Hiroshi Nakaso: Japan's economy and the Bank of Japan - yesterday, today, and tomorrow
Central bank: boj | Type: speech | Date: 2016-05-23

## Hiroshi Nakaso: Japan's economy and the Bank of Japan - yesterday, today, and tomorrowSpeech

by

Mr

Hiroshi

Nakaso,

Deputy

Governor

of

the

Bank

of

Japan,

at

the

Economic Conference to commemorate the 150th Anniversary of Diplomatic Relations between Italy and Japan 'The Economics of Italy and Japan: Historical Development and Future Policies for Stability and Growth', co-hosted by Keio University and Bocconi University, Tokyo, 23 May 2016.*

*

*Accompanying charts can be found at the end of the speech.

## IntroductionIt

is

a

great

honor

to

have

the

opportunity

to

speak

to

you

today

at

this

conference commemorating the 150th anniversary of the establishment of diplomatic ties between Italy and Japan.

Moreover, I am grateful for the wide-ranging close relationship that has developed between the Bank of Italy and the Bank of Japan at all layers and am very happy to be able to speak with Senior Deputy Governor Rossi in this session.

Personally, when I was a young boy, the legend of Romulus and Remus about the founding of Rome left a lasting impression on me, and ever since, I have been one of the many Japanese who are fascinated by Italy's history, art, fashion, food, and football.

The subtitle of today's speech - 'Yesterday, Today, and Tomorrow' - is chosen based on the title of the movie starring Sophia Loren and Marcello Mastroianni, which won the 1965 Academy Award for Best Foreign Language Film.Well, let me start with my speech today.

As is well known, following the collapse of the bubble economy in the early 1990s, Japan's economy suffered a prolonged period of low growth and deflation - what has come to be called the 'Lost Decades.' The causes of the Lost Decades have been the subject of active debate among policy makers and economists alike, but until relatively recently, the associated issues were regarded as specific to Japan.

However, since the 2008 global financial crisis, the United States and Europe also have faced the threat of low growth and deflation, giving rise to talk about a 'Japanization' and renewed interest in Japan's experience.

In fact, when I glance at the economies of the euro area including Italy, I have to say I often have a sense of deja vu .Therefore,

in

my

speech

today,

I

would

like

to

look

back

at

Japan's

experience

since

the collapse of the asset bubble and the Bank of Japan's policy responses to maintain the stability of

the

financial

system

as

well

as

monetary

policy.

I

will

then

go

on

to

discuss

the

policy challenges for Japan as well as the implications of Japan's experience for Europe today.

## I.

Developments in Japan's economy during the lost decadesAs is well known, Japan's economy has been mired in stagnation since the 1990s.

On the other hand, what is less well known, especially abroad, is that the challenges that Japan's economy has faced during this prolonged stagnation have differed over time.

Put simply, until the early 2000s, the main challenge consisted of dealing with the instability of the financial system and deleveraging in the banking sector brought about by the collapse of the asset bubble, and of resolving the so-called 'three excesses' in the corporate sector, consisting of excess

debt,

excess

capacity,

and

excess

employment.

However,

these

problems

were essentially resolved by the early 2000s and a more serious challenge since the second half of the 2000s has been the decline in Japan's growth potential and inflation expectations.

The decline in both since the 1990s has been brought to the fore by the large decline in aggregate demand as a result of the global financial crisis.

These two major challenges appeared in succession and it is mainly for this

reason that Japan's

economic stagnation has been so prolonged.BIS central bankers' speeches

## The collapse of the asset bubble, financial system instability, deleveraging, and the 'three excesses'In

the

1990s,

Japan's

banking

sector

was

riddled

with

a

mountain

of

nonperforming

loans resulting from the collapse of the 1980s bubble in real estate and stock prices.

At the same time,

Japan's

corporate

sector

was

suffering

from

the

'three

excesses'

just

mentioned

excess debt, capacity, and employment - owing to the expansion of businesses driven by overly

optimistic

growth

expectations.

In

1997

through

1998,

these

problems

led

to

the successive

failure

of

major

financial

institutions,

significantly

impairing

the

functioning

of financial

intermediation

and

causing

a

sudden

credit

crunch

(Chart

1).

The

economy contracted severely and the year-on-year rate of change in the consumer price index (CPI) fell into negative territory, marking the beginning of Japan's prolonged, though moderate, deflation (Chart 2).The Bank of Japan responded to this financial crisis

in

Japan

during

the

1990s

by

acting extensively as lender of last resort. 1 Moreover, since the safety net was underdeveloped at that time, the Bank of Japan, in order to carry out its mission of ensuring the stability of the financial system, played the role that essentially should have been the responsibility of the government, had there been a robust financial safety net; specifically, in addition to supplying liquidity, the Bank took various extraordinary measures such as injecting capital to an ailing bank and setting up a bridge bank on its own.

However, as a result, the Bank had the painful experience of recording credit losses reaching 200 billion yen.

The crisis became obvious to everyone, and legislative steps to set up a safety net were finally taken.

It was only in 1998, almost a decade after the collapse of the bubble, that a comprehensive framework for the temporary nationalization and the injection of capital using public funds was put in place.Under this framework, the resolution of failed banks progressed.

Whereas the increase in the number of failed financial institutions in the late 1990s occurred under circumstances in which the underdeveloped safety net made it difficult to get the crisis under control, the spike from 2000 onward is proof of a systematic resolution of failed banks under the new framework (Chart 3).

During

this

period,

deleveraging

in

the

banking

sector

and

the

resolution

of

the

three excesses in the corporate sector continued.

For example, the amount outstanding of bank lending, which stood at more than 500 trillion yen in the second half of the 1990s, fell below 400 trillion yen in the mid-2000s - a drop of more than 20 percent (Chart 1).

The decline in bank lending through this deleveraging process finally came to an end in 2006, when bank lending rebounded.

Moreover, in the same year, CPI inflation returned into positive territory, so that deflation temporarily receded (Chart 2).

Fortunately, Japan had been able to avoid a 1930s-style deflationary spiral with a rapidly deteriorating economy and falling prices.

Thus, by the mid-2000s, Japan's economy had overcome the negative legacy of the asset bubble and appeared to have laid the foundations for renewed sustained growth.

## The decline in the growth potential and inflation expectationsIn fact, Japan's economy did return to a growth trajectory, benefitting from the tailwind of a favorable global economy spurred on by rapid growth in China.

However, triggered by the outbreak of the global financial crisis in autumn 2008, circumstances changed at a stroke.

In contrast

with

Europe

and

the

United

States,

the

exposure

of

Japan's

financial

sector

to subprime mortgage-related financial products was limited and the financial system generally remained stable; however, the real economy, as a result of the significant slowdown of the global economy, could no longer rely on exports, the traditional engine of economic recoveries in Japan.

Against this background, the decline in the potential growth rate came to the fore as1 For details on Japan's experience during the financial crisis, see Hiroshi Nakaso, 'The financial crisis in Japan during the 1990s: how the Bank of Japan responded and the lessons learnt,' BIS Papers No. 6, October 2001.BIS central bankers' speechesa

major

economic challenge (Chart 4). 2 The

decline

in

the

potential

growth

rate

reflects

a slowdown in productivity growth since the collapse of the bubble economy, a decline in the labor force since the late 1990s due to demographic trends, and deceleration in the pace of capital accumulation.Meanwhile,

on

the

price

front,

CPI

inflation

fell

back

into

negative

territory,

and

inflation expectations started to slide (Chart 2).

With only little room to lower interest rates, it did not take much time for Japan to face the zero lower bound on interest rates again and real interest rates remained elevated.

At the same time, in line with the falling potential growth rate since the 1990s, the natural rate of interest - that is, the interest rate at which the economy neither accelerates

nor

decelerates

-

had

declined

substantially

(Chart

4).

As

a

result,

Japan's economy fell into a situation in which it was difficult for the Bank of Japan to provide sufficiently accommodative financial conditions through an extension of policies that had been employed before.

These economic difficulties were compounded by the Great East Japan Earthquake in 2011.

## II.

Evolution of monetary policy during the lost decadesNext, I would like to look back at monetary policies taken by the Bank of Japan from the start of the Lost Decades until recently.

As the first central bank facing the aftermath of the collapse of a bubble and deflation, the Bank developed a range of new policy measures.

These consist mainly of two measures that correspond to the challenges that the Bank faced at different points in time.

The first measure was quantitative easing, QE for short, which concentrated on the provision of ample liquidity, while the second was quantitative and qualitative monetary easing, or QQE, which focused on raising inflation expectations (Chart 5).QE, which was implemented from 2001 to 2006, proved effective in that it maintained the stability of the financial system through the provision of ample liquidity and prevented Japan's economy from falling into a deflationary spiral.

However, it was not powerful enough to reverse the

declining

trend

in

inflation

expectations

and

overcome

deflation.

As

mentioned

earlier, Japan's natural rate of interest had been falling due to the decline in the potential growth rate; at the same time, real interest rates remained high due to the zero lower bound on nominal short-term

interest

rates

and

the

decline

in

inflation

expectations.

As

a

result,

QE

did

not provide sufficiently accommodative financial conditions.

Under these circumstances, a vicious cycle

of

a

decline

in

prices,

a

fall

in

sales

and

profits,

restraint

in

wages,

stagnation

in consumption, and a further decline in prices took hold.

This indicates that once the economy becomes stuck in a deflationary equilibrium, it is difficult to escape from it.From a theoretical

perspective,

the

policy

prescriptions

are

obvious.

What

is

needed

is

to remove, once and for all, the deflationary mindset and raise inflation expectations - that is, to lower real interest rates - through decisive monetary easing, and to raise the potential growth rate - that is, to raise the natural rate of interest - through a growth strategy and deregulation.

This, in fact, is exactly what the three arrows of Abenomics are aimed at.

One can often hear discussions as to whether monetary easing or structural reforms are more important, but I do not see this is a particularly constructive question.

Both are essential for overcoming deflation and achieving sustainable growth.

It is not a question of either monetary easing or structural reforms - they are complementary to each other.With regard to the first arrow, monetary policy, the Bank of Japan introduced the price stability target in January 2013 with the aim of achieving 2 percent inflation in terms of the year-onyear rate of change in the CPI.

This was followed, in April 2013, by the introduction of QQE to achieve the price stability target of 2 percent at the earliest possible time.

The challenge for2 I gave my detailed views on the implications of the decline in the potential growth rate in my speech on 'Monetary Policy and Structural Reforms' at the Japan Society in New York in February 2016.monetary policy is how to raise inflation expectations given the limited room for lowering shortterm interest rates.

For this reason, QQE consists of two elements.

The first is the Bank's strong and clear commitment to the target.

Specifically, the Bank has made clear its stance that it seeks to achieve the price stability target at the earliest possible time, with a time horizon of about two years, and has committed itself to pursuing QQE as long as it is necessary for achieving the price stability target in a sustainable manner.

The second element is the exertion of downward pressure on nominal interest rates across the entire yield curve through massive purchases of Japanese government bonds (JGBs).

That is, the Bank seeks to exploit to the greatest possible extent any remaining room for further declines in nominal interest rates.

The combination of the two elements will lower real interest rates and thereby stimulate private demand.

If people as a result see prices going up, this will raise their confidence in the Bank's commitment, which will further reinforce this process.In January 2016, the Bank further enhanced QQE by adding the new dimension of a negative interest rate. 'QQE with a Negative Interest Rate' aims to exert stronger downward pressure on the entire yield curve by lowering the short end of the yield curve through a negative interest rate applied to a certain tier of current accounts at the Bank while continuing with massive purchases of JGBs.

In designing the negative interest rate policy scheme, we were inspired by the experience of central banks in Europe, including the ECB.

## III.

The effects of QQE and QQE with a negative interest rateAbout three years have passed since the introduction of QQE, and the Bank judges that QQE has been exerting its intended effects.Let me start by considering the effects on interest rates.

Since the introduction of QQE, yields on 10-year JGBs have cumulatively fallen by about 70 basis points (Chart 6).

Against this background, bank lending rates have continued to decline, so that the average interest rate on the stock of total bank lending has fallen to a level around 1 percent.

The amount outstanding of bank lending, including to small firms, has continued to rise, with the annual pace of increase recently

exceeding

2

percent (Chart

1).

It

appears that,

at

present,

with

real

interest

rates substantially below the natural rate of interest, financial conditions for the real economy are highly accommodative (Chart 4).Given such accommodative financial conditions, the real economy has evidently improved.

In the

household

sector,

the

employment

and

income

situation

has

steadily

improved.

Labor market conditions have continued to tighten as seen in the fact that the unemployment rate has declined to the range of 3.0-3.5 percent, which we think corresponds to full employment (Chart 7).

Reflecting the tight labor market conditions, base pay increases - that is, acrossthe-board

wage

increases

mainly

reflecting

inflation

and

decided

in

the

annual

labormanagement wage negotiations - returned in 2014 for the first time in two decades.

Base pay increases have continued this year, marking the third consecutive year of such increases.

In the corporate sector, profits have increased to record levels, partly helped by the correction of the

excessive

appreciation

of

the

yen

and

the

decline

in

energy

prices.

Against

this background, firms have maintained their positive stance with regard to fixed investment.As for prices, the year-on-year rate of change in the all-item CPI excluding fresh food is about 0

percent,

reflecting

the

decline

in

energy

prices,

but

the

underlying

trend

in

inflation

has steadily improved.

CPI inflation for all items excluding fresh food and energy, which had been in the range of about minus 0.5 to minus 1.0 percent before the introduction of QQE in April 2013, has been positive for 30 consecutive months since the latter half of 2013 and in recent months has been about 1 percent (Chart 8).

This is the first time since the second half of the 1990s,

when

Japan's

economy

fell

into

deflation,

that

such

sustained

inflation

has

been observed.

Moreover, looking at price changes across all items, the share of price-increasing items minus the share of price-decreasing items has been rising clearly since the introduction of

QQE,

and

is

currently

near

its

peak.

This

indicates

that

firms

have

maintained

theirwillingness to increase prices, and a virtuous cycle between a moderate rise in inflation and wage growth has remained in place.Meanwhile, I admit there has been a fair amount of criticism in Japan of the negative interest rate policy adopted by the Bank in January 2016.

The situation seems not dissimilar to the one in Europe.

Such criticism can be divided into two broad strands.The first is that the negative interest rate policy may have an adverse impact on economic activity and prices by squeezing banks' profits, which could hamper the functioning of financial intermediation.

However, in the case of Japan, the concern that the negative interest rate policy will

undermine

financial

intermediation

is

unfounded,

at

least

at

this

moment.

First,

as

I explained,

the

process

of

deleveraging

in

Japan

was

completed

by

the

mid-2000s,

and financial institutions now have a strong capital base, partly helped by the fact that the impact of the global financial crisis on them was limited.

Second, despite the current low interest rate environment, the profits of both major banks and regional banks are close to record levels, mainly reflecting the significant decline in credit costs due to the steady economic recovery.

And third, when the Bank introduced the negative interest rate policy, it designed the policy so as

not

to

excessively

squeeze

banks'

profits.

Specifically,

the

Bank

designed

the

policy framework such that a negative interest rate is applied only on the margin by dividing the current account balances that financial institutions hold at the Bank into three tiers.

As the Bank continues to purchase JGBs, the current account balances will increase accordingly; however, since the tier will be adjusted at the same time, the balances subject to a negative interest rate will remain relatively small, between around 10 and 30 trillion yen.

Needless to say, the Bank will closely monitor the effects on financial institutions' earnings, and will examine and

evaluate

those

effects

in

the Financial

System

Report .

The

importance

of

banks' functioning

as

financial

intermediaries

in

the

transmission

of

monetary

policy

cannot

be overemphasized. 3 That is exactly why, since the outbreak of the financial crisis in the 1990s, the Bank of Japan has consistently acted as the guardian of financial intermediation.

I assure you this shall not change in the future.The second criticism is that the general public will not really feel the benefits of the negative interest rate policy.

While the public understand that their deposits will not diminish as a result of the negative interest rate policy, we are aware that, for example, households that do not have a mortgage will not necessarily feel any specific benefits.

Particularly those who rely on their savings, such as pensioners and the elderly, may think that the negative interest rate policy

has

an

adverse

effect,

since

their

interest

income

further

decreases.

The

Bank's negative interest rate policy can be understood as an extension of QQE in that its transmission channel is to maintain real interest rates well below the natural rate of interest, but I cannot deny that some aspects of this policy may be counterintuitive to the public.

Therefore, we need to carefully listen to criticisms.

At the same time, we need to clearly explain that the effects of monetary policy should not be assessed only in terms of households' and firms' direct profits and losses in transactions with banks, but in terms of the macroeconomic effects such as the benefits from an increase in employment and a rise in wages.

In other words, it is essential to explain more persuasively that these policy measures are necessary for the economy to revert to a sustainable growth path.

This seems to be a challenge the Bank of Japan and the ECB have in common.At any rate, I will keep a watchful eye on how the negative interest rate policy, through the further decline in interest rates following its introduction, will work through the economy.3 I

explained

the

importance

of

the

functioning

of

financial

intermediation

in

my

speech

'Challenges

toward Financial

Stability

and

the

Policy

Frontier:

Unconventional

Monetary

Policy,

Macroprudence,

and

Financial Institutions' Low Profitability' made at the IVA-JSPS seminar in Stockholm in March 2016.

## IV.

Central banks' lender of last resort function: lessons from the global financial crisisSo far, I have outlined the challenges facing Japan's economy in the past and present and how the Bank of Japan has responded.

Now, looking into the future, I would like to touch upon two issues which I believe are important from the perspective of central banks.First, we need to work on the development of an international financial safety net and discuss, from a global perspective, central banks' lender of last resort function.

Domestically in Japan, our financial safety net has been strengthened based on the lessons learned during Japan's financial crisis in the 1990s and the role of the Bank of Japan's lender of last resort function has become quite clear.

The global financial crisis has raised new challenges for central banks' role as lender of last resort, especially in the case of a temporary liquidity crisis of a systemically important financial institution operating in multiple jurisdictions and currencies.

Issues include how central banks should share information and how responsibilities should be allocated in such circumstances.

Moreover, it is also possible that different countries and jurisdictions treat banks and non-bank differently under their individual safety nets.

The Bank of Japan actually has experience in some aspects of such cross-border challenges, since Yamaichi Securities, which failed in 1997 and to which the Bank provided liquidity, had overseas bank subsidiaries.In addition, partly as a result of lessons learned during the global financial crisis, the use of central

counterparties

(CCPs)

to

centrally

clear

transactions

is

being

promoted

to

reduce settlement risks.

This raises additional issues, such as how liquidity shortages at cross-border CCPs dealing with multiple currencies should be addressed, and how central banks should contribute to resolving such issues. 4Central banks are responsible for the stability of their respective domestic financial systems.

However, in order to fulfill their responsibilities, they need to ever more closely monitor and engage

with

the

global

financial

system.

There

is

also

a

growing

importance

of

further strengthening cooperation among central banks.

I believe the Bank of Japan, based on its wealth of experience, should take a leading role in the discussions in this area.

## V.

Strengthening Japan's growth potentialThe second issue is the need to redouble efforts to raise the growth rate.

In order to return Japan's economy to a sustainable growth path, it is also important to strengthen the dynamism of

the

corporate

sector

and

raise

the

economy's

growth

potential.

In

this

respect,

the government's growth strategy plays a major role.

If the growth strategy bears fruit, the natural rate of interest will rise in line with the potential growth rate.

The shape of the yield curve will gradually return to normality as upward pressure is exerted on the longer end.A key characteristic of the government's growth strategy is that it will take a while before its effects become visible.

Nonetheless, we are starting to see some tangible results.

Let me give you one example: raising the labor participation of women (Chart 9).

As in Italy, the female labor force participation rate in Japan has historically been low and raising it is a long-term challenge.

Specifically, a major issue is that women in their prime of life have to interrupt their career for child

rearing.

Against

this

background,

one

of

the

pillars

of

the

Abe

administration's

aim

to achieve the 'Dynamic Engagement of All Citizens' is to boost support for child rearing.

In fact, the labor participation rate of women has already started to increase through measures such as the expansion of childcare facilities.

If such tangible results were to spread, this would build further public support for the growth strategy and help to drive it forward.4 I provided a detailed explanation of central bank policies with regard to financial market infrastructure and the associated challenge, including the relationship between central banks and CCPs, in my remarks on 'Central Bank Policy on Financial Market Infrastructure' delivered at the Conference on Retail Payments in May 2016.Of course, the problems Japan needs to address span a wide range of areas.

As mentioned, the decline in Japan's potential growth rate is due partly to the deceleration in productivity growth.

To give you one example, it appears that there is substantial room for productivity improvements in IT-related sectors.

Both in IT-producing and IT-using sectors, productivity growth is lower than in the United States (Chart 10).

In this context, a survey on firms in the United States and Japan provides instructive results: compared to firms in the United States, fewer firms in Japan attach importance to IT investment or have a chief information officer (CIO).

These results suggest that strengthening Japan's growth potential is not something that can be achieved through the government's growth strategy alone; what is also needed are greater efforts on the part of the private sector to strengthen competitiveness.

## VI.

Lessons for EuropeFinally, I would like to make a few comparisons between Japan's Lost Decades and Europe since the global financial crisis.

What is worth noting is that in Europe the policy response has been quick and decisive.

In addition to innovative policy measures such as the coordinated provision

of

dollar

funds

by

the

major

central

banks

through

swap

arrangements, financial system

instability

was

warded

off

through

the

provision

of

ample

liquidity,

preventing

the financial crisis from turning into a global panic.

Moreover, on the institutional front, the Single Supervisory Mechanism (SSM) for the supervision of banks became operational.

Further, I expect

that

efforts

to

deal

with

remaining

issues

such

as

the

full

operation

of

the

Single Resolution Mechanism (SRM) charged with the resolution of failed financial institutions and the expeditious recapitalization of undercapitalized banks will make

good

progress.

Meanwhile, on the monetary policy front, the ECB has stressed from an early stage the risks associated with a potential decline in inflation expectations.

In fact, the ECB has responded very proactively, being the first among major central banks to introduce a negative interest rate policy and combining it with asset purchases.There is also perceived to be a need to redouble efforts to drive ahead with structural reforms to

raise

the

potential

growth

rate.

However,

this

too

is

clearly

recognized,

as

indicated

in President Draghi's observation that low interest rates are not the consequence of monetary policy

but

a

symptom

of

low

growth

and

low

inflation.

I

am

convinced

that

the

risk

of

a Japanization of the euro economy is small, given that European policy makers are aware of the issues and are responding appropriately.

## ConclusionIn my speech today I tried to look back at Japan's Lost Decades and consider potential lessons for the current economic situation in Italy and Europe.

Naturally, there are many other aspects in which Japan and Italy can learn from each other, not only with regard to finance and the economy.

Looking

at

the

OECD's

Better

Life

Index,

which

measures

happiness

across countries

based

on

various

indicators

such

as

education

and

the

living

environment,

both Japan

and

Italy

rank

in

the

middle

of

OECD

countries;

interestingly,

however,

individual indicators suggest that whereas Japan ranks favorably in terms of labor market conditions and education, Italy ranks highly in terms of work-life balance and health (Chart 11).It is said that Japan became widely known in Europe when the Venetian-born merchant Marco Polo in his 13th century travel diary introduced Japan as 'Zipangu, the Land of Gold.' Since then, as countries with a long history and long traditions, Italy and Japan have continued to learn from each other.

Let me close this speech by saying that although our two countries are currently

facing

a

number

of

similar

problems,

I

am

convinced

that

by

overcoming

these problems through cooperation, our bonds will continue to grow over the next 150 years and bring a golden future for our two countries, even without the Zipangu's gold.Thank you.BIS central bankers' speeches

## Deleverage at the Banking Sector in JapanTankan: Lending Attitude of Financial InstitutionsAmount Outstanding of Bank LendingSource: Bank of Japan.

## Consumer PricesNotes:1.consumption2.

Figures for the trimmed mean are the weighted averages of the year-on-year price changes in all individual items making up the CPI.

Ttems are arranged in ascending order of their year-on-year rate of price change and those falling into the upper and lower 10 percentFigures areadjusted toexclude theestimated effectsof changesin thetax rate.Chart 3

## Developments in the Financial System

## Credit Cost Ratio of BanksNumber of Failed Financial InstitutionsNotes:2.

The number of failed financial institutions is the total number of failed banks, shinkin banks, and credit cooperatives.1.

Credit cost ratio for fiscal 2015 is as of the first half of fiscal 2015 (annualized).3.

Figures are based on the date when final measures for resolution, such as financial assistance by the Deposit Insurance Corporation of Japan, were implemented.Sources: Bank of Japan; Deposit Insurance Corporation of Japan.32

## Japan's Potential Growth Rate and Natural Rate of InterestPotential Growth RateNatural Rate of Interest8587899199O0109- Notes: 1.

The potential growth rate is estimated by the Research and Statistics Department, Bank of Japan.

Figures for the second half of fiscal 2015 are those of 2015/Q4.- Sources: Cabinet Office; Bank of Japan: Ministry of Intemal Affairs and Communications; Ministry of Health, Labour and Welfare; Ministry of Economy, Trade and Industry, Research Institute of Economy.

Trade and Industry, Bloomberg. 42.

The natural rate of interest and real interest rate are calculated based on 10-year government bond yields.

The shaded area indicates the 95 percent confidence interval for the natural rate of interest.

For details of the estimation procedures, see Imakubo et al. (2015), "The Natural Yield Curve: Its Concept and Measurement." Bank of Japan Working Paper Series, 15-E-5.Chart 5

## Monetary Policy since the 1990sCY94969900O0204Source: Bank of Japan.

## JGB Yield CurveChart7Labor Market Conditions and Corporate ProfitsSources: Ministry of Intemal Affairs and Commmnications; Ministry of Finance.7

## .

Price DevelopmentsChart 9

## Labor Force Participation Rate of WomenTotalAged 25 to 34Source: OECD.

## IT-Related Sector and Labor Productivity

## Growth Rate of Labor Productivityannual growth rate from CY 1998 to CY 2013, % chg.| IT-producing sector

| TT-using sector

| TT-using sector

||-----------------------|-------------------|-------------------||

|

| ‘United States

|State of IT Management

## IT-Users' Perception of IT Investment

## Whether Firms Have a CIONotes:1."machinery."instruments.”communications,”IT-producing sectorconsists of"electrical machinery,equipment andsupplies."and“precision activities.”Sources: Cabinet Office; Bureau of Economic Analysis; Japan Electronics and Information Technology Industries Association (JEITA); IDC Japan.- TT-using sector consists of "wholesale and retail trade." "information and and "service 2.

Figures on the "state of IT management" are based on a survey conducted by JEITA and IDC Japan in June and July 2013. 'The figures are taken from conference material presented by JEITA at the CEATEC JAPAN 2015 (with some adjustment by the Bank of Japan).

CIO stands for chief information officer.10Chart 11

## Better Life IndexAverage Scores for OECD CountriesScore of Each Topic for Japan and ItalyNotes:1.The averagescore foreach countryis theaverage ofscores ofeleven2.Source: OECD.OECDcountries.topics thatcomprise theBetterLifeIndex(2015edition).nCountries inthe leftchart includeBrazil andRussia otherthan