Not to be released until 2:00 p.m.
Japan Standard Time on
Tuesday, April 30, 2024.
.

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

The year-on-year rate of increase in the consumer price index (CPI, all items less freshfood) is likely to be in the range of 2.5-3.0 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 ofcost increases led by the past rise in import prices are expected to wane, the rate ofincrease is projected to be pushed up through fiscal 2025 by the effects of the recent risein crude oil prices and a waning of the effects of the government's economic 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- tolong-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 levelthat is generally consistent with the price stability target.

Comparing the projections through fiscal 2025 with those presented in the previous
Outlook for Economic Activity and Prices (Outlook Report), the projected real GDP growth
rates for fiscal 2023 and 2024 are lower, mainly reflecting lower private consumption, but
the projected growth rate for fiscal 2025 is more or less unchanged. The projected
year-on-year rate of increase in the CPI (all items less fresh food) for fiscal 2024 is higher,
but that for fiscal 2025 is more or less unchanged.

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.

With regard to the risk balance, risks to economic activity are generally balanced for fiscal
2024 onward. Risks to prices are skewed to the upside for fiscal 2024 but are generally
balanced thereafter.

"The Bank's View" was decided by the Policy Board at the Monetary Policy Meeting held on April 25 and26, 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. The pace of recovery in overseas economies has slowed. Although exports havebeen affected by the developments in overseas economies, they have been more or lessflat. Industrial production has been more or less flat as a trend, but it has declined recently,
partly due to the effects of a suspension of production and shipment at some automakers.
Corporate profits have improved and business sentiment 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, although the impact of price rises and developments such as a decline inautomobile sales due to the suspension of shipment at some automakers have been
observed. Housing investment has been relatively weak. Public investment has been
more or less flat. Financial conditions have been accommodative. On the price front, theyear-on-year rate of increase in the CPI (all items less fresh food) has been at around 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 to consumer prices ofcost 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 growing moderately and as a virtuous cycle from income tospending gradually intensifies against the background of factors such as accommodative
financial conditions.
Comparing the projections through fiscal 2025 with those presented in the previous
Outlook Report, the projected real GDP growth rate for fiscal 2023 is lower, mainlyreflecting lower private consumption due in part to the effects of the suspension of
production and shipment at some automakers. The projected growth rate for fiscal 2024 issomewhat lower, given that the GDP growth rate for the second half of fiscal 2023 is
expected to be fairly lower than previously projected. The rate for fiscal 2025 is more orless 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

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

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 andimprovement in consumer sentiment. Private consumption is also projected to beunderpinned by the government's initiatives, such as the continuation of measures toreduce the household burden of higher gasoline prices and also cuts in income tax andinhabitant 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 growmoderately. Meanwhile, inbound tourism demand, which is categorized under services
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 in therange of 2.5-3.0 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

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

pushed up through fiscal 2025 by the effects of the recent rise in crude oil prices and awaning of the effects of the government's economic measures pushing down CPI inflation.
Meanwhile, underlying CPI inflation is expected to increase gradually, since it is projectedthat the output gap will improve and that medium- to long-term inflation expectations willrise 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 theprice stability target.
Comparing the projections through fiscal 2025 with those presented in the previous
Outlook Report, the projected year-on-year rate of increase in the CPI (all items less freshfood) for fiscal 2024 is higher, mainly due to the effects of the recent rise in crude oil
prices, but that for fiscal 2025 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 economic measures. Crude oil prices are assumed
to decline moderately toward the end of the projection period with reference, for example,
to developments in futures markets. The government's measures to reduce the householdburden of higher gasoline prices, electricity charges, and gas charges 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 March 2024
Tankan (Short-Term Economic Survey of Enterprises in Japan) shows that figures forfirms' inflation outlook for general prices have been at high levels. Given that the formationof inflation expectations in Japan is largely adaptive, the increase in inflation seen thus far
has brought about a rise in households' and firms' medium- to long-term inflation
expectations. Firms' behavior has shifted more toward raising wages and prices, and it is4highly likely that firm wage increases that are higher than those seen in the previous year
will be achieved in this year'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, the virtuous cycle between wages and prices is
projected to keep intensifying through achievement of wage increases that reflect pricerises and through a pass-through of wage 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 overseas central banks have apparently
signaled future policy interest rate reductions. That said, inflationary pressure hasremained on a global basis and, in the case where inflation rates stay elevated throughwage increases and other factors, there is a risk of tight monetary policy being prolonged.
Moreover, since the policy interest rate hikes by overseas central banks to date havebeen rapid, there are uncertainties over how these hikes will affect their real economies
and financial systems with a time lag. Taking these risks into account, it is necessary to
pay due attention to developments in financial and foreign exchange markets and theirimpact on Japan's economic activity and prices. Meanwhile, depending on 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 adjustmentpressure has remained in the labor and real estate markets, and it is necessary to pay
attention to how inventory adjustment pressure on some goods will affect 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 and5other 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
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. Relatively high wage increases arelikely to be achieved in this year's annual spring labor-management wage negotiations, inview of factors such as the need to recruit and retain employees, with labor market
conditions tightening. While moves to reflect price developments in wages have beenstrengthening, there remain uncertainties over the extent to which moves 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 will continue to intensify.
However, given that many firms, especially small and medium-sized firms, have reported

6

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 and mindset based on theassumption that wages and prices will not increase easily have taken hold in Japanesesociety for a prolonged period, it is necessary to pay close attention to whether moves topass on increases in wages and other costs to selling prices will weaken with the waningof the effects of the pass-through to consumer prices of cost increases led by the past risein 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, 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. Including future developments in global inflation rates andpossible fluctuations in foreign exchange markets, how these factors will affect Japan's
prices requires due attention.

IV. Conduct of Monetary Policy
In the context of the price stability target, the Bank assesses the aforementioned
economic and price situation from two perspectives and then outlines its thinking on the
future conduct of monetary policy.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 in the range of 2.5-3.0 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 theoutput gap will improve and that medium- to long-term inflation expectations will rise withthe virtuous cycle between wages and prices continuing to intensify. In the second half ofthe 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

As for the examination from two perspectives in the context of the price stability target, see the Bank's
statement released on January 22, 2013, entitled "The 'Price Stability Target' under the Framework for the
Conduct of Monetary Policy."
47

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 generally balanced for fiscal 2024 onward. Risks to prices are skewed to the upside
for fiscal 2024 but are generally balanced thereafter.
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 andabroad 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.5
As for the conduct of monetary policy, it will depend on future developments in economic
activity and prices as well as financial conditions. Uncertainties surrounding these
economic and financial developments at home and abroad remain high. If theaforementioned outlook for economic activity and prices will be realized and underlying
inflation will increase, the Bank will adjust the degree of monetary accommodation, while it
anticipates that accommodative financial conditions will be maintained for the time being.
With the price stability target of 2 percent, the Bank will conduct monetary policy as
appropriate, in response to developments in economic activity and prices as well as
financial conditions, from the perspective of sustainable and stable achievement of thetarget.

5

For details, see the Bank's Financial System Report (April 2024).

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 2023

+1.3 to +1.4[+1.3]+2.8+3.9

Forecasts made in January 2024

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

Fiscal 2024

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

Forecasts made in January 2024

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

Fiscal 2025

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

Forecasts made in January 2024

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

Fiscal 2026

+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.
4. The CPI figures for fiscal 2023 are actual values.

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

y/y % chg.

3.0

2.0

2.0

1.0

1.0

0.0

0.0

-1.0

-1.0

-2.0

-2.0

-3.0

-3.0

-4.0

-4.0

-5.0
FY
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 Background6
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

Real GDP decreased for the July-September
quarter of 2023, registering minus 0.8 percent on
a quarter-on-quarter basis and minus 3.2 percent

540

520

on an annualized basis (Chart 1). It thenregistered 0.1 percent on a quarter-on-quarter500

basis and 0.4 percent on an annualized basis forthe

October-December

quarter,

resultinginpositive growth for the first time in two quarters.
Relativetotheprevious

quarter,

480
CY 09

11

13

fixed investment increased clearly. In addition,
exports rose significantly, partly due to large-scale
projects in services exports. The output gap -which captures the utilization of labor and capital-- for the October-December quarter improved
somewhat from the previous quarter, mainly due
to a recovery in the capacity utilization rate for the
manufacturing industry (Chart 2).

Monthly indicators and high-frequency data since
that

Japan's

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.

suggest17

privateconsumption declined slightly while business

then

15

economyhascontinued on a recovery trend, although someweakness has been seen in part. In the corporate
sector, although exports have been affected by aslowdown in the pace of recovery in overseas

6"The Background" provides explanations of "The Bank's View"
decided by the Policy Board at the Monetary Policy Meeting heldon April 25 and 26, 2024.

11

17

18

19

20

21

22

23

economies, they have been more or less flat.
Production has been more or less flat as a trend,

Chart 2: Output Gap

but it has declined recently, partly due to the8effects of a suspension of production and6

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

Output gap (left scale)

-40
-30

Tankan factor utilizationindex (right scale)shipment at some automakers. Corporate profits4

have improved and business sentiment has

2-10

stayed at a favorable level. In this situation,00business fixed investment has been on a-2

10

moderate increasing trend. The business fixed-4

20

investment plans in the March 2024 Tankan-630

indicate that the year-on-year rate of change in

-8
CY 85

investment for fiscal 2023 is expected to beclearly positive, at around 10 percent, and that therate of change in planned investment for fiscal
2024 -- which was surveyed for the first time inthis Tankan -- is firmly positive. In the household
sector, the employment and income situation has
improved moderately. Under these circumstances,private consumption has been resilient, although
the impact of price rises and developments suchas a decline in automobile sales due to thesuspension of shipment at some automakers
have been observed.

Japan's economy is likely to keep growing at apace above its potential growth rate, withoverseas economies growing moderately and as
a virtuous cycle from income to spending
gradually intensifies against the background offactorssuchasaccommodative

financialconditions.7 Comparing the projections with thosepresented in the previous Outlook Report, theprojected real GDP growth rate for fiscal 2023 is
7

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

12

-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.

lower, mainly reflecting lower private consumption
due in part to the effects of the suspension ofChart 3: Potential Growth Rate

production and shipment at some automakers.

5

The projected growth rate for fiscal 2024 is4

somewhat lower, since it is expected that GDP

3y/y % chg.
Total factor productivity
Capital input
Labor input
Potential growth rate

growth for the second half of fiscal 2023 will belower than previously projected and this will have2

a smaller carry-over effect on GDP growth for1

fiscal 2024. The rate for fiscal 2025 is more or0

less unchanged.

-1
-2
FY 85

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

andaresulting

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

13

90

95

00

05

10

15

20

Source: Bank of Japan.
Note: Figures are staff estimates. Figures for the second half of fiscal 2023 are those for2023/Q4.

variousmeasuresandbyaccommodative

financial conditions.8

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
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 as
the continuation of measures to reduce thehousehold burden of higher gasoline prices andalso cuts in income tax and inhabitant tax, are8

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.

14

projected to push up disposable income. In thissituation, private consumption is expected toincrease moderately, despite being affected byhigh prices.

In fiscal 2025 and 2026, Japan's economy isexpected to keep growing at a pace above its
potential growth rate, with domestic and external
demand rising. Goods exports are likely toincrease moderately, with overseas economies
continuing to grow. Inbound tourism demand is
projected to keep increasing. Business fixed
investment

is

also

expectedtocontinue

increasing, mainly for investment to address labor
shortages, digital-related investment, investment
related to growth areas and decarbonization, andinvestment associated with strengthening supply
chains. However, the pace of increase is
projected to slow somewhat, partly because it islikely to be pushed down by adjustment pressure
on capital stock. In the household sector, nominal
employee 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 of
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 been more or less flat
(Chart 4). While construction based on thegovernment's

economic

measures,

Chart 4: Public Investment
24s.a., ann., tril. yens.a., ann., tril. yen

30

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

23

29

22

28

21

27

20

26

completed -- a coincident indicator of public
investment -- has been more or less flat. The
value of public works contracted and orders
received for public construction -- both of which
are leading indicators of public investment -- havebeen more or less flat, albeit with fluctuations.

Public construction completed(nominal, left scale)

19

25

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/Q1 is the January-February average.

As for the outlook, public investment is likely to be
more or less flat.9 Government consumption isChart 5: Overseas Economies

projected to continue increasing moderately,

10

reflecting an uptrend in healthcare and nursing

8

y/y % chg.
IMF
projections

6

care expenditures.

4
20Overseas Economies-2

Overseas total

The pace of recovery in overseas economies has-4

Advanced economies

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

Emerging and commodity-exporting
economies

has been firm, mainly led by private consumption,although it has been affected by policy interest
rate hikes. European economies have kept
slowing moderately as they have continued to beaffected by factors such as policy interest rate

9

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

-8
CY 90

95

00

05

10

15

20

25

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

hikes. The Chinese economy has remained on amoderate slowing trend, mainly affected byChart 6: Global PMI

adjustments in the real estate market, but signs of60

a pick-up have been observed in some aspects,

55

such as private consumption. Emerging and50

commodity-exporting economies other than China

45

have improved moderately on the whole, as signs

40of a pick-up have been seen in exports. Amongs.a., DI

35

those in Asia, which are closely related to Japan's
economy, the ASEAN economies have improved

30
Manufacturing

moderately, as domestic demand has continued

25

to improve and exports have bottomed out. The

20
CY 09

NIEs economies also have improved moderately,on the back of a pick-up in exports, mainly led by
IT-related

goods,

improvementinalthough

the

pace

domestic

demandServices

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.

ofhas

decelerated.

Chart 7: Effective Exchange Rates
200

Looking at the Global PMI to see the current

180

situation for the global economy, figures for the160

services industry have clearly exceeded 50, the140

break-even point between improvement and120

deterioration in business conditions; figures for100

the manufacturing industry had been below 50,

80

but they have improved recently somewhat to60

around 50 (Chart 6).

40

CY 2020=100
Yenappreciation
Yen
depreciation

Real effective exchange rate

20
CY 80

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.

As for the outlook, overseas economies areprojected to gradually move out of the phase ofslow recovery and grow moderately. Looking at
developments by region for the time being, theU.S. economy is likely to continue to be firm. The
Chinese economy is projected to gradually moveout of its slowing phase due to policy support.
European economies are expected to remain on a
slowing

trend.

Emerging

andcommodity-exporting economies other than China

17

are likely to continue improving moderately with

Chart 8: Real Exports and Imports

external demand 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
Although exports have been affected by theslowdown in the pace of recovery in overseas

6

Real imports (left scale)

100

4

90

2

80

0

70

-2

economies, they have been more or less flat
(Chart 8). By region, exports to the U.S. andEuropean economies have been at relatively highlevels, albeit with fluctuations (Chart 9). Those to
the Chinese economy have picked up moderately,with an increase in exports of semiconductor

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.

production equipment and other goods. Exports
to the NIEs, the ASEAN economies, and someother Asian economies have started to bottom out
against the background of progress in global
adjustments for IT-related goods. By goods,

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

s.a., 2019/Q1=100

130

120

120

110

110

100

100

have

90

90

decreased recently, mainly due to the effects of80

80

the suspension of production and shipment at

70

70

some automakers and the dissipation of the60

effects of the sales promotion measures in China

50

United States <20.1>(Chart 10). Exports of capital goods overall have40

EU <10.3>

been more or less flat, when fluctuations are

30
CY

exportssmoothedofautomobile-relatedout,

semiconductor

mainlygoods

becauseproduction

exportsofequipment--

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.

particularly those to the Chinese economy -- haveincreased, while those of ships have declined.
Exports of IT-related goods have started tobottom out against the background of the
progress in global adjustments for IT-related

Chart 10: Real Exports by Type of Goods
140s.a., 2019/Q1=100

s.a., 2019/Q1=100130Intermediate
goods <20.1>

120

Motor vehicles andrelated goods <24.4>

140
130
120

110

110

goods, although exports of lithium-ion batteries

100

100

used in automobiles have been relatively weak.

90

90

Meanwhile, those of intermediate goods have

80

80

been at relatively low levels, mainly reflecting

70

weakness in the Chinese real estate market.

60

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

50
40
CY

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

As overseas economies grow moderately, exports
are projected to return to an uptrend, mainly due

Chart 11: Current Accountto a pick-up in global demand for IT-related50

goods.

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

30
20

Imports have decreased to a relatively large

10degree recently, mainly affected by shipping0

delays for imports from Europe that reflect-10

increased tension over the situation in the Middle-20

East (Chart 8).

-30

Trade balance
Services balancePrimary income balance
Secondary income balance
Current account balance

-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/Q1 are January-February averages.

Imports are expected to follow a moderate
uptrend on the back of developments in demand
induced by increases in domestic demand andChart 12: Number of Inbound Visitors

exports.

35s.a., ann., mil. persons

30

Europe, the United States, and other regions
ASEAN
NIEs
China

25

External Balance
The nominal current account surplus has been at20

a high level (Chart 11). The trade balance deficit

15

has been small, marking a clear decrease

10

compared to a while ago. Despite a surplus in the5

travel balance, which reflects a recovery in
inbound tourism demand (Chart 12), the services
balance has remained on a slight deficit trend, as
payments for digital-related services have been athigh levels, albeit with fluctuations. Meanwhile,
the primary income balance surplus has remained
at a high level.

The nominal current account balance is likely tofollow a moderate improving trend. This is basedon the projection that (1) the primary income
balance surplus will increase moderately, (2) the
trade balance deficit will decline moderately due
to factors such as an increase in goods exports,

19

0
CY 14

15

16

17

18

19

20

21

22

23

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

24and (3) the services balance deficit will decrease

Chart 13: Savings-Investment Balance

due to an increase in inbound tourism demand.

80

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

60

In terms of the savings-investment balance,

40

overall excess savings in Japan's economy are20

projected to follow a moderate expanding trend,0

because the fiscal balance is likely to improve at apace that somewhat exceeds the pace of decline
in excess savings in the private sector (Chart 13).

Excess investment-20
Household sector-40

Corporate sector
General government-60

Domestic savings-investment balance

-80
CY 14

Industrial Production

15

16

17

18

19

20

21

22

23

21

23

Source: Bank of Japan.

Industrial production has been more or less flat asa trend, but it has declined recently, partly due tothe effects of the suspension of production andshipment at some automakers (Chart 14). By
major

industry,

productionof"transport

Chart 14: Industrial Production
120
115

equipment" has significantly declined recently,

110

owing to the effects of the suspension of

105

production and shipment at some automakers,100

although

supply-side

semiconductors
dissipated.

used

Production

inof

constraints

forautomobiles

have"general-purpose,

production, and business-oriented machinery"has decreased recently. This is mainly due to apause in demand for construction machinery andthe impact of a production decline in automobiles,
although production of semiconductor production
equipment has shown signs of bottoming out.
Productionofinformationand"electricalmachinery,communication

andelectronics

equipment" has also decreased recently, due torelatively weak developments in production oflithium-ion batteries used in automobiles and totheeffects

oftheproduction

declineinautomobiles. Production of "electronic parts anddevices" has bottomed out with progress ininventory adjustments. Meanwhile, production of

20s.a., CY 2020=10095
Production

90
85
CY 09

Inventories

11

13

15

17

19

Source: Ministry of Economy, Trade and Industry.
Notes: 1. Shaded areas denote recession periods.
2. The production figure for 2024/Q1 is the January-February average. The
inventories figure for 2024/Q1 is that for February.

"chemicals (excluding medicine)" has been at alow level, mainly reflecting weakness in theChart 15: Indicators Related to Corporate
Profits
1. Sales and Current Profits

Chinese real estate market and in cosmetics.
400s.a., tril. yens.a., tril. yen

30

Sales (left scale)

380

As

overseas

economiesgrow

moderately,25

Current profits(right scale)

360

20

340

15

320

10

300

5

industrial production is projected to return to an
uptrend, mainly due to a pick-up in global demandfor IT-related goods.

Corporate Profits
Corporate profits have improved. According to the
Financial Statements Statistics of Corporations by

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.

Industry, Quarterly, current profits for all industries
andenterprises

for

the

2. Contribution to Changes in Terms of Trade

October-December

quarter of 2023 decreased slightly, mainly due toa decline in dividends from overseas subsidiaries
of some firms, but continued on an improving
trend (Chart 15). By industry and firm size,

30

y/y % chg.
Commodity prices, etc.
Exchange rates

Terms of trade20

10

although operating profits of large manufacturers
have increased slightly -- mainly due to progress0

in the pass-through of cost increases to selling
prices -- their current profits have decreased,-10

mainly reflecting the waning of the effects of major
dividends from overseas subsidiaries of somefirms that were paid in the previous quarter.
Current profits of small and medium-sized
manufacturers are more or less unchanged fromthe previous quarter. As for nonmanufacturers,
operating profits of large firms have risen, mainlyreflecting an increase in sales of digital-related
items in the information and communicationsindustry, but their current profits have decreasedslightly, mainly because dividends from overseas
subsidiaries of firms in shipping and otherindustries have declined due to lower freight rates.
Current profits of small and medium-sized
nonmanufacturers have decreased for industries

21

-20
CY 09

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

such as retail trade and services, in reflection ofChart 16: Business Conditions

sluggish private consumption.

60

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

40

Manufacturing

Business sentiment has stayed at a favorable
level. According to the March Tankan, the DI for
business conditions has remained at a favorable

Nonmanufacturing

200level on the whole, although it has weakened
somewhat (Chart 16). By industry, the DI for
manufacturing has weakened somewhat, mainly-20"Favorable"-40

due to the effects of the suspension of production
and shipment at some automakers. Looking at
industries where the DIs have weakened, that fortransportation machinery has done so due to theimpact of the production decline in automobiles,
and this has led to weakening in the DIs forrelevant industries -- namely, iron and steel, as
well as nonferrous metals. Turning to industries
where the DIs have improved, those for thefollowing industries have done so due to theprogress in the pass-through of cost increases toselling

prices:

"food

and

beverages,""general-purpose machinery," and "ceramics,
stone, and clay." In addition, the DI for chemicals
has headed toward improvement due to thepick-up in global demand for IT-related goods.
With regard to nonmanufacturing, the DIs havecontinued to improve for a wide range ofindustries, particularly those related to private
consumption. This is due to the recovery ineconomic activity, an increase in inbound tourism
demand, and the progress in the pass-through of
cost increases to selling prices. On the other hand,a rise in personnel expenses and intensifying
labor shortages have contributed to weakening in
the DIs for goods rental and leasing, as well as forsmall firms engaged in services for businesses,
while high costs have contributed to weakening in
the DI for electric and gas utilities.

22"Unfavorable"

-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.

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

95s.a., ann., tril. yens.a., CY 2020=100

to the progress in the pass-through of cost

120

90

increases to selling prices.

130

110

85

100

Business Fixed Investment

80
90

Business fixed investment has been on amoderate increasing trend (Chart 17). The
aggregate supply of capital goods -- a coincident
indicator

ofmachineryinvestment

--

has

significantly declined recently, mainly due to theeffects of the suspension of production andshipment at some automakers, although demandfor digital- and labor saving-related capital goods

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

Domestic shipments and imports ofcapital goods (right scale)70

Private construction completed(nonresidential, real, right scale)

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. Figures for 2024/Q1 are January-February averages.
2. Figures for real private construction completed are based on staff calculations
using the construction cost deflators.

has been firm. Despite progress in, for example,

Chart 18: Leading Indicators of Business
Fixed Investment

construction of logistics facilities and urban

13

redevelopment

construction

12

coincident

11completedprojects,

private(nonresidential)--aindicator of construction investment -- has been
relatively weak recently, partly due to dissipationof the effects of large-scale projects, with moves
the7

factors

such

as

high

construction material prices.

6
5
CY 09

Machinery orders -- a leading indicator ofmachinery investment -- have remained atrelatively high levels, although they have seen alowering in their levels compared to a while ago(Chart 18). By industry, although orders by the
manufacturing industry overall have been pushed
down by dissipation of the effects of large-scale
projects in some industries, orders by the"electricalmachinery"andConstruction starts (private, nonresidential,
estimated construction costs)

9
8

of

Machinery orders (private sector, excluding
volatile orders)10

to postpone investment being observed against
backgrounds.a., ann., tril. yen"information

andcommunication electronics equipment" industries-- which remained relatively weak, partly due to

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/Q1 are January-February averages.

the effects of the global adjustments for IT-related
goods -- have started to bottom out. Orders by theChart 19: Developments in Business Fixed
Investment Plans

nonmanufacturing

increased

18

moderately, albeit with fluctuations stemming from15

large-scale

labor

12

saving-related investments have followed an

9uptrend. Construction starts (in terms of planned

6

expensesnonresidential

3

construction) -- a leading indicator of construction0

investment -- have significantly increased recently,-3

partly due to establishment of new factories and-6extension of existing ones, as construction of

-9
Mar.

logistics
continued.

industry

projects,

for

and

as

have
digital-privateandredevelopment

Looking

at

the

and

projects

havebusiness

fixed

investment plans in the March Tankan, businessfixed investment (on the basis close to GDP
definition; business fixed investment -- including
software and R&D investments but excluding landpurchasing expenses -- for all industries andenterprises including financial institutions) showsa year-on-year rate of increase of 10.4 percent for
fiscal 2023 (Chart 19). Although this is a
downward revision from the previous survey
conducted last December, the rate of change ininvestment for fiscal 2023 is expected to besignificantly positive for both manufacturing andnonmanufacturing industries. In addition, thereported rate for fiscal 2024 of 4.9 percent
indicates a relatively high increase compared withpast March Tankan surveys.

Business fixed investment is expected to continue
on an increasing trend, mainly on the back ofaccommodative financial conditions, as corporate
profits follow an improving trend. Toward the endof the projection period, such investment is
projected to continue increasing, partly due to arise in investment that is not necessarily

24

y/y % chg.

FY 2024

Average (FY 2004-2022)

FY 2020
FY 2021
FY 2022
FY 2023

June

Sept.

Dec.

Forecast

ActualSource: Bank of Japan.
Notes: 1. Based on the Tankan. All industries including financial institutions.
2. Including software and R&D investments and excluding land purchasing
expenses. R&D investment is not included before the March 2017 survey.
3. There are discontinuities in the data for December 2021 and December 2023
due to changes in the survey sample.

responsive to the business cycle, although thepace of increase is likely to slow, reflecting
cyclical adjustment pressure stemming from theaccumulationofcapitalstock(ChartChart 20: Capital Stock Cycles
10business fixed investment, y/y % chg.

20).

Specifically, investment that is expected to beundertaken during the projection period includes

5
​

​

04

15
​
​
06
21

10
12

0

(1) investment induced by the increase indomestic and external demand; (2) labor-saving-5​

expanding e-commerce, and in offices andcommercial

facilities

due

to

redevelopment

​

​

1.5%

19

1%

0.5%

20

-10

0%
09

digitalize business activities; (3) construction
investment in logistics facilities, resulting from​​FY 2023and efficiency-improving investment to address
labor shortages and IT-related investment toInvestmentcapital stock
ratio at theend of FY
2022

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. The
figure for fiscal 2023 is the 2023/Q2-Q4 average.

projects; (4) investment in growth areas and toaddress

environmental

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

Employment and Income Situation
Chart 21: Number of Employed Persons
The employment and income situation has

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

105

improved moderately.
67

100

66

95

65

90

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

Employed persons(left scale)
Regular employees(right scale)
Non-regular employees(right scale)information 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. Total hours
worked per employee have been more or less flat
when fluctuations due to the number of weekdays
are smoothed out. With regard to labor market

25

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. Figures for 2024/Q1 are
January-February averages.

conditions, the unemployment rate has been at a
low

level

(Chart22).

openings-to-applicants

The

ratio

activehadjobremained

Chart 22: Unemployment Rate and Labor
Force Participation Rate
7

Labor force participation rate(right scale)

663

seniors -- due to the normalization of economic
activity and a decline in real income; however, theratio has been more or less flat recently (Chart23). Meanwhile, the labor force participation rate
has been on a moderate uptrend, particularly for

62
5
61
4
60

3

59

women, when fluctuations are smoothed out(Chart 22).

2
CY 09

58
11

13

15

17

19

21

23

Source: Ministry of Internal Affairs and Communications.

With regard to the outlook for the number of
employees, regular employees are likely toincrease moderately, mainly in industries with

Chart 23: Job Openings-to-Applicants
Ratio
2.6

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

labor shortages, such as the information andcommunications industry. Non-regular employees,
mainly in the face-to-face services industry, are

2.2

New job openings-toapplicants ratio

1.8

expected to keep increasing along with the rise indomestic and external demand. However, thepace of increase in the number of overall

1.4
1.0

employees is projected to decelerate, partly
because it will become more difficult for labor
supply to increase, reflecting factors such as
demographic

changes,

with

labor

force

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

rate

is

expected to follow a moderate declining trend.

On the wage side, the year-on-year rate ofchange in nominal wages per employee has
increased moderately, reflecting the recovery ineconomic activity and the results of last year's
annualspringlabor-management

wage

26

64

Unemployment rate (left scale)somewhat weak, partly reflecting an increase in
the number of job applicants -- including amongs.a., %

s.a., %

0.6
0.2
CY 09

11

13

15

17

Source: Ministry of Health, Labour and Welfare.

19

21

23

negotiations(Chart24). 10

Lookingatthebreakdown, the rate of change in scheduled cash

Chart 24: Nominal Wages

earnings has continued to increase moderately

3(Chart 25). Specifically, the rate of increase forfull-time employees has remained at around 2
percent -- albeit with fluctuations that are due

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

2

1

mainly to changes in working hours -- reflecting
theresults

of

lastyear'sannualspring0labor-management wage negotiations, whichshowed high wage growth. The year-on-year rateof increase in hourly scheduled cash earnings forpart-time employees has continued to show highgrowth of around 3 percent recently, as labormarket conditions have remained tight andminimum

wages

have

been

raised.

Non-scheduled cash earnings have been more or

-1

-2
14/Q1

16/Q1

18/Q1

20/Q1

Chart 25: Decomposition of Developments
in Scheduled Cash Earnings
y/y % chg.

less flat recently. The year-on-year rate of change

2.5

in special cash earnings (bonuses) has risen

2.0

Contribution of part-time employees

1.5

Scheduled cash earnings

clearly, even after the high growth in the previous
year due to lump-sum payments by some firms in

22/Q1

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

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

Contribution of full-time employees

1.0

response to price rises, or "inflation allowances."

0.5
0.0

With regard to the outlook for wages, it is-0.5

expected that the wage growth rate (base pay
increase) that significantly exceeds last year's
high rate will be achieved in this year's annual
spring labor-management wage negotiations. 11
As a result, the rate of increase in scheduled cash
earnings is likely to accelerate clearly through thissummer.

Theseearnings

areprojected

tocontinue increasing firmly from fiscal 2025, inreflection 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
10

Wages in the Monthly Labour Survey are assessed on the basisof continuing observations, which are less susceptible tofluctuations due to sample revisions.
11

Box 2 outlines developments in thelabor-management wage negotiations this year.

annualspring

27

-1.0
14/Q1

16/Q1

18/Q1

20/Q1

22/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.

participation

of

women

and

seniors.

Non-scheduled cash earnings are expected toChart 26: Employee Income

increase

4

moderately,reflecting

the

rise

in

y/y % chg.

domestic and external demand. Special cash
earnings (bonuses) are likely to keep rising with2

corporate profits following an improving trend.
Taking all of these factors into account, the rate of0change in nominal wages per employee is-2projected to continue increasing clearly.

-4
14/Q1

In light of the aforementioned employment andwage conditions, employee income has improvedin nominal terms (Chart 26). In real terms, theyear-on-year rate of decline in employee income
has remained on a slowing trend due to a
combinationofadeclineininflationandimprovement 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, although
the impact of price rises and developments suchas a decline in automobile sales due to asuspension of shipment at some automakers
have been observed.12

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

12

Box 1 outlines the current situation and outlook for private
consumption.

28

Total cash earnings
Number of employees
Employee income
Real employee income

16/Q1

18/Q1

20/Q1

22/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).

combining various sales and supply-side statistics
from

the

viewpointofgauging

Japan's

consumption activity in a comprehensive manner--

declinedslightlyonaveragefortheJanuary-February period of 2024 relative to theChart 27: Real Private Consumption
120s.a., CY 2015=100

s.a., CY 2015=100

125
120

115

115

110

110

October-December quarter of 2023 (Charts 27

105

105

and 28). 13 This is mainly because of lower

100

100

spending -- such as on heating equipment,

95

electricity, and fuel -- owing to mild winter weather

90

and a considerable decline in the number of new85

passenger cars sold, due to the effects of the

80
CY 14

suspension of production and shipment at some
automakers.

Looking

atdevelopments

inprivateconsumption

sources,such

asvariousindicators,

statistics

subsequentfromhigh-frequency

publishedbyindustryorganizations, and anecdotal information fromfirms, consumption seems to have been resilient

Consumption of households(excluding imputed rent, leftscale)
Disposable income, etc.
(SNA, left scale)

95

Consumption Activity Index(travel balance adjusted, right scale)

80

90
85

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 (travel balance adjusted) exclude inbound tourism
consumption and include outbound tourism consumption. The figure for2024/Q1 is the January-February average.
2. "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.

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

s.a., 2019/Q1=100

s.a., 2019/Q1=100

Nondurable goods<40.5>

110

Services <50.7>

115
110

despite being affected by price rises -- when105

excluding the aforementioned temporary factors

100

100

that have pushed down consumption -- partly due

9595

to the improvement in the income situation (Chart

90

90

29).

85

85

80

80

75

By type, consumption of durable goods had
declined considerably, but it seems to havepickedupsomewhatrecently(Chart28).

Specifically, the number of new passenger cars
solddecreasedsignificantly

for

the

January-February period, mainly due to theeffects of the suspension of production and

70
CY

70
19

20

21

22

23 24 19

50

21

22

23 24

chg. from baseline, %40

30have slightly rebounded recently. Sales of

100household electrical appliances have remained-10

relatively weak, mainly reflecting sluggish sales of

-20
-30

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

-40

29

20

Chart 29: Consumption Developments
Based on Credit Card Spending

20

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

75

Durable goods <8.9>

Sources: Bank of Japan, etc.
Notes: 1. Based on staff calculations. Figures in angular brackets show the weights in the
CAI. Figures for 2024/Q1 are January-February averages.
2. Nondurable goods include goods classified as semi-durable goods in the SNA.

shipment at some automakers, but it seems to

13

105

-50
-60
CY 20

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.

heating equipment -- such as air conditioners -owing to mild winter weather, in addition todissipation of the effects of the front-loaded
increase in demand during the pandemic.

Nondurable goods (e.g., "beverages and food"and "clothes") have followed a decreasing trend,
mainly owing to the impact of mild winter weather-- which has led to weakness in sales of winterclothes and in spending such as on electricity andfuel -- as well as to the impact of high prices.
Recently, however, sales of clothes and otheritems seem to have shown signs of positive
movements, mainly reflecting temperature rises,
and consumption of high-end goods by thewealthy at department stores has been favorable,
partly due to a rise in stock prices in themeantime.

Services consumption has increased moderately
as a trend, although the pace of increase has
slowed (Charts 28 and 29). Dining-out has also
been on a moderate increasing trend, despite aslowdown in the pace of increase due to theimpact of high prices, the effects of changes in
consumers'

lifestyles,

andconstraintson

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

Looking at confidence indicators related to private
consumption, the Consumer Confidence Index -which asks consumers for their views on theoutlook -- has continued to improve recently,

30

mainly reflecting the fact that the pace of pricerises has moderated compared to a while ago andChart 30: Confidence Indicators Related to
Private Consumptionthat there have been expectations for an increase

60

s.a.

in nominal income (Chart 30). The Economy
Watchers Survey -- which asks firms for theirviews on the direction of the economy -- shows
that

the

current

economic

conditions

threshold

value

of

50

with

40

DI

(household activity-related) has been at aroundthe50

private30
20

Improved

Consumer Confidence Index

consumption being resilient.
10

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

Economy Watchers Survey(household activity)

0
CY 09

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.

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

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

toimprove.

100
95

Thereafter, private consumption is projected tocontinue increasing moderately as employee
income keeps improving. The propensity to90
85

consume is likely to gradually return to theaverage level seen before the pandemic, albeit
with fluctuations due to the effects of theeconomic measures (Chart 31).

80
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.

Housing investment has been relatively weakChart 32: Housing Investment
24s.a., ann., tril. yens.a., ann., mil. units

1.2(Chart 32). The number of housing starts -- aleading indicator of housing investment -- has

1.1

22

followed a downtrend that reflects a rise in
1.0

housing prices. Housing investment is likely to20

follow a moderate declining trend in reflection of
the rise in housing prices and demographic

0.9
18
0.8

developments, although accommodative financial

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

conditions are expected to provide support.

Housing starts(right scale)

14
CY 09

0.6
11

13

15

17

19

21

23

Sources: Cabinet Office; Ministry of Land, Infrastructure, Transport and Tourism.
Note: The figure for 2024/Q1 is the January-February average.

31

0.7

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

Chart 33: Inflation Indicators
y/y % chg.

the producer price index (PPI, adjusted for theeffects of seasonal changes in electricity rates)
has been slightly positive recently (Chart 33). The
year-on-year rate of increase in the services
producer

price

index

(SPPI,

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

3.3

3.0

2.5

2.5

3.3

2.9

2.1

2.3

4.2

4.3

3.8

3.2

excludingExcluding temporary factors

4.3

4.2

3.4

3.0

international transportation) has remained at

Producer Price Index (q/q % chg.)

-0.2

-0.1

0.3

0.5

Services Producer Price Index

2.1

2.3

2.5

2.1

GDP Deflator

3.7

5.2

3.9

2.7

2.5

2.1

around 2 percent, mainly on the back of therecovery in economic activity and a rise in

Domestic demand deflator

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

personnel expenses.

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

traveldiscount

program)has

decelerated steadily, mainly because the impactof the previous year's price hikes has dissipated(Chart 35).14 Specifically, as for goods, the rates
14

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

32

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

4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
CY 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 introduced in April 2020.

of increase in prices of a wide range of items havedecelerated, as the impact of the previous year's
price hikes has dissipated and the pressure on
firms to pass on raw material cost increases toselling prices has waned compared to a while ago.

Chart 35: CPI (Excluding Temporary Factors)
4.5

y/y % chg.
Goods
General services (less housing rent)
Housing rent (private and imputed rent)
Administered prices
CPI (less fresh food and energy)

4.0

3.5
3.0

The rate of increase in general services prices

2.5

has decelerated somewhat, particularly for items

2.0

such

housework-related

1.5

services (e.g., services related to housing repairs

1.0

and maintenance), with the pressure on firms to

0.5

pass on raw material cost increases waning

0.0

compared

-0.5
CY 19

as

dining-out

to

a

and

while

ago.

That

said,

a

pass-through of higher personnel expenses to
consumer prices has progressed moderately foritems

includingtutorial

andlesson

fees.

20

21

22

23

24

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.

Meanwhile, the rate of increase in hotel charges
has remained relatively high. The year-on-year
rate of change in overall administered prices has

Chart 36: Various Measures of Core
Inflation

been flat recently because, while factors such as

3.5

dissipation of the effects of the previous year's

3.0

hikes in fire and earthquake insurance premiums

2.5

have been observed, railway fares and other

2.0

prices have been raised.

1.5

y/y % chg.
Trimmed mean
Weighted median
Mode

1.0
0.5
0.0

The indicators for capturing the underlying trend

-0.5

in

-1.0

the

CPI

have

developments (Chart

exhibitedthefollowing36). 15 , 16 , 17

The trimmed

-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 introduced in April 2020.

15

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

33mean of the year-on-year rate of change in the
CPI has been in the range of 2.0-2.5 percent as
the impact of the previous year's price hikes has
dissipated. The mode and the weighted medianChart 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

have been at around 2 percent and in the range of

40

70

1.0-1.5 percent, respectively. Looking at the20

60

year-on-year price changes across all CPI items(less fresh food), the share of price-increasing

0

50

-20

40

-40

30

items minus the share of price-decreasing items

-60

20

has decreased moderately (Chart 37).

-80

10

-100
CY 09

Meanwhile, the year-on-year rate of change in thedomestic demand deflator has been at around 2
percent (Chart 33). By component, that for theprivate consumption deflator has been in therange of 2.5-3.0 percent. The rates of increase insuch deflators as for business fixed investment
have decelerated moderately. The year-on-year
rate of change in the GDP deflator has been ataround 4 percent recently; specifically, the rate ofincrease in the domestic demand deflator has
remained

relatively

highdespiteslowing

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

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

16

In this report, the mode is defined as the inflation rate with thehighest density in the distribution that is estimated parametricallyby fitting a normal inverse Gaussian distribution to the observed
price change distribution in each period. It should be noted that,with dispersions of the observed distributions increasing, the fit of
the normal inverse Gaussian distribution has deteriorated recently.
Therefore, estimates of this mode should be interpreted with somelatitude.
17

See Box 4 for approaches to examining underlying inflation in
the current phase.

34

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
introduced in April 2020.

First, the output gap is likely to continue to widen

Chart 38: Inflation Rate and Output Gap

moderately within positive territory toward the end

10of the projection period (Charts 2 and 38).

8

4

6

3

4

2

2

1

0

0

-2

-1

Second,medium-tolong-term

inflation

expectations have risen moderately (Chart 39).
The March 2024 Tankan shows that figures forfirms' inflation outlook for general prices havebeen at high levels. Given that the formation of
inflation expectations in Japan is largely adaptive,
the increase in inflation seen thus far has brought
about a rise in households' and firms' medium- to

y/y % chg.

%

-4

-2

Output gap (left scale)-6

CPI (less fresh food and energy, right scale)

-8
CY 85

90

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

has shifted more toward raising wages and prices,

1. Survey

are higher than those seen in the previous year

-3
-4

95

long-term inflation expectations. Firms' behavior
and it is highly likely that firm wage increases that5

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

2.0

will be achieved in this year's annual springlabor-management wage negotiations. In addition, 1.5
moves to reflect wage increases in selling prices
have been strengthening. Regarding the outlook,

1.0

inflation expectations are expected to risemoderately, with continued improvement in the

0.5

output gap and changes in firms' wage- andprice-setting

behavior.

Under

these

circumstances, the virtuous cycle between wages
and prices is projected to keep intensifying
through achievement of wage increases thatreflect price rises and through a pass-through of

0.0
CY 05

07

09

11

13

15

17

19

21

23

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

2. BEI

wage increases to selling prices.
2.5

%

2.0
1.5

Third, the year-on-year rate of change in theimport price index had remained negative due to

1.0
0.5

0.0

dissipation of the impact of past high commodity-0.5

prices, but since such negative contribution has

-1.0
-1.5

Old (10 years)-2.0

Old (longest)

recently (Charts 41 and 42). Looking at the final-2.5

New (10 years)

demand-intermediate-3.0

ended, the rate has been at around 0 percent
demand(FD-ID)

price

-3.5
CY 05

35

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.

indexes, the index for stage 1 of the ID -- whichshows developments in an upstream stage of theChart 40: Output Prices

production process -- had seen a lowering in its

50

level compared to around last autumn; however,40

Manufacturingreflecting the subsequent rise in crude oil prices

30

Nonmanufacturing

and depreciation of the yen, it has increased20slightly recently (Chart 43). That for stage 2 of the
ID has remained on a moderate uptrend. That

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

10

0
-10

said, the indexes for stages 3 and 4 of the ID,

-20

which

relatively-30

downstream stages of the production process,-40

have remained more or less flat. This indicates-50
CY 74 78 82 86 90 94 98 02 06 10 14 18 22

show

developments

inthat the upward pressure on the CPI stemmingfrom the past rise in import prices has weakened
compared to a while ago.

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

Meanwhile, the year-on-year rate of change inoil: $/bbl, copper: 100 $/t, monthly avg.
Crude oil (Dubai)

120

Copperenergy prices (e.g., gasoline prices and electricity

100

charges) had remained negative due to the80

government's measures to reduce the household

60

burden of higher gasoline prices, electricity
charges, and gas charges. 18 However, it has
been at around 0 percent recently, largely
because discounts on electricity and gas charges,
which have made a negative contribution to

40
20

0
CY 09

11

13

15

17

19

21

23

Sources: Nikkei Inc.; Bloomberg.

energy prices, have been reduced compared toChart 42: Import Price Index
18

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

36

60

y/y % chg.

50

Yen basis
Contract currency basis

40
30
20
10
0

-10
-20
CY 19

20

Source: Bank of Japan.

21

22

23

24

the previous year. As for the outlook, the effects of
the recent rise in crude oil prices is expected toChart 43: FD-ID Price Indexes (AllCommodities)

push up the year-on-year rate of change in

170

energythe160

government's measures to reduce the household

150

burden of higher energy prices will be phased out,140

the rate is highly likely to register a relatively large130

prices,andassumingthat

positive figure because a waning of the effects ofthese measures pushing down such prices of theprevious year is expected to be observed.

19, 20After the impact of the rebound caused by thephasing out of the government's measuresdissipates, the rate is projected to be slightly
negative in light of developments 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

19

The government announced that it will extend theimplementation period of its gasoline subsidies, which was initiallythrough the end of April 2024. Regarding measures to reduce theburden of higher electricity and gas charges, it also announced
that the current discount rate to these charges will continue to be
applied to those up to May 2024, the rate will be cut to half in June,
and the measures will be discontinued at the end of that month(the months refer to the timing at which the charges arecalculated).
20

It is projected that the rate of change in energy prices for fiscal
2024 will also be pushed up by the hike in the rate of renewableenergy surcharges on electricity.

37

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

120
110
100
90
80
70
CY 15

16

Source: Bank of Japan.

17

18

19

20

21

22

23

24

factors such as firms' wage- and price-setting

Chart 44: Phillips Curve

behavior (Chart 44).21

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 fresh1food) is likely to be in the range of 2.5-3.0 percent

0

Takingaccountofthefor fiscal 2024 and then be at around 2 percent for

2013/Q2-2023/Q4
2024/Q1

B
A

A:1983/Q1-2013/Q1
y = 0.41x + 0.6
B:1983/Q1-1995/Q4
y = 0.24x + 1.5
C:1996/Q1-2013/Q1
y = 0.25x - 0.1-1

fiscal 2025 and 2026. In the first half of the
projection period, the rate of increase is expected
to be pushed up by the effects of the recent rise in
crude oil prices and a waning of the effects of thegovernment's economic measures pushing down
CPI inflation, while the effects of the pass-throughto consumer prices of cost increases led by thepast rise in import prices are likely to wane.
Thereafter, the rate is projected to be at around 2
percent in reflection of the developments 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.
Although relatively high wage increases are likely
to be achieved in this year's annual springlabor-management

wage

negotiations,close

attention is warranted on the extent to whichmoves to reflect wage developments in selling
prices will become widespread. On the other hand,moves to reflect wages in selling prices could
strengthen to a greater extent than expected, andupward pressure on wages could intensify withlabormarketconditions

tightening.

In

this

situation, there is also a possibility that both21

Box 3 outlines recent developments surrounding the CPI,
specifically, the current situation of the linkage between wages
and prices.

38-2

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.

wages and prices will deviate upward from thebaseline scenario, accompanied by a rise inmedium- to long-term inflation expectations.

39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.22
0.0
-0.2

Lookingatshort-term

interest

rates,

the-0.4

uncollateralized overnight call rate had been in
the range of minus 0.1 to 0 percent under the-0.6

framework

-0.8

of

Quantitative

andQualitative

Monetary Easing (QQE) with Yield Curve Control.

-1.0

Following the changes in the monetary policy

CY15

framework decided at the March 2024 Monetary

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

Policy Meeting, it has been in the range of 0 to 0.1
percent (Chart 45). Interest rates on term

17

18

19

1.4

Firms' funding costs have increased recently but

1.2

have remained at low levels (Chart 46). Lending

1.0

rates (the average interest rates on new loans

0.8

and discounts) had been at extremely low levels

0.6

through February 2024. Since March, however,

0.4

have remained at low levels. Those for corporate
bonds have been more or less flat, albeit withfluctuations.

22

23

24

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

1.6

Issuance rates for CP have increased recently but

21

%

1.8

some base rates for short-term loans have risen.

20

Chart 46: Bank Lending Rates and Issuance
Yields for CP and Corporate Bonds
2.0

instruments have risen.

16

0.2
0.0
CY05

07

09

11

13

15

17

19

21

23

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

Chart 47: Lending Attitudes of Financial
Institutions as Perceived by Firms
The DI in the Tankan for financial institutions'40

lending attitudes as perceived by firms suggests

30

that

such

attitudes

haveremained

accommodative on the whole (Chart 47). That for

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

20

issuance conditions for CP has continued to show

10

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

0

-10
22

Box 5 outlines the assessment of financial conditions in termsof interest rates.

Small enterprises

-30
CY 95

40

Large enterprises

-20

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.

issuance conditions for CP and corporate bonds
have been favorable. The DI for firms' financial

Chart 48: Firms' Financial Positions

positions in the Tankan suggests that they have40

been at favorable levels on the back of a recovery

30

ineconomic

activity

andprogressinthe

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

Small enterprises

20

pass-through of cost increases to selling prices
10(Chart 48).

0

-10

Firms'

demand

for

funds

has

increased

moderately on the back of, for example, the-20

recovery in economic activity as well as mergers

-30
CY 95

and acquisitions of firms. In this situation, theSource: 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.

00

05

10

15

20

year-on-year rate of increase in the amountoutstanding of bank lending has been at around
3.5 percent (Chart 49). That in the aggregate
amount outstanding of CP and corporate bonds
has been in the range of 1.5-2.0 percent.

Chart 49: Amounts Outstanding of Bank
Lending, CP, and Corporate Bonds
16

y/y % chg.
Lending by domestic commercial banks

14

CP and corporate bonds

12
10
8
6

The year-on-year rate of change in the monetarybase has been at around 1.5 percent. The rate of420change in the money stock (M2) has been at-2

around 2.5 percent, as the amount outstanding of-4bank lending has continued to increase and fiscal
spending has kept pushing the rate up (Chart 50).

-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.

Chart 50: Money Stock10monthly avg., y/y % chg.

9
8

M2

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.

41

Developments in Financial Markets
In global financial markets, long-term interest
rates and stock prices in major economies had
followed an uptrend through March, mainlyreflecting solid economic indicators in the UnitedStates. Subsequently, however, stock prices haveChart 51: 10-Year Government Bond Yields
in Selected Advanced Economies
6

%

Japan

5

turned to a decline in many economies, while4

long-term interest rates have risen significantly

3with market attention being drawn to the2United States
Germany

prolonged monetary tightening in the UnitedStates, and geopolitical risks in the Middle East10have heightened.

-1
CY 18

19

20

21

22

23

24

Source: Bloomberg.

Yields on 10-year government bonds in the UnitedStates have risen substantially, mainly reflecting
solid

economic

indicators

andattention,

particularly since the beginning of April, on the
prolonged monetary tightening (Chart 51). Yields
on 10-year government bonds in Europe haveincreased, in line with developments in those in
the United States. In Japan, yields on 10-year
government bonds have increased as well.23

Premiums for U.S. dollar funding through thedollar/yen foreign exchange swap market havebeen at low levels on the whole (Chart 52).

While stock prices in the United States had risen
against the background of solid economic
indicators and of growth expectations supported
by an expansion in demand for new technologies
in the high-tech industry, they have turned to a
decline recently, mainly reflecting the rise in23

Box 6 examines the impact of the Bank's Japanese government
bond (JGB) purchases on the yield curve.

42

Chart 52: 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
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.

long-term interest rates and the heightened
geopolitical risks in the Middle East (Chart 53).
Those in Europe have decreased after rising

Chart 53: Selected Stock Price Indices200

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

significantly in line with the increase in U.S. stock 180
prices.

Stockprices

in

Japan

had

risen 160
considerably, in reflection of the increase in U.S.
stock prices and solid corporate results, but have140

declined recently, in line with the decrease in U.S. 120
stock prices. Stock prices in emerging economies 100
have declined, mainly reflecting the increase in80

U.S. yields, after rising on the back of, for
60
CY 18

example, a pick-up in the Chinese economy.

19

20

21

22

23

24

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

In foreign exchange markets, the yen has
depreciated against the U.S. dollar, albeit withfluctuations, reflecting attention to factors such as

Chart 54: U.S. Dollar/Yen and Euro/Yen
170

yen

the yield differential between Japan and the160

U.S. dollar/yen

United States (Chart 54). The yen has also

150

Euro/yendepreciated140

against

the

euro,

albeitwithfluctuations.

130
120
110

Yen
depreciation

100

Yen
appreciation

90
CY 18

19

Source: Bloomberg.

43

20

21

22

23

24

Land Prices
Land prices have increased in reflection of theeconomic recovery. According to the Land Market
Value Publication for 2024 (as of January 1), theChart 55: Residential Land Prices
6year-on-year rates of increase in both residential

4and commercial land prices have accelerated

2(Charts

55

and

56).

In

the

three

y/y % chg.

major

metropolitan areas (Tokyo, Osaka, and Nagoya),0

the year-on-year rates of increase in both-2

residential and commercial land prices have-4

accelerated. In nonmetropolitan areas, the rate of

Nationwide
Three metropolitan areas
Nonmetropolitan areas

-6

Tokyo

increase in residential land prices has been flat,
while the rate of increase in commercial land

-8
CY 09

11

13

15

17

19

21

23

Source: Ministry of Land, Infrastructure, Transport and Tourism.
Notes: 1. Based on the Land Market Value Publication. Figures are as of January 1.
2. The three metropolitan areas are the Tokyo area (Tokyo, Kanagawa, Saitama,
Chiba, and Ibaraki prefectures), the Osaka area (Osaka, Hyogo, Kyoto, andNara prefectures), and the Nagoya area (Aichi and Mie prefectures).
Nonmetropolitan areas are areas other than the three metropolitan areas.

prices has accelerated.

Chart 56: Commercial Land Prices
8y/y % chg.

6

4
2
0
-2
Nationwide-4

Three metropolitan areas-6

Nonmetropolitan areas

-8
-10
CY 09

Tokyo

11

13

15

17

19

21

23

Source: Ministry of Land, Infrastructure, Transport and Tourism.
Notes: 1. Based on the Land Market Value Publication. Figures are as of January 1.
2. The three metropolitan areas are the Tokyo area (Tokyo, Kanagawa, Saitama,
Chiba, and Ibaraki prefectures), the Osaka area (Osaka, Hyogo, Kyoto, andNara prefectures), and the Nagoya area (Aichi and Mie prefectures).
Nonmetropolitan areas are areas other than the three metropolitan areas.

44

(Box 1) Current Situation and Outlook for Private Consumption

A look at recent developments in private
consumption shows that, in addition to the impact

Chart B1-1: Overall Livelihoodof price rises, temporary factors such as a decline

1. By Annual
2. By AgeHousehold Income

in automobile sales due to a suspension of

55s.a., DIs.a., DI

9.5 mil. yen and over
3-9.5 mil. yen
Less than 3 mil. yen

Aged up to 39
Aged 40-59
Aged 60 and over55

shipment at some automakers have exerted

50

downward pressure. In terms of the impact of45

45

price rises, as a decline in real income has

40

40

become prolonged, households are gradually

35

35

becoming more defensive in their spending. By

30

30

type, sales of items including food (non-durable

25

goods) have seen a gradual decline with a20

continued rise in their prices (Chart 28). Whilehouseholds' sentiment has been recoveringmoderately

on

the

whole,

partlydue

toexpectations of an improvement in income, as

15
CY 20

Improved

Improved

Worsened

Worsened

50

25
20
15

21

22

23

24 20

21

22

23

24

Source: Cabinet Office.
Note: Figures show developments in the index of consumers' perceptions of their overall
livelihoods for two-or-more-person households in the Consumer Confidence Survey.
Figures are the weighted averages for each household income group and age ofhousehold head group using the number of households as weights.

described below, it has been relatively weakamong low-income and senior households (Chart
B1-1). Among the seniors, moves to restrain
purchase quantities relative to the pre-pandemic
period have been spreading (Chart B1-2).

Chart B1-2: Consumption by Age
2chg. from baseline, real, %

0
-2

-4

Nevertheless, private consumption is expected toincrease moderately in reflection of a couple of-6-8factors described below, in addition to a waning of
temporaryfactors,

such

as

a

declineinautomobile sales.

October 2023
January 2024

-10
Aged 25-64 Aged 65 and Aged 25-64 Aged 65 and
over
over
RetailFirst, with regard to prices, the impact of
cost-push pressure stemming from the past rise inimport prices has been waning clearly. For thetime being, the slowdown in the rate of increase infood prices is expected to continue steadily, andthe downward pressure on consumption from thisside is projected to ease, although attention

45

Services

Sources: Ministry of Internal Affairs and Communications; Nowcast Inc./ JCB, Co., Ltd.,"JCB Consumption NOW."
Notes: 1. The chart shows the consumption per person in JCB Consumption NOW.
Real values are obtained using the corresponding CPIs.
2. The baseline is the average for the corresponding months for fiscal 2016
through fiscal 2018.

should be paid to the potential impact of therecent rise in crude oil prices.

Chart B1-3: Wage Increases andHouseholds' Income Outlook
share of respondents expecting their income to rise in the next five years, %3530Second, with regard to income, the results of thisyear'sspringlabor-management

25

wage

negotiations are expected to be reflected inworkers' actual salary payments through the

20
15

are

10

expected to rise clearly. 24 For pensioners,

5

pensions for fiscal 2024 have been revised

0summer. Consequently, nominal

wages

upward by 2.5-3.0 percent from last year. The
cuts in income tax and inhabitant tax as part of thegovernment's economic stimulus measures will
also underpin households' disposable income.

Moreover, the prospect of two consecutive yearsof high-level base pay increases is expected tocreate an expectation among households ofincreasing permanent income -- that is, aperception that wages will continue to increase inthefuture,therebysupporting

privateconsumption. In this context, an analysis ofhousehold survey microdata shows that a highpercentage of households whose income has
improved recently expect their income to increasein the future as well (Chart B1-3). Furthermore,estimation results show that, as the expectation ofcontinued improvement in income grows, thisexerts effects that push up current consumption(Chart B1-4). In addition, the recent substantial
rise in stock prices is expected to push up private
consumption through wealth effects (Chart B1-5).

24

See also Box 2 of this report for details on the 2024 springlabor-management wage negotiations.

46

Decreased or
unchanged

Increased

Income over the past year
Source: JTUC Research Institute for Advancement of Living Standards.
Note: The vertical axis shows the share of respondents who answered that they expected
their wages in five years to be considerably or somewhat higher than the current
wages of those five years their senior in the same company. The bar labeled"increased" shows this share for respondents who replied that their income had
increased over the past year, while the bar labeled "decreased or unchanged"
shows the share for respondents who replied that their income had decreased orremained unchanged over the past year. Figures are based on the April 2023
survey.

The pace and degree of such improvements inincome will differ depending on households'

Chart B1-4: Positive Effects of Wage
Increases on Consumption

attributes, such as their household type (working

1. Estimation Modelhousehold, pensioner household, etc.), the level(Ordered Probit Model)of increase in base pay at their place of work, andDependent variable:
Change in consumption over the past year
Explanatory variables:(1) Income rise over the past year dummy(2) Income rise over the past year dummy
× Income expected to rise over coming one year dummy(3) Income rise over the past year dummy
× Income expected to rise over coming five years dummy

their financial asset holdings. It is necessary tocontinue to carefully examine developments inprivate consumption, taking into account thedifferences across household attributes.

2. Estimation Results
0.30

marginal effects on the probability that respondents
reported a consumption increase

0.25

0.20
0.15
0.10
0.05
0.00
Income rise over Income rise over Income rise overthe past year
the past year + the past year +over coming one over coming five
year
years
Source: JTUC Research Institute for Advancement of Living Standards.
Notes: 1. The bands denote the 95 percent confidence intervals. The estimation period isfrom 2013 to 2023 (April surveys). The horizontal axis shows different
combinations of the dummies for actual and expected rises in income used in
the marginal effects estimation.
2. The dummy "over coming one year" takes a value of 1 if the respondent
answered that they expected their wages to rise considerably or somewhat overthe coming year. The dummy "over coming five years" takes a value of 1 if the
respondent answered that they expected their wages in five years to beconsiderably or somewhat higher than the current wages of those five years
their senior in the same company.
3. The estimations control for respondents' perceptions of and outlook for income,prices, and economic conditions, as well as their age group, income group, job
status, etc.

Chart B1-5: Stock Prices and Household
Assetsamount outstanding at the end of the quarter, tril. yen quarterly avg., points

300

3,000
Shares and investment trusts (left scale)

250

TOPIX (right scale)

2,500

200

2,000

150

1,500

100

1,000

50

500

0
CY 05

0
08

11

14

17

20

23

Sources: Bank of Japan; Bloomberg.
Note: Figures for shares and investment trusts are those for listed shares and investment
trust beneficiary certificates held by households.

47

(Box 2) Spring Labor-Management Wage Negotiations in 2024

Developments

in

the

annualspringlabor-management wage negotiations this year
show that moves to raise wages have been
accelerating further, as many firms have agreed

Chart B2-1: 2024 Spring Wage
Negotiations (Aggregation by Rengo)
1. Developments over Time76

to higher wage increases than those last year,

5

which already were relatively high.25 The average

4

rate of increase in wages for regular employees in3labor unions that belong to the Japanese Trade2

Union Confederation (Rengo) -- which mainly1consists of labor unions of large firms -- marked0

the highest level in 33 years since 1991 (Charty/y % chg.

CPI inflation
Base pay increase
Total wage increase-1-2
CY 91 94 97 00 03 06 09 12 15 18 21 24

B2-1[1]).

By firm size, not only firms with 1,000 or more

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 (the figures for 2024 are from Rengo's
fourth aggregation).

union members but also smaller firms have

2. By Type of Employment and Firm Sizeagreed to much higher rates （ベースアップ率、％）
of wage increases

base pay increase, %CY 2022 CY 2023 CY 2024
Regular employees
0.6
2.1
3.6
1,000 or more
0.6
2.2
3.6
300 to 999
0.7
2.1
3.6
100 to 299
0.7
2.0
3.4
99 or less
0.8
1.9
2.9
Part-time employees 2.3
5.1
6.1

than last year (Chart B2-1[2]). Moreover, the rateof increase in wages of part-time employees,
which were raised significantly last year, has
accelerated as well. The labor market hascontinued to face structural changes, including
intensifying labor shortages and growing job
markets for workers looking for new jobs. Under
such circumstances, given the price rises andfurther heightened social momentum for wage
increases, large firms' stance has shifted more
toward raising wages.

Small and medium-sized firms (hereafter referred
to as "SMEs"), which have low union membership

25

Regarding the spring labor-management wage negotiations in
2023, see Box 1 of the April 2023 Outlook Report and Box 1 of theOctober 2023 Outlook Report.

48

Source: Japanese Trade Union Confederation (Rengo).
Note: The figures for 2024 are from Rengo's fourth aggregation. The figures for the
breakdown of regular employees are aggregated values based on the number ofunion members. Part-time employees include fixed-term employees.

rates, often conduct their wage negotiations from
April onward. Therefore, at this point, the full
picture of their wage revisions is not yet clear.
That said, SMEs face more intense labor

Chart B2-2: Employment Conditions DI-60-50

Labor shortage-40

shortages than large firms, and many of them are-30

strongly aware of the need to raise wages (Chart-20B2-2). In addition, many SMEs have mentioned-10

that they want to reference the rate of wage

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

Large enterprises
Small enterprises

010increases agreed in the wage negotiations of20

large firms for their own wage increases.

30

Therefore, the positive results of the negotiations

40
CY 91

of large firms are likely to support SMEs' wage

96

01

06

11

16

21

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.

increases. Meanwhile, among SMEs and firms inthe services sector, such as eating and drinking
services, many have pointed to the minimum

Chart B2-3: Regular Employees Slightly
above the Minimum Wage

wage as one of the reasons why full-time

16

employees' wages need to be raised, in addition14

to changes in the labor market. At these firms, the12differential between wages of full-time and10part-time employees is small and the increase in8

the minimum wage seems to have induced wage

6

increases not only for part-time employees but

4also for full-time employees (Chart

B2-3). 26

wage negotiations, suggest that there has been ashift toward wage increases (as seen in an
increase in the number of firms planning to raisebase pay and a rise in the rate of planned wage
increases) (Chart B2-4).

26

The government aims to raise the minimum wage (hourly
wages, all Japan average) to 1,500 yen.

49

Accommodations,eating and drinking

toward wage increases, conducted ahead of theWholesale andretail trade

this situation, several surveys on SMEs' stanceTransport andpostal activities

and this is likely to encourage wage increases. In

Information andcommunications

been spreading among firms, including SMEs,

Construction

0labor cost increases on to selling prices have

<By industry>

Manufacturing

addition, as described in Box 3, moves to pass

Small enterprises

2<By size>

Large enterprises

Inshare of regular employees, %Source: Ministry of Health, Labour and Welfare.
Notes: 1. Figures show the share of regular employees with hourly scheduled cash
earnings no more than 100 yen above the minimum wage, based on staff
calculations using microdata from the 2023 Basic Survey on Wage Structure.
2. Large enterprises are enterprises with 1,000 or more employees. Small
enterprises are enterprises with 5 to 99 employees.

In this regard, at the April 2024 meeting of generalmanagersoftheBank'sbranches,

many

Chart B2-4: Wage Developments in SmallEnterprises
1. Share of Firms
Raising Wages

branches reported that moves to raise wages -- atsimilar levels as in 2023 or more -- were expected70

even among regional SMEs, as labor market

60

conditions have been tightening and firms have50

been faced with intensifying labor shortages. That

2. Total Wage
Increaseshare of firms, %share of firms, %Firms raising wages
by 3% or more

35
30

40

said, there were also reports that a number offirms were (1) maintaining a cautious stance

25
30

toward raising wages in view of the severe

20

situationa10

wait-and-see stance to see the situation for their

0
CY

in

their

profitsor(2)

takingcompetitors regarding the degree of wage
increases. Given such circumstances, the need tocarefully monitor future developments was notedatthemeeting. 27

Indeed,

the

pace

of

improvement in corporate profits and the pace of
decline in labor share have been more moderate

40

20
15
10
2022

2023

2022

2024

2023

2024

Sources: Teikoku Databank, Ltd.; Tokyo Shoko Research, Ltd.; Japan/Tokyo Chamber ofCommerce and Industry (JCCI and TCCI); Japan Finance Corporation.
Notes: 1. In the left-hand chart, figures show the average of several surveys of small
enterprises regarding their plans on raising base pay. The bands indicate thehighest and lowest survey results.
2. In the right-hand chart, figures show the share of firms in a JCCI-TCCI survey
planning to raise total wages by 3 percent or more among firms planning toraise wages.

Chart B2-5: Corporate Profits and Labor
Share
1. Ratio of Current
Profits to Sales

at SMEs than at large firms; also, both corporate
profits and labor share vary among SMEs (Chart

14B2-5).28 As this may suppress the growth rate of

12

2. Labor Share

%

%

110

Large enterprises

100

Small enterprises

10

wages at SMEs, it warrants attention.

90

8
6

80

4

70

The results of wage negotiations will likely be2reflected in actual wages through this summer.

0

Although there remain uncertainties regarding-2

factors such as the future course of wage

-4
FY 05

revisions at SMEs, it is highly likely that thegrowth rate of scheduled cash earnings will27

For details, see Bank of Japan, "Kaku chiiki kara mita keiki nogenjō (2024 nen 4 gatsu shitenchō kaigi ni okeru hōkoku) [Current
economic situation seen in each region (reports made at the April
2024 meeting of general managers of the Bank's branches)](available only in Japanese).
28

Box 2 of the January 2024 Outlook Report points out that it may
not be easy for firms with a high level of labor share to increase
distribution to employees through wage increases. However, italso points out that even such firms tend to carry out relatively highwage increases, reflecting intensifying labor shortages and an
improvement in profits through rises in output prices.

50

60

50
40
10

15

20

95

05

15

Source: Ministry of Finance.
Notes: 1. Figures for large/small enterprises are annual means. The shaded areas denotethe 25th-75th percentile distributions for small enterprises, based on staff
calculations using microdata from the Financial Statements Statistics ofCorporations by Industry, Quarterly.
2. Large enterprises are enterprises with a capitalization of 1 billion yen or more,while small enterprises are enterprises with a capitalization of 10 million yen or
more but less than 100 million yen. Figures exclude "finance and insurance"
and those for fiscal 2009 onward also exclude pure holding companies.

increase further, and this is likely to underpin
private consumption, as described in Box 1.

51

(Box 3) Linkage between Wages and Prices: Spread of Moves to Pass
Labor Cost Increases on to Selling Prices

While both the year-on-year rates of change inwages and prices had remained rigidly at around

Chart B3-1: Developments in Wages andPrices0 percent since the 2000s, they have been rising

35

recently (Chart B3-1). When considering the30

outlook for price developments, whether the25

linkagewould

20

strengthen gradually has become increasingly

15

important, as pointed out in past Outlook

10

Reports.29

This box provides an update on the5current situation of the linkage between wages

0

between

wages

and

pricesand prices.

y/y % chg.

CPI (less fresh food)Nominal wages

-5
FY 71

First, regarding spillovers from prices to wages,
as shown in Box 2, following last year, a high-level

81

91

01

11

21

Sources: Ministry of Internal Affairs and Communications; Ministry of Health, Labour andWelfare.
Notes: 1. The CPI figures are staff estimates and exclude the effects of the consumption
tax hikes, policies concerning the provision of free education, and travel subsidy
programs. Figures for nominal wages are for establishments with 30 or more
employees up through fiscal 1990, and with 5 or more employees from fiscal
1991 onward. Figures from fiscal 2016 onward are based on continuing
observations following the sample revisions.
2. Figures for fiscal 2023 are April 2023-February 2024 averages.

base pay increase is expected to be achieved at
the spring labor-management wage negotiations

Chart B3-2: Interview Responses by Firms

in 2024.

-- Getting consumers to accept higher prices
due to higher labor costs is difficult(manufacturer).

Second, with regard to spillovers from wages toprices, developments in services prices -- wherelabor costs account for a high share of output
prices -- are particularly important. In this regard,
this box examines the current situation withmoves to pass higher labor costs on to selling
prices both qualitatively and quantitatively.

Some firms still indicate that "getting consumers
to accept higher prices due to higher labor costs

29

Regarding the linkage between wages and prices, see also Box
3 of the October 2023 Outlook Report and Box 3 of the January2024 Outlook Report.

52-- We raised membership fees because we
increased wages to recruit and retain
employees (sports club).
-- We expect labor market conditions to remaintight. Moreover, the continuous increase inminimum wages planned by the government
will add upward pressure on wages forregular employees. Considering thesefactors, we have raised prices to secure
funds for future wage increases (eating anddrinking).
-- We believe that higher labor costs should
basically be absorbed through productivity
gains. However, we recently changed ourstance in negotiating input costs to takesuppliers' wages into account(manufacturer).
Source: Interviews by the Bank of Japan.
Note: The industry of the interviewee is shown in parentheses.

is difficult," but in services industries, labor costs
increasingly have been passed on to selling

Chart B3-3: Price Change Distributionof General Services, Total

prices, as labor shortages have been exerting

80

upwardB3-2).

70

Moreover, to prepare for future wage increases,

60

some firms have raised selling prices in advance.

50

With regard to goods prices, manufacturers still40

tend to hold the view that "higher labor costs

30

should be absorbed through productivity gains";

20

nevertheless, moves to pass labor costs on to10

selling prices seem to have been spreading0

gradually.

-4 -2
or lesspressure

on

wages

(Chartshare of the number of items, %Latest
Early 2010s

0

2

4

6

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

Source: Ministry of Internal Affairs and Communications.
Notes: 1. Figures show the CPI for general services (less housing rent and the effects oftravel subsidy programs).
2. Figures for the early 2010s are as of March 2012 and the latest figures are as ofMarch 2024.

Next, a look at the distribution of changes inservices prices by item shows that the distribution
overall has shifted to the right (Chart B3-3). This

Chart B3-4: Price Change Distributionof General Services, Breakdown
2. Labor Cost Ratio

1. Subgroupis mainly due to the fact that the inflation rates

share of the number of items, % share of the number of items, %have been increasing in items such as dining out

35

and services related to housing repairs and30

maintenance due to the strong impact of the past25

rise in import prices (Chart B3-4). As this impact

Eating out, services
related to housing
repairs andmaintenance
Other

35

Low labor cost ratio
High labor cost ratio

30
25

20

20

15

15

10

10

recreational services (such as monthly lesson

55fees) and in items with a high ratio of labor costs

0wanes, such increase in the inflation rate is likely
to slow. In contrast, the right tail of the distribution
has become thicker recently, in culture andto total costs, suggesting that moves to pass labor
cost increases on to selling prices have been
spreading.

Furthermore, the following part attempts to carryoutquantitative

analyses

that

have

been

presented in the Bank's publications including the
October 2023 Outlook Report. In Chart B3-5, alook at elasticity, which represents the responseof inflation rates to wage increases, indicates that,
although the CPI less fresh food has been

53

0
-2 0 2 4 6 8 10
-2 0 2 4 6 8 10
or moreor more or lessor lessy/y % chg.

y/y % chg.

Source: Ministry of Internal Affairs and Communications.
Notes: 1. Figures show the CPI for general services (less housing rent and the effects oftravel subsidy programs). Figures are as of March 2024.
2. Figures for "other" include culture and recreation.
3. In the right-hand chart, CPI items are matched to the items in the 2015 InputOutput Tables for Japan and grouped in terms of the share of "wages and salaries"
and other labor costs in the domestic output of those items. Figures for items with ahigh (low) labor cost ratio are for items that fall into the top (bottom) 50 percent ingeneral services.

increasingly

reactive,

it

is

not

statisticallysignificant yet; on the other hand, the elasticity ofChart B3-5: Response of Prices to a 1%
Increase in Wages

the services prices to wage increases has

1.2

increased recently in a statistically significant way.

1.0

Moreover, "low-volatility items," "wage factors,"

0.8

and "the trend in services prices," all of which are

0.6

estimatedto

0.4

determine upward pressure on prices deriving

0.2

from the linkage between wages and prices, have

0.0

using

the

statisticalmethods

cumulative impact on level, %been increasing further (Chart B3-6).30 In addition, -0.2

Early
1990s

high base pay increases are expected to be

increased spillover from wages to prices.

As explained, positive developments have been

As of2023/Q2

Latest

Early
2010s

CPI (less fresh food)agreed in the 2024 spring labor-management
wage negotiations. This will also encourage an

Early
2010s

LatestCPI (generalservices)

Sources: Ministry of Internal Affairs and Communications; Cabinet Office; Bank of Japan.
Notes: 1. Figures show the estimation results of a time-varying parameter VAR model
consisting of the output gap, nominal wages, and the CPI. Import prices areadded as an exogenous control variable. The CPI figures are staff estimatesand exclude temporary factors.
2. Figures are 4-quarter cumulative impulse responses. The bands indicate the 75
percent confidence intervals, while the broken lines indicate that the results are
not statistically significant. Figures for the early 1990s are as of 1991/Q2, thosefor the early 2010s are as of 2012/Q2, and the latest figures are as of 2023/Q4.

spreading in firms' wage- and price-setting

Chart B3-6: CPI and Scheduled Cash
Earnings

behavior as time has passed. It is necessary to5%contribution to y/y % chg. in CPI less fresh food, % points

2.5

CPI (low-volatility items, left scale)keep

monitoring

carefully

fromvarious4will continue. A few firms point out that "it is easy3

to pass labor costs on to selling prices together

22.0

Trend component of the CPI for
services (left scale)
Scheduled cash earnings of fulltime employees (left scale)Contribution of wage factors to
CPI changes (right scale)standpoints if recent changes in firms' behavior

1.5
1.0

with a rise in raw material costs amid theremaining effects of the rise in the latter, which isan exogenous shock common to many firms."
Going forward, careful attention is warranted inparticular on whether labor cost increases willcontinue to be passed on to selling prices as theeffects of the past rise in raw material costs wane
further.

30

For details of each indicator, see "Recent Developments in the
Linkage between Wages and Prices," Bank of Japan Review
Series, forthcoming.

54

1

0.5

0

0.0

-1
CY 83

-0.5
87

91

95

99

03

07

11

15

19

23

Sources: Ministry of Internal Affairs and Communications; Ministry of Health, Labour andWelfare; Bank of Japan.
Notes: 1. Figures for low-volatility CPI items and scheduled cash earnings of full-time
employees are year-on-year percentage changes, while those for the trend
component of the CPI for services are the 6-quarter backward moving averagesof annualized quarter-on-quarter percentage changes. 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.

(Box 4) Approaches to Examining Underlying Inflation
Chart B4-1: Price Developments in
the Current Phase (Conceptual Diagram)

In forecasting consumer price inflation, it isimportant to capture the underlying inflation trend

Price inflation

5

Pass-through toconsumer prices ofcost increases led by
the rise in import prices

by examining the factors that fundamentally drive
price changes and excluding the effects of
temporary fluctuations, such as in input prices.

4
3
2

Changes in wageand price-setting
behavior, etc.

Capturing an underlying inflation trend is not aneasy task, even under normal circumstances, and
it is especially difficult in the current phase. The

10reason is that price inflation in the current phaseis characterized by two notable components: (1)

-1
-2

-1

0

1

Output gap

cost-push inflation triggered by the sharp rise in2

import prices and (2) the intensification of thevirtuous cycle between wages and prices, where

Chart B4-2: Import Prices and the CPI

price increases have been accompanied by wage

6

increases resulting from changes in firms' wage-

5

and price-setting behavior following the first

4component (Chart B4-1). The direct impact of thefirst component is likely to fade once the rise inimport prices comes to a halt, and in this sense it

y/y % chg.

y/y % chg.

60
50

CPI (less fresh food, left scale)

40

Import price index (right scale)

3

30

2

20

1

10

0

0

can be regarded as a temporary change (Chart

-1

-10

B4-2). On the other hand, the effect of the second

-2

-20

component is expected to push up prices in the

-3

-30

long run by making price developments better

-4
CY 07

reflect domestic supply and demand conditions
and by raising inflation expectations. Therefore, inthe current phase, it is important to extract thesecond component in order to capture theunderlying inflation trend. Given the specificnature of the current phase, this box presents
threeapproaches

toexaminingunderlying

inflation.

55

-40
09

11

13

15

17

19

21

23

Sources: Bank of Japan; Ministry of Internal Affairs and Communications.
Note: Figures of the import price index are on a yen basis. The CPI figures are staff
estimates and exclude mobile phone charges and the effects of the consumption
tax hikes, policies concerning the provision of free education, and travel subsidy
programs.

The first approach is to construct indicators fromprice statistics that (1) are less susceptible totemporary fluctuations, such as in import prices,and (2) reflect underlying developments such aschanges in labor costs. As for the former, theChart B4-3: Measures of Underlying Inflation
Based on Price Statistics
1. Indicators Excluding Items Susceptible toTemporary Fluctuations
5

CPI (less fresh food and energy)

Bank has conventionally used consumer price4

indicators that exclude highly volatile items (such3

as fresh food and energy) and indicators that use

y/y % chg.

Trimmed mean
Weighted medianLow-volatility items

2

information on the distribution of price changes(such as the trimmed mean, the weighted median,1

and the mode); however, in the current phase,0

these indicators, like the CPI itself, have risen-1

sharply since prices of an extremely wide range ofitems have shown large increases in the wake ofthe rise in importprices.31

Therefore, the Bank

has recently developed a new indicator that

-2
CY 07

09

11

13

15

17

19

21

23

Sources: Bank of Japan; Ministry of Internal Affairs and Communications.
Notes: 1. The CPI figures are staff estimates and exclude mobile phone charges andthe effects of the consumption tax hikes, policies concerning the provision offree education, and travel subsidy programs.
2. Low-volatility items are items that fall into the bottom third in terms of theirvolatility using long-term time series data for the CPI (less fresh food).

extracts low-volatility items, which are lesssusceptible to temporary factors, by classifying

2. Indicators Likely Reflecting Wage Developments

items based on their rate of price change (Chart5

B4-3[1]).32 While this indicator remained close to4

zero percent for the past 25 years or so, it has%contribution to y/y % chg. in CPI less fresh food, % points

2.5

CPI (low-volatility items, left scale)

2.0

Trend component of the CPI for
services (left scale)
Scheduled cash earnings of fulltime employees (left scale)Contribution of wage factors to
CPI changes (right scale)3

been rising gradually recently.
2

1.5
1.0

1

0.5

0

0.0

Meanwhile, with regard to the latter, i.e.,
indicators reflecting developments in labor costs,
one method is to use a model to extract the part ofchanges in consumer prices that can be regarded
as due to wage factors, while another method
would be to extract the trend component of the
CPI for services, where labor costs account for a
31

The Bank has been compiling various measures of underlying
inflation for many years and regularly releases some of them on its
website. For details, see "Measures of Underlying Inflation" under
Research Data on the Bank's website.
32

For details, see "Recent Developments in the Linkage between
Wages and Prices," Bank of Japan Review Series, forthcoming.
The Review article also focuses on cost information for items thatmake up the CPI and presents developments in items with a low
share of import costs to total costs and items with a high share oflabor costs to total costs.

56

-1
CY 83

-0.5
87

91

95

99

03

07

11

15

19

23

Sources: Ministry of Internal Affairs and Communications; Ministry of Health, Labour andWelfare; Bank of Japan.
Notes: 1. Figures for low-volatility CPI items and scheduled cash earnings of full-time
employees are year-on-year percentage changes, while those for the trend
component of the CPI for services are the 6-quarter backward moving averagesof annualized quarter-on-quarter percentage changes. 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.

large share in overall costs (Chart B4-3[2]). These
indicators have been rising moderately in recent
years, and their developments are similar to thosein wages (scheduled cash earnings of full-timeChart B4-4: Measures of Underlying Inflation
Based on Indicators of Inflation Expectations
1. Composite Index of Inflation Expectations,by Forecast Horizon
2.5%

employees), which means they may be useful for
examining the linkage between wages and prices.

1 year ahead
3 years ahead
5 years ahead
10 years ahead

2.0
1.5
1.0

The second approach is to focus on indicators
related to inflation expectations, which represent

0.5

people's perceptions of price developments. 33

0.0

However, such indicators of inflation expectations-0.5

vary across economic agents and forecasthorizons, and have different meanings, statisticalcharacteristics, and biases. In addition to carefully
examining each of the individual indicators (Chart39), the Bank has constructed a composite index
that aggregates the information contained in each

-1.0
CY 07

09

13

15

17

19

21

23

2. Composite Index of 10-Year-Ahead Inflation
Expectations, by Type of Economic Agents
2.5%
Composite index of inflation expectations(10-year ahead)
Sub-index for households

2.0

Sub-index for firmsof the indicators using statistical methods.34 This
composite index of inflation expectations has

11

Sub-index for economists and market
participants

1.5

recently been hovering around the past 20-year
peaks for all horizons (Chart B4-4[1]). A more

1.0

detailed look shows that 1-year-ahead inflation
expectations have declined somewhat in an
adaptive manner that reflects the decline in actual
inflation, while longer-term inflation expectations
have continued to rise moderately. Moreover, thesub-indexes of 10-year inflation expectations forhouseholds, firms, and economists and market
participants all have been increasing recently(Chart B4-4[2]).
33

Conceptually, medium- to long-term inflation expectations
correspond to the intercept of the Phillips curve (i.e., theintersection with the vertical axis) shown in Chart B4-1.
34

Specifically, using principal component analysis, the common
components of each indicator are extracted. Moreover, the mean
and variance of the aggregate indicators are based on the inflation
expectations of economists and market participants, which haverelatively small biases. For details, see "Assessing Measures ofInflation Expectations: A View from Term Structure andForecasting Power," Bank of Japan Review Series, forthcoming.

57

0.5

0.0
CY 07

09

11

13

15

17

19

21

23

Sources: Bank of Japan; QUICK, "QUICK Monthly Market Survey <Bonds>"; Consensus
Economics Inc., "Consensus Forecasts"; Bloomberg.
Note: Based on the first principal component for each forecast horizon extracted fromthe following six indicators: two indicators for households from the Opinion
Survey on the General Public's Views and Behavior (for qualitative andquantitative questions), one indicator for firms from the Tankan, and three
indicators for economists and market participants from the QUICK Survey, theConsensus Forecasts, and data based on inflation swap rates. Estimated using
data as of April 12. Data for firms before 2014 are obtained from the following
paper: Nakajima, J. (2023), "Estimation of Firms' Inflation Expectations Using
the Survey DI," IER Discussion Paper Series A.749, Hitotsubashi University.

The third approach is to construct economic
inflation using statistical methods. Trend inflation

Chart B4-5: Measures of Underlying Inflation
Based on Macroeconomic Models(Estimates of Trend Inflation)

here is defined as the long-run value that actual

2.5

inflation could converge to in the absence of

2.0

Model 1: Phillips curve model (time-varying
intercept)
Model 2: Time-varying parameter VAR model

1.5

Model 3: Semi-structural model

models and then estimate indicators of trend

additional shocks to the economy. While the%literature provides a variety of models to estimate
trend inflation, this box focuses on three. The first

1.0

is a Phillips curve model with a time-varying

0.5

intercept (Model 1). The second and third models

0.0

focus not only on the relationship between prices
and economic activity, but also on that between
pricesandwages;

namely,avectorautoregressive (VAR) model that captures thechanging relationships between price inflation,
wage growth, and economic activity over time
(Model 2), and a semi-structural model thatassumes

short-

andlong-runrelationships

between price inflation, wage growth, and inflation
expectations (Model 3).

The estimation results in Chart B4-5 show thattrend inflation estimates have gradually increased
in all models. It should be noted, however, that theresults need to be interpreted with some caution
since they largely depend on the assumptions
made in the models and as the results may berevised when new data become available.

All three approaches support, to varying degrees,
the view that underlying inflation in Japan has
been rising. It should be noted that all of theapproaches presented in this box have limitations,such as the fact that they are based on specificassumptions. In particular, individual estimatesand short-term changes in them should beinterpreted

withconsiderable

latitude.

To

58

-0.5
-1.0
CY 07

09

11

13

15

17

19

21

23

Sources: Bank of Japan; Ministry of Health, Labour and Welfare; Ministry of Internal
Affairs and Communications; Cabinet Office; Google Trends; QUICK,"QUICK Monthly Market Survey <Bonds>"; Consensus Economics Inc.,"Consensus Forecasts"; Bloomberg.
Notes: 1. Model 1 is based on a Phillips curve model with regime-switching intercept andslope. Its time-varying intercept is regarded as trend inflation. For details, see
Nakajima, J. (2023), "Estimating Trend Inflation in a Regime-Switching Phillips
Curve," IER Discussion Paper Series A.750, Hitotsubashi University.
2. Model 2 is based on a time-varying parameter VAR model with four variables:
the CPI inflation rate, the output gap, import price growth, and wage growth.
Trend inflation is defined as the long-run value that actual inflation could
converge to for each date. For details, see Rudd, J. B. (2020), "Underlying
Inflation: Its Measurement and Significance," FEDS Notes, September 18.
3. Model 3 is based on a semi-structural model with four endogenous variables:
the CPI inflation rate, short- and long-term inflation expectations, and wage
growth. Trend inflation is defined as the long-run value that actual inflation could
converge to (400-quarter ahead value in the simulation) for each date. For
details, see Nakamura, K. et al. (2024), "What Caused the Pandemic-Era
Inflation?: Application of the Bernanke-Blanchard Model to Japan," Bank ofJapan Working Paper Series, 24-E-1.

comprehensively assess the underlying inflation,
it is necessary to take a variety of perspectives
into account, including anecdotal information fromfirms, in addition to the analyses presented here.

59

(Box 5) Assessing Financial Conditions in Terms of Interest Rates

In general, monetary easing by central banks isundertaken with the intention of stimulating

Chart B5-1: Nominal Short-Term Rate andCPI
y/y % chg.

10

%

10

Uncollateralized overnight call rate (left scale)aggregate demand and employment by creating

CPI (less fresh food and energy, right scale)88accommodative financial conditions, which in turnpushes up wages and prices by tightening labormarket conditions. In this context, the degree of

6

6

4

4

2

2

0

0

monetary accommodation needs to be assessedbroadly in terms of developments in interest rates,
firms' funding conditions, and financial market
developments. This box provides an overview ofways to assess financial conditions, focusing on

From a theoretical point of view, the following
three points are important to bear in mind whenassessing financial conditions in terms of interest
rates. First, a low nominal interest rate does not
imply

a

highlyaccommodativeenvironment. While short-term interest rates inJapan have remained close to 0 percent for a long
period of time, since the late 1990s, the average
inflation rate from 2000 to the early 2010s was
below 0 percent (Chart B5-1). When people
expect prices to fall in the future, they have lessincentivetoborrow

for

-2
95

00

05

10

15

20

Sources: Bank of Japan; Ministry of Internal Affairs and Communications.
Note: 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.

interest rate developments.

necessarily

-2
CY 90

the

purposeof

consumption or investment. Therefore, in terms ofdecision-making by economic agents, it isimportant to look at the real interest rate, which isthe nominal interest rate minus the expected rateof inflation.

As described in Box 4, there are various
measures of inflation expectations, and theirlevels should be interpreted with some caution.

60

As such, the composite indicator of inflation
expectations -- an aggregate of these various
measures with some assumptions -- is used toestimate the level of real interest rates at themacro level (Chart B5-2). It suggests that,

Chart B5-2: Real Interest Rates by Maturity
1. 1-Year
1.5

Nominal interest rate

although nominal interest rates for one-year
maturity have fluctuated only slightly, short-term

0.0(one-year) real interest rates, reflecting higher-0.5

inflation

generally-1.0

remained negative following the introduction of

-1.5

(1)

have

Quantitative and Qualitative Monetary Easing(QQE) in 2013 and (2) have become even morenegative

since

2022.

Meanwhile,

long-term(10-year) real interest rates (1) have been clearly

Real interest rate

1.0
0.5

expectations,

%

-2.0
-2.5
CY10

12

14

16

1.5

decline in nominal interest rates. Moreover, (2)1.0unchanged,

mainlybecauseofasimultaneous increase in long-term inflation

22

24

%
Real interest rate
Nominal interest rate

despite a moderate rise in nominal interest rates
less

20

2. 10-Yearnegative since 2013, mainly due to a substantialfrom 2022, real interest rates have been more or

18

0.5
0.0
-0.5

expectations.
-1.0

Second, for any given real interest rate level, theimpact of real interest rates differs between
economies with strong and weak funding demand.
For example, in an economy with a high potential
growth rate, the real interest rate level that isneutral to economic activity and prices -- theso-called natural rate of interest -- also tends tobe higher, so the easing effects of any given realinterest rate level will be larger. For this reason,
the real interest rate gap -- i.e., the difference
between the real interest rate and the naturalinterest rate -- is often used as an indicator to

61

-1.5
CY10

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 real interest rates for each maturity are calculated as government bondyields minus the composite index of inflation expectations (staff estimates) for thecorresponding maturity.

assess the degree of monetary accommodation.35
A larger negative real interest rate gap indicatesChart B5-3: Estimates of the Natural Rateof Interest for Japan
4.0

more accommodative financial conditions.

%

Holston, Laubach, Williams (2023)
Nakajima et al. (2023)
Imakubo, Kojima, Nakajima (2015)
Okazaki, Sudo (2018)
Del Negro et al. (2017)
Goy, Iwasaki (2023)

3.5
3.0
2.5

That said, since the natural rate of interest cannot

2.0
1.5

be directly observed in the real world, it must be

1.0

estimated based on some kind of economic

0.5

model. As shown in Chart B5-3, all estimates of

0.0
-0.5

the natural interest rate using various models-1.0

show a decline in the long run. At the same time,-1.5
CY 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22

there is considerable variation in their levels,
meaning that it is difficult to specify the level of thenatural interest rate.36

Third, it is also important to assess financial

Sources: Bank of Japan; Ministry of Finance; Ministry of Health, Labour and Welfare;Cabinet Office; Ministry of Internal Affairs and Communications; Bloomberg;
Consensus Economics Inc., "Consensus Forecasts."
Note: The estimates are based on staff calculations using the models proposed in the
different papers. The shaded area indicates the range of natural interest rateestimates from the minimum to the maximum.

Chart B5-4: Effects of a Decline in Interest
Rates on the Output Gap, by Maturity

conditions by taking account of their impact on therealeconomy.

The

Bank'sComprehensive

Assessment in 2016 shows that the effects of adecline in interest rates on the real economy are
relatively

large

in

the

case

of

short--0.06

elasticity-0.05
Larger impact ofa decline in interest rates
on the output gap

-0.04

to

medium-term interest rates and become smaller
for longer maturities (Chart B5-4). Therefore, it

-0.03
-0.02

should be noted that the impact of a decline ininterest rates on the real economy may differ bymaturity. In addition, as pointed out at the
beginning of this box, the degree of monetary

-0.01
0.00
1

2

3

4

5

6

7

8

9

10 years

Sources: Bank of Japan; QUICK, "QUICK Monthly Market Survey <Bonds>";
Consensus Economics Inc., "Consensus Forecasts"; Bloomberg.
Note: For details of the methodology, see Appendix 8 in the Comprehensive Assessment
released in September 2016. The results are re-estimated using the latest data.
35

In standard macroeconomic models, an increase in the degreeof monetary accommodation, as measured by the real interest rategap, is assumed to have a positive impact on the output gap.
Previous studies such as Laubach and Williams (2003) estimatedthe natural rate of interest based on this relationship.
Laubach, T. and J. C. Williams (2003), "Measuring the Natural
Rate of Interest," The Review of Economics and Statistics, vol. 85(4): 1063-1070.
36

For details on the estimation methods, see the presentationmaterial by the Monetary Affairs Department, "The Effects andSide Effects of Unconventional Monetary Policy" (available only inJapanese), reported at the first workshop on the "Review ofMonetary Policy from a Broad Perspective."62

accommodation can also vary depending on
factors other than developments in interest rates-- including firms' funding conditions, such as
banks' lending stance and credit risk premiums,
and developments in financial markets, such as
stock prices and foreign exchange rates.

As seen above, to grasp financial conditions inJapan, it is important to make a comprehensive
assessment based not only on nominal interest
rates but also on real interest rates -- i.e., nominalinterest rates minus inflation expectations -- andthe natural rate of interest, while carefully
examining the impact of financial conditions on
the real economy.

63

(Box 6) Impact of the BOJ's JGB Purchases on the Yield Curve

The Bank has purchased JGBs to push down theChart B6-1: Yield Curves

overall yield curve, which in turn has affected

2.5

economic activity and prices (Chart B6-1). This

2.0

Before the introduction of QQE

box attempts to quantitatively assess the impact
on the formation of long-term interest rates ofpolicy measures

such aslarge-scale

JGB

purchases, the setting of a target level for%

Under QQE
Under QQE with Yield Curve Control

1.5
1.0
0.5

long-term interest rates, and fixed-rate purchase
operations, under the previous policy frameworkof Quantitative and Qualitative Monetary Easing

0.0
-0.5
0 1 2 3 4 5 6 7 8 910(QQE) with Yield Curve Control.

15

20

30

residual maturity, years
Source: Bloomberg.
Note: Figures for "before the introduction of QQE" are the average from January 3,
2012, to April 3, 2013; for "under QQE," the average from April 4, 2013, toSeptember 20, 2016; and for "under QQE with Yield Curve Control," the average
from September 21, 2016, to March 18, 2024.

Conceptually, the effects of large-scale centralbankpurchasesofgovernment

bonds

on

long-term interest rates are often divided into (1)the flow effect and (2) the stock effect. The flow
effect is the direct impact that central bankgovernment bond purchases in the secondary
market have in terms of pushing down yields on
the bonds being purchased. On the other hand,the stock effect refers to the impact that thecentral banks' large holdings of government
bonds have in terms of pushing down interest
rates of various maturities by affecting theallocation of risk among the market participants.
Recent empirical studies suggest that the stock
effect tends to be more persistent than the flow
effect. 37 Using the demand and supply curve
framework shown in Chart B6-2, the stock effect37

See, for example, the following studies.

Bernanke, B. S. (2020), "The New Tools of Monetary Policy,"
American Economic Review, vol. 110 (4): 943-983.
Sudo, N. and M. Tanaka (2021), "Quantifying Stock and Flow
Effects of QE," Journal of Money, Credit and Banking, vol. 53 (7):1719-1755.

64

can be summarized as follows: larger central
bank holdings of long-term government bonds

Chart B6-2: Stock Effect of JGB Purchases

reduce the total amount of interest rate risk for

Expected
Interest
supply curve
rates

market participants, which lowers interest rates --in the future

Supply curveafter JGB
purchases(1) JGB purchases

in particular, the term premium -- through new
risk-taking by such participants. Moreover, this
impact could occur before actual government

Supply curve
without JGB
purchases
Demandcurve(1) Reduction ofinterest rates(Effect of BOJ's JGB
holdings)

bond purchases are made -- which is the(2) Additional
impact oninterest rates

so-called announcement effect -- as market
participants anticipate that the central bank will

(2) Demand increasein anticipation offurther JGB purchases

purchase them in the future.

Amount outstanding (interest rate risk) for market participants

QQE with Yield Curve Control, introduced in
September 2016, affects the formation of market
interest rates through large-scale purchases of
JGBs. From this perspective, it can be classified
as a form of central bank purchases ofChart B6-3: Effect of Yield Curve Control
on Interest Rate Fluctuations
Interest
rates

Supply curve withinelastic JGB purchases
to demand changes

government bonds, and the stock effect plays animportant role in affecting long-term interest rates.
However, since Yield Curve Control (YCC) is a(2) Interest rates
tend to stabilize
under YCC

Demandcurve
Demand changes
for some reason

framework that directly targets the level oflong-term interest rates, its impact differs inseveral respects. First, as shown in Chart B6-3,
under the framework without YCC, which targets(1) Interest rates would
be volatile if the amountof JGB purchases is notchanged flexibly

Supply curveunder YCC

the amount of purchases and/or holdings, interest
rates could fluctuate substantially in response tochanges in demand for JGBs; on the other hand,under YCC, the range within which long-term
interest rates are allowed to fluctuate is fixed, sothat fluctuations in interest rates are stabilized,
with

the

amount of purchases

determined

endogenously in response to changes in the
demand for JGBs. Second, if the Bank conducts
YCC to keep interest rates strictly between theupper and lower bounds, interest rates may fallwithin this range in a self-fulfilling manner without

65

Amount outstanding (interest rate risk) for market participantspurchases actually being made, as market

Chart B6-4: Estimation Results:
Long-term Interest Rate Models

participants anticipate the conduct of YCC.38

Model 1Model 210-year JGB yields

Dependent variable: 10-year JGB yields

Although YCC has such positive effects, it should(sum of estimatedcoefficients for expectedshort-term interest ratecomponent and term
premium)

Expected BOJ holdings of JGBs in
the future (share in total
outstandings)-0.024 ***-0.021 ***Probability that the upper bound of
the YCC range is exceeded-0.008 **-0.037 ***Moreover, when interest rates nearly reached theProbability that the offer rate of"fixed-rate purchase operations forconsecutive days" is exceeded-0.023 ***-0.053 ***upper bound under the strict conduct of YCC from

Probability that the lower bound of
the YCC range is exceeded-0.0020.028 ***

be noted that it may also lead to a deterioration inmarket functioning, such as suppressing the pricediscovery function of the market and its liquidity.

around mid-2022 to early 2023, the negative
impact on market functioning increased, resulting
in, for example, high volatility in other financial
markets, including the foreign exchange market.

10-year U.S. Treasury yields

0.230 ***

0.246 ***CPI (less fresh food and energy)

0.055 ***

0.083 ***

Uncollateralized overnight call rate

0.583 ***

0.777 ***

Constant

0.537 ***

Adjusted R-squared
Estimation period

Chart B6-4 shows the results of estimating simple
long-term interest rate models constructed on thebasis of the above considerations. First, in orderto capture the stock effect of JGB purchases insuch a way that the models include the effects ofmarket participants' expectations on the Bank's
future JGB holdings, the variable "expected BOJ
holdings of JGBs in the future" is constructed on
the basis of certain assumptions and used as an
explanatory variable. Second, in order to capture
the effects of setting a target range under YCC,
the models include the probabilities that thetargeted long-term yield exceeds the upper boundof the YCC range and that it exceeds the offer
rate of "fixed-rate purchase operations forconsecutive days," which are priced in the options
market. As these probabilities increase, market

38

Studies (e.g., Hattori and Yoshida, 2023) show that, after the
introduction of YCC, fluctuations in 10-year interest rates haveindeed been contained.
Hattori, T. and J. Yoshida (2023), "Yield Curve Control,"International Journal of Central Banking, December 2023:
403-438.

66

0.936

0.473 ***
0.919

January 1997 to December 2023

Sources: Bank of Japan; Ministry of Internal Affairs and Communications;Bloomberg; LSEG Eikon.
Notes: 1. *** and ** denote statistical significance at the 1 and 5 percent levels,
respectively.
2. Expected BOJ holdings of JGBs in the future denote the estimated share of
the BOJ's JGB holdings in the total amount outstanding 2 years ahead of eachmonth, which would be realized under the assumption that the BOJ continues
to purchase the same amount of JGBs in the next 2 years as in thecorresponding month (up to September 2016) or purchase JGBs based on
the monthly purchase schedule at that time (from October 2016). The share is
calculated on the basis of the interest rate risk. The probability that the upperbound of the YCC range (the lower bound of the YCC range or the offer rate ofthe "fixed-rate purchase operations for consecutive days") is exceeded is theprobability that long-term interest rates will exceed such level after 3 months,
which is priced in the options market.
3. The coefficients in Model 2 are the sum of the coefficients of the regression
results for models with the two components -- the expected short-term interest
rate component and the term premium -- of the 10-year interest rates as
dependent variables.

participants' expectations that the likelihood of theBank's response to prevent interest rates fromrising becomes high in the future will be factored
into market prices in advance. The estimation
results show that all variables, including othercontrol variables, have a statistically significant
impact. Using these results, Chart B6-5, which
presents a decomposition of developments in

Chart B6-5: Sources of Changes inLong-Term Interest Rates
2.5
2.0
1.5
1.0

0.5
0.0

long-term interest rates, shows that long-term-0.5interest rates are pushed down by about 1.0-1.0

percentage point on average, mainly through thestock effect, although the results from such simple

%

-1.5
CY 05

07

latitude.39 Moreover, Chart B6-6 -- which showsinterest

rates

with

different

maturities

anddecomposes the changes in the yield curve -indicates that, since the introduction of QQE in
2013, large-scale monetary easing has pushed

13

15

17

19

21

23

Sources: Bank of Japan; Ministry of Internal Affairs and Communications;Bloomberg; LSEG Eikon.
Note: Figures are calculated based on the average coefficients of Models 1 and 2 inChart B6-4. "Effects of BOJ's JGB holdings" are calculated on the basis of thecoefficients on the expected BOJ holdings of JGBs in the future, and "effects ofsetting the YCC range" are calculated based on the coefficients on theprobabilities in Chart B6-4 (such as the probability that the upper bound of the
YCC range is exceeded).

Chart B6-6: Sources of Changes in the
Yield Curve

down not only 10-year interest rates but the yield
curve as a whole.

11

Effects of BOJ's JGB holdings
Effects of setting the YCC range
U.S. Treasury yields
Other
10-year JGB yields

models should be interpreted with considerable
the results when applying the same models to09

1. QQE
0.4

2. QQE with YCC

%

%

0.4

0.2

0.2

0.0

0.0

In March 2024, the Bank changed its policy

-0.2

-0.2

frameworklarge-scale

-0.4

-0.4

monetary easing, including the framework of QQE

-0.6

-0.6

with Yield Curve Control, and decided to conduct

-0.8

-0.8

monetary policy by guiding the short-term interest

-1.0

from

the

previous

rate as a primary policy tool. As a result, long-term
interest rates are now basically formed in financial
markets, and the effects of setting the YCC range
seen in Chart B6-5 in terms of putting downward
pressure on long-term interest rates are likely to

39

In the March 2021 Assessment for Further Effective andSustainable Monetary Easing, the Bank shows the empiricalresults that its JGB purchases have significantly pushed down
long-term interest rates by about 1.0 percentage point on average,
using slightly different model specifications.

67

-1.0
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

years

years

Effects of BOJ's JGB holdings
Effects of setting the YCC range
U.S. Treasury yields
Other
Changes in yield curve
Sources: Bank of Japan; Ministry of Internal Affairs and Communications;Bloomberg; LSEG Eikon.
Notes: 1. In the left-hand chart, figures are the average from April 2013 to August 2016
relative to the average from January 2012 to March 2013. In the right-handchart, figures are the average from September 2016 to March 2024 relative tothe average from January 2012 to March 2013.
2. Figures are calculated on the basis of Models 1 and 2 in Chart B6-4, but foreach maturity from 1 year to 10 years. In the estimations, U.S. Treasury yields
for the corresponding maturities are used.

have shrunk substantially.40 On the other hand,
the Bank's JGB holdings are expected to remain
at high levels for the time being. The basic ideas
and estimation results described in this box imply
that the Bank's ongoing purchases and holdingsof JGBs will continue to affect the formation of theyield curve, mainly through the stock effect. The
quantitative results presented here should beinterpreted with considerable latitude as theeffects of JGB purchases may differ over time.
That said, based on these circumstances, theBank will continue to achieve appropriate financial
conditions while responding to developments ineconomic activity and prices by guiding theshort-term interest rate as a primary policy tool.

40

The Bank decided in the March 2024 Monetary Policy Meeting
that, in the case of a rapid rise in long-term interest rates, it will
make nimble responses by, for example, increasing the amount of
JGB purchases, regardless of the monthly schedule of JGB
purchases. Although it is difficult to quantify the effects of thisstatement using the analytical framework in this box since it does
not indicate a specific target level of the long-term yield in advance,
it is expected to contribute to the stable formation of long-term
interest rates in a manner similar to the setting of an upper boundunder YCC.

68