Toyoaki Nakamura: Economic activity, prices, and monetary policy in Japan
Central bank: boj | Type: speech | Date: 2024-12-05

Bank

of

JapanDecember 5, 2024

## Economic Activity, Prices, and Monetary Policy in JapanSpeech at a Meeting with Local Leaders in Hiroshima

## NAKAMURA ToyoakiMember of the Policy Board(English translation based on the Japanese original)

## I.

Economic Developments at Home and AbroadI will begin my speech by talking about recent developments in and the outlook for overseas economies.Overseas economies have grown

moderately on the whole, although uncertainties surrounding these economies have continued to be high, such as a delay in the recovery of the European and Chinese economies, and the prolonged situation in Ukraine and the Middle East (Chart 1).

The U.S. economy, despite the impact of successive policy interest rate hikes, has been firm, mainly due to resilient private consumption, and is increasingly expected to make a soft landing.

However, the economy has also shown some signs of deceleration, such as declining trends in the number of job openings and the consumer confidence index, and a significant rise in credit card delinquency rates.

Moreover, attention should be paid to the risk of a resurgence of inflation as a result of, for example, future economic developments and policy conduct.

European economies have kept slowing moderately due to the continued impact of factors such as successive policy interest rate hikes in the past.

There is concern over economic recovery being delayed in Europe due not only to the economic stagnation in Germany -- which has seen a decline in industrial strength and an increase in downward pressure on wages -- but also to chronic labor issues in European economies.

The pace of recovery in the Chinese economy has slowed, reflecting an increase in households' thriftiness.

The increase

is

mainly

due

to

(1) prolonged

sluggishness

in

the real

estate

market, (2) intensified

price

competition,

(3)

the

high

youth

unemployment

rate,

and

(4)

people's concerns over future wages and their post-retirement years.

I believe that further deterioration in the Chinese economy will be avoided through expansion in fiscal spending and monetary easing.

However, as adjustment pressure in the real estate and labor markets remains, there is concern over a lower economic growth rate in the future, due to intensified price competition brought about by higher supply capacity and to growing trade friction.Let me move on to recent developments in Japan's economic activity and prices.

The economy has recovered moderately, although some weakness has been seen in part.

In the corporate sector, goods exports have been more or less flat.

Meanwhile, services exports have continued to increase at a pace almost surpassing the record high, given an increase in inbound tourism demand reflecting factors such as a higher number of foreign visitors.

Industrial productionhas been more or less flat.

Corporate profits have been on an improving trend.

Business fixed investment has also been increasing moderately, due to growing demand for investment such as efficiency-improving investment and investments associated with digital transformation (DX) and green transformation (GX).

That said, with aggregate demand remaining below aggregate supply, some of the business fixed investment plans may be postponed, and thus future

developments

warrant

attention.

With

respect

to

the

household

sector,

the income situation has improved moderately, as seen in the year-on-year wage growth continuing to be in the range of 2.5-3.0 percent.

However, I am closely monitoring future developments in wage growth, as there seems to be a polarization between (1) growth-oriented firms -- large and medium-sized ones as well as some small ones -- making "virtuous" wage hikes and (2) the majority of small firms -- whose recovery of earning power has trailed behind -- making "defensive" wage hikes.

Private consumption has been lacking momentum, mainly due to the impact of price rises and households' thriftiness.

Turning to prices, the year-on-year rate of increase in the consumer price index (CPI) for all items excluding fresh food has been in the range

of

2.0-2.5

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 of cost increases led by the past rise in import prices have waned.As for the outlook, the Bank of Japan's October 2024 Outlook for Economic Activity and Prices (Outlook Report) forecasts that Japan's economy is likely to keep growing at a pace above its potential growth rate, with overseas economies continuing to grow moderately and as a virtuous cycle from income to spending gradually intensifies against the background of factors such as accommodative financial conditions (Chart 2).

However, because I am not yet confident in the sustainability of wage hikes, my projection for real GDP growth rates for fiscal

2024

to

2026 is lower

than

the

medians

of

the

Policy

Board

members'

forecasts presented

in

the

October

Outlook

Report.

My

projection

is

based

on

factors

such

as

the following: (1) private consumption that reflects an intensified thriftiness among households; (2)

the

possible

postponement of implementing

business

fixed

investment

plans;

and

(3) mounting

international competition

triggered

by the

slowdown

in

overseas

economies, particularly China.

In the October Outlook Report, the median of the Policy Board members' forecasts for the year-on-year rate of increase in the CPI for all items excluding fresh food isaround 2.5 percent for fiscal 2024, and around 2 percent for fiscal 2025 and 2026.

However, in my view, the rate may not reach 2 percent in fiscal 2025 and thereafter.

## II.

Conduct of Monetary Policy in Line with the State of the Economy's Return to a Growth PathThe purpose of the Bank of Japan's monetary policy is to achieve the 2 percent price stability target in a sustainable and stable manner, thereby contributing to the sound development of the national economy.

Factors such as U.S. monetary policy and developments in overseas economies and exchange rates impact economic activity and prices in Japan, and thus require consideration.

However, I believe what is essential in the conduct of monetary policy is to contribute to improvement in Japan's economic fundamentals from a medium- to long-term perspective

in line

with the

state

of the

economy's recovery, as

the

economy faces

low profitability due to changes in demographics and the industrial structure.

Keeping this view in mind and drawing from my own experience, I will overview topics such as the changes in Japan's industrial structure from a somewhat long-term perspective.

## A.

Changes in Japan's Industrial Structure and the State of Economic RecoveryDuring the Showa era's post-war period of rapid economic growth in Japan, export industries quickly flourished in a weak yen environment by realizing high performance, high quality, and low prices via a business model of mass production and vertical integration.

Household income

also

continued

to

experience

rapid

growth.

Meanwhile,

as

firms

pursued

greater production efficiency, the system

of lifetime employment

and seniority-based

wages took shape.

Trade friction subsequently broke out between Japan and the United States, while the yen began to appreciate rapidly following the 1985 Plaza Accord.

This led firms, especially large ones, to actively expand their overseas sites.As Japan entered the Heisei era in 1989, even under a strong yen, it seemed as if the bubble economy offset the downturn in export industries.

However, as advances in IT drove greater digitalization

and

globalization,

business

models

involving

a

horizontal

division

of

laborproved increasingly superior.

In this situation, the international competitiveness of Japan, 1 which globally ranked

first

until

1992,

gradually

declined

because Japanese firms trailed behind in restructuring their business portfolios (Chart 3).

Corporate earnings deteriorated, due in part to the collapse of the bubble economy in early 1992 and the financial system crisis.

These developments prompted large firms with high productivity to actively invest overseas and relocate their supply chains to China, Southeast Asia, and other countries and regions, in pursuit of lower costs and higher growth.

On the other hand, in Japan, large firms reformed their cost structures, by, for example, closing factories, downsizing, restraining investment, encouraging

voluntary

retirement,

and

cutting

wages.

The

trends

of

cutting

costs

and restraining investment also spilled over to small firms, which faced dwindling orders as well as intensified price competition.

As a result, despite an aging and declining population, the issue of labor shortages did not surface (Chart 4).

Employment was prioritized over wages, and firms made little headway with restructuring their business portfolios to strengthen their ability to create added value.

Under these circumstances, intensified price competition led to lower growth and profitability for domestic industries, and Japan's economy fell into deflation in which it was difficult for wages and prices to rise.

The ensuing three decades of an economy oriented toward contraction, characterized by a deflationary mindset and cost-cutting, gave rise to a persistent vicious cycle in which the output gap fell into negative territory.

Firms in Japan grew more cautious in their wage- and price-setting behavior, falling behind in terms of business fixed investment and digitalization.

Thriftiness among households also seemed to take root.

Looking at trends in the trade balance, Japan's terms of trade have deteriorated, due to lower exports of industrial products and higher imports of goods such as mineral fuels, and this has propelled a decline in firms' profitability (Chart 5).

Moreover, Japan's wage levels, even those of large firms, is low compared to the Group of Seven (G7) countries and major Asian economies (Chart 6), and private consumption is lacking momentum.

However, bold monetary easing and flexible fiscal policies have helped to bring about a situation where the economy is no longer in deflation.1 The IMD World Competitiveness Booklet published by the International Institute for Management Development (IMD) shows that Japan ranked first in international competitiveness until 1992, but is now ranked quite low, in 38th place.Furthermore,

the

rise

in

global

inflation

and

the

yen's

depreciation

after

the

onset

of

the COVID-19 pandemic gave rise to inflation in Japan as well, sparked by a rise in import prices.

Firms, large ones

in

particular,

have

achieved

stronger

earning

power

due

to

their implementation of business portfolio restructuring.

That is why in 2024, Japan saw its highest wage growth in 33 years, stock prices that exceeded the level of the bubble economy, and business

fixed

investment

totaling

more

than

100

trillion

yen.

Such

vigorous

business activities have yielded initial signs of a significant shift toward "a growth-oriented economy driven

by

wage

increases

and

investment"

that

is

capable

of

keeping

up

with

inflation.

Regulatory reforms that had been sluggish have also begun to move ahead.

That being said, real GDP has recently experienced quarter-on-quarter increases and decreases, and it is still too early to judge whether the economy is on a stable growth path.

## B.

Conduct of Monetary Policy in Line with the State of Economic RecoverySince the recovery phase from the pandemic, labor shortages have grown more acute, fueling greater mobility in employment and wage hikes.

Structural issues remain, however, including weak

demand and

supply-side constraints --both due

to the

aging

and declining population -- and low profitability of the industrial structure.

As the recovery in investment has trailed behind for small firms in particular, I personally do not yet have confidence in the sustainability of the wage hikes.

Achieving the 2 percent price stability target in a sustainable and stable manner will require changes to Japan's economic structure so that it will inspire confidence in the economy's expected return to a growth path driven by the stronger earning power of firms.

I should note that this will take a considerable amount of time.

However, there are already initial signs of a significant shift toward "a growth-oriented economy driven by wage increases and investment" that is capable of keeping up with inflation.

To ensure that this shift maintains momentum and does not subside, I think it is now vital for the Bank to examine a wide range of data and cautiously adjust the degree of monetary accommodation to reflect the state of economic recovery.Specifically, I would like to carefully confirm the state of Japan's economic recovery with reference to a wide range of data and anecdotal information, including (1) whether the level of earning power of small firms, for which recovery has trailed behind, is higher than before the pandemic, (2) whether firms are able to pass on costs to prices at a higher rate, (3) whetherprogress

is

made

in

stepping

up

business

fixed

investment

as

well

as

wages

and

bonus payments,

(4)

whether

more

small

firms

are

making virtuous

wage

hikes,

(5)

whether households' thriftiness has improved, and

(6) whether Japan's exports have become more competitive.

I will return to these points later, along with a discussion of the structural issues facing Japan.

## III.

Toward Sustainable Economic Growth that Overcomes Structural IssuesI would now like to share my personal views from a medium- to long-term perspective on the "dynamism" of firms, employment, and households needed to achieve sustainable growth in Japan's economy, which is facing structural issues.

## A.

Improving Japanese Firms' Earning Power and Capacity for Raising WagesAs discussed so far, employment was prioritized over wages in Japan.

This hindered business metabolism , generated delays in productivity gains, and led to stagnant wages.

Following the 2008 Global Financial Crisis, many large firms shifted the focus of their management from reforming their cost structures to restructuring their business portfolios, thereby strengthening earning power.

To secure human capital, 2 I think large and medium-sized firms that have boosted productivity will strengthen their mid-career hiring by offering higher wages than those of existing employees, and they will continue to raise wages at high rates to bridge the gap between the wages of existing employees and wages formed in the labor market.Labor shortages among large firms spur the movement of labor from small firms to large firms, creating employment dynamism (Chart 7).

Developments in the following components of

nominal

wage

growth

show

positive

signs:

the

inflation

rate

(maintenance

of

living standards), the labor productivity growth rate (fruits of productivity gains), and changes in labor share (capacity for raising wages) (Chart 8).

Nonetheless, I believe that the benefits of restructuring at large firms have not yet sufficiently spilled over to small and medium-sized firms.

According to the Financial Statements Statistics of Corporations by Industry, Annually , for fiscal 2023, operating profits per employee among medium-sized firms was around 40 percent of that of large firms, and only around 10 percent among small firms (micro firms2 "Human capital" is a term coined to express the idea that human resources are valuable for corporate management.excluded).

Personnel

expenses

per

employee

among

medium-sized

firms

was

around

70 percent of that of large firms, and around half among small firms (micro firms excluded).

In terms of per-employee operating profits, business fixed investment, and personnel expenses by firm size, for large and medium-sized firms, operating profits per employee -- an indicator of earning power -- grew significantly compared with the pre-pandemic period of fiscal 2018.

It appears that these firms are implementing virtuous wage hikes, which are accompanied by productivity gains achieved through active business fixed investment (Chart 9).

Meanwhile, the earning power of small firms (micro firms excluded) is still on its way to recovery from the pandemic and remains below pre-pandemic levels.

These firms are also taking a waitand-see approach to fixed investment, and many seem to have raised wages as a defensive step that aims at retaining employees and is not accompanied by productivity gains.

This trend was unchanged in the July-September 2024 Financial Statements Statistics of Corporations by Industry, Quarterly .

Furthermore, at the October 2024 meeting of the general managers of the Bank's branches, there were many reports that small firms had raised wages as a defensive step to retain employees.A March 2024 follow-up survey on the Price Negotiation Promotion Month organized by the Small and Medium Enterprise Agency found that the proportion of small firms that engaged in price negotiations was 59 percent, only a slight increase from the previous survey.

The rate of passing on costs to prices was 46 percent -- largely unchanged from the previous survey, and the rate of passing on labor costs was 40 percent.

These figures suggest that there has been a polarization between firms that have been able to pass on costs to prices, while others remain unable to do so.

If the recovery in small firms' earning power does not progress while they continue to raise wages at high rates, they could theoretically start operating at a loss within several

years.

This indicates their lack of capacity

for raising wages.

A June 2024 survey by the Japan Chamber of Commerce and Industry found that only 30 percent of small firms had implemented virtuous wage hikes, while 44 percent had raised wages as a defensive step, and 26 percent reported being undecided or having no plans to raise wages.

Thus, there is still a long way to go before sustainable and structural wage hikes are achieved.With

a

view

to

securing

funds

for

raising

wages,

economic

growth

and

improvement

in corporate profits are important.

In terms of corporate earnings of listed firms for the first halfof

fiscal

2024,

according

to media reports, those of

nonmanufacturers

increased

for

four consecutive years, led by the finance and shipping industries.

However, among manufacturers, firms in the automobile and steel industries in particular, earnings decreased for the first time in four years, mainly due to the slowdown in China and other overseas economies and to intensified price competition.

Japan's trade balance deficit continued in October, making it the

fourth

consecutive

month; consequently,

the

nominal

GDP

growth

rate

for

the

JulySeptember quarter remained low at a 0.5 percent quarterly increase.

However, many listed firms

have

been

conducting

business

portfolio

restructuring

that

strengthens

the

earning power of core businesses.

I am closely monitoring the progress in this restructuring, and hope that its benefits will spill over to small firms.Japan's economy is expected to head toward a growth path, albeit at a moderate pace, mainly led by growth-oriented large, medium-sized, and small firms.

The Bank will gradually adjust its monetary policy accordingly.

In response, small firms will need to move away from closed innovation, which relies on in-house expertise, and hasten structural reforms to step up the scale

of

their

businesses,

in

order

to

reinforce

the

management

resources

necessary

for growth-oriented business development.

From this perspective, I am also paying attention to developments that feed into greater earning power, such as those in business fixed investment and exports, as well as mergers and acquisitions (M&As) and third-party business succession (Chart 10).

## B.

Improving

the

Dynamism

of

Firms

and

Employment

to

Make

Industries

Highly ProfitableIf

firms

improve

their

capacity

for

innovation

to

make

Japan's

industrial

structure

highly profitable and enhance export competitiveness, these firms will be able to capture growth in overseas

markets to

a

greater

extent.

This,

in

turn,

will

generate

sustainable

demand

for business fixed investment in Japan and promote industrial clusters.

Such moves are expected to

spill

over across

small

and

medium-sized

firms.

Research and

development

(R&D) expenses -- which are critical in terms of boosting the declining international competitiveness I mentioned earlier -- were sluggish, amounting to 200.7 billion U.S. dollars in Japan in 2022, reflecting stagnation in its economic growth.

In comparison, R&D expenses for the United States and China increased in line with their economic growth, standing at 923.2 billion U.S.dollars and 811.8 billion dollars, respectively.

One reason for this sluggishness in Japan's R&D expenses is that, due to the historical background I explained earlier, the innovation required

of

advanced

economies

has

stagnated

in

Japan,

forcing

firms

to

face

price competition

with

emerging

economies

and

to

cut

costs.

For

example,

while

software investment has grown 11-fold in the United States since 1990, it has barely grown in Japan over the same period, indicating a widening disparity between the two (Chart 11).

In addition to expanding business performance, it is important for advanced economies to play a leading role

in

making active investment in R&D, human capital, and digitalization to accelerate future growth, while providing greater value through generating innovation.

I expect reforms to the industrial structure to progress through continued expansion in investment, including firms'

actions

currently

underway

to

foster

and

develop

leading

industries

and

strengthen human capital development.It is also vital to support the development of small and medium-sized firms and startups that aspire to expand overseas.

Many large firms started out as so-called unicorns and then grew rapidly.

From 2011 to 2021, about 30 percent of medium-sized firms in the United States and Europe

grew

into

large

firms,

but

this

proportion

in

Japan

was

only

about

10

percent, suggesting the weakening growth potential of small and medium-sized firms in Japan that form the backbone of domestic economic activity and investment.

Compared with the 1990s, while large firms' operating profits per employee grew 2.4-fold and those of medium-sized firms grew 1.9-fold, profits of small firms remained flat (Chart 9).

Increasingly acute labor shortages are also a major supply-side constraint.

Furthermore, there are concerns that, if firms face delays in productivity gains due to the postponement of business fixed investment, they may move supply chains offshore.

Therefore, my hope is to see growth in the following two types of firms especially: medium-sized firms aiming to grow into large firms, and small firms aiming to reach annual sales of 10 billion yen.

This is also in line with the policy laid out by the Japanese government.In addition, compared with the 1990s, large firms' labor costs per employee increased 1.1fold,

while

those

for

small

and

medium-sized

firms

remained

flat

(Chart

9).

As

wages represent employee value, firms need to continue with their strenuous efforts to improve their earning

power

and

implement

virtuous

wage

hikes,

thereby

enhancing

employee

value.Investment

in

human

resource development,

including

reskilling

efforts,

is

important

in enhancing employee value.

If firms find it difficult to do this on their own, one option is to entrust

the

management

of

the

businesses

to

their

best

owners. 3 Nowadays,

employees themselves must also make efforts to enhance their own value, and it is natural for employees to consider changing jobs as an option, if they are unable to enhance their value at their current employment.

Therefore, I believe that the key to sustainable wage increases is how growthoriented small and medium-sized firms implement structural reforms to step up the scale of their businesses.Admiration for growth-oriented firms will be inspired through the growth of small firms into medium-sized

firms, the

growth

of

medium-sized

firms

into

large

firms,

and

the

rapid expansion of startups into unicorns, especially unicorns that use new technologies to generate new markets.

I believe that this will draw both funds and talent to these firms, creating a growth

spiral

that

reinforces

the

dynamism

of firms

and

employment

characterized

by continuing

rises

in

wage

levels

(Chart

12).

Through

such

developments,

I

hope

to

see

a virtuous cycle of growth and profit sharing.In addition, the growth of small firms -- whose employees account for about 70 percent of the total workforce in Japan -- is indispensable to raising wage levels nationwide, revitalizing the

attractiveness

of

regions

struggling

with

population

outflows,

and

improving

job satisfaction.

I

expect

regional

financial

institutions

familiar

with the

situation

in their respective regions and their client firms to play their part in supporting them by reinforcing their earning power through a strengthening of cooperation with support organizations, such as the Organization for Small & Medium Enterprises and Regional Innovation, the National Center for Industrial Property Information and Training (INPIT), 4 university research centers, and consulting firms.

Regional financial institutions should also provide in-depth business3 The "Practical Guidelines for Group Governance Systems" issued by the Ministry of Economy, Trade and Industry on June 28, 2019, highlights the importance of focusing on which company is the best owner to realize the potential of each business, when optimizing the business portfolio of the group firm as a whole, by identifying and strengthening core businesses, while also streamlining noncore businesses.4 INPIT is an institution that offers various services such as providing information on intellectual property rights,

including

patents,

and

other

support

services for

users

of

the

system

of

industrial property rights.matching for M&As and third-party business succession, and other value-added services.

These efforts in turn would propel the structural reforms to step up the scale of the small firms'

businesses

and

thereby

strengthen

their

earning

power.

I

look

forward

to

the strengthening of support activities dedicated to improving corporate dynamism.

## C.

Improving Household Dynamism to Mitigate Concerns about the FutureAs Japan's industrial structure relies on imports for most of its resources for production inputs, coupled with today's globalized supply chains, the country's economic structure is therefore susceptible

to

global

inflation.

The

latest

figure

for

the

year-on-year

rate

of

increase

in scheduled cash earnings per employee is in the range of 2.5-3.0 percent, reflecting the highest wage increase rate in 33 years (Chart 13).

Meanwhile, over the same period, the working age population in Japan has decreased by about 10 percent, while the number of pensioners has increased 2.4-fold.

Furthermore,

pensioners, whose income replacement ratio is about 60 percent

relative

to

their

past

wages,

now

account

for

around

30

percent

of

the

overall population, resulting in a heavy social burden for the working age population.

As a result, the social structure has characteristics of overall sluggishness in households' purchasing power and their tendency toward thriftiness.As Japan's economic structure is subject to low profitability, to dispel concerns about the future, it is essential for growth-oriented large and medium-sized firms, as well as some small ones, to take the lead in driving overall economic growth, and for virtuous wage hikes to spread

to

the

majority

of

small

firms

that

employ

a

sizable

proportion

of

the

country's workforce.

However,

the

current

wage

level

in

Japan

is

low

compared

with

other

major economies.

Japan also faces structural issues such as higher hourly cash earnings not leading to higher disposable income, due to the heavier social burden and the so-called annual income barrier.

The latter refers to the fact that households' secondary earners or seniors try to adjust their working hours so that their income stays under the ceiling for tax exemption.

Meanwhile, Japan's income structure is heavily dependent on employee compensation, which accounts for more than 90 percent of households' disposable income.

To alleviate households' concerns about the future, efforts to diversify their earning power are necessary, as in the case with the United States, where employee compensation accounts for about 70 percent of disposable income, with dividend and interest income accounting for about 20 percent (Chart 14).

Withthe launch of the new Nippon Individual Savings Account (NISA) program, households have started to diversify their income sources, enabling them to earn more income not only through better business performance at the firm where they work, but also through greater returns from their

investments that

reflect the growth of listed

firms (Chart

15).

Sustained

wage increases

and

higher

wages

accompanied

by

job

changes,

coupled

with

investment

that focuses on the long term, on regular contributions, and on risk diversification, will lead to improved household dynamism, thereby strengthening households' earning power.

The hope is that this will feed into improvement in households' consumption patterns (Chart 16).The Bank of Japan will continue to conduct monetary policy as appropriate to support firms' management

efforts,

enhance

the

dynamism

of

firms,

employment,

and

households,

and guide the economy's return to a growth path.Thank you.

## Economic Activity, Prices, and Monetary Policy in JapanSpeech at a Meeting with Local Leaders in HiroshimaDecember 5, 2024NAKAMURA Toyoaki Member of the Policy Board Bank of JapanIMF Projections in the World Economic Outlook (October 2024)Chart 1

## Forecasts of the Majority of the Policy Board Membersy/y % chg.|

| Real GDP

| CPI (all items less fresh food)

| (Reference) CPI (all items less fresh food and energy)

||-----------------------------|---------------------|-----------------------------------|----------------------------------------------------------|| Fiscal 2024

| +0.5 to +0.7 [+0.6] | +2.4 to +2.5 [+2.5]

| +1.9 to +2.1 [+2.0]

|| Forecasts made in July 2024 | +0.5 to +0.7 [+0.6] | +2.5 to +2.6 [+2.5]

| +1.8 to +2.0 [+1.9]

|| Fiscal 2025

| +1.0 to +1.2 [+1.1] | +1.7 to +2.1 [+1.9]

| +1.8 to +2.0 [+1.9]

|| Forecasts made in July 2024 | +0.9 to +1.1 [+1.0] | +2.0 to +2.3 [+2.1]

| +1.8 to +2.0 [+1.9]

|| Fiscal 2026

| +0.8 to +1.1 [+1.0] | +1.8 to +2.0 [+1.9]

| +1.9 to +2.2 [+2.1]

|| Forecasts made in July 2024 | +0.8 to +1.0 [+1.0] | +1.8 to +2.0 [+1.9]

| +1.9 to +2.2 [+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 with reference to views incorporated in financial markets regarding the future conduct of policy.Source: Bank of Japan.Chart 3

## IMD World Competitiveness RankingOverall Score for 2024Japan's RankingNotes: 1.

In the left panel, figures in parentheses indicate the ranking of the economy out of all 67 economies analyzed. 2.

In the right panel, there is a discontinuity in the data for 1997 due to a change in the survey framework.Source: IMD, "World Competitiveness Ranking 2024."

## Diffusion Index (DI) for Employment ConditionsNote: Figures are for all industries, excluding financial institutions.Source: Bank of Japan.

## Nominal Trade BalanceSource: Ministry of Finance.Chart 5

## Annual Pay Comparison (as of 2024)

## G7 Countries

## Asian Economies- Notes: 1.

The horizontal axis shows the level of the position class as defined by Mercer.

Position classes below the executive level at large firms are shown in this chart.

The further to the right, the higher the position class.2.

Figures include incentives paid for 100 percent achievement of performance targets and are the medians for each position class.Source: Mercer, 2024 Total Remuneration Survey .

## Labor Mobility and Wages

## Number of Job Changers by Size of EnterpriseShare of Workers Who Experienced a Wage Increase after a Job ChangeNote: In the left panel, small and medium-sized enterprises (SMEs) are enterprises with 5-299 employees.

Large enterprises are those with 300 employees or more.Source: Ministry of Health, Labour and Welfare.Chart 7

## Three Indicators That Show Signs of Wage IncreasesOperating ProfitsChart 9

## Recovery Status of Small and Medium-Sized FirmsOperating ProfitsFixed InvestmentPersonnel Expenses per Employeeper Employee per EmployeeNotes: 1.

Figures are based on the Financial Statements Statistics of Corporations by Industry, Annually , and exclude the finance and insurance industries.

Large firms are commercial corporations with capital of 1 billion yen or more.

Medium-sized firms are commercial corporations with capital of 100 million yen or more but less than 1 billion yen.

Small firms are commercial corporations with capital of 10 million yen or more but less than 100 million yen.

The dotted lines show the average values for the 1990s.2.

Personnel expenses include salaries and wages, bonuses, and welfare expenses.

## Progress in Structural Reforms by Small FirmsChart 11

## Investment in InnovationR&DSoftware InvestmentNote: Figures are based on nominal values denominated in U.S. dollars.

Source: OECD.

## Dynamism of Firms and EmploymentChart 13

## Scheduled Cash EarningsNotes: 1.

In the left panel, Q1=March-May, Q2=June-August, Q3=September-November, Q4=December-February.2.

Figures from fiscal 2016 onward are based on continuing observations following the sample revisions.Source: Ministry of Health, Labour and Welfare.

## Household Disposable IncomeNote: Figures for Japan before 1994 are calculated using year-on-year changes in each item based on the benchmark year of 2000.

Sources: Cabinet Office; U.S. Bureau of Economic Analysis (BEA).Chart 15

## Household Financial AssetsNote: In the right panel, figures are as of end-March 2024.

Figures for the United States and the euro area are based on "Flow of Funds: Overview of Japan, the United States, and the Euro area," released by the Bank's Research and Statistics Department on August 30, 2024.

Figures for Japan in parentheses indicate changes from the previous fiscal year (% points).Source: Bank of Japan.

## Dynamism of Households