Seiji Adachi: Economic activity, prices, and monetary policy in Japan
Central bank: boj | Type: speech | Date: 2023-11-29

Bank

of

JapanNovember 29, 2023

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

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

## I.

Economic Activity and Prices

## A.

Economic ActivityI would like to start my speech by talking about points that are noteworthy in examining the current situation and outlook for Japan's economy.Amid

the

ongoing

reopening

of

the

economy

and

society,

as

seen

in,

for

example,

the downgrading

of

COVID-19

to

a

Class

V

infectious

disease

under

the

Infectious

Disease Control Law in May 2023, Japan's economy has recovered moderately (Chart 1).

With such progress in reopening, demand that was suppressed during the pandemic, or pent-up demand, will likely continue to be a factor pushing up economic activity.

However, as a significant rise in such demand is expected to peak out in the near future, it seems that the actual strength of Japan's economy has begun to be tested.Let us look at recent developments in Japan's economic activity in detail.

With respect to private consumption, the positive effects from pent-up demand

have remained in consumption

of

some

durable

goods

such

as

automobiles.

I

have

an

impression

that consumption overall has regained the pre-pandemic trend of a stable increase, albeit at a moderate pace (left panel of Chart 2).

That said, due in part to a decline in real disposable income stemming from recent price rises, households have been defensive about spending; for

instance,

their

demand

for

frequently

purchased

items

including

beverages,

food,

and daily necessities has shifted to lower-priced goods such as affordable private brand products.

Meanwhile, services consumption such as entertainment, travel, and accommodations has remained firm despite having been affected by price hikes (right panel of Chart 2).

These developments

suggest

that

households,

faced

with

high

inflation,

have

increasingly

been selective with their spending patterns, in that they are willing to spend money for certain goods

and

services

regardless

of

price

while

opting

for

lower

prices

on

other

goods

and services or refraining from spending in the first place.

These changes in spending patterns will potentially affect price developments, which I will describe later.Next, I will turn to business fixed investment.

The environment surrounding such investment has

been

extremely

favorable

in

Japan.

Specifically,

a

number

of

promising

projects

are scheduled to take place: (1) IT-related investment aimed at digital transformation (DX) andlabor saving; (2) construction investment in, for example, urban redevelopment projects and in

logistics

facilities

resulting

from

expansion

in

e-commerce;

and

(3)

large-scale

fixed investment

projects

by

large

domestic

and

overseas

manufacturing

firms

that

aim

at strengthening supply chains and are backed by the yen's depreciation.

Accordingly, reflecting firms' positive stance toward fixed investment, the Bank of Japan's September 2023 Tankan (Short-Term Economic Survey of Enterprises in Japan) showed firmness in such investment plans (Chart 3).

However, hard data on business fixed investment collected from the results of statistics on GDP and machinery orders representing actual economic activity have shown somewhat weaker results relative to the plans presented in the Bank's Tankan (Chart 4).

In some respects, there may be fundamental reasons for such weakness in fixed investment -namely, amid high uncertainties regarding developments in overseas economies, firms have still been reluctant to take on risks and invest for their future growth.Exports

have

been

more

or

less

flat

on

the

whole.

By

region,

exports

of

transportation machinery to the United States and Europe in particular have been on an uptrend, mainly led by

automobiles,

which

had

been

burdened

by

high

levels

of

order

backlogs

due

to semiconductor shortages.

In contrast, those to China have remained weak, mainly for capital goods, and this is also the case for those to the NIEs and the ASEAN economies due to a drop in

demand

for

digital-related

parts

such

as

semiconductors

for

smartphones

and

personal computers (Chart 5).Given what I have just outlined, I believe that the following points are crucial in forecasting the future course of Japan's economy.

First, with respect to private consumption, how a rise in firms' earning power will be allocated to households in the form of wages is important.

With regard to business fixed investment, it is worth examining how firms will raise their growth expectations and in turn boost their investment activities.

Lastly, in terms of exports, whether Japan can take a lead in the restructuring of global supply chains warrants attention.

These all suggest that it is time for the actual strength of Japan's economy to begin to be tested.

To foster these key factors for economic growth, underpinnings from the government's policy measures may also be necessary.Moreover, since business fixed investment and exports are influenced by overseas economies, future developments in these economies are also of significance to Japan's economy.

While European economies in particular have been pushed down by the effects of the situation in Ukraine since 2022, geopolitical risks in the Middle East have been heightening most recently, and this could be a new factor that will give rise to uncertainties.

Adjustments in China's real estate

market

have

been

heightening

uncertainties

regarding

the

outlook

for

its

economy.

Moreover, while the U.S. economy has been firm despite its rapid and substantial monetary tightening, attention should continue to be paid to economic developments as the impact of the rapid policy interest rate hikes to date might emerge with a time lag.

## B.

Price Developments in Japan

## 1.

Price situationI will now talk about recent price developments in Japan.The year-on-year rate of increase in the consumer price index (CPI) for October 2023 was 2.9 percent for all items less fresh food and 4.0 percent for all items less fresh food and energy (Chart 6).

The rate of increase for all items less fresh food has been slower than the peak marked in

January

2023,

partly

because

the

government's

economic

measures

have

been pushing down energy prices (Chart 7).

On the other hand, the rate of increase for all items less fresh food and energy has accelerated since early spring 2023 and has remained elevated in the range of 4.0 to 4.5 percent, as a pass-through to selling prices of cost increases such as for raw materials has intensified for a wide range of items.Meanwhile, inflation expectations -- an important factor in considering monetary policy -have risen moderately, although they differ depending on economic entity (Chart 8).

Until recently, it was believed that prices were highly unlikely to rise as many people, the younger generation in particular, had never experienced a situation in which prices rise and found it difficult to expect future inflation.

Currently, however, the situation may be starting to change.2.

Future price developments that are subject to considerable uncertaintiesThe Bank aims to achieve the price stability target of 2 percent in a sustainable and stable manner.

It

is

thus

highly

important

to

examine

how

prices

will

progress.

To

state

theconclusion first, the Bank's baseline scenario does not assume that prices will continue to rise at the current pace.

In other words, the effects of cost pass-through led by the increase in import prices, which have been pushing up consumer prices to date, are expected to wane gradually.

On the other hand, the strengthening of a virtuous cycle between wages and prices -- which I will touch on later -- will in part contribute to gradually pushing up prices.

With such shift in the main factor pushing up prices, the year-on-year rate of increase in the CPI for all items less fresh food -- in terms of the median of the Bank's Policy Board members' forecasts presented in the October 2023 Outlook for Economic Activity and Prices --

was projected

at

1.7

percent

for

fiscal

2025.

The

baseline

scenario

involves

extremely

high uncertainties

and

is

subject

to

both

upside

and

downside

risks.

Given

actual

price developments until recently, though, my sense is that risks are skewed to the upside.Before I talk specifically about risks to the outlook for prices, I would like to touch on a perspective that I have referred to in my past speeches, which I think is a useful starting point when considering developments in consumer prices.I

would

like

to

note

that,

although

the

CPI

consists

of

prices

of

a

variety

of

items,

price fluctuations vary by item.

Given this aspect, I would like to focus on the frequency of price changes, specifically by separating the category of "flexible" consumer prices, made up of items for which prices change relatively frequently, and "sticky" consumer prices, made up of items for which prices change relatively infrequently.

Flexible consumer prices are mainly composed of goods prices while sticky consumer prices are mainly composed of services prices.Having made this distinction, I would like to explain the reasons behind my thinking that risks to the outlook for prices are skewed to the upside.First, let me talk about flexible consumer prices.

On a yen basis, import prices have been trending downward since peaking in September 2022.

Flexible consumer prices, which are primarily composed of goods prices, tend to track movements in import prices with a time lag,

because

they

are

made

up

of

items

for

which

prices

change

relatively

frequently.

Currently,

however,

even

as

import

prices

have

decreased,

the

rate

of

decline

in

flexibleconsumer prices has been slower than expected.

The decrease in import prices, which mainly consist of raw material and fuel prices, will spread from upstream to downstream demand stages in producer prices, and presumably this will eventually spill over into consumer prices.

The decline in import prices has in fact been spreading from upstream to downstream demand stages, but it seems possible that prices in the downstream have become less likely to fall than before (Chart 9).

This may be because, compared to the past deflationary period, firms have become more likely to pass on cost increases to selling prices at each stage of demand.Let us look back at firms' business strategies in the deflationary environment.

Many firms at the time, faced with intense price competition, were forced to maintain or lower their selling prices even at the expense of some measure of profit.

In this context, they secured profits through business strategies that emphasized cutting costs, including the wages of workers.

With these points in mind, the current situation -- where firms' pass-through of cost increases has

been

more

widespread

than

expected

--

seems

to

suggest

that

the

deflationary environment

in

which

price

competition

was

predominant

is

beginning

to

undergo

a

sea change.Next, I would like to touch on sticky consumer prices.

These prices are thought to be more susceptible

to

medium-

to

long-term

inflation

expectations

than

short-term

expectations, since their index is made up of items for which prices change relatively infrequently.

Sticky consumer prices are also considered to be affected by wage developments.

As I suggested earlier, if we take it that firms have recently begun to emerge from a deflationary environment, the addition of upward pressure on workers' wages, which firms restrained in the deflationary environment, is likely to affect sticky consumer prices.

There is a strong tendency in Japan for firms to revise wages at the outset of the fiscal year, especially for regular employees, as typified by the annual spring labor-management wage negotiations.

Given the results of the spring 2023 negotiations, sticky consumer prices are also expected to rise (Chart 10).Several

points

are

crucial

to

keep

in

mind

when

considering

the

outlook

for

price developments in this context.

One concerns whether or not wage hikes at firms following the 2023 annual spring labor-management wage negotiations, which became more aggressive, are

temporary

or

will

continue

in

fiscal

2024

(Chart

11).

On

this

score,

there

have

beenpositive comments from both labor and management, mainly among large firms.

By contrast, many local small and medium-sized firms have expressed concerns that this year's wage hikes were as much as they could manage, and that further increases will impair business continuity.

Thus, the outlook for wages is unclear at present.

In light of unfolding demographic changes in Japan, and also considering the unprecedented increase in the labor force participation rate of seniors and women, another scenario regarding wage developments can be considered: as constraints on labor supply intensify, labor market conditions will tighten further and firms will raise wages more actively to recruit and retain employees.

In considering this scenario, though, a question arises as to whether many firms have an incentive that is strong enough to lead them to raise wages at the expense of profit to recruit and retain employees.

In this regard, for firms to raise wages sustainably from fiscal 2024 onward, one of the key factors will be economic activity at home and abroad remaining stable, fostering an environment conducive to

solid

corporate

profits.

Having

said

that,

given

the

considerable

uncertainties

over

the outlook for overseas economies, there is a risk that, depending on economic developments going forward, downward pressure will be exerted on wages and then on prices.

On the other hand, if changes in firms' wage- and price-setting behavior continue and the virtuous cycle between wages and prices strengthens, these -- together with the stable increase in private consumption that I described earlier -- will likely push up prices further.

## II.

Conduct of Monetary Policy

## Further Increasing the Flexibility in the Conduct of Yield Curve ControlBased on the economic and price developments I have explained so far, I would now like to present my views regarding the Bank's current conduct of monetary policy, focusing on its conduct of yield curve control in particular.At

the

Monetary

Policy

Meeting

(MPM)

held

in

October

2023,

the

Bank

decided

by

a majority vote to further increase the flexibility in the conduct of yield curve control.

Within this modification, the Bank -- while maintaining the basic framework of yield curve control by setting the short-term policy interest rate at minus 0.1 percent and the target level of 10year Japanese government bond (JGB) yields at around 0 percent -- decided to conduct yield curve control with the upper bound of 1.0 percent for 10-year JGB yields as a reference and control the yields mainly through large-scale JGB purchases and nimble market operations.Specifically, the upper bound of 1.0 percent for 10-year JGB yields prior to the modification in October was a "rigid cap," in that when the yields were at 1.0 percent, fixed-rate purchase operations for consecutive days were to be conducted to strictly contain the rise in the yields to below 1.0 percent.

However, given that developments in economies and financial markets at

home

and

abroad

are

extremely

uncertain

at

present,

the

Bank

considered

that

strictly capping 10-year JGB yields could entail large side effects.

It therefore decided to further increase

the

flexibility

in

the

conduct

of

yield

curve

control

with

a

"flexible

cap,"

which regards the upper bound of 1.0 percent for 10-year JGB yields as a reference (Chart 12).

## Increasing

the

Flexibility

in

the

Conduct

of Yield

Curve

Control

and

Basic

Stance

on Monetary PolicyThe Bank's decision in October to further increase the flexibility in the conduct of yield curve control marks the third time over the past year that it has modified such conduct, following moves of the sort in December 2022 and July 2023.

These modifications appear to have been the subject of various interpretations in financial and capital markets at home and abroad.

I would like to take this opportunity to offer my own summary of the conduct of monetary policy to date.At the July 2023 MPM, multiple numerical guidelines were attached to the conduct of yield curve control: the target level of 10-year JGB yields, the permissible fluctuation range of these yields from the target level, and the rigid upper bound for strictly capping the yields.

This resulted in a complex monetary policy scheme, which might have made understanding its intended purposes difficult.

In this context, the Bank decided in October to further increase the flexibility in the conduct of yield curve control, with the result that it has maintained the target level of 10-year JGB yields at around 0 percent and has set the upper bound of 1.0 percent for these yields as a reference.

I believe that the latest modification has allowed for a simpler scheme for conducting monetary policy.Given

that

the

conduct

of

yield

curve

control

has

been

simplified,

some

have

started

to become

skeptical

as

to

whether

the

Bank's

decision

in

October

to

further

increase

the flexibility

in

such

conduct

was

laying

the

groundwork

for

an

exit

from

monetary

easing.

However, current developments in economic activity and prices necessitate that the Bankpatiently

continue

with

monetary

easing;

I

think

that

it

is

still

too

early

for

the

Bank

to deliberate on an exit.The Bank aims to achieve the price stability target of 2 percent in a sustainable and stable manner.

This does not imply that simply achieving 2 percent in terms of recent figures for the year-on-year

rate

of

change

in

the

CPI

is

enough.

Rather,

the

underlying

economic mechanism should be capable of sufficiently guaranteeing the achievement of sustainable and stable 2 percent inflation.

To this end, it is important for the Bank to clearly confirm that the virtuous cycle between wages and prices is at work.

At present, budding developments toward such a virtuous cycle may be appearing, but it has not yet taken hold.

Therefore, the Bank should patiently continue with monetary easing for the moment.

Furthermore, as in the past statements on monetary policy, the Bank presented in its statement released immediately after the October MPM that it will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI for all items less fresh food exceeds 2 percent and stays above this target in a stable manner, and it will not hesitate to take additional easing measures if necessary.

Monetary policy measures remain well prepared to combat downside risks to economic activity and prices.

It is thus clear that the Bank's decision at the October MPM to further increase the flexibility in the conduct of yield curve control did not aim at normalizing monetary policy.To sum up, the three rounds of modifications to increase the flexibility in the conduct of yield curve

control,

including

the

one

decided

at

the

October

MPM,

did

not

intend

to

lay

the groundwork for an exit from monetary easing.

Rather, I would like to emphasize that the modifications aimed at continuing with accommodative monetary policy to achieve the price stability target.

## Informational Value of Long-Term Interest Rates Formed in Financial MarketsNext, I would like to express my thoughts on the significance of continuously increasing the flexibility in the conduct of yield curve control.Conventional monetary policy, in my understanding, involves controlling short-term policy interest

rates

and

communicating

with

financial

institutions

through

day-to-day

marketoperations,

to

form

a

perception

of

optimal

interest

rates

to

ensure

stability

in

economic activity and prices.

In this context, long-term interest rates are an indicator reflecting market participants'

outlook

for

monetary

policy

as

well

as

the

results

of

their

comprehensive assessment

of

developments

in

and

prospects

for

economic

activity

and

financial

market conditions at home and abroad.

Long-term interest rates are thus regarded as an extremely informative

indicator

in

conducting

monetary

policy.

Given

these

considerations,

the framework of yield curve control, in which a central bank controls long-term interest rates more directly, carries the disadvantage of losing the valuable information provided by such rates.

The Bank's decision to introduce yield curve control, despite this disadvantage, was based on its judgment that a framework for continuing with powerful monetary easing is necessary to achieve the price stability target of 2 percent.However, amid the ongoing elevated inflation that started during the pandemic, I believe the room for making effective use of the informational value pertaining to long-term interest rates is gradually expanding.

Thus, there seems to be a change in the balance between the policy effects of the conduct of yield curve control, in which the Bank works to stabilize long-term interest rates so that Japan's economy will make an exit from the prolonged deflationary trap, and the informational value of long-term interest rates that could be gained by leaving the formation of these rates up to the financial markets to some extent.

From the perspective of making use of the informational

value

of

long-term

interest

rates,

I

consider

it

as

highly significant that the Bank has increased the flexibility in the conduct of yield curve control as necessary.I should point out that the increased flexibility does not imply that the effects of yield curve control to hold down long-term interest rates are no longer needed.

This is because, if 10-year JGB yields rise to a level well above 1.0 percent, the resultant increase in real interest rates could undermine the effectiveness of monetary easing and significantly dampen economic activity, which could hinder the economy's transition to a virtuous cycle between wages and prices.

## Risk Management in the Conduct of Monetary PolicyRisk management is another aspect that I consider as critical in the conduct of monetary policy.To continue conducting monetary policy appropriately, the key is the Bank's baseline scenario for economic and price developments that forms the basis for policy conduct.

Having said that, drawing from my many years of experience as an economist, it is extremely difficult to always be accurate in predicting such developments.

Moreover, given the current situation overseas

and

geopolitical

risks,

even

greater

uncertainties

over

economic

and

price developments at home and abroad are anticipated.

Under such conditions, a risk management perspective becomes critical in the conduct of monetary policy.I view the Bank's modifications to date to increase the flexibility in the conduct of yield curve control

as

a

sort

of

risk

management

in

monetary

policy

conduct.

During

the

pandemic, emphasis was placed on addressing downside risks to prices, but recently, it also has become necessary to take upside risks into account.

In this context, I believe that the Bank's decision to increase the flexibility in the conduct of yield curve control has had the following two benefits.The

first

is

the

improvement

in

market

functioning.

This

applies

to

such

factors

as

the formation of a consistent relative relationship among interest rates of bonds with different maturities and the narrowing of the yield differential between JGB issues that are eligible for the Bank's outright purchases and those that are not.

If the Bank attempts to strictly contain yield increases for bonds with specific maturities through, for example, fixed-rate purchase operations for consecutive days in its conduct of yield curve control, not only will the curve see a distortion, but distortion in terms of bond prices could also emerge -- namely, as the Bank purchases specific bond issues, market bond prices for issues purchased and those for other issues with approximately the same residual maturity may end up being completely different.

With respect to such market price gaps, there is generally room in the market for arbitrage

to

operate,

and

price

distortions

among

different

bond

issues

will

be

mostly eliminated;

however,

should

yields

under

yield

curve

control

be

far

removed

from

those predicted based on actual macroeconomic conditions, the price gaps among different bond issues will not be resolved.Furthermore,

since

JGB

yields

serve

as

reference

rates

for

corporate

bond

yields,

bank lending

rates,

and

other

funding

rates,

there

is

concern

that,

if

yield

distortions

are

leftunaddressed, they will adversely affect corporate financing.

Indeed, the second half of 2022 saw the risk of some concerns of this sort coming true.

However, as the Bank's decision to increase the flexibility in the conduct of yield curve control has mostly eliminated such yield distortions, firms' funding conditions have been favorable recently.The second benefit is the effects of enhancing the sustainability of monetary easing.

As I mentioned earlier, if yields under yield curve control turn out to be far removed from those predicted based on actual macroeconomic conditions, attempts to forcibly maintain yields at that level may spark speculative moves in financial markets.

Such moves were seen in foreign exchange markets of several economies in the past during their course of abolishing fixed exchange rate systems.

Let me touch on the case of Australia's central bank.

Although the framework differs from the Bank of Japan's yield curve control, the Reserve Bank of Australia (RBA),

since

March

2020,

adopted

a

target

for

the

yield

on

the

three-year

Australian Government

bond.

However,

with

mounting

inflationary

pressure,

it

was

forced

to discontinue the yield target in November 2021, earlier than expected.The Bank's decision in October to further increase the flexibility in the conduct of yield curve control, before 10-year JGB yields actually reach the rigid upper bound set in July, may result in

raising

the

level

of

such

yields

to

some

extent.

Given

past

examples,

however,

this modification is at the same time enhancing the sustainability of monetary easing under the framework of yield curve control.Thank you.

## Economic Activity, Prices, and Monetary Policy in JapanSpeech at a Meeting with Local Leaders in EhimeNovember 29, 2023 ADACHI Seiji Member of the Policy Board Bank of JapanReal GDPChart 1

## Private Consumption

## Real Private ConsumptionConsumption Activity Index (CAI, Real)- Notes: 1.

In the left panel, figures for the CAI are based on Bank staff calculations.

The CAI figures (travel balance adjusted) exclude inbound tourism consumption and include outbound tourism consumption.2.

In the left panel, "disposable income, etc." consists of disposable income and adjustment for the change in pension entitlements.

Real values are obtained using the deflator of consumption of households.3.

In the right panel, figures are based on Bank staff calculations.

Figures in angle brackets show the weights in the CAI.4.

In the right panel, nondurable goods include goods classified as semi-durable goods in the SNA.Sources: Cabinet Office; Bank of Japan, etc.Chart 3

## Developments in Business Fixed Investment Plans- Notes: 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 is a discontinuity in the data for December 2021 due to a change in the survey sample.Source: Bank of Japan.

## Business Fixed Investment

## Indicators of Business Fixed Investment

## Capital Stock Cycles- Notes: 1.

In the left panel, volatile orders are orders for ships and those from electric power companies.2.

In the right panel, each broken line represents the combination of the rate of change in business fixed investment and the investment-capital stock ratio at a certain expected growth rate.

The figure for fiscal 2023 is that for 2023/Q2.Source: Cabinet Office.

## ExportsChart 5

## Developments in the CPI

## CPI for All Items Less Fresh Foody/y % chg.Notes: 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.Chart 7

## Inflation Expectations- Notes: 1.

Figures for economists are the forecasts of forecasters surveyed for the ESP Forecast .2.

Figures for households are from the Opinion Survey on the General Public's Views and Behavior , estimated using the modified Carlson-Parkin method for a 5-choice question.3.

Figures for firms show the inflation outlook of enterprises for general prices (all industries and enterprises, average) in the Tankan .Sources: Japan Center for Economic Research (JCER), ESP Forecast ; QUICK, QUICK Monthly Market Survey (Bonds) ; Bank of Japan.Chart 9 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.

## Developments in Wages and Prices- Notes: 1.

The CPI figures are Bank staff estimates and exclude the effects of the consumption tax hikes, policies concerning the provision of free education, and travel subsidy programs.

Figures for nominal wages are for establishments with 30 or more employees up through fiscal 1990, and with 5 or more employees from fiscal 1991 onward.2.

For fiscal 2023, the figure for the CPI (less fresh food) is the April-October average, while that for nominal wage is the April-September average.- Sources: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications.

## Base Pay IncreasesNote: Figures show actual base pay increases.

Figures from fiscal 1992 to 2013 are those published by the Central Labour Relations Commission, while figures from fiscal 2014 to 2023 are those released by the Japanese Trade Union Confederation (Rengo).

Sources: Central Labour Relations Commission; Rengo.Chart 11

## Further Increasing the Flexibility in the Conduct of Yield Curve Control (YCC)-  The Bank will patiently continue with monetary easing under Yield Curve Control (the short-term policy interest rate: -0.1%, the long-term interest rate: around 0%), aiming to support Japan's economic activity and thereby facilitate a favorable environment for wage increases.-  Toward the end of the projection period, the Bank expects that underlying CPI inflation will increase gradually toward achieving the price stability target of 2 percent, while this increase needs to be accompanied by an intensified virtuous cycle between wages and prices.-  With extremely high uncertainties surrounding economies and financial markets at home and abroad, the Bank judges that it is appropriate to increase the flexibility in the conduct of yield curve control, so that long-term interest rates will be formed smoothly in financial markets in response to future developments.

## 

## 

## y/y % chg.|

| Fiscal 2023

| Fiscal 2023

| Fiscal 2024

| Fiscal 2024

| Fiscal 2025

| Fiscal 2025

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

|

| Forecasts made in July |

| Forecasts made in July |

| Forecasts made in July || CPI (all items less fresh food)

| +2.8

| +2.5

| +2.8

| +1.9

| +1.7

| +1.6

|| (Reference) CPI (all items less fresh food and energy) | +3.8

| +3.2

| +1.9

| +1.7

| +1.9

| +1.8

|Note: Figures indicate the medians of the Policy Board members' forecasts (point estimates).