Seiji Adachi: Economic activity, prices, and monetary policy in Japan
Central bank: boj | Type: speech | Date: 2024-05-29

Bank

of

Japan May

2 9 ,

2 0 2 4

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

## ADACHI SeijiMember of the Policy Board(English translation based on the Japanese original)

## I.

Recent Depreciation of the Yen and Monetary PolicyI usually start my speech at the meetings with local leaders by talking about developments in economic activity and prices.

However, this time I would first like to talk about the Bank of Japan's possible responses to foreign exchange rate developments, while sharing my own views.

This

is

because

the

Bank

has

been

receiving

an

increasing

number

of

opinions regarding its stance toward the weaker yen, which temporarily approached 160 yen against the U.S. dollar recently.First of all, the basic principle is that the sole objective of monetary policy is to achieve price stability.

The concept of the trilemma of international finance shows that no economy can simultaneously achieve the three goals of autonomous monetary policy, free capital mobility, and a stable foreign exchange rate.

Based on this, if a central bank tries to fix the exchange rate, which fluctuates in the short term, at a certain level by means of monetary policy, this induces a trade-off for a large constraint on its future conduct of monetary policy.Let

me

apply

this

idea

to

the

current

situation.

If

a

central

bank

frequently

changes

its monetary policy to stabilize

a

foreign

exchange

rate

that

is

as

highly

volatile

as

recently observed,

swings

in

interest

rates

are

expected

to

become

larger.

Should

fluctuations

in interest

rates

become

too

large,

it

will

be

difficult

to

project

future

interest

rates,

thereby hindering fund raising for households' housing investment and firms' fixed investment.

If fund raising by firms and households becomes difficult, this inevitably has a negative impact on economic activity.

I therefore believe that, if responses to short-term fluctuations in the foreign exchange rate are made by means of monetary policy, price stability will be adversely affected.Then, in what case should a central bank respond to foreign exchange rate developments through monetary policy?

Currently, the Bank of Japan aims to achieve the price stability target of 2 percent in a sustainable and stable manner.

If a prolonged excessive depreciation of

the

yen

affects

price

developments

and

this

is

projected

to

have

a

negative

effect

on achieving the price stability target, it will be an option for the Bank to respond by means of monetary policy.

To give a clear image, I would like to talk about how foreign exchange rate developments

affect

prices.

Fluctuations

in

the

foreign

exchange

rate

are

one

factor

thatdirectly affects yen-denominated import prices, which tend to correlate with goods prices with a time lag.

Changes in import prices will spread from upstream to downstream demand stages in producer prices, and presumably this will eventually spill over into consumer prices (Chart 1).

That said, it warrants attention that the extent of the spillover and time lag is not fixed,

because

this

depends

on

how

firms

at

each

demand

stage

pass

on

cost

increases.

Meanwhile, if the rate of increase in this fiscal year's consumer price index (CPI) is pushed upward through the channel I have mentioned, this could affect the results of the 2025 annual spring labor-management wage negotiations.The impact of foreign exchange rate developments on firms' inflation expectations is also an important factor.

Firms' price-setting stance is significantly affected by their medium- to longterm outlook for inflation for three to five years ahead.

In terms of firms' inflation outlook, the Bank's March 2024 Tankan (Short-Term Economic Survey of Enterprises in Japan) shows that firms' medium- to long-term inflation expectations have been stable at about 2 percent since around 2022 (Chart 2).

This is evidence that it has become more likely that sustainable and

stable

inflation

will

be

achieved.

Should

there

be

large

swings

in

these

inflation expectations

due

to

foreign

exchange

rate

developments,

the

Bank

may

need

to

consider making monetary policy responses.

## II.

Economic Activity and Prices

## A.

Economic Activity1.

Current situationI

would

now

like

to

talk

about

economic

activity,

which

can

be

considered

as

a "fundamentals" factor when looking at future developments in foreign exchange rates.Japan's economy has recovered moderately, although some weakness has been seen in part (Chart 3).

The effects of a suspension of production and shipment at some automakers have recently

been

exerting

downward

pressure

on

the

economy,

but

I

believe

this

is

only temporary.

In

my

view,

if

this

temporary

factor

is

excluded,

the

economy

is

recovering moderately at the moment.

In what follows, I would like to take a look at economic activity in detail, disregarding this temporary factor that has been pushing down the economy.Let us first look at private consumption.

Faced with the recent high inflation, households are becoming thriftier.

For example, they have been shifting toward lower-priced goods -- such as

private

label

products

--

especially

when

purchasing

nondurable

goods,

which

mainly include food and daily necessities.

However, various statistics and high-frequency indicators indicate

that

private

consumption

has

been

solid

as

a

whole,

led

mainly

by

services consumption (Charts 4 and 5).

Anecdotal information also suggests that appetite for spending on high-end goods has been strong among high-income individuals and foreign visitors to Japan.Next, I will turn to exports.

Exports to China and Europe have been lacking momentum due to

stagnation

in

those

economies.

Those

to

the

NIEs

and

the

ASEAN

economies

have bottomed out, but they have been somewhat weak due to a sluggish rebound in IT-related demand.

However, exports overall have been more or less flat, with those to the United States having been firm, particularly in automobiles (Chart 6).Let us now look at business fixed investment.

In addition to increasing demand for fixed investment

associated

with

digital

transformation

(DX)

and

green

transformation

(GX), demand for construction investment in, for example, urban redevelopment and development of logistics centers has also been increasing over the past few years.

Accordingly, the Bank's March

2024 Tankan shows

that

business

fixed

investment

plans

maintain

high

growth.

However, actual data continues to fall behind the solid plans presented in the Tankan (Charts 7 and 8).

This may be because it has been difficult for firms to project future external demand due

to

uncertainties

regarding

developments

in

overseas

economies,

and

also

because business fixed investment has been delayed due to a shortage of the human resources needed to actually construct and set up new buildings and facilities.

However, despite such delays, investment plans continue to show firmness, suggesting that firms' appetite for investment remains strong.

Let me also note that I consider developments in business fixed investment an extremely important factor since it holds the key to achieving the price stability target.Hence, Japan's economy is certainly not stagnant, but, as a number of uncertainties remain, it cannot be said to be buoyant.

## 2.

OutlookNext, regarding the outlook for economic activity, I believe that Japan's economy has started to show many encouraging signs of an upturn.Let me start with private consumption.

Disposable income is expected to increase on the whole

as

the

provisional

results

of

the

2024

annual

spring

labor-management

wage negotiations have significantly exceeded the 2023 level, despite some differences observed in the level of wage increases among individual firms.

The amount outstanding of households' financial assets, which are savings, or "stocks" when thinking in terms of flow and stock, has increased substantially, mainly due to a rise in stock prices at home and abroad (left panel of Chart 9).

Furthermore, with significant wage increases expected for a second consecutive year, households' expectations for an increase in their permanent income may be heightening, reflecting their anticipation that wages will continue to rise (right panel of Chart 9).

Given that these factors are already pushing up consumer sentiment at present, private consumption is expected to remain firm.Exports

and

business

fixed

investment

are

projected

to

rise

from

the

current

levels.

One reason

for

this

is

that

there

have

been

signs

that

overseas

economies

will

recover

after bottoming

out.

By

region,

the

U.S.

economy

has

remained

firm,

mainly

led

by

private consumption.

The Chinese economy is likely to gradually move out of its slowing phase owing to the government's economic measures, although it will still take time for adjustments in the real estate market to be completed and for structural issues such as those pertaining to regional economies to be resolved.

European economies have shown signs of bottoming out.

Returning to Japan's economy, if a virtuous cycle between wages and prices starts to operate smoothly, reflecting wage increases in fiscal 2024, growth expectations for Japan's economy will be revised upward accordingly.

Consequently, this could bring about an expansion in business fixed investment because the necessary capital stock will have increased.

## B.

Price Developments in Japan

## 1.

Current situationI will now talk about price developments in Japan.The year-on-year rate of increase in the CPI has been declining, and it can be said that the rate is now in a deceleration phase (Chart 10).

To examine this movement in detail, I would like

to

focus

on

the

frequency

of

price

changes

by

separating

the

category

of

"sticky" consumer prices, made up of items for which the price changes relatively infrequently, and "flexible"

consumer

prices,

made

up

of

items

for

which

the

price

changes

relatively frequently. 1 Sticky consumer prices are likely affected by medium- to long-term inflation expectations and wage developments, whereas flexible consumer prices tend to be affected by raw material prices that mainly reflect developments in commodity markets.Sticky consumer prices have continued to rise moderately due to the upward pressure exerted mainly by wage increases.

On the other hand, the rate of increase in flexible consumer prices seems to be decelerating, as the impact of the pass-through of cost increases stemming from the rise in import prices has waned.

I have therefore judged the rate of increase in the CPI to be in a deceleration phase because flexible consumer prices currently have a larger impact on overall consumer prices than sticky consumer prices.

## 2.

OutlookI will also separate the categories of sticky and flexible consumer prices in talking about the outlook for the CPI.First, let me look at flexible consumer prices.

On a yen basis, import prices rose sharply, mainly due to a surge in international commodity prices and to the impact of disruptions in global supply chains, both of which were observed during the COVID-19 pandemic.

After peaking in September 2022, however, import prices were on a declining trend.

They then bottomed out in July 2023 and turned positive in February 2024 on a year-on-year basis (Chart 11).

Because flexible consumer prices move with a time lag of about six to nine months from changes in import prices, flexible consumer prices may hit the bottom from around summer to autumn 2024 and start rising thereafter.1 Sticky consumer prices are mainly composed of services prices, as they refer to items for which the price changes relatively infrequently.

Flexible consumer prices are mainly composed of goods prices, as they refer to items for which the price changes relatively frequently.Next, I would like to look at sticky consumer prices.

The rate of increase in sticky consumer prices is more likely to rise, reflecting the results of the 2024 annual spring labor-management wage negotiations.

Let me elaborate on this.

It is expected to take about a few months for the results of the 2024 wage negotiations to be reflected in wages.

As wage increases are expected to be reflected in inflation only thereafter, I presume that the momentum for a rise in sticky consumer prices will increase from around summer to autumn 2024, as will be the case with flexible consumer prices.

Regarding future wage developments, I am concerned that there is a risk of labor shortages becoming more acute.

This is for the following reasons: (1) even if high wage increases are realized in fiscal 2024, it is unlikely that structural labor shortages due to the declining and aging population will be resolved, and (2) the number of those who are not in the labor force is at a historically low level for seniors and women, whose labor participation has underpinned labor supply to date.

Therefore, the current main scenario is that

firms

will

inevitably

continue

to

need

to

raise

wages

to

some

extent

to

secure

their workforce.

Based on this scenario, sticky consumer prices are likely to rise steadily.As I have explained, the rate of increase in the CPI is currently in a deceleration phase.

That said, my view is that it could start rising again from around summer to autumn 2024, as far as can be determined from developments in import prices, producer prices, and wages.

## C.

Upside and Downside Risks to Economic Activity and PricesThe outlook for economic activity and prices I have presented so far may seem somewhat optimistic.

I should note that it is important to pay due attention to the fact that the outlook is uncertain as it entails both upside and downside risks.

These risks also range from the short term to the medium to long term.I will first talk about the short-term risks.

As I mentioned earlier, if the yen depreciates further or remains weak for a prolonged period, this could cause an earlier-than-expected reversal in the year-on-year rate of increase in the CPI.

Moreover, if the reversal occurs and the prospect of sustainable and stable inflation exceeding 2 percent increases, the Bank may face the need to

adjust

the

level

of

monetary

accommodation more rapidly than expected by raising its policy

interest

rate.

On

the

other

hand,

if

the

Bank

raises

its

policy

interest

rate

at

an excessively rapid pace, this will run the risk of economic downturn in Japan.

Furthermore,although it is very unlikely, should an unexpected shock in global financial markets occur, the preconditions for achieving sustainable and stable inflation could break down.When

considering

short-term

upside

and

downside

risks,

due

attention

is

required

to developments in inflation in the United States.

If it takes longer than expected for inflation in the United States to stabilize, this will make it harder to bring the policy interest rate down and consequently leave U.S. interest rates at high levels.

If the United States continues to see firm economic conditions even under such circumstances, this could cause the yen to remain weak for a longer period.

Meanwhile, if prolonged high U.S. interest rates cause, for example, adjustments in the U.S. real estate market to intensify, and this then sparks concern over financial system stability or induces adjustments in stock prices, market participants may shift to a "risk-off" mode.

In any case, developments in the U.S. economy warrant attention and I will continue to monitor the situation closely.Let us now look at the medium- to long-term risks.

These include disruptions in international commodity markets and international distribution systems stemming from geopolitical issues such as the situation in Ukraine and the Middle East.

There is also a risk that the global economy

will

become

fragmented,

reflecting

strengthened

efforts

to

address

economic security, and risks pertaining to U.S. fiscal conditions.

As I will discuss later, while I foresee that it will take some more time to achieve the Bank's monetary policy goal of sustainable and stable inflation, if, in the meantime, medium- to long-term risks materialize, the Bank may need to change its projected timing for achieving that goal.It is extremely difficult to precisely predict the upside and downside risks to economic activity and prices that I have discussed.

For this reason, I believe it important to carefully monitor changes in the environment, including developments in economic activity at home and abroad and in financial markets.

## III.

Conduct of Monetary Policy

## Changes in the Monetary Policy FrameworkTaking account of the economic and price developments I have explained so far, I would like to talk about the Bank's conduct of monetary policy, while sharing my own views.First, I will summarize the Bank's current conduct of monetary policy.

At the Monetary Policy Meeting (MPM) held in March 2024, the Bank judged that it was now within sight that the price stability target of 2 percent would be achieved in a sustainable and stable manner.

It revised the policy framework in this light (Chart 12).

Specifically, the Bank terminated largescale monetary easing measures, including yield curve control and the negative interest rate policy, as it considered that these measures had fulfilled their roles.

The Bank decided that it would guide the short-term interest rate as a primary policy tool and that, with the price stability target of 2 percent, it would conduct monetary policy as appropriate, in response to developments

in

economic

activity

and

prices

as

well

as

financial

conditions,

aiming

at sustainable

and

stable

achievement

of

the

target.

In

addition,

the

Bank

judged

that

the inflation-overshooting commitment regarding the monetary base had fulfilled the conditions for its achievement.

It should be noted that these policy changes do not signify a shift to monetary tightening.

In other words, given the current outlook for economic activity and prices, the Bank anticipates that accommodative financial conditions will be maintained for the time being.In hindsight, I believe that these policy changes were implemented smoothly for the most part, given the absence of any major market disruptions in their wake.

At the outset, however, some voiced the opinion that it would have been better to first confirm incoming data, such as the results of various economic indicators due to be released in April.

I voted for the policy changes at the March MPM, and I would like to explain my rationale for doing so.The first reason was that the conditions for changing policy had already been met.

Various conditions were in play.

For example, looking at the distribution of the year-on-year rate of change in the price of individual items constituting the CPI, the shape of the distribution clearly differs from that at the time of policy changes in 2000 and 2006 (Chart 13).

When the Bank

made

policy

changes

in

2000

and

2006,

the

distribution

was

weighted

to

the

left, indicating that a high proportion of items had a negative year-on-year rate of change.

This shape

suggests

the

possibility

that

the

policy

changes

were

taken

in

a

situation

where considerable deflationary pressure remained.

By contrast, the price change distribution by item in the CPI at the time of the March 2024 policy changes was weighted to the right, indicating that an overwhelmingly high proportion of items had a positive year-on-year rateof change.

This means that the current increase in CPI inflation is not driven by a limited increase

in

the

price

of

specific

items,

but

rather,

the

prices

of

many

items

together

are increasing.The second reason for my vote pertains to the market's understanding of the policy decision.

My concern about making policy changes at the March 2024 MPM was the possibility that the changes would lead market participants to form a dominant view that monetary policy had

taken

an

abrupt

shift

toward

tightening.

If

this

happened,

it

would

initially

spark

a negative reaction in financial markets.

This would then spread to the real economy, causing the

economy

to

deteriorate,

and

raising

the

likelihood

that

deflationary

pressure

would increase again.

To avoid this situation, it was important for the Bank to provide appropriate communication so that market participants would understand that, even if the Bank made policy changes, it was only part of its efforts to achieve the price stability target, and that accommodative financial conditions would be maintained for the time being.

Fortunately, the short-term

interest

rate

--

the

main

policy

interest

rate

target

following

the

March

policy changes

--

has

remained

at

a

very

low

level.

Given

various

sources

such

as

anecdotal information, I feel that market participants have an adequate understanding of the Bank's intention behind the changes.The

third

reason

for

my

vote

relates

to

the

2024

annual

spring

labor-management

wage negotiations.

The first provisional aggregate results compiled by the Japanese Trade Union Confederation (Rengo) showed that the year-on-year rate of increase in wages (including seniority- and performance-related wages) agreed in the negotiations was significant at 5.28 percent, which was even higher than the previous year's wage hikes.

My thinking was that, if the first provisional aggregate results indicated a year-on-year increase of at least 5 percent, that would be a good benchmark for going ahead with policy changes.

This was because past results suggested that, if the annual spring labor-management wage negotiations achieved a 5

percent

wage hike, the rate of increase in "sticky" consumer prices, especially services prices, would likely return to a level in which the achievement of the Bank's price stability target comes into sight.

My view back in January was that the results would not exceed this benchmark.

The reason for my belief was that, although Rengo had set a target for wage hikes of 5 percent or more at this year's negotiations, experience suggested that the numbers usuallyturn out to be lower than the level demanded by labor unions.

Thus, I assumed we would have to make a comprehensive judgment on the timing of policy changes after examining other data, including economic indicators to be released in April and onward.

However, the yearon-year increase turned out to be 5.28 percent, which took me by surprise.There may be some issues with the aggregate results of the annual spring labor-management wage negotiations, such as the range of firms included in the calculations.

Judging by the past, however, these results allow an estimation of wage developments at firms overall.

Moreover, the high figures in the first provisional aggregate results suggest that many firms have enough encouraging

prospects

for

business

performance

and

plans

for

improving

productivity

to cover wage costs.

This gave me reason to expect that the results of economic indicators and other data to be released in April and onward would be relatively positive; thus, I did not see the need to wait for those results to come out before making policy changes.

## Future Conduct of Monetary PolicyNext, I will talk about the future conduct of monetary policy.The goal of the Bank's monetary policy will continue to be the achievement of sustainable and stable inflation, and until this goal is reached, it is important to

maintain the current accommodative

financial

conditions.

The background

for

this is that, although the achievement of sustainable and stable inflation has become increasingly more likely, it is still difficult to affirm that such inflation will be achieved.

It is important for the Bank to maintain accommodative financial conditions until it can be confident of achieving its goal.The

Bank

must

at

all

costs

avoid

hastily

raising

the

policy

interest

rate,

since

making monetary policy changes prematurely would hinder the momentum toward the long-awaited recovery in Japan's economy.

This is why I believe it is vital to keep the real interest rate negative, in principle.

However, at the same time, it is important to be aware of the possibility that too much focus on downside risks could accelerate inflation and result in the Bank having to conduct rapid monetary tightening, which could adversely affect the economy.

Let me be a little more specific.

If the Bank fixes the policy interest rate at its current level of around 0 percent until sustainable and stable inflation is achieved and begins to raise the policy interestrate only after this has been achieved, it will, to curb rapid inflation, inevitably raise the policy interest rate at a much faster pace than the inflation rate.

This could in turn have a negative impact on the economy.I believe the implication of monetary policy conduct since the outbreak of the COVID-19 pandemic is that it is necessary to be mindful of the risk of projections skewing too much in one direction; for example, during the pandemic, although risks for prices were expected to be skewed to the downside, prices actually rose higher than expected.

It has therefore become increasingly important

for

the

Bank,

in

terms

of

risk

management

in

its

monetary

policy conduct, to take account not only of downside risks but also of upside risks.

As long as the underlying inflation rate continues to rise toward 2 percent, I believe it is vital to adjust the degree

of

monetary

accommodation

gradually

in

response

to

developments

in

economic activity and prices as well as financial conditions.Since

the

framework

for

yield

curve

control

has

fulfilled

its

long-standing

purpose,

it

is conceivable that the Bank will reduce the amount of its Japanese government bond (JGB) purchases

at

some

point

in

the

future.

The

Bank

is

currently

examining

the

situation

in financial markets under the framework of JGB purchases revised in March; under the revised framework, it has continued its purchases at broadly the same amount as before.

If the Bank reduces the amount at a rapid pace in the future, this could cause discontinuous fluctuations in long-term yields, and such a move might be misinterpreted as an abrupt shift in the Bank's monetary policy toward tightening, in which case there is a risk of a negative impact being exerted on the economy, as I said earlier.

This is why I believe that, when it comes to reducing its JGB purchases, it is desirable for the Bank to do so gradually, while taking comprehensive account of the situation in the bond market in terms of supply and demand conditions, the degree of functioning, and liquidity conditions.Thank you.

## Economic Activity, Prices, and Monetary Policy in JapanSpeech at a Meeting with Local Leaders in KumamotoMay 29, 2024 ADACHI Seiji Member of the Policy Board Bank of JapanChart 1 Spillover Effects of Import Prices on the CPI for GoodsNote: The import price index is on a yen basis.

The FD-ID price indexes divide demand into the final demand (FD) stage and four stages of intermediate demand (ID) based on the Input-Output Tables for Japan.

Goods and services prices are then aggregated according to the stage to which they belong to compile the FD index and the ID indexes for stages 1 to 4, ranging from the upstream to downstream stages of the production process.

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

## Firms' Inflation Outlook for General PricesNote: Figures show the inflation outlook of enterprises for general prices (all industries and enterprises, average) in the Tankan .

Source: Bank of Japan.Real GDPChart 3

## Consumption Activity Index (CAI, Real)

## CAI (Travel Balance Adjusted)CAI by TypeNotes: 1.

In the left panel, figures exclude inbound tourism consumption and include outbound tourism consumption, and are based on Bank staff calculations.2.

In the right panel, figures in angle brackets show the weights in the CAI.

Figures are based on Bank staff calculations.3.

In the right panel, "nondurable goods" includes goods classified as semi-durable goods in the SNA.Sources: Bank of Japan; etc.Chart 5 Consumption Developments Based on Credit Card SpendingNotes: 1.

Figures are from the reference series inJCB Consumption NOW, which take into account changes in the number of consumers.- The baseline is the average for 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.

Figures are based on Bank staff calculations.Source: Nowcast Inc./ JCB, Co., Ltd., "JCB Consumption NOW."

## Exports

## Total Real ExportsNotes: 1.

Figures are based on Bank staff calculations.2.

Figures for 2024/Q2 are those for April.3.

In the right panel, figures in angle brackets show the share of each country or region in Japan's total exports in 2023.Figures for the EU exclude those for the United Kingdom for the entire period.Sources: Ministry of Finance; Bank of Japan.Chart 7 Developments in Business Fixed Investment PlansNotes: 1.

Figures are based on the Tankan and are for all industries including financial institutions.2.

Figures include software and R&D investments but exclude land purchasing expenses.

R&D investment is not covered as a survey item 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.Source: Bank of Japan.

## Real Exports by Region

## Business Fixed InvestmentCoincident Indicators ofBusiness Fixed Investment

## Leading Indicators of Business Fixed InvestmentNote: Figures for real private construction completed are based on Bank staff calculations using the construction cost deflators.

Sources: Cabinet Office; Ministry of Economy, Trade and Industry; Ministry of Land, Infrastructure, Transport and Tourism.Note: Volatile orders are orders for ships and those from electric power companies.Sources: Cabinet Office; Ministry of Land, Infrastructure, Transport and Tourism.Chart 9

## Factors Affecting Future Private ConsumptionHouseholds' Financial Assets

## Wage Increases and Households' Income OutlookNote: 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 or remained unchanged over the past year.

Figures are based on the April 2023 survey.Source: JTUC Research Institute for Advancement of Living Standards.

## CPI for All Items Less Fresh FoodNotes: 1.

Figures for "energy" consist of those for petroleum products, electricity, as well as manufactured and piped gas charges.2.

Figures for the "effects of the consumption tax hike and free education policies" from April 2020 onward are Bank staff estimates and include the effects of measures such as free higher education introduced in April 2020.Source: Ministry of Internal Affairs and Communications.

## Import Price Index (Yen Basis)Chart 11

## Changes in the Monetary Policy Framework (March 2024)-  As recent data and anecdotal information have gradually shown that the virtuous cycle between wages and prices has become more solid, the Bank judged that it was now within sight that the price stability target of 2 percent would be achieved in a sustainable and stable manner .

It considers that its large-scale monetary easing measures have fulfilled their roles , including the negative interest rate policy and the yield curve control.-  With the price stability target, the Bank will conduct monetary policy as appropriate, guiding the short-term interest rate as a primary policy tool , in response to developments in economic activity and prices as well as financial conditions from the perspective of sustainable and stable achievement of the target.

Given the current outlook for economic activity and prices, it anticipates that accommodative financial conditions will be maintained for the time being .Chart 13 CPI Price Change Distributions- Notes: 1.

Figures are calculated using long-term time series data for each item in Japan's CPI (2020-base).2.

Figures for CY 1991 are for January 1991.

Figures for CY 2000, CY 2006, and CY 2024 are for July 2000, February 2006, and February 2024,respectively; these are the months preceding the months in which a change in monetary policy was introduced.Source: Ministry of Internal Affairs and Communications.