Toyoaki Nakamura: Economic activity, prices and monetary policy in Japan
Central bank: boj | Type: speech | Date: 2021-08-25

Bank

of

JapanAugust

25,

2021

## Economic Activity, Prices, and Monetary Policy in JapanSpeech at a Meeting with Local Leaders in Miyazaki (via webcast)

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

## I.

Economic and Price Developments at Home and Abroad

## A.

Recent Developments in Economic Activity and PricesI will begin my speech by talking about recent developments in economic activity and prices.Overseas economies have recovered on the whole, led by advanced economies and China, despite

the

growing

impact

of

the

spread

of

the

novel

coronavirus

(COVID-19)

and

its variants (Chart 1).Against this background, Japan's economy has picked up as a trend, although it remains in a severe situation (Chart 2).

Exports and production continue to increase steadily.

Business performance of firms also has improved on the whole.

On the other hand, private consumption has been stagnant due to weakness in consumption of face-to-face services, such as eating and drinking as well as accommodations.

On the price front, the year-on-year rate of change in the consumer price index (CPI) for all items less fresh food, or the core CPI, has been at around 0 percent recently, mainly due to the rise in energy prices, despite being affected by COVID-19 and the reduction in mobile phone charges (Chart 3). 1 The rate of change in the core CPI remains slightly positive and has been steady when excluding the temporary effects of energy prices and mobile phone charges.

Given that the recent large reduction in charges for mobile phones is a temporary price change in one specific sector, it is rather unlikely to affect people's medium- to long-term inflation expectations.

Nonetheless, I will continue to closely monitor price developments.

## B.

Outlook for Economic Activity and PricesLet me touch on future developments in overseas and domestic economies.As the impact of COVID-19 wanes due to progress with vaccinations, overseas economies are likely to continue growing, albeit with variation across countries and regions, supported also by aggressive macroeconomic policies taken mainly in advanced economies.1

With the base year of the CPI being changed from 2015 to 2020, the year-on-year rate of change in the core CPI for the April-June quarter of 2021 was revised downward by about 0.7 percentage point from 0.1 percent for the 2015 base to minus 0.6 percent for the 2020 base.

This is mainly because the negative contribution of mobile phone charges to the year-on-year rate of change in the core CPI increased from about minus 0.6 percentage point to about minus 1.1 percentage points.In this situation, Japan's goods exports are projected to continue increasing steadily, supported mainly by an expansion in digital-related demand and a recovery in business fixed investment, both on a global basis.

Private consumption and inbound tourism consumption, the latter of which is

categorized

under

services

exports,

are

expected

to

be

substantially

affected

by COVID-19 for the time being but likely to recover as the impact of the pandemic wanes due to,

for

example,

the

progress

with

vaccinations

both

at

home

and

abroad

and

with strengthening of domestic medical response capabilities.

As the economy recovers, the yearon-year rate of change in the CPI is expected to increase moderately (Chart 4).

## C.

Risk Factors for Economic Activity and PricesI

should

note

that

the

outlook

is

subject

to

considerable

uncertainty

and

call

particular attention to downside risks for the time being, mainly due to the impact of the spread of COVID-19,

caused

in

particular by variants across

Japan

and

abroad.

Considering developments in the more distant future, I am particularly attentive to the following three factors.The

first

is

pent-up

demand

for

services

consumption.

In

the

United

States,

the

amount outstanding of household cash and deposits increased by 3.1 trillion dollars relative to the trend as of end-March 2021 (Chart 5).

Economic activity in the country has been buoyed by the materialization of pent-up demand with the vaccination progress.

Similarly in Japan, the amount outstanding reached a historical high of 1,056 trillion yen as of end-March 2021, increasing by 37 trillion yen relative to the trend.

If Japan's vaccine rollout and strengthening of medical response capabilities make progress and this contributes to reducing the impact of COVID-19, households will try to make up for lost spending opportunities, thereby increasing consumption by more than in normal times.

This is expected to result in a materialization of pent-up demand, thereby stimulating economic activity.

My view is that the timing of such materialization has been somewhat delayed, mainly due to the impact of the resurgence of COVID-19, but economic activity thereafter could become more vigorous than expected.The second factor is firms' price-setting behavior.

Reducing prices is not an effective measure to

attract

customers

under

the

current

circumstances

as

vigilance

against

COVID-19continues.

Firms also suffer higher costs due to infection prevention measures and to rises in prices of imported raw materials with the global economic recovery.

I therefore consider that firms' price cuts that aim at stimulating demand will still not be observed widely.

Having said that, as seen in some cases in the United States, it is important from a longer-term perspective that

firms

improve

their

profitability

through,

for

example,

passing

on

cost

increases

by raising prices at the time of the materialization of pent-up demand in order to repay the loans that have grown, mainly in the face-to-face services sector, due to the decline in sales.

I am closely

monitoring

whether

firms

will

adopt

a

price-setting

behavior

that

reflects

the improvement in demand so that their loan repayments and efforts to increase productivity will make steady progress.The third factor is the path of firms' medium- to long-term growth expectations.

In the Bank of

Japan's

June

2021 Tankan (Short-Term Economic Survey of Enterprises in Japan), the business conditions DI for all industries and enterprises improved for the fourth consecutive quarter.

The survey also showed an 8.1 percent decrease in the business fixed investment plan for all industries and enterprises, including financial institutions, for fiscal 2020 from the previous fiscal year and a subsequent 9.4 percent increase in the plan for fiscal 2021, returning to a level broadly similar to that of the fiscal 2019 plan (Chart 6).

Thus, there has been no evidence of a decline in firms' medium- to long-term growth expectations.

However, attention should be paid to the fact that the business fixed investment plan for fiscal 2021 includes investment carried over from the previous fiscal year.

I am paying careful attention to firms' investment behavior, because in order for the economy to achieve sustainable growth, firms' investment to accelerate structural reforms so as to address digitalization and climate change -- I will revisit these issues later -- needs to lead to a sustainable improvement in productivity and in turn an increase in their medium- to long-term growth expectations.

## II.

Conduct of Monetary PolicyLet me now turn to the Bank's policy conduct.The Bank has conducted powerful monetary easing since March 2020 in response to COVID19 through the following three measures (Chart 7).

The first is the Special Program to Support Financing in Response to the Novel Coronavirus (COVID-19) to provide support, mainly forcorporate

financing.

The

second

is

an

ample

and

flexible

provision

of

funds,

mainly

by purchasing

Japanese

government

bonds

(JGBs)

and

conducting

the

U.S.

dollar

fundssupplying operations.

The third is purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs).

As indicated in the findings of the Assessment for Further Effective and Sustainable Monetary Easing released in March 2021, the Bank's responses have

had

positive

effects,

coupled

with

the

government's

measures

and

active

efforts

by financial institutions.Climate change -- which has increasingly been regarded both at home and abroad as an issue that requires innovative changes -- could exert an extremely large impact on developments in economic activity and prices as well as financial conditions from a medium- to long-term perspective.

Thus, it is relevant to the Bank's mandate to achieve price stability and financial system stability.

From this perspective, the Bank, at the Monetary Policy Meeting held in July 2021, decided on the preliminary outline of a new fund-provisioning measure to support financial institutions' efforts on climate change (Chart 8).In this measure, the Bank takes the approach of providing funds to financial institutions for investment or loans they make to address climate change based on their own decisions.

The aim is to avoid its direct involvement as much as possible in micro-level resource allocation.

The

guidelines,

or

taxonomies,

for

classifying

economic

activities

depending

on

the contribution to addressing climate change are still under discussion both at home and abroad.

However, if we wait for these debates to be settled, this will considerably delay the actions on climate change.

I believe that the Bank's approach has the advantage of enabling it to support private sector initiatives to tackle this important challenge as promptly as possible while also ensuring flexibility in responding to changes in the situation.The Bank will consider the details of this new measure to increase effectiveness through an exchange of opinions with financial institutions and other entities, and will likely start the fund-provisioning under the measure within 2021.

To realize a sustainable society, I believe that

financial

institutions'

investment

or

loans

to

address

climate

change

are

important

in supporting the efforts of firms that aim to meet Japan's target of reducing greenhouse gas emissions and in increasing firms' medium- to long-term growth expectations.

Thus, I hopethat the Bank's new measure will further encourage such investment and lending activities by financial institutions.

## III.

Structural Changes in Japan's Economy

## A.

The "Lost Two Decades" and DeflationNext,

I

would

like

to

share

my

view

on

structural

changes

in

Japan's

economy

and

the challenges they pose from a longer-term perspective, based on my experience at a private firm I worked at from 1975 to 2020.Up until the 1985 Plaza Accord, the yen remained weak against the U.S. dollar, generally hovering above 200 yen (Chart 9).

In that situation, Japan's economic growth was export driven.

At the same time, industrial clusters were formed that incorporated small and mediumsized firms within the country.

Firms took advantage of the growth in overseas economies by way of product exports and distributed their profits to households through sustained increases in employment of domestic workers and labor income.

Against this background, a virtuous cycle

operated in Japan where (1) households deposited their surplus funds at banks and profited from the high interest income brought about by the strong growth of the domestic economy, ultimately increasing consumption, (2) banks earned interest margins on the loans they

made

to

firms,

and

(3)

firms

used

borrowed

funds

for

fixed

and

research

and development (R&D) investments to drive exports and production.After the Plaza Accord, in the second half of the 1980s, the yen appreciated against the U.S. dollar to 120-130 yen.

Partly because the government encouraged a structural change of the economy

from

one

that

is

export

driven

to

one

that

is

driven

by

domestic

demand, manufacturers started to transfer their production bases overseas.

Furthermore, in Japan, the nonmanufacturing industry saw rapid growth, fueled by strong private consumption on the back of an increase in household disposable income (Chart 10).

There was a view at the time that Japan's economy had achieved domestic demand-driven growth. 22

Economic Planning Agency, Economic Survey of Japan ( Economic White Paper ), August

1989 (available only in Japanese).However, after the bubble burst in the first half of the 1990s, firms were burdened by the "three excesses"

in employment, production capacity, and debt. 3 The working styles that involve traditional employment practices were slow in changing.

Many firms addressed the decline in earnings by means of cost structure reforms, mainly by squeezing fixed expenses such

as

labor

and

depreciation

costs

and

shifting

their

production

bases

to

developing economies with cheap labor

costs.

Therefore,

the

realignment

of

their

business

portfolio, which would enhance their value-added, was postponed.Given this, as well as the further appreciation of the yen, Japan slipped into deflation from the latter half of the 1990s.

Let me elaborate on the effects of deflation from the viewpoint of firms, albeit in simplified terms (Chart 11).

Amid deflation, which persisted for about 15 years, Japanese firms were met with higher prices of imported raw materials brought about by the growth

of

overseas

economies

and

with

inflows

of

low-priced

goods

from

developing economies.

As

a

result,

they

experienced

decreases

in

sales

and

profits

as

well

as

lower productivity.

Firms then took measures to reduce fixed expenses.

However, as I recall, in many cases they (1) prioritized maintaining employment of their workers, mainly due to the traditional practice of lifetime employment, (2) postponed the realignment of their business portfolio, which would enhance their value-added otherwise, and (3) held down wage growth due to sluggish productivity growth.

They also had little choice but to restrain fixed and R&D investments, which led to delayed development of attractive and competitive new products and services.

Consequently, firms were in a vicious cycle of sluggish demand, excluding that for daily necessities such as food, and of further price cuts to maintain demand.

Moreover, the prolonged deflation undermined firms' prospects for future increases in sales and profits and reduced their capacity to invest in innovative initiatives such as digital utilization.Turning to households, about 70 percent of those employed in Japan work for small and medium-sized firms.

Many of these firms were met with cost competition from developing economies and weak domestic demand owing to structural problems of Japan's economy -namely,

the

declining

birth

rate,

the

aging

population,

and

the

drop

in

the

working-age population.

Therefore,

they

had

little

room

to

raise

the

wages

of

their

workers,

and

the3

Economic

Planning

Agency, Economic

Survey

of

Japan ( Economic

White

Paper ),

July

1999 (available only in Japanese).workers

in

turn

hardly

benefited

from

the

growth

of

overseas

economies.

Under

these circumstances, households did not have hopes for a sustained increase in wages based on the lifetime employment practice and seniority-based wages, which created anxiety for the future.

To prepare for uncertainty, I think that households were increasingly inclined to hold back on risky asset investment and instead hoard cash and deposits.As

illustrated,

both

firms

and

households

postponed

innovation

and

investment,

being entrenched in deflation that persisted for about 15 years.

Consequently, Japan lagged other countries in the pace of innovation, which in turn led to sluggish productivity growth.

## B.

Progress of Globalization and Household Income StructuresSubsequently, bold monetary easing policy and flexible fiscal policy -- part of a strategy that the Bank started implementing in 2013 -- served to arrest the deflationary trend.

Various other measures were also put in place to tap into growth in overseas economies, including ones to stimulate

demand

from

inbound

tourism,

which

is

classified

as

service

exports,

and

this caused such exports to assume a larger role in driving growth (Chart 12).

Likewise in the private sector, following the Global Financial Crisis, major manufacturers seeking to capture foreign demand made further inroads into overseas markets 4 while firms, including leading nonmanufacturing firms, turned increasingly to acquisitions from around 2013, leading to further growth in outward direct investment (Chart 13).

Reflecting these developments, the surplus in primary income -- or the positive balance associated with foreign investment -- has expanded, serving as the main factor in the current account surplus (Chart 14).The achievement of globalization has not been without its share of pain brought about by needed structural reforms, but it has enabled leading firms to tap into growth in overseas economies in their improved consolidated performance and in the form of higher dividends and royalties from overseas subsidiaries.

Growth in consolidated performance is reflected in stock prices and feeds into higher dividends paid out to shareholders.

These efforts to reform corporate structure have borne fruit: developments in the Tokyo Stock Price Index (TOPIX), which represents the corporate value of listed Japanese firms, have been increasingly inclined to follow the world's trend of nominal GDP (Chart 15).4 Cabinet Office, Annual Report on the Japanese Economy and Public Finance 2013 , July 2013.Let

me

turn

to

the

income

structure

of

Japanese

households

over

this

period.

Employee compensation has risen moderately since around 2013, but only to the extent of making up for former decreases (Chart 10).

After peaking in 1991, interest income continued to slide until 2005, after which it has languished.

Dividend income has increased modestly but not enough to offset the fall in interest income.

Reflecting these developments in income and changes in the social structure, household disposable income had been sluggish after reaching its peak in 1998, but finally started to improve from the first half of the 2010s.

By contrast, in the United States, employee compensation, interest income, and dividend income have all risen, with disposable income for 2020 more than triple that of the first half of the 1990s.

In Germany, while interest income is on a slight decline, employee compensation and dividend income are rising by a wider margin, and disposable income has roughly doubled from the amount of the early 1990s.Household financial assets in Japan continued to increase even during the so-called "lost two decades," almost doubling from 1,017 trillion yen at the end of fiscal 1990 to 1,946 trillion yen at

the

end

of

fiscal

2020.

However,

the

breakdown

shows

that

growth

in

equity

and investment trusts has been sluggish compared with cash and deposits.

This is also evident when comparing the household financial asset composition in Japan with the United States and Europe: in Japan, cash and deposits are markedly higher, at 54 percent, while equity and investment trusts combined are lower, at 14 percent (Chart 16).

The upshot is that employee compensation accounts for an extremely high proportion of household income in Japan.As I touched on earlier, because Japanese firms that have moved forward with globalization efforts

have

been

able

to

tap

into

growth

in

overseas

economies,

if

households

gradually expand their investments in the equity of these firms or in investment trusts that invest in these firms, they will reap the benefit of overseas economic growth over the longer term, as higher dividends and other investment income feed into their disposable income.

It is a rough estimate assuming all other things are equal, but if Japanese households start to invest 20 percent of their financial assets, or about 400 trillion yen, shifting their cash and deposits into equity and investment trusts, at a 1.6 percent dividend yield, this will translate into an annualincrease in disposable income of 5 trillion yen, or roughly 2 percent.

If this is then channeled into private consumption, it is expected to engender a virtuous cycle in the domestic economy.In Japan, as in other advanced economies, I would say that people can be more willing to hold assets over the long term and shift their asset structure to one that derives stable income through dividends.

In doing so, they would invest in risk assets such as investment trusts while appropriately diversifying risks, placing a part of their savings in cash and deposits.

To be sure, history has seen repeated turmoil in the financial markets and plunges in stock prices, but I believe that many listed firms have overcome these events and are pursuing sustainable growth while consolidating their positions in global markets.

This is reflected in their stock prices.Currently, some observers note that public interest in investment, such as in investment trusts, is

on

the

rise

in

Japan,

especially

among

younger

people

who

have

limited

negative experience of market turmoil, such as the bursting of the economic bubble.

Indeed, the total number of individual stock investors as of the end of fiscal 2020 was up by 3.08 million from the previous fiscal year, the seventh straight year of growth.

This signals a change in the deeprooted propensity of Japanese people to hold their financial assets in the form of cash and deposits.

Adding to this momentum, the working population is increasingly starting to select their own financial products: of pension funds sponsored by firms, the number of subscribers to

defined contribution corporate pension plans, where employees select products of their choice, has risen to approximately 7.5 million. 5 Given the increase in financial literacy, risktaking

behavior

has

been

spreading

among

individual

investors

seeking

to

increase

their returns by taking on short-term investment risks on the assumption that investments will be made in the long term.

Consequently, the yields of defined contribution pension plans have come to exceed those of defined benefit pension plans.

Coupled with rising public interest in environmental, social, and governance (ESG) and other aspects of sustainability, my hope is that

household

financial

assets

that

have

long

been

tucked

away

in

the

form

of

cash

and deposits will make a greater contribution to economic growth and social change in Japan.

Meanwhile,

I

also

hope

that

firms

will

strengthen

their

business

strategies

to

achieve5

Ministry of Health, Labour and Welfare, "Implementation of Defined Contribution Pension Plans (as of March 31, 2021)" (available only in Japanese).sustainable

growth

and

build

corporate

value,

and

that

the

financial

sector

will

further encourage these developments.

## IV.

Digitalization and Climate Change Response

## A.

DigitalizationIn

addition

to

these

structural

problems

facing

the

domestic

economy,

Japan

is

currently dealing with sweeping changes associated with digitalization and response to climate change.

The delay in Japan's digitalization

has

become

evident

once

again

due

to the

COVID-19 pandemic.

The

World

Digital

Competitiveness

Ranking

of

the

Institute

for

Management Development (IMD) shows that South Korea and China are steadily improving their digital competitiveness,

while

Japan

remains

at

a

low

ranking

among

the

Group

of

Seven

(G7) countries and major Asian economies (Chart 17).

Japanese firms have a similar perception about their digital competitiveness.

Developments in software investment among Organisation for

Economic Co-operation and Development (OECD) countries reveal that investment by the United States, the United Kingdom, Germany, and France has risen sharply since 2000, growing by 2.4 times in the United States and France and doubling in the United Kingdom and Germany in 2018.

In Japan, such investment grew by about 1.2 times from 2000 to 2002 but has since been lackluster (Chart 18).

Software investment for all industries and enterprises, including financial institutions, in the Bank's June 2021 Tankan registered a 7.4 percent year-on-year decrease for fiscal 2020.

It was projected to register a 16.1 percent year-on-year increase for fiscal 2021, but this still represents only about a 7 percent increase over the fiscal 2019 level.

At this rate it will take a decade for such investment in Japan to double from the current level.Digitalization can be classified into the following three types, according to its stage 6 :

(1) digitization, such as converting analog or paper-based data into digital format, or automating business

and

manufacturing

processes;

(2)

digitalization,

such

as

digitalizing

individual business

operations

and

manufacturing

processes,

or

incorporating

digital

features

into existing products; and (3) digital transformation (DX), such as transforming business models using digital technology.6

Study Group for Acceleration of Digital Transformation, Ministry of Economy, Trade and Industry, DX Report 2 (Interim Report) , December 2020 (available only in Japanese).One

of

the

reasons

Japanese

firms

have

fallen

behind

in

digitalization

is

the

slow implementation

of

digitization

for

raising

the

efficiency

of

existing

business

operations, which was hindered by the practice

of

lifetime

employment

in

the

country,

among

other factors.

As

a

result,

I

believe

that

digitalization

and

DX,

which

have

already

become mainstream in Europe and the United States, have been largely neglected in Japan.

I also think the lack of economic metabolism comes into play: there are very few startups or small and medium-sized firms that make use of digital technology in an open-minded manner so as to grow into so-called unicorns with a valuation of over 1 billion U.S. dollars.Recently, the shortage of digital technology professionals and firms' weak commitment to business transformation seem to be key obstacles to raising digital competitiveness in Japan (Chart

19).

However,

management's

awareness

of

the

need

for

business

transformation through digitalization is higher than ever due to the pandemic.

In a survey on IT trends 7 of Japanese

firms,

when

asked

what

problems

require

immediate

action

on

the

part

of management, 70 percent of firms responded, "working style reforms," such as remote work, while about half answered, "decision-making for accounting, personnel management, and other matters, and revision of work processes," while half also answered, "changes in the way products and services are provided." Digitization and digitalization still seem to be a task for many

firms.

However,

I

am

hopeful

that

Japanese

firms

will

promote

digitization, digitalization, and also DX to make use of digital technology -- including cloud computing and other services -- as a tool to drive growth, and further step up the pace of actions in reforming their business structures and boosting productivity.

## B.

Response to Climate ChangeClimate change is a global challenge that will have a broad and large impact on our society and economic activity into the future.

Discussions are underway at international forums, such as the G7 and the Group of Twenty (G20), to consider international initiatives, and making7

Japan

Users Association

of

Information

Systems, Survey

of

Corporate

IT

Trends

2021:

Newest Trends in User Companies' Investment in and Use of IT (Fiscal 2020) , April 2021 (available only in Japanese).headway

in

addressing

climate

change

will

require

various

entities

in

society

and

the economy to actively play their roles.As the central bank of Japan, the Bank has been communicating with financial institutions and engaging in international discussions.

As various stakeholders, including the government and

firms,

accelerate

their

efforts

concerning

climate

change,

the

Bank,

for

its

part,

has decided on a comprehensive strategy to further its efforts on climate change consistent with its

mandate

of

achieving

price

stability

and

ensuring

the

stability

of

the

financial

system (Chart 20).

One measure under the strategy is the new fund-provisioning measure I explained earlier, under which the Bank will provide funds to financial institutions for investment or loans they make to address climate change.This is a crucial first step, but transforming the economy, industry, and society in order to achieve carbon neutrality by 2050 will require establishing an ecosystem that can support a monumental amount of private funds invested and recovered in a sustainable manner, and it will be necessary to keep a close eye on the progress of transformation overseas.

In this regard, the European Union expects more than 1 trillion euros (130 trillion yen) worth of public and private

investment

in

environmental

fields

by

2030

and

is

exploring

the

introduction

of measures such as a Carbon Border Adjustment Mechanism to build an ecosystem in which the

costs

of

investment

can

be

steadily

recovered.

It

is

putting

in

place

a

framework

to facilitate the flow of private sector funds inside and outside the region into environmental areas by, for example, formulating a taxonomy and proposing a regulation regarding green bond issuance.As many investments that address climate change are long-term, the steady supply of risk money

on

a

large

scale

is

necessary.

To

this

end,

financial

institutions

and

institutional investors are being called on to have strategic discussions with the firms that actually invest in climate change initiatives, and to harness their expertise in enhancing the functioning of the market to carry out efficient fund allocation.Outside Japan, the financing of investments that address climate change is growing, mainly through the direct financing markets, such as via the issuance of stocks and green bonds.

Forinstance, green bond issuance worldwide has more than tripled in the last four years, from 80.4 billion U.S. dollars in 2016 to 285.8 billion U.S. dollars in 2020 (Chart 21).

Issuance in Japan has also ballooned in recent years.

However, the amount is about 1 trillion yen in 2020; thus,

it

remains

small

compared

to

the

scale

of

Japan's

economy

and

further

growth

is expected.In response, the Japanese government announced plans to establish an international green finance center and is working with the Tokyo Stock Exchange to develop the green bond market.

Various steps to ensure investor confidence in green bonds will be instrumental in stimulating

this

market.

For

example,

firms

need

to

enhance

their

climate

change-related disclosure in terms of both quality and quantity, work to prevent "greenwashing," or the guise of environmental friendliness, and create a framework that allows investors to obtain useful information for their investment decisions.My hope is that these reforms will create an ecosystem that facilitates the steady recovery of investment costs and enables monumental investments to be carried out sustainably.

I

will continue

to

keep

a

close

eye

on

the

progress

of

transformation

regarding

climate-related issues, steadfastly review and make adjustments to the Bank's measures where needed, and consider how a central bank can encourage firms' efforts on climate change so as to realize a sustainable society.Thank you.

## Economic Activity, Prices, and Monetary Policy in JapanSpeech at a Meeting with Local Leaders in Miyazaki (via webcast)August 25, 2021NAKAMURA Toyoaki Bank of Japan

## IMF Projections in the World Economic OutlookNote: ASEAN5 consists of Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.Source: IMF.

## Japan's Real GDPSource: Cabinet Office.

## Japan's CPI (Less Fresh Food)Notes: 1.

Energy consists of petroleum products (gasoline, kerosene, and liquefied propane), electricity, and manufactured and piped gas charges.2.

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

## Outlook for Economic Activity and Prices as of July 2021: Chart 4

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

| Real GDP

| CPI (all items less fresh food)

||------------------------------|---------------------|-----------------------------------|| Fiscal 2021

| +3.5 to +4.0 [+3.8] | +0.3 to +0.6 [+0.6]

|| Forecasts made in April 2021 | +3.6 to +4.4 [+4.0] | 0.0 to +0.2 [+0.1]

|| Fiscal 2022

| +2.6 to +2.9 [+2.7] | +0.8 to +1.0 [+0.9]

|| Forecasts made in April 2021 | +2.1 to +2.5 [+2.4] | +0.5 to +0.9 [+0.8]

|| Fiscal 2023

| +1.2 to +1.4 [+1.3] | +0.9 to +1.1 [+1.0]

|| Forecasts made in April 2021 | +1.2 to +1.5 [+1.3] | +0.7 to +1.0 [+1.0]

|Notes:1.

Figures in brackets indicate the medians of the Policy Board members' forecasts (point estimates).2.

The forecasts of the majority of the Policy Board members are constructed as follows: each Policy Board member's forecast takes the form of a point estimate -- namely, the figure to which he/she attaches the highest probability of realization.

These forecasts are then shown as a range, with the highest figure and the lowest figure excluded.

The range does not indicate the forecast errors.3.

The CPI forecasts in this table are based on the previous 2015-base index.

## Cash and Deposits Held by HouseholdsUnited StatesJapanNote: The figures for the United States include MMF.Sources: Federal Reserve; Haver; Bank of Japan.Note: The Tankan figures include software and R&D investments and exclude land purchasing expenses.

R&D investment is not included before the March 2017 survey.

The figures are for enterprises of all sizes and in all industries including financial institutions.Sources: Cabinet Office; Bank of Japan.

## The Bank's Measures in Response to COVID-19

## Supporting Corporate FinancingSpecial Program to Support Financing in Response to COVID-19Purchases of CP and corporate bonds: amount outstanding of about 20 tril. yen at maximum (previous amount outstanding of about 5 tril. yen)Special Funds-Supplying Operations to Facilitate Financing in Response to COVID-19

## Stabilizing Financial MarketsAmple and Flexible Provision of Yen and Foreign Currency FundsActive purchases of JGBs and T-BillsU.S.

Dollar Funds-Supplying Operations

## Purchases of ETFs and J-REITsETFs: annual pace with an upper limit of about 12 tril. yen J-REITs: annual pace with an upper limit of about 180 bil. yen

## Fund-Provisioning Measure to Support Efforts on Climate ChangeFrom a central bank standpoint, the Bank provides funds to financial institutions for investment or loans they make to address climate change based on their own decisions.Amid the uncertain external environment, it can respond flexibility to changes in circumstances while avoiding direct involvement in micro-level resource allocation as much as possible.Eligible Counterparties- Eligible Investment/LoansCounterparties make investment/loans based on their own decisions.

Discipline will be exercised through a certain level of disclosure.- Financial institutions that disclose a certain level of information on their efforts to address climate change- Of the investment/loans made by counterparties as part of their efforts, those that contribute to Japan's actions to address climate change

## Terms and ConditionsLong-term support for financial institutions' efforts- Interest rate: 0% -- The measure will fall under Category III (applied interest rate: 0%) in the Interest Scheme to Promote Lending- Twice as much as the amount outstanding of funds that counterparties receive will be added to the Macro Add-on Balances in their current accounts at the Bank- Duration of fund-provisioning: 1 year, rollovers can be made until the end of the implementation periodEffectively, counterparties can receive long-term financing from the Bank- Implementation period: in principle, until the end of fiscal 2030

## U.S. Dollar/YenNote: QQE denotes quantitative and qualitative monetary easing.

Source: Bloomberg.

## Household Disposable IncomeJapanUnited StatesGermany8084889296000408121620CYNotes: 1.

Figures for Japan before 1993 are calculated using year-on-year changes in each item in the 2000 System of National Accounts.2.

Figures for interest income and dividend income in Germany are "other interests, rents" and "distributed income of corporations," respectively.Sources: Cabinet Office; Bureau of Economic Analysis; Statistisches Bundesamt.Vicious cycle of deflationWeakDomestic domesticdemandConsumptionAnxiety for the futureHoarding of cash and depositsInterest incomepricesInterest rateInflow of low-priced goods from developingeconomiesSales and profitsProductivityReduction of fixed expenses while maintaining employment due to the lifetime employmentpractice and seniority-based wagesIfFurtherChart 11

## Vicious Cycle of Deflation and Virtuous Economic Cycle from Firms' ViewpointWeak domestic demandShifting of production bases toVirtuous economic cycle developingeconomiesSlow growth in employmentConstrained postponedreduction of fixed expenseswagesFixed, software, and R&DinvestmentsCapability to develop new products and servicesDelay in development of attractive and competitive newproducts and servicesIf conductedRealignment of business portfolioWorking style reform stagnantIf successfulEntry of startups with innovative technology/business modelsGrowth of overseas economiesPrices of imported raw materialsto achieve sustainable growthExternal demandSales and profitsProductivityWagesInvestmentEmploymentDevelopment of attractive andcompetitive new products and servicesDisposable incomeFinancial investmentIfConsumptionPrices

## Share of Exports and Imports in Nominal GDPSource: Cabinet Office.

## Outward Direct Investment PositionNote: Figures are based on the directional principle.

These include investments from a parent company located in Japan to its overseas affiliates.Sources: Ministry of Finance; Bank of Japan.

## Current Account

## TOPIXNotes: 1.

Figures for the world's nominal GDP are based on values denominated in U.S. dollars.2.

Figures for Japan's nominal GDP are based on values denominated in Japanese yen.3.

Figures for TOPIX are calculated from yearly averages.Sources: IMF; Bloomberg.

## Household Financial AssetsNote: In the right panel, "Other" is the residual after deducting "Cash and deposits," "Debt securities," "Investment trusts," "Equity," and "Insurance, pension, and standardized guarantees" from total financial assets.Sources: Bank of Japan; Federal Reserve; European Central Bank.

## IMD World Digital Competitiveness Ranking 2020- Notes: 1.

The overall scores are calculated based on three factors: knowledge, technology, and future readiness, which represents the level of preparedness for digital transformation.

Each factor contains three sub-factors, and the nine sub-factors comprise 52 criteria.2.

In the left panel, figures in parentheses indicate the ranking of the economy out of all 63 economies analyzed.- Source: IMD.

## Software InvestmentNote: Figures are based on nominal values denominated in local currencies.Source: OECD.

## Comparison of Digital Competitiveness between Japan and the United StatesUnited StatesNotes: 1. "Training & education," "Talent," and "Scientific concentration" are sub-factors of knowledge. "Regulatory framework," "Capital," and "Technological framework" are sub-factors of technology. "Adaptive attitudes," "Business agility," and "IT integration" are sub-factors of future readiness.2.

In the left panel, figures in parentheses indicate the ranking of Japan out of all 63 economies analyzed.Source: IMD, "World Digital Competitiveness Ranking 2020."

## The Bank's Strategy on Climate Change- ® Climate change is a global challenge and could have a broad impact into the future.- @ Various entities in society and the economy need to actively play their roles.The Bank, with an intention of furthering its efforts on climate change consistent with its mandate of achieving price stability and ensuring the stability of the financial system, decided the comprehensive strategy.Financial systemThe impacts of climate change on economic activity, prices, and the financial system are highly uncertain and could greatly vary over time.=> The Bank will constantly review its measures and make adjustments where needed.

## Green Bond IssuanceWorldJapanNotes: 1.

Figures include any type of self-labeled fixed income instruments where the proceeds will be directed exclusively to financing or refinancing, in part or in full, of new and/or existing green projects.2.

Green bonds encompass commercial papers, certificates of deposit, and sukuk.Source: IMF.