Goushi Kataoka: Economic activity, prices, and monetary policy in Japan
Central bank: boj | Type: speech | Date: 2021-03-03

March

3,

2021Bank

of

Japan

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

## KATAOKA GoushiMember of the Policy Board(English translation based on the Japanese original)

## I.

Economic Activity and Prices

## A.

Overseas EconomiesI would like to start my speech by looking at developments in overseas economies.In

2020,

developments

in

the

global

economy

took

an

unexpected

turn

after

the

novel coronavirus

(COVID-19)

began

to

spread

worldwide.

Chart

1

shows

that

the

number

of confirmed new cases has generally stayed at a high level, although having declined after a resurgence since last autumn, mainly in advanced economies such as the United States and the euro area.

Under these circumstances, the global economy has picked up on the whole, although the impact of the resurgence of COVID-19 has been seen in part.

The pace of the pick-up, however, has been moderate.

While production activity and the trade volume of the manufacturing

industry

continue

to

recover,

downward

pressure

has

been

exerted

on

the services industry, which is heavily affected by COVID-19.Chart 1

Daily Confirmed New Cases of COVID-19Notes: 1.

Figures are 7-day backward moving averages.2.

Figures

for

the

United

States

are

based

on

data

from

the

Centers

for

Disease

Control

and Prevention (CDC), while those for the euro area and "Other" are based on data from the World Health Organization (WHO).

For China, there is a discontinuity in the data for February 17 to 19 of 2020 due to the difference in the basis compared with other periods, and figures for March 16 onward are based on data released by the Chinese government (those before March 16 are based on WHO data).Source: CEIC.As for the outlook, for the time being the pace of recovery is expected to be moderate on the whole.

It is also likely to vary across countries and regions depending on the severity of the spread of COVID-19 and the impact of public health measures, as well as of macroeconomic policies taken by the respective governments and central banks.Chart 2 shows the January 2021 World Economic Outlook (WEO) Update released by the International Monetary Fund (IMF) as compared with the Update released a year ago, before the worldwide spread of COVID-19.

Looking at developments by country and region, the Chinese

economy

has

achieved

an

expansion

of

domestic

demand

through

increases

in employment and income while successfully capturing external demand.

China's real GDP growth rate has already surpassed its pre-pandemic level, and is expected to grow roughly in line with the January 2020 WEO projection.

This is likely to be attributed to China's early containment of COVID-19 and the government's effective economic measures.

In contrast, advanced economies as well as emerging market and developing economies other than China have seen a delay in economic recovery, and the real GDP growth rates of these economies are expected to return to pre-pandemic levels only in the second half of 2021.

Moreover, there are

various

risk

factors

with

respect

to

the

outlook

for

the

global

economy,

such

as developments regarding COVID-19, geopolitical factors, and climate change issues.

Thus, accompanying downside risks continue to warrant particular attention.Chart 2

World Economic Outlook (IMF)Note: WEO = World Economic Outlook; AEs = advanced economies; EMDEs = emerging market and developing economies excluding China.Source: IMF, "World Economic Outlook Update (January 2020, January 2021)."

## B.

Japan's EconomyNext, I would like to turn to Japan's overall economic trends, starting with real GDP growth rates.In Chart 3, the line graph shows developments in the real GDP growth rate and the bar graph shows the contribution of demand components, such as consumption and investment, to the growth rate.

The first preliminary estimate for the October-December quarter of 2020 marked a real GDP growth rate of 3.0 percent on a quarter-on-quarter basis and 12.7 percent on an annualized basis.

The economy registered positive growth for the second consecutive quarter, with

private

consumption,

exports,

business

fixed

investment,

and

public

demand

all contributing to the positive growth.

Nevertheless, the annual real GDP growth rate for 2020 was minus 4.8 percent, demonstrating that economic recovery from the plunge for the AprilJune quarter was still weak.Chart 3

Real GDP Growth Rate and Breakdown by Demand ComponentSource: Cabinet Office, "Quarterly Estimates of GDP for October-December 2020 (First Preliminary Estimates)."Chart 4 shows the outlook for Japan's economy.

As presented in the January 2021 Outlook for Economic Activity and Prices (Outlook Report), the medians of the Bank of Japan Policy Board members' forecasts for real GDP growth rates are minus 5.6 percent for fiscal 2020, 3.9 percent for fiscal 2021, and 1.8 percent for fiscal 2022.

Japan's economy is likely to follow an

improving trend

from the second half

of 2020, with the

impact

of COVID-19 waning gradually, but the pace is expected to be only moderate while vigilance against COVID-19 continues.

Thereafter,

as

the

impact

subsides

globally,

the

economy

is

projected

to

keep improving further, with overseas economies returning to a steady growth path.Chart 4

Outlook for Economic Activity and Pricesmedians of Policy Board members' forecasts, y/y % chg.|

|

Real GDP |

CPI (all items less fresh food) ||-------------|------------|-----------------------------------|| Fiscal 2020 |

-5.6 |

-0.5 || Fiscal 2021 |

3.9 |

0.5 || Fiscal 2022 |

1.8 |

0.7 |Source: Bank of Japan, "Outlook for Economic Activity and Prices (January 2021)."Having said that, risks to the outlook seem to be skewed to the downside, mainly due to the impact of COVID-19.

In particular, the future course of COVID-19 at home and abroad as well as accompanying downside risks to economic activity and prices continue to warrant close attention.I

would

now

like

to

examine

developments

in

major

GDP

components

such

as

private consumption, business fixed investment, and exports.Let me start with private consumption.

As Chart 5 shows, from March through May 2020, the period when COVID-19 started to spread nationwide, there was a marked decline in real consumption -- mainly services consumption, such as tourism, accommodation, eating and drinking, and recreation.

Thereafter, while goods consumption has recovered to the level seen at the start of 2020, services consumption has been slow to pick up, due in part to the impact of the resurgence of COVID-19.

Given uncertainty as to when the pandemic will subside, consumption will likely remain weak for some time.Chart 5

Real ConsumptionSource: Bank of Japan, "Consumption Activity Index."Let us take a closer look at developments in the employment situation, which underpin private consumption.

As presented in the left panel of Chart 6, the unemployment rate, after having climbed to 3.1 percent, improved slightly to 2.9 percent; however, the rate remains at a high level compared with that prior to the COVID-19 outbreak.

To examine in more detail changes in the number of employed persons, Chart 7 compares the number of employed persons by gender and age group between the average for the 2013-2019 period and the total for 2020, with the latter reflecting the impact of COVID-19.

The chart reveals that, for each age group, in

2020

the

number

of

employed

persons

started

to

trend

downward.

This

is

primarily attributed

to

the

decrease

in

the

number

of

non-regular

employees,

with

the

younger generations and women exhibiting significant changes.

Yet, for women aged 25-64, there was an

increase

in

the

number

of

regular

employees,

despite

the

extent

of

the

decrease

in

the number of non-regular employees.

As can be seen in the right panel of Chart 6, the year-onyear rate of change in nominal wages has been negative since April 2020.

In particular, it saw a

larger

decline

again

at

the

end

of

2020,

primarily

reflecting

a

decrease

in

special

cash earnings; how this will affect future consumption is a matter of concern.

## Chart 6

Labor Market ConditionsUnemployment Rate and Labor Force Participation Rate

## Nominal WagesSource: Ministry of Internal Affairs and Communications, "Labour Force Survey (Basic Tabulation)."Note: Figures are based on continuing observations following the sample revisions of the Monthly Labour Survey .Source: Ministry of Health, Labour and Welfare, "Monthly Labour Survey."

## Chart 7

Changes in Number of Employed PersonsMaleFemaleNote: Figures show the change in the annual average number of employed persons over the year.

Figures for "Past average" are averages for the period from 2013 through 2019.

Figures for "Other workers" include self-employed workers and executives of corporations.Source: Ministry of Internal Affairs and Communications, "Labour Force Survey (Detailed Tabulation)."I will now shift to business fixed investment.

As shown in Chart 8, although the business fixed investment ratio, which represents the share of the amount outstanding of business fixed investment to nominal GDP, has recently been picking up somewhat, the level remains below that observed until 2019.

Firms' perception of their production capacity, as indicated by the production capacity diffusion index (DI) in the Bank's Tankan (Short-Term Economic Survey of Enterprises in Japan), has shifted toward being significantly "excessive," in line with the spread of COVID-19.

Looking at the business fixed investment plan in the December 2020 Tankan , as shown in Chart 9, the investment plans of manufacturing firms turned negative on a year-on-year basis for fiscal 2020.

The plans of nonmanufacturing firms also fell further into

negative

territory.

These

developments

suggest

that

business

fixed

investment

will remain weak for the time being.

## Chart 8

Business Fixed Investment RatioNote: Figures for "Business fixed investment ratio" represent the ratio of nominal private nonresidential investment to nominal GDP.

Figures for "Production capacity DI" are those for large enterprises of all industries.Sources: Cabinet Office, "Quarterly Estimates of GDP for October-December 2020 (First Preliminary Estimates)"; Bank of Japan, " Tankan. "Chart 9

Developments in Business Fixed Investment PlansNote:

Figures

are

for

all

enterprises,

including

software

and

R&D

investments

and

excluding

land purchasing expenses.Source: Bank of Japan, " Tankan. "Lastly, let me turn to exports.

As can be seen in Chart 10, real exports saw a significant drop in the April-June quarter of 2020 when the impact of COVID-19 intensified.

This drop is evident in exports to Europe and the United States, and in exports of automobile-related goods, IT-related goods, and capital goods.

Thereafter, exports saw an upturn, and as of the end of 2020, generally recovered to the level posted before the impact of COVID-19 grew most intense.

IT-related exports have since continued the firm recovery trend into 2021 to date.

Regarding the outlook, exports are likely to remain on an increasing trend, particularly for IT-related goods and capital goods, on the premise that recovery in the Chinese and U.S. economies will continue.

## Chart 10

Real ExportsSource: Bank of Japan, "Developments in Real Exports and Real Imports."

## C.

Recent Developments and Outlook for PricesNext, I will move on to price developments.The observed year-on-year rate of change in the consumer price index (CPI) for January 2021 was minus 0.6 percent for all items less fresh food and 0.1 percent for all items less fresh food and energy, as seen in the left panel of Chart 11.

The right panel shows developments in the indicators for capturing the underlying trend in the CPI.

It shows that the underlying inflation trend has been declining moderately, with the trimmed mean decreasing further into negative territory and other measures of underlying inflation showing smaller growth.

## Chart 11

Consumer PricesNotes: 1.

In the left panel, figures are adjusted for consumption tax hikes and the introduction of free preschool education.

In addition to the above, figures for "CPI estimates (less fresh food, energy, and policy effects)" also exclude the effects of policies concerning the provision of free higher education and the "Go To Travel" campaign.2.

In the right panel, "Diffusion index" is defined as the share of increasing items minus that of decreasing items.Sources: Ministry of Internal Affairs and Communications, "Consumer Price Index"; Bank of Japan, "Measures of Underlying Inflation."Turning to the outlook for prices, according to the medians of the Policy Board members' forecasts presented in the January 2021 Outlook Report, the year-on-year rate of change in the CPI (all items less fresh food) is expected to increase gradually from minus 0.5 percent for fiscal 2020 to 0.5 percent for fiscal 2021, and to 0.7 percent for fiscal 2022, as shown in Chart 4.

If we look at the output gap and medium- to long-term inflation expectations -- both of which affect the underlying trend in prices -- the output gap, shown in the left panel of Chart

12,

continues

to

indicate

a

significant

excess

supply,

although

the

gap

itself

had narrowed after having recorded an excess supply of over 4 percent in the April-June quarter of 2020.

Inflation expectations have declined since the end of 2019, as confirmed in the right panel of the chart.

Bearing in mind that the pace of economic recovery is likely to be modest, with uncertainty over when the spread of COVID-19 will subside, it is difficult to project at this stage that the inflation rate will gather momentum toward approaching the 2 percent pricestability

target,

with

the

output

gap

shifting

to

excess

demand

and

inflation

expectations rising. 1Chart 12

Output Gap and Inflation ExpectationsOutput GapSynthetic Indicators of Inflation ExpectationsNote: In the right panel, inflation expectations of firms are taken from the Tankan (output prices DI), and those of households are taken from the Opinion Survey on the General Public's Views and Behavior (average of responses for annual inflation expectations between minus 5 percent and plus 5 percent).

For experts' inflation expectations, the QUICK Survey , the Consensus Forecasts , and the inflation swap rate are used.Sources: Consensus Economics Inc., "Consensus Forecasts"; QUICK Corp., "QUICK Monthly Market Survey "; Bloomberg; Bank of Japan.

## II.

Conduct of Monetary PolicyLet me first outline the Bank's current monetary policy, based on the outlook for economic activity and prices that I have described.

I would then like to express my opinion about the Bank's monetary policy conduct.1 As for the outlook, some factors could put upward pressure on prices.

Real disposable income and savings

rates

have

increased

significantly

on

the

back

of

the

impact

of

COVID-19

and

the government's economic measures.

When the pandemic subsides, savings rates are likely to return to pre-pandemic levels.

Accordingly, the inflation rate may rise if consumption and investment, both of which have been constrained so far, see an upsurge.

## A.

Outline of the Current Monetary PolicyThe Bank conducts monetary policy under the framework of Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control, aiming to achieve the 2 percent price stability target.

This current framework consists of three measures: yield curve control, the purchase of risk assets, and the Bank's public commitment regarding the future conduct of monetary policy.In addition to these measures, the Bank has taken the following three actions to address the pandemic

since

March

2020,

as

shown

in

Chart

13:

(1)

the

Special

Program

to

Support Financing in Response to the Novel Coronavirus (COVID-19) to provide support mainly for corporate

financing;

(2)

an

ample

and

flexible

provision

of

funds

to

ensure

stability

in financial markets; and (3) active purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) to lower the risk premia in asset markets.

I hold the view that these actions taken in response to COVID-19 have thus far contained the disturbance in the financial and capital markets and produced some positive effects on financing, mainly of firms.

## Chart 13

Actions Taken by the Bank to Address COVID-19

## (1) Supporting Corporate Financing

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

## (2) Stabilizing Financial Markets

## Ample and Flexible Provision of Yen and Foreign Currency Funds- Further active purchases of JGBs and T-Bills- Enhancement of the U.S. Dollar Funds-Supplying Operations

## (3) Actively Purchasing ETFs and J-REITs

## ETFs: annual pace of about 6 tril. yen-  annual pace with the upper limit of about 12 tril. yen for the time being- J-REITs: annual pace of about 90 bil. yen-  annual pace with the upper limit of about 180 bil. yen for the time beingHowever, with the moderate pace of economic improvement and significant downside risks, financing, mainly of firms, is likely to remain under stress for the time being.

To address this situation, the Bank decided at the December 2020 Monetary Policy Meeting (MPM) to extend the duration of the Special Program by six months until the end of September 2021, thereby continuing to support financing, mainly of firms.The Bank will continue to closely monitor the impact of COVID-19 and not hesitate to take additional

easing

measures

--

including

further

extension

of

the

Special

Program

--

if necessary.

Moreover, as a forward-looking approach, the Bank has decided to conduct an assessment for further effective and sustainable monetary easing, with a view to supporting the

economy

and

thereby

achieving

the

price

stability

target

of

2

percent.

Based

on

the premise that the Bank will maintain the current framework of QQE with Yield Curve Control, it will assess various measures and make public its findings, likely at the March 2021 MPM.

## B.

My View on the Conduct of Monetary PolicyI voted for the Bank to take the aforementioned actions in response to COVID-19, but I have continued to dissent from the majority decision on the following two measures: yield curve control and the Bank's commitment regarding the future conduct of monetary policy.

This was based on my view that it is necessary not only to support financing and provide liquidity but also to implement measures to contain any downward pressure that may be exerted on prices and thereby support Japan's economy to return to a powerful growth path.I would first like to present my view on the transmission channels through which changes in the number of confirmed cases of COVID-19 and subsequent public health measures affect economic activity and prices.

A surge in the number of COVID-19 cases, for example, will lead

to

the

tightening

of

public

health

measures.

This

will

in

turn

not

only

curb

private consumption directly but could also dampen private consumption and firms' fixed investment indirectly,

through

deterioration

in

consumer

sentiment

and

increased

uncertainty

over economic and financial

conditions.

These developments will

exert downward pressure on prices through deterioration in the output gap toward excess supply.Judging from a model that assumes the aforementioned transmission channels and estimating future price developments based on Japan's situation regarding COVID-19 to date, the risk of prices becoming stagnant has increased further.

If the timing of a turnaround in the output gap toward excess demand is delayed due to the resurgence of COVID-19, prices are expected to remain under downward pressure for a longer period, compared with a scenario in which there is no resurgence.

Moreover, given that the formation of inflation expectations is highly adaptive in Japan, the longer the rate of inflation remains stagnant, the less likely inflation expectations are to rise.

As I have explained, if there are repeated resurgences of COVID-19, prices are expected to remain stagnant for a protracted period, with both the output gap and inflation expectations being pushed down.Based on this recognition, I consider that the Bank needs to strengthen monetary easing in terms of yield curve control and its commitment regarding the future conduct of monetary policy.

As for yield curve control, with a view to encouraging firms to make investment for growth, such as through active business fixed investment for the post-COVID-19 era, it is appropriate for the Bank to lower short- and long-term interest rates by actively purchasing Japanese government bonds (JGBs).

I believe that supporting investment for growth through monetary easing does not necessarily involve a trade-off with the spread of COVID-19.

In terms of the Bank's commitment regarding the future conduct of monetary policy, in order to avoid Japan's economy returning to deflation, further coordination of fiscal and monetary policy is necessary, and it is appropriate for the Bank to revise the forward guidance for the policy rates to make such guidance more powerful by relating it to the price stability target, so as to enable the Bank to take actions based on concrete conditions.As for

the

assessment

for

further

effective

and

sustainable

monetary

easing,

I

consider

it necessary

first

and

foremost

to

thoroughly

analyze

and

examine

the

effects

on

economic activity and prices in terms of each measure -- namely, yield curve control, the purchase of risk assets, forward guidance for policy rates, and the inflation-overshooting commitment.

In addition, the Bank needs to take into account the current situation, in which it is difficult to envision the path for achieving the price stability target, with economic activity and prices remaining under downward pressure for a prolonged period due to the impact of the spread of COVID-19.

On this basis, I believe that it is necessary for the Bank to carefully assess thecurrent

measures,

and

then,

together

with

the

findings

of

such

assessment,

consider

and explain its future strategies.

As a member of the Policy Board of the Bank, I will continue to do my utmost to achieve and maintain the price stability target.Thank you.