2023 through May 2024, and 1.8 yen
per kilowatt-hour in June (the months refer to the timing at whichelectricity charges were calculated). Regarding manufactured andpiped gas charges, measures to reduce the household burdenroughly similar to those for electricity charges were implemented.

35

50

Contract currency basis

40
30
20
10
0

-10
-20
CY 19

20

Source: Bank of Japan.

21

22

23

24

accelerate temporarily with the discontinuation of
the discounts on electricity and gas charges, but

Chart 43: FD-ID Price Indexes (AllCommodities)

downward pressure is projected to be exerted

170

again this summer by emergency measures

160

against higher electricity and gas charges. 17

150

Thereafter, assuming that the government's

140

measures to reduce the household burden of

130

higher energy prices will be phased out toward
the end of 2024, the rate of change in energy

110
100
90

positive figure after the turn of 2025, due to a80

pushing down energy prices. After the impact of
the rebound caused by the phasing out of thegovernment's measures dissipates, the rate is
projected to be slightly negative in light ofdevelopments in the futures market.

Outlook for Prices
Based

on

this

underlying

scenario,

theyear-on-year rate of increase in the CPI (all items
less fresh food and energy) is likely to decelerate
due to a gradual waning of the effects of thepass-throughtoconsumerpricesofcostincreases led by the past rise in import prices.
Subsequently, the rate of increase is expected toaccelerate moderately and be at around 2 percent,as the output gap continues to improve and as
medium- to long-term inflation expectations andwage growth rise, accompanied by changes in

17

The government announced that it would continue with its
gasoline subsidies through the end of 2024. It discontinued thediscounts on electricity charges at the end of June 2024, and will
cut the charges by 4 yen per kilowatt-hour for September andOctober and by 2.5 yen per kilowatt-hour for November (themonths refer to the timing at which the charges are calculated).
Regarding manufactured and piped gas charges, measures toreduce the household burden roughly similar to those for electricity
charges are planned to be implemented.

36

ID index (stage 1)
ID index (stage 2)
ID index (stage 3)
ID index (stage 4)
FD index (excluding exports)

120

prices is highly likely to register a relatively large
dissipation of the effects of these measures

CY 2015=100

70
CY 15

16

17

Source: Bank of Japan.

18

19

20

21

22

23

24

factors such as firms' wage- and price-setting

Chart 44: Phillips Curve

behavior (Chart 44).

5

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

4

aforementioned

3

developments in energy prices, the year-on-year2

rate of increase in the CPI (all items less fresh

1

Takingaccountofthefood) is likely to be at around 2.5 percent for fiscal
2024 and then be at around 2 percent for fiscal

2013/Q2-2024/Q1
2024/Q2

B
A

0
A:1983/Q1-2013/Q1
y = 0.42x + 0.6
B:1983/Q1-1995/Q4
y = 0.25x + 1.5
C:1996/Q1-2013/Q1
y = 0.25x - 0.1-12025 and 2026. In the first half of the projection
period, the rate of increase is expected to bepushed up by factors such as a dissipation of theeffects of the government's measures pushingdown CPI inflation, while the effects of thepass-throughtoconsumerpricesofcostincreases led by the past rise in import prices arelikely to wane. Thereafter, the rate is projected to
be at around 2 percent in reflection of thedevelopments in the CPI for all items less fresh
food and energy.

That said, there remain uncertainties overwhether underlying inflation will increase with astronger linkage between wages and prices. In
particular, close attention is warranted on the
degree

to

which

moves

to

reflect

wage

developments in selling prices will become
widespread. On the other hand, if such moves
strengthen to a greater extent than expected orlabor market conditions become tighter, there is apossibility that both wages and prices will deviate
upward from the baseline scenario, accompanied
by a rise in medium- to long-term inflation
expectations.

37-2

2013/Q2
C-3-7 -6 -5 -4 -3 -2 -1 0

1

2

3

4

5

6

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

III. Financial Developments in Japan

Chart 45: Short-term Interest Rates
0.4 %Financial Conditions

TIBOR (3-month)T-Bill rate (3-month)
Repo rate (overnight)
Uncollateralized overnight call rate

0.2

Financial conditions have been accommodative.
0.0
-0.2

Lookingatshort-term

interest

rates,

the-0.4

uncollateralized overnight call rate has been in
the range of 0 to 0.1 percent (Chart 45). Interest-0.6

rates on term instruments have risen slightly.

-0.8

-1.0
CY 15

Real interest rates have been negative (Chart46).18

16

17

18

19

20

21

22

23

24

Sources: Bank of Japan; JBA TIBOR Administration; Bloomberg.
Note: Figures for repo rate are the Tokyo Repo Rate.

Chart 46: Real Interest Rate (1-Year)
1.5

Firms' funding costs have increased but haveremained at low levels (Chart 47). Lending rates

Real interest rate

1.0

Nominal interest rate

0.5

(the average interest rates on new loans and0.0

discounts) have risen, particularly for long-term-0.5loans, but have remained at low levels. Issuance-1.0

rates for CP have been more or less flat. Those-1.5

for corporate bonds have increased, albeit with

-2.0

fluctuations.

%

-2.5
CY 10

12

14

16

18

20

22

24

Sources: Bank of Japan; QUICK, "QUICK Monthly Market Survey <Bonds>";
Consensus Economics Inc., "Consensus Forecasts"; Bloomberg.
Note: Figures for the real interest rate are calculated as government bond yields (1-year)
minus the composite index of inflation expectations (staff estimates).

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

such

attitudes

haveChart 47: Bank Lending Rates and Issuance
Yields for CP and Corporate Bonds

remained

2.0

accommodative on the whole (Chart 48). That for

1.8

issuance conditions for CP has continued to show

1.6

net "easy" conditions. As suggested by the latter,

1.4

issuance conditions for CP and corporate bonds

1.2

have been favorable. The DI for firms' financial
positions in the Tankan suggests that they have

0.8

0.6
0.4

in

0.2

activity

andprogress

in

the

0.0
CY05
18

See Box 5 of the April 2024 Outlook Report for an assessmentof financial conditions in terms of real interest rates.

38

Bank lending rate (short-term)
Bank lending rate (long-term)
CP (3-month)
Corporate bonds (AA)1.0

been at favorable levels on the back of a recovery
economic

%

07

09

11

13

15

17

19

21

23

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

pass-through of cost increases to selling prices(Chart 49).

Chart 48: Lending Attitudes of Financial
Institutions as Perceived by Firms
40

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

30

Firms'

demand

for

funds

has

increased

moderately on the back of, for example, the20

recovery in economic activity as well as mergers

10

and acquisitions of firms. In this situation, the0year-on-year rate of increase in the amountoutstanding of bank lending has been at around-10
Large enterprises

3.5 percent (Chart 50). That in the aggregate-20

amount outstanding of CP and corporate bonds

-30
CY 95

has been at around 2.5 percent.

Small enterprises

00

05

10

15

20

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

Chart 49: Firms' Financial Positions
40

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

30

Small enterprises

20
10
0

-10
-20

-30
CY 95

00

05

10

15

20

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

Chart 50: Amounts Outstanding of Bank
Lending, CP, and Corporate Bonds
16

y/y % chg.

14

Lending by domestic commercial banks
CP and corporate bonds

12
10
8
6
4
2
0
-2

-4
-6
-8
CY 05

07

09

11

13

15

17

19

21

23

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

39

The rate of change in the money stock (M2) has
been at around 1.5 percent, as the amountoutstanding of bank lending has continued toChart 51: Money Stock10monthly avg., y/y % chg.

9

increase and fiscal spending has kept pushing the8

M2

rate up (Chart 51).

7

M3

6
5
4
3
2
1
0
-1
CY 98 00 02 04 06 08 10 12 14 16 18 20 22 24
Source: Bank of Japan.

40

Developments in Financial Markets
In global financial markets, market sentimentbecame somewhat cautious for a time, reflecting

Chart 52: 10-Year Government Bond Yields
in Selected Advanced Economies

heightened uncertainties regarding the political

6

situation in Europe. However, long-term interest

%

Japan

5

United States

rates have declined, particularly in the UnitedStates, and stock prices in many economies have4

followed an uptrend.

3

Germany

2

Yields on 10-year government bonds in the United

1

States had continued to rise from the beginning of0

this year, due to speculation that the Federal

-1
CY 18

Reserve'smonetary

tightening

would

be

19

20

21

22

23

24

Source: Bloomberg.

prolonged; however, yields have declined since
the turn of May, as such speculation has waned
compared to a while ago, reflecting factors suchas the decline in the inflation rate (Chart 52).
Yields on 10-year government bonds in Europe
have decreased slightly, albeit with fluctuations, inline with developments in yields in the UnitedStates. Meanwhile, in Japan, yields on 10-year
government

bonds

have

increased,

mainlyagainst the background of market views on the
Bank of Japan's future monetary policy, despite
the impact of the decline in 10-year yields in the
United States.

Premiums for U.S. dollar funding through thedollar/yen foreign exchange swap market havebeen at low levels on the whole (Chart 53).

Stock prices in the United States have increased,reflecting the decline in long-term interest rates
and solid corporate results in the high-techindustry (Chart 54). While generally moving in linewith those in the United States, stock prices in

41

Chart 53: Dollar Funding Premiums throughForeign Exchange Swaps
%

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

Yen
Euro

19

20

21

22

23

24

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

Europe have been more or less flat, weighed
down by uncertainties regarding the politicalsituation. Stock prices in Japan had risenChart 54: Selected Stock Price Indices220

somewhat rapidly, mainly reflecting the increase200

in U.S. stock prices and solid corporate results,

180

start of 2018=100
Japan (Nikkei 225 Stock Average)
United States (S&P500)
Europe (EURO STOXX)Emerging markets (MSCI)

but have turned to a decline recently. Stock prices 160
in emerging economies, particularly in Asia, have 140
risen, driven by high-tech-related stocks.

120
100
80

In foreign exchange markets, reflecting attention
to factors such as the yield differential between
Japan and the United States, the yen had

60
CY 18

19

20

21

22

23

24

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

depreciated against the U.S. dollar but recently
has appreciated (Chart 55). The yen had also
depreciated against the euro but recently has

Chart 55: U.S. Dollar/Yen and Euro/Yen
180

appreciated.

yen

170

U.S. dollar/yen

160

Euro/yen

150
140
130
120
110

Yen
depreciation

100

Yen
appreciation

90
CY 18

19

Source: Bloomberg.

42

20

21

22

23

24

(Box 1) Review of the Annual Spring Labor-Management Wage Negotiations in 2024

In the annual spring labor-management wage
negotiations this year, the rate of base pay

Chart B1-1: Results of Spring Wage
Negotiations (Aggregation by Rengo)

increase further accelerated at many firms,

7

indicating that moves to raise wages have spread6

to even more firms (Chart B1-1). 19 This box

5provides a brief review of the key features of this4

year's wage negotiations using the most recent

3y/y % chg.
CPI inflation
Base pay increase
Total wage increase

2

data.

1
0
-1

Among large firms, "leader firms," which have alarge number of union members, implemented
large base pay increases. Following in theirfootsteps, many other firms also raised wages-2
CY 91 94 97 00 03 06 09 12 15 18 21 24
Sources: Japanese Trade Union Confederation (Rengo); Central Labour Relations
Commission; Ministry of Internal Affairs and Communications.
Notes: 1. Figures for CPI inflation are for all items less fresh food, excluding the effects ofthe consumption tax hikes, etc.
2. Figures for base pay and total wage increases from 1991 to 2013 are thosepublished by the Central Labour Relations Commission, while those from 2014
to 2024 are figures released by Rengo.

considerably (Chart B1-2). The distribution of therates of base pay increase at individual firms withlabor unions that belong to the Japanese Trade

Chart B1-2: Spillover of Wage Hikes from
Leader Firms

Union Confederation (Rengo) -- which mainly

5base pay increase, %Other firms

consists of labor unions at large firms -- shows
that

in

both

the

manufacturing

and

the

nonmanufacturing industries (1) the tail on the

Leader firms

43

left-hand side has clearly become thinner,
including at around 0 percent, and (2) the2

distribution has visibly shifted to the right (Chart1B1-3).

0
FY 2014 FY 2023 FY 2024 FY 2014 FY 2023 FY 2024
-2022
-2022

For small and medium-sized enterprises (SMEs),
many of which do not have labor unions, the full
picture of wage revisions is not yet clear. That19

See also Box 2 of the April 2024 Outlook Report fordevelopments in wage revisions of regular employees in labor
unions that belong to the Japanese Trade Union Confederation.
Meanwhile, for details on labor-management negotiations in 2023,
see Box 1 of the April 2023 Outlook Report and Box 1 of theOctober 2023 Outlook Report.

43

Automobiles and electricalmachinery

Food and beverage
production

Source: Japanese Trade Union Confederation (Rengo).
Notes: 1. Figures for base pay increases are staff estimates based on Rengo's microdata
on wage hikes and wage levels reported by its major labor unions.
2. Figures for leader firms in each sector are the averages of three firms withamong the largest number of union members in that sector.
3. The blue bars show the 25th-75th percentile distributions of wage hikes at otherfirms.

said, some surveys of SMEs and other sourcesindicate that the positive wage-setting behavior ofChart B1-3: Base Pay Increase Distribution,
Large Firms

large firms is steadily spreading to SMEs. For
example, using the results of a special survey

45

conducted by the Ministry of Finance to compare40

the rates of base pay increase with the previous

35

year shows that (1) while a certain fraction of
SMEs have not yet increased base pay, the shareof such firms has decreased from the previous

share of firms, %share of firms, %60

CY 2022

CY 202350

CY 2024

30

40

25
30
20
15

year, and (2) the distribution of the rates of base10

pay increases at individual SMEs has shifted to5

the right, although the shift is not as pronounced

0

20
10

as in the distribution for large firms (Chart B1-4).
In this context, interviews conducted by the

2. Nonmanufacturing

1. Manufacturing0
0 1 2 3 4 5 6 7 8

0 1 2 3 4 5 6 7 8base pay increase, %base pay increase, %Source: Japanese Trade Union Confederation (Rengo).
Note: Figures for base pay increases are staff estimates based on Rengo's microdata on
wage hikes and wage levels reported by its major labor unions.

Bank's Head Office and branches with SMEs alsosuggest a spread of wage hikes across all regions,industries, and firm sizes, with many respondents

Chart B1-4: Base Pay Increase Distribution,
Small and Medium-Sized Firms

saying that wage increases exceeded or were on

50

par with those in the previous year.20

share of firms, %share of firms, %30

CY 202345

CY 2024

40
35

25
20

30

Going

positive25

wage-setting behavior continues needs to be20

monitored closely. In this context, it is likely that,

15

with

forward,labor

whethermarketfirms'

conditions

becoming

15
10

10

5

5

increasingly tight, wages are becoming more
susceptible to upward pressure. For example, thegrowing market for job changers is likely to lead
not only to higher wages for those looking tochange jobs but also for existing employees asfirms seek to retain workers. Moreover, inindustries

and

firms

where

the

differential

betweenwages

offull-timeandpart-time

employees is small, increases in the minimum

20

See the annex paper to the Regional Economic Report, "Chiiki
no chūken chūshō kigyō ni okeru chingin dōkō -- saikin no kigyō
kōdō no henka wo chūshin ni" [Wage developments in regional
SMEs: Focusing on changes in firms' behavior] released in July2024 (available only in Japanese).

44

0

0

No basepay increase

0

1

2

3

4

5 or morebase pay increase, %Source: Ministry of Finance.
Notes: 1. Based on the results of a special survey conducted by the Ministry of Finance.
Small and medium-sized firms are firms with a capitalization of less than 1 billionyen.
2. The left-hand side of the chart shows the share of firms that did not raise basepay. The right-hand side shows the distributions of the rates of base pay
increase for firms that raised base pay.

wage are likely to lead to wage increases not only

Chart B1-5: Labor Input

for part-time employees but also for full-time

mil. persons

130
120
110
100
90
80
70
60
50
30
20
10
0
-10
FY 70

employees. 21 Furthermore, from a somewhat
medium- to long-term perspective, given the
demographic outlook, the room for further
increases in the labor supply is likely to graduallyshrink, which will continue to push up wages
through tightening labor market conditions (Chart
B1-5).

Total population(1) Aged 25-74(2) Aged 15-64 (working-age population)(3) Employed persons(1) - (3)80(2) - (3)

90

00

10

20

30

40

Sources: Ministry of Internal Affairs and Communications; National Institute of Populationand Social Security Research; Japan Institute for Labour Policy and Training.
Note: The shaded areas denote projection periods. The population projections are by the
National Institute of Population and Social Security Research. The projection for thenumber of employed persons is calculated based on projections by the Japan
Institute for Labour Policy and Training.

It should be noted, however, that the labor shareat SMEs is higher than at large firms, and thepace of decline in the labor share is slower than atlarge firms, which may act to hold down wages. In

Chart B1-6: Labor Share and Wage Increases

this context, analysis of microdata from the

1. Labor Share

2. Enterprises with aHigh Labor Share

Tankan and other sources shows that even SMEs
4-quarter backward moving avg., %Large enterprises
Small enterprises

with a high labor share have tended to implement 120
relatively large wage increases in an environment 110

y/y % chg.
Large enterprises
Small enterprises

43

in which profits can be expected to improve as a 100
result of higher output prices (Chart B1-6). Going 90

2

forward, whether firms, including SMEs, make 80
further progress in passing on price increases and 70

1

improving profits and this leads to sustained 60
increases in wages warrants careful attention.

0

50
40
CY 90

"Rise"

00

10

20"Unchanged"or "fall"

Changes in output prices

Sources: Ministry of Finance; Bank of Japan.
Notes: 1. Large enterprises are enterprises with a capitalization of 1 billion yen or more.
In the left-hand chart, small enterprises are enterprises with a capitalization of
10 million yen or more but less than 100 million yen. In the right-hand chart,small enterprises are enterprises with a capitalization of 20 million yen or more
but less than 100 million yen.
2. In the left-hand chart, the shaded area denotes the 25th-75th percentile
distribution for small enterprises, based on staff calculations using microdata
from the Financial Statements Statistics of Corporations by Industry, Quarterly.
Figures exclude "finance and insurance" and those for 2009/Q2 onward also
exclude pure holding companies.
3. In the right-hand chart, figures show the year-on-year percentage changes inlabor costs per employee in 2023/Q4. Figures are the medians of wage
increases at enterprises with a high labor share and are calculated by matching
microdata for enterprises that responded to both the survey for the Financial
Statements Statistics of Corporations by Industry, Quarterly (wage increases)
and the Tankan survey (the output prices DI). Enterprises with a high labor
share are enterprises whose labor share falls into the top 50 percent in theirsize group.

21

The government has indicated that it intends to raise theminimum wage to 1,500 yen per hour (national weighted average)by the mid-2030s. At SMEs and in accommodations services andeating and drinking services, the differential between wages offull-time and part-time employees tends to be small (see Box 2 of
the April 2024 Outlook Report).

45

(Box 2) Developments in Services Prices: The Spread of Beginning-of-the-Period
Price Hikes
Chart B2-1: CPIs for Goods and Services
1. Goods

The year-on-year rate of change in the consumer
price index (CPI, all items less fresh food and3.5energy)inflation

3.0

decelerated considerably due to a further waning

2.5

of upward pressure on costs led by the past rise in

2.0

shows

that

goods

price

import prices (Chart B2-1[1]). Under thesecircumstances, in terms of how the gradual rise inwages affects future price developments, the key
factor is developments in the prices of services,where labor costs account for a high share of

1.5
1.0
0.5
0.0
-0.5
CY 21

revised in April and October at the beginning of

3.5

each period. Price developments in April 2024

3.0

indicate whether spillovers from wages to prices
will strengthen further going forward (Chart B2-2).

22

23

24

2. General Services

selling prices. Services prices in Japan are often

warranted attention as they were considered tocontribution to y/y chg. in consumer prices, % points
Daily necessities, etc.
ApparelDurable goods
Food products
Agricultural products, etc.
CPI for goods

contribution to y/y chg. in consumer prices, % points
Other
Housing rent
Eating out
Culture and recreation
Services related to domestic duties
CPI for general services

2.5
2.0
1.5
1.0
0.5

While the year-on-year rate of change in services
prices has remained more or less unchanged on
the whole, the rate of increase for items
susceptible to the impact of changes in importprices (such as dining out and housing repair andmaintenance) has been following a decreasing

0.0
-0.5
CY 21

22

23

24

Source: Ministry of Internal Affairs and Communications.
Notes: 1. Figures for goods exclude petroleum products. Figures for "agricultural
products, etc." include aquatic and livestock products.
2. Figures for services related to domestic duties include services related tohousing repairs and maintenance.
3. Figures are the contribution to changes in the CPI (less fresh food and energy).
Figures are staff estimates and exclude mobile phone charges and the effectsof the consumption tax hike, policies concerning the provision of free education,and travel subsidy programs.

trend. On the other hand, the rate of increase for

Chart B2-2: Month When Price Changes
Take Place (General Services)

items susceptible to labor costs (such as culture8

and recreational services) has been gradually7

rising (Chart B2-1[2]). The following takes a closer
look at services price revisions in April 2024 andprobability of price chg., %6
54shows that a spread of price changes was3

observed.

2

1
0Jan. Feb. Mar. Apr. May June July Aug.Sept. Oct. Nov. Dec.

Starting

with

individual

items,

there

were

widespread moves to pass on higher labor costs

46

Source: Ministry of Internal Affairs and Communications.
Note: Figures are staff estimates and show the probability of change in prices of items
corresponding to those in the CPI for general services in each month, based on theestimation results of a probit model using microdata from the Retail Price Survey.
The estimation period is from January 2022 to December 2023.

to selling prices, particularly for items that are

Chart B2-3: CPI Momentum
ann., chg. from 3 months earlier, % ann., chg. from 3 months earlier, %susceptible to labor costs, such as lesson fees for

8

English conversation and other schools (services

7

related to culture and recreation), cram school
fees for junior high and high school students

Less fresh food andenergyGeneral services

Culture andrecreational services
Educational services

24
20

6

16

5

12

4

8

(services related to education), charges for3

4

domestic help and automotive maintenance20charges (services related to domestic duties), and1-4charges for massage (services related to medical

0-8care and welfare). Looking at the rate of price

-1
CY 22

changes relative to three months earlier makes it
clear that the rate of price increases, especiallyfor

cultureandeducation-related

recreational
services,

serviceshas

andaccelerated

markedly (Chart B2-3).

-12
23

24

22

23

24

Source: Ministry of Internal Affairs and Communications.
Note: Figures are staff estimates and exclude mobile phone charges and the effects ofpolicies concerning the provision of free education and travel subsidy programs.
Figures denoted by the round markers are for April 2024.

Chart B2-4: Price Change Distributionof General Services, Total
share of the number of items, %30

April 2023

25

October 2023
April 2024

20

Next, the distribution of price changes by item

15

shows that the peak of the distribution has shifted

10

from close to 0 to close to 2 percent, indicating a

5change in price-setting behavior in the services
0

sector as a whole (Chart B2-4). To get a moredetailed grasp, the distribution is divided into
items with a high and with a low ratio of laborcosts to total costs. This shows that the
distribution of items with a low labor cost ratio(such as dining out) -- prices of which had been
rising at a high rate due to the effects of past-4 -2
or less

0

2

4

6

8 10 12 14 16 18 20
or morey/y % chg.

Source: Ministry of Internal Affairs and Communications.
Note: Figures show the CPI for general services (less housing rent). Figures are staff
estimates and exclude the effects of policies concerning the provision of freeeducation and the effects of travel subsidy programs.

Chart B2-5: Price Change Distributionof General Services, Breakdown
1. April 2023

2. April 2024

share of the number of items, % share of the number of items, %30

Low labor cost ratio

Low labor cost ratio

High labor cost ratio

High labor cost ratio

30

upward pressure on costs -- has shifted to the left,

25

while the distribution of items with a high labor

20

20

15

15

10

10

5

5

cost ratio (such as lesson fees) has clearly shifted25

to the right (Chart B2-5).

The widespread trend to raise services prices
amid rising labor costs can also be confirmed
from other perspectives. Using microdata from theTankan to extract firms that had been cautious inchanging their output prices for many years and470-2 0 2 4 6 8 10
-2 0 2 4 6 8 10
or more or lessor lessor more0y/y % chg.

y/y % chg.

Source: Ministry of Internal Affairs and Communications.
Notes: 1. Figures show the CPI for general services (less housing rent). Figures are staff
estimates and exclude the effects of policies concerning the provision of freeeducation and the effects of travel subsidy programs.
2. CPI items are matched to the items in the 2015 Input-Output Tables for Japan andgrouped in terms of the share of "wages and salaries" and other labor costs in thedomestic output of those items. Figures for items with a high (low) labor cost ratio
are for items that fall into the top (bottom) 50 percent in general services (lesshousing rent).

examining their price-setting behavior for goods
and services separately shows that, in the case ofChart B2-6: Change in Firms' Price-Setting
Stance1. Overall

goods, such firms have been actively revising
prices since 2021 against the background of50

growing cost-push pressure led by the rise in40

import prices (Chart B2-6). On the other hand,with regard to services prices, changes in thesefirms' price-setting behavior thus far had been

2. Breakdown

output prices DI, % points

output prices DI, % points

Firms cautious aboutchanging output
prices <20%>

Firms cautious
about changing
output prices(goods)Other firms<80%>

Firms cautious
about changing
output prices(services)

30
20
10

35
30
25
20
15

0

10

relatively moderate compared to goods prices, but-105

price revisions have recently been gaining-20

0

momentum. In this situation, "low-volatility items,"

-30

-5

"wage factors," and "the trend component in the-40
CY 07 10 13 16 19 22

CPI for services," which indicate how the linkage
between

wages

and

pricesaffects

pricedevelopments -- indicators that were presented,-10
07 10 13 16 19 22

Source: Bank of Japan.
Note: Based on the Tankan (all enterprises). Figures for firms cautious about changing
output prices are for firms that for at least about 95 percent of the period from 1991
to 2019 replied that their output prices were "unchanged." In the left-hand chart,
figures in angular brackets show the share in all firms. In the right-hand chart,
figures for "firms cautious about changing output prices (goods)" are for
manufacturing firms, while those for "firms cautious about changing output prices(services)" are for nonmanufacturing firms.

for example, in past Outlook Reports -- have all
been on a moderately increasing trend (Chart
B2-7).22

Chart B2-7: CPI and Scheduled Cash
Earnings
5%

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

2.5

CPI (low-volatility items, left scale)

4

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

Going forward, it is necessary to continue toexamine from a broad perspective whether
changes in firms' price-setting behavior spreadfurther. In particular, heading into the next period

3
2

2.0
1.5
1.0

1

0.5

wage hikes seen in this year's annual spring0

0.0

labor-management wage negotiations will be

-1
CY 83

of price revisions, (1) whether the high level ofreflected in selling prices, particularly for services,(2) whether more firms will set selling prices in
anticipation of future wage increases, and (3)whether the continuation of these trends will leadto a further strengthening of the linkage between
wages and prices, needs to be examined carefullyin conjunction with firms' wage-setting behavior.23
22

For details, see "Recent Developments in the Linkage between
Wages and Prices," Bank of Japan Review Series, no. 24-E-2,
May 2024.
23

For details on the 2024 spring labor-management wage
negotiations, see Box 1 of this report and Box 2 of the April 2024
Outlook Report.

48

-0.5
87

91

95

99

03

07

11

15

19

23

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