Asahi Noguchi: Transformation of the global economy and developments in monetary policy
Central bank: boj | Type: speech | Date: 2025-09-29

Bank

of

JapanSeptember 29, 2025

## Transformation of the Global Economy and Developments in Monetary PolicySpeech at a Meeting Held by the Sapporo Chamber of Commerce and Industry

## NOGUCHI AsahiMember of the Policy Board

## IntroductionIt is my pleasure to have the opportunity to speak at this meeting.

In my speech today, I would like to offer my overview of how the focus of monetary policy of central banks, including the Bank of Japan, has changed to date in light of the global economic environment, which has undergone a major transformation in the wake of the Global Financial Crisis (GFC) and the COVID-19 pandemic.

Since April 2021, I have been involved in monetary policy conduct as a Policy Board member of the Bank.

Before that, as an academic researcher, I was engaged in analyzing monetary policy and other macroeconomic policy measures.

Today, I will talk about developments in monetary policy from the past and into the future by trying to get back to a scholarly, somewhat holistic point of view.Triggered mainly by the GFC from

2008

and

the COVID-19

pandemic from

2020, the monetary policy of major central banks shifted dramatically from conventional policy, in which the central bank guides the interest rate as a policy tool, to unconventional policy, such as quantitative easing (QE).

To come right to the point, the changes brought about by this policy shift to a considerable extent have been irreversible.

Although many major central banks have returned from

unconventional

policy to

conventional

policy,

their policy framework is very different from what it looked like before the GFC.

That is, these central banks

are now conducting

monetary

policy in

the

context

of reserve balances that are significantly larger than before the GFC.The crucial thing is that, despite such changes in policy measures, the established role of a central bank -- which is to ensure sustainable price stability by guiding the policy interest rate -- is not undermined.

In response to the globally high inflation in the wake of the pandemic, many central banks in the United States and Europe discontinued unconventional policy and actively raised their policy interest rates, successfully containing inflation on the whole.

This suggests that, in the end, adjusting policy interest rates is an effective tool in maintaining price stability, and that central banks' large reserve balances do not impede this process.Turning to the Bank of Japan, at the March 2024 Monetary Policy Meeting, the Bank changed its unconventional policy -- namely, the framework of Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control and the negative interest rate policy -- and returnedto conventional policy, in which it guides the policy interest rate as a primary policy tool.

The Bank made this decision because it judged at that point that it was now within sight that the price stability target of 2 percent would be achieved in a sustainable and stable manner.

The Bank also raised the policy interest rate in July 2024 and again in January 2025, judging that the likelihood of achieving the target was increasing.For a long time, prices and wages barely rose in Japan despite improvements in economic conditions.

However,

the

impact

of

global

inflation following

the pandemic

spread throughout the country in the form of higher import prices, causing Japan's economy to be struck with the kind of high inflation it had not experienced for a prolonged period.

As a result, wages -- which tended to decline and not rise after the collapse of the bubble economy in the early

1990s -- have recorded their highest growth since the bubble period.

This

is partly because, while labor market conditions had begun to tighten due to labor shortages before the pandemic, they have now grown tighter across a wider range of industries following the pandemic.

These developments indicate that Japan's economy is transitioning from a very unique

economy with a "zero

norm" --which

assumes

that both prices

and

wages are unchanged -- back to a normal, growing economy -- where both prices and wages continue to rise in interaction with each other.Another change in monetary policy was that the Bank in July 2024 decided on a guideline for reducing its purchases of Japanese government bonds (JGBs) for the period until March 2026.

Subsequently, the Bank in June 2025 decided on a guideline for the period until March 2027.

This

means that the Bank will slowly reduce its balance sheet, which expanded with the conduct of unconventional policy, to restore the functioning of the JGB market.

I personally think the Bank should take sufficient time in reducing its JGB purchases to minimize any disruptive impact on the market.

Going slowly is possible because, as I mentioned earlier, the large size of the balance sheet will not hinder the conduct of monetary policy aimed at price stability.

Rather, under the current policy framework, the smooth conduct of monetary policy necessitates that the Bank's balance sheet remain at a decent size.Especially since April 2025, the global economy has faced large downside risks arising from U.S. tariff policy.

It is not yet clear at what point and to what extent these risks will be resolved.On the other hand, various economic indicators for Japan show steady progress in achieving the 2 percent price stability target.

This suggests that the need to adjust the policy interest rate is increasing more than ever.

Put differently, in terms of making policy decisions, upside risks to prices and economic activity in Japan are currently outweighing the downside risks.

In this sense, it can be said that monetary policy in Japan is now entering a phase in which a careful assessment of the situation is necessary.

## I.

Developments in the Global Economy and Macroeconomic Policy Since the 2000s A.

From Economic Globalization to DeglobalizationIn the early 2000s, the global economy entered an era marked by widespread globalization, in

the

sense

of

the

expansion

of

cross-border

economic

activity.

This

trend

was

driven particularly

by

emerging

economies

such as

China, India,

Russia, and

Brazil.

These

four countries came to be known as the BRICs after an acronym coined by Goldman Sachs in a 2001

report. 1 Moreover,

Europe

saw

the

introduction

of

a

single

currency,

the

euro,

in January

1999,

with

banknotes

and

coins

entering

circulation

in

January

2002.

This represented deeper economic integration among European countries.A major catalyst for reversing this trend was the GFC, which began with the collapse of the U.S. investment bank Lehman Brothers in September 2008.

The underlying cause was the U.S. subprime mortgage problem, triggered by a reversal of credit for mortgages extended to low-income borrowers,

which

had

expanded

unsustainably.

The

resulting

financial

shock spread

to

other

countries,

setting

in

motion

what

has

been

called

a

"once-in-a-century" economic crisis comparable only to the Great Depression.Countries around the world subsequently experienced rapid economic contraction, and their public finances were hit hard.

This is because an economic downturn typically reduces tax revenues while driving up government spending.

In 2009, concerns surfaced about Greece, which had long-standing fiscal

problems.

These

concerns

soon

spread

to

other

European countries, and by 2010 had grown into what became known as the European sovereign debt1 Jim O'Neill, "Building Better Global Economic BRICs," Goldman Sachs Global Economics Paper , no.

66

(November

2001), 

The

five

euro

area

countries

that

were

seen

as

facing

a

particularly

severe

fiscal situation were Portugal, Italy, Greece, Spain, and Ireland.

The severity of the crisis was such that, at one point, it was feared that the euro might collapse.As I will

discuss later,

governments and central banks across the world responded to the financial and economic crisis that began in 2008 with a variety of policy measures.

As a result, some economies began to gradually recover from the 2010s onward.

The pace of recovery was extremely slow, however, and the global economy as a whole increasingly appeared to be in what former U.S. Treasury Secretary Lawrence Summers termed "secular stagnation." 2Against this background, the process of globalization began to reverse, and the trend toward deglobalization gradually gathered strength.

In June 2016, the United Kingdom in a national referendum voted to leave the European Union.

In the United States, concerns about the threat posed by China gained momentum and, in October 2018, then-Vice President Mike Pence delivered a speech marking the onset of what has since come to be called the "new Cold War" between the United States and China.

Most recently, the second Trump administration, which took

office

in

January

2025,

has

introduced a new tariff

policy that poses a fundamental challenge to the postwar international trade system advocating the expansion of free trade.

## B.

Macroeconomic Policy in the Wake of the GFCAmid

these

developments

in

the

global

economy,

the

most

significant

watershed

in

the evolution of macroeconomic policy, including monetary policy, was the GFC that began in 2008.

Prior to this crisis, the global economy -- or more specifically, advanced economies from the mid-1980s to the early 2000s -- experienced a period of relative stability in both output

and

prices,

a

period

known

as

the

Great

Moderation. 3 Regarding

the

conduct

of macroeconomic

policy,

the

established

approach

had

been

that

the

role

of

ensuring macroeconomic

stability --such

as

stability

in

prices,

employment,

and

income --fell primarily to conventional monetary policy, while the primary role of fiscal policy was public2 View Summers' recorded remarks at a panel discussion at the Fourteenth Jacques Polak Annual Research Conference held by the International Monetary Fund in Washington D.C., November 8, 2013, 1:32:54, Ben

Bernanke,

"The

Great

Moderation,"

remarks

at

the

meetings

of

the Eastern

Economic Association in Washington D.C., February 20, 2004.goods provision and income redistribution.

However, the "once-in-a-century" shock of the GFC forced governments and central banks to adopt entirely new approaches.One such approach was the full-fledged shift to unconventional monetary policy.

Until then, monetary policy had relied solely on guiding the money market rate as the policy interest rate.

That is, to realize stable growth in prices and employment, central banks lowered their policy interest

rates

when

deterioration

in economic

conditions led

to

a

decline

in

prices

and employment, and raised policy interest rates in the opposite case.

However, confronted by rapid economic contraction following the GFC, many central banks were forced to lower their policy interest rates to around 0 percent (Chart 1).

These central banks then embarked on a new dimension of monetary policy by expanding their purchases of various assets, including long-term government bonds.

This unconventional monetary policy measure of making largescale asset purchases is generally known as quantitative easing or QE.

Incidentally, the Bank of

Japan

pioneered

this

QE

policy and

implemented

it from

2001

to

2006

to

overcome deflation in the country.The primary objective of unconventional monetary policy, typified by QE, was to purchase more assets and thereby apply an easing effect to overall financial conditions, including real long-term interest rates.

Furthermore, some central banks -- including the Bank of Japan -introduced a negative interest rate policy, under which a negative interest rate is applied to current

account

balances

held

by

financial

institutions

at

a

central

bank, and yield

curve control, in which they controlled not only short-term but also longer-term interest rates.

It can be said that, similar to QE, these policy measures were aimed at an enhanced easing of overall financial conditions.

In this regard, unconventional monetary policy differs from conventional monetary policy, because the latter focuses on the effects generated through the transmission of interest rate changes in the money market to other financial markets.The second distinctive approach of macroeconomic policy in the wake of the GFC was that, alongside unconventional monetary policy, many countries and regions once again began implementing fiscal policy as an economic stimulus measure.

While there were exceptions, such

as

Japan

in

the

1990s,

fiscal policy

had

long

been

largely

absent

from

the

global macroeconomic toolkit.

Immediately after the

GFC, however,

many

countries introducedfiscal

stimulus

measures,

such

as

the American

Recovery

and

Reinvestment Act

(2009) implemented by the Obama administration in the United States.

This marked the return of fiscal policy as an integral part of macroeconomic policy.However, this coordination of fiscal and monetary policy aimed at overcoming economic stagnation was quite short-lived.

The reason for this is that, after fiscal concerns arose in Greece in 2009 and escalated into the European sovereign debt crisis, many countries began to turn to austerity measures out of fear of further deterioration in their fiscal situation.

The upshot was that, despite patient monetary easing by central banks, escaping from low growth and

low

inflation

proved

difficult,

and

extremely

low

nominal

interest

rates

became entrenched in many countries and regions.

In Europe, for instance, not only policy interest rates but also long-term interest rates were occasionally negative in the second half of the 2010s

(Chart

2).

This

was

the

clearest

manifestation

of

what

Summers

termed

"secular stagnation." In the end, the resumption of macroeconomic coordination had to wait until the onset of the COVID-19 pandemic.

## C.

Global Inflation Stemming from the COVID-19 PandemicThe pandemic that first broke out in 2020 utterly transformed secular stagnation in the global economy.

Initially, the pandemic triggered a sharp decline in production activity -- the largest such decline since the GFC.

Conditions then reversed, however, with rapid inflation emerging across countries and regions.

In response, many central banks in the United States and Europe began implementing strong monetary tightening measures in 2022, with a view to curbing high inflation and thereby achieving their inflation targets.

From around mid-2024, given their progress in bringing inflation down toward the target rate, these central banks gradually lowered policy interest rates to appropriate levels.When the pandemic started to spread, governments first imposed restrictions on economic activity

to

contain

infections.

Income

and

consumption

in

each

country

decreased

and inflation

slowed

as

a

result,

since

many

of

the

infection

prevention

measures

not

only intensified supply-side constraints but also reduced demand.

As economic activity began to resume in spring 2021, however, prices started to rise in many countries and regions.

Two factors

were

at

work

here:

supply-side

constraints

and

excess

savings.

Specifically,

thecontraction in economic activity brought about by the pandemic created supply bottlenecks in different places through disruptions in supply chains and logistics networks; however, since these bottlenecks took time to resolve, supply-side constraints materialized once economic activity

resumed.

In

addition,

curbed

consumption

and

public

support

led

households

to accumulate savings during the pandemic, and these excess savings fueled a surge in pent-up demand after the resumption of economic activity.

This surge in demand in the absence of a normal supply capacity inevitably drove a sharp acceleration in inflation worldwide.Many experts and policymakers initially regarded high inflation in the post-pandemic period as

merely

a

temporary

phenomenon

that

would

subside

naturally

once

pent-up

demand dissipated and supply-side constraints waned.

In reality, subsequent developments unfolded quite differently.

From 2021 to 2022, consumer price inflation reached 9 percent in the United States, 11 percent in the United Kingdom, and 10 percent in the euro area.

Many countries and regions faced their highest level of inflation since the early 1980s (Chart 3).Essentially, the reason inflation was this high was excess demand at the macroeconomic level --that

is,

aggregate

demand

exceeded

aggregate

supply

at

full

employment.

This

was particularly evident in the U.S. economy.

In the United States, the unemployment rate, which had risen sharply during the pandemic, started to decline in 2021, whereas the job vacancy rate soared.

As a result, the ratio of job openings to unemployment reached roughly 2 (Chart 4).

The fact that the average of this ratio since the 2000s has been around 0.7 implies that such tight labor market conditions had hardly ever been seen in the United States.

Firms facing

job

vacancies

typically

try

to

secure

a

workforce

by

raising

wages.

In

the

postpandemic period, however, wage hikes instead set off an upswell in employees leaving their jobs in search of higher wages, a phenomenon known as the Great Resignation.

Labor market conditions in the United States tightened further in consequence, propelling wage growth to its highest rate since the early 1980s, when prices and wages were locked in an upward spiral (Chart 5).Compared to the United States, inflation in Europe was less demand-driven and more cost push-driven.

Inflation was mainly caused by rising energy prices, partly reflecting the fact that Russia's invasion of Ukraine in February 2022 brought about an energy supply shortagein

neighboring

Europe.

That

said,

even

in

Europe,

excess

demand

led

to

a

significant tightening of labor market conditions.

Many

European

countries reached near-full employment by 2022 and,

in

some

countries,

there

were

concerns

about

excessive

wage increases.

In

the

United

Kingdom,

for

example,

wage

growth

at

one

point

marked

a historically

high

level

of

over

7

percent;

services

prices,

which

are

susceptible

to

wage increases, rose in turn, leading to persistent high inflation that has lasted to the present day (Chart 6).

## II.

Japan's Economy Making Progress in Overcoming the Zero Norm A.

Exiting from Prolonged Deflation and Zero InflationThe global economy first shifted from secular stagnation, in which the economy experienced low inflation and low interest rates in the wake of the GFC, to a temporary deceleration phase following the COVID-19 pandemic, and then to what experts call a high-pressure economy, in which high inflation rates and low unemployment rates coexist. 4 This shift in the global economic

environment

unquestionably

affected

Japan's

economy.

Japan,

ahead

of

other economies, had already fallen into secular stagnation in the 1990s, and the consequent rigidity in its economic structure developed into a semi-permanent condition, reflected in people's beliefs and in the social norm.

However, intense pressure from global inflation ushered in by the pandemic shattered such beliefs and upset the norm, in the sense that it eliminated the persistent rigidity in prices and wages, although this was accompanied by the pain of inflation.Japan's economy faltered for a significantly protracted period after the collapse of the bubble economy in the early 1990s.

In particular, following the financial crisis in the second half of the 1990s, the economy fell into severe deflation where unemployment rates surged and both prices and wages continued to decline.

In the first half of the 2000s, the economy picked up somewhat, buoyed in part by the effects of the U.S. subprime bubble, but deflation was not dispelled.

In the wake of the GFC in 2008, the economy once again experienced a serious surge in unemployment rates and a decline in prices and wages.

The Bank started its large-4 Arthur M.

Okun, "Upward Mobility in a High-Pressure Economy," Brookings Papers on Economic Activit y,

no.1, The

Johns

Hopkins University

Press

(1973),

and

Janet

L.

Yellen,

"Macroeconomic Research after the Crisis," remarks at the 60th annual economic conference sponsored by the Federal Reserve Bank of Boston titled "The Elusive 'Great' Recovery: Causes and Implications for Future Business Cycle Dynamics," October 14, 2016.scale

monetary easing policy in

2013,

against the

background

of

"Abenomics"

under

the second

administration

of then-Prime

Minister

Abe.

Aided

by

the

tailwind

of

moderate recovery in the global economy, this easing policy contributed significantly to improvement in

Japan's economic conditions, especially the recovery in employment (Chart 7).

Japan's economy thereby managed to dispel deflation, in the sense of a sustained decline in prices.

Nevertheless, the policy target of "2 percent in terms of the year-on-year rate of change in the consumer price index," as spelled out in the joint statement issued by the government and the Bank in January 2013, was ultimately not achieved in the 2010s.As I explained, before the onset of the pandemic, prices and wages declined and did not increase

in

Japan's

economy

for

nearly

30

years.

In

a

normal

economy,

when

economic conditions improve, employment expands, and labor market conditions tighten in the way that they did in Japan during the Abenomics period, prices and wages rise, and conversely fall when economic conditions worsen.

This economic cycle operates consistently overseas, and

did

in

Japan

as

well

through

the

1980s,

before

the

collapse

of

the

bubble

economy.

Subsequently, however, a very unique situation became entrenched in Japan, in which prices and wages ceased rising, almost as if frozen, despite an improvement in economic conditions.In a complete about-face from that situation, Japan's economy is currently experiencing high inflation for the first time in decades.

The direct cause of this turnaround has been the strong cost-push pressure on domestic prices, resulting from

a surge in

import prices caused by global inflation in the wake of the pandemic.

If this were the sole cause, however, inflation would have subsided at the point where the surge in import prices abated.

In fact, cost-push inflation in the past, such as what was seen in 2008, was only temporary.

At present, however, what we see is that the rate of increase in the consumer price index (CPI) has remained high despite the decline in yen-denominated import prices, with the sizable contribution of the increase

in

rice

prices,

which

is

a

special

factor

(Chart

8).

The

current

high

inflation

is therefore probably due to a major shift in firms' price- and wage-setting behavior.

## B.

How the Zero Norm with Regard to Prices and Wages EmergedNow, let me explain the background as to why prices and wages remained unchanged in Japan's

economy.

The

cause

may

be

that,

through

the

experience

of

deflation

and

zeroinflation that started in the 1990s, the widespread belief that prices and wages do not rise had become deeply entrenched among firms and households.

When people come to believe that prices and wages will not rise, they in fact become less likely to do so.

This is what is referred to as

the zero

norm

with

regard to

prices and wages. 5 People's perceptions of prices and wages exert a significant influence on their developments.The

zero

norm

with

regard

to

prices

and

wages

implies

that

firms

actually

continued

to restrain prices and wages.

They did so because, for them, it was a rational business strategy.

In a sense, it may be natural for firms to restrain wages as much as possible, as wages basically represent costs for firms.

As for prices, although it could be considered that firms in general would raise selling prices whenever they have the chance, they in fact often avoid raising prices as much as possible even when faced with a certain degree of higher costs or stronger demand.

One reason for this is that price hikes carry a high possibility of leading directly to a

significant decline in sales volume.

While cutting prices tends to induce competitors to lower their prices as well, price hikes do not necessarily draw competitors to follow suit.

Another reason to avoid raising prices is to retain frequent customers; since consumers' daily purchasing behavior is by and large routine, price hikes may trigger customer defection. 6As I have explained, even if demand or costs increase somewhat, under certain circumstances firms intentionally ignore the increase and choose to keep selling prices unchanged.

To put it differently, firms opt to raise prices only when they are certain that the price hikes will not significantly reduce sales volume, or when costs increase to the extent that the firms cannot secure

adequate

profits

without

passing

on

the

increase.

During

the

period

of

secular5 The price and wage norm refers to the implicit beliefs people have about how prices and wages evolve.

The concept was first proposed in the early 1980s by the American economist Arthur Okun.

See Arthur M.

Okun, Prices and Quantities: A Macroeconomic Analysis , The Brookings Institution (1981).6 Such

cases

of

firms

being

averse

to

price

hikes

suggest

that the

downward-sloping

individual demand curve they face is kinked at the prevailing prices.

The conventional explanation for this kinked demand is the asymmetric behavior of competitors.

Okun, on the other hand, argues that the reason why

firms

are

more

averse

to

raising

prices

than

lowering

them

is

the

fear

of

damaging

their relationship of trust with frequent customers.

Meanwhile, Takashi Negishi attributes this aversion to asymmetry in the communication of information to customers.

See Okun, op. cit, ch. 4, and Negishi, T., Microeconomic Foundations of Keynesian Macroeconomics , North-Holland Publishing Co. (1979).stagnation after the collapse of the bubble economy, the mindset of prioritizing cost-cutting spread among Japanese firms, as price hikes would have directly resulted in a decrease in sales volume or profits.

This entrenched mindset therefore drove firms to avoid price hikes for a prolonged period.It should be noted that Japanese firms remained capable of maintaining selling prices because they were able to continue restraining wage costs.

As the ultimate objective of firms is to maximize profits, they attempt to minimize wage costs.

This is not always possible, however, because excessively restraining wages may make it difficult to recruit new employees or may cause an exodus of existing employees.

Both situations tend to

happen more often when employment

increases

on

the

whole

due

to

economic

improvement

and

labor

market conditions are tight.

Thus, firms wishing to retain a sufficient workforce raise wages in line with the actual trend in the labor market.

Then, in such cases, unless they can absorb the cost of

wage

hikes

by

improving

productivity,

firms

will

have

no

choice

but

to

pass

on

cost increases to selling prices, thereby elevating the prices of their products.This brings us to the point that the reason why CPI inflation remained extremely low in Japan from the 1990s until quite recently is that many firms were able to restrain wages, which allowed them to continue to avoid raising selling prices. 7 In Japan's economy, it was not until near the second half of the 2010s that employment increased and labor market conditions started tightening.

The labor market prior to that continued to be a buyer's market (Chart 7).

In particular, there was a considerable imbalance in labor market conditions for people who were recruited during the so-called employment ice age, from the second half of the 1990s through

the

2000s.

During

that

period,

many

new

workers

were

shut

out

of

regular employment.

This suggests that

firms were

able

to secure

a

sufficient

workforce

without raising wages.Another reason why Japan's wage growth rate remained at around 0 percent lies in the unique structure of its employment system.

Japan's labor market can be broadly divided into two7 This kind of wage restraint is referred to as wage markdowns, as contrasted with price markups.

See Aoki, K., Hogen, Y., and Takatomi, K., "Price Markups and Wage Setting Behavior of Japanese Firms," Bank of Japan Working Paper Series , no. 23-E-5 (April 2023).categories: regular employment that is premised on long-term employment and non-regular employment that is premised on temporary employment.

Since it is difficult to dismiss regular employees, faced with secular stagnation after the collapse of the bubble economy, many firms reduced the new recruitment of regular employees and instead increased that of nonregular employees.

At the same time, those firms embarked on an employment approach to restrain

the

wages of

existing

regular employees as much as possible.

Their management strategy of retaining regular employees in exchange for wage freezes was generally accepted by labor unions.

This is how the

unique situation in

which prices and wages barely rose became entrenched in Japan's economy for an extremely long period from the mid-1990s.

## C.

Breaking the Zero NormThe zero norm with regard to prices does not simply mean that the inflation rate -- meaning the average rate of increase in prices of various goods and services -- is close to 0 percent; it refers to the severity of price rigidity -- in that prices of individual items barely change.

Indeed, if the rates of change in individual prices are 0 percent, the average will also be 0 percent, so the inflation rate is generally low in an economy where price rigidity is strong.

On the other hand, even if the average rate of price increase is around 0 percent, individual prices of goods and services could be changing flexibly in line with supply and demand in each market.

Thus, price rigidity is not always strong when the inflation rate is around 0 percent.

To grasp the degree of price rigidity more accurately, it is necessary to examine not only the average rate of price increase, but also the price change distribution, particularly the share of items for which prices are unchanged.The unusual nature of Japan's economy with the zero norm, which persisted from the second half of the 1990s, can be confirmed by comparing its price change distribution with that of other economies at the time.

For example, when comparing the price change distribution by item

between

Japan

and

the

United

States

in

10-year

increments,

there

is

a

significant difference in both the position of the peak of the distribution and its dispersion, particularly from the 2000s (Chart 9).

Specifically, in Japan, many items cluster around the point where the rate of price change is 0 percent, and the degree of concentration is high.

By contrast, in the United States, the largest number of items cluster around the rate of price increase of about 2 percent, but the degree of concentration is low, and the overall dispersion of price changesis significant.

In other words, price rigidity clearly increased to a striking degree in Japan's economy.It is worth noting that, from the late 1990s, price rigidity increased in Japan mainly in services and housing rent, not in goods (Chart 10).

In this regard, since wages likely represent the majority of the costs of providing services, this rigidity of services prices can be interpreted as reflecting the fact that wages stopped rising in the country.

While it is rare for there to be no change in wages or housing rent as in this case, these elements are known to be essentially stickier than goods prices.

This is because, in terms of employment and the housing rental business, it is particularly costly to match jobseekers to jobs and potential tenants to housing.

Apart from part-time work and other non-regular forms of employment, considerable costs and time are required for jobseekers to find a job that meets their criteria and for firms to search

for

necessary

human

resources.

As

both

employers

and

employees

try

to

avoid repeatedly

incurring

these

costs,

employment

relationships

tend

to

be

continuous.

This implies that, in the labor market, the mechanism whereby supply and demand are adjusted through changes in wages does not function well, or only sluggishly.

The same can be said of housing rent.

Basically, what had been essentially sluggish changes in wages and housing rent hardly occurred in Japan from the late 1990s.The zero norm with regard to prices and wages had been as solid as bedrock in Japan, but is now finally about to be broken.

This is particularly clear from the change in shape of the price change distribution.

While there is far less clustering around 0 percent compared to the prepandemic period, the overall distribution has shifted to the right and the 2-4 percent range has become thicker (Chart 11).

It can be said that the distribution is currently returning to the original shape seen around 1990, when price rigidity was not yet strong.Moreover, although the rigidity of housing rent is still strong, the rigidity of services prices is gradually weakening (Charts 10 and 11).

This trend in services prices is likely to continue, considering that the wage growth rate is close to that in the bubble period, as wage increases have gained much more momentum and have taken root much more firmly, driven by the annual spring labor-management wage negotiations over the past few years (Chart 12).

The rate of increase in the services producer price index (SPPI) has begun to remain stable ataround 3 percent; this is particularly pronounced in services with a high labor cost ratio, where wages account for a large share of total costs (Chart 13).

Going forward, it will be important for this trend to steadily expand to small and medium-sized firms and regional economies, and for the mechanism in which wages and prices continue to rise moderately in interaction with each other to be established as a new norm.

## III.

Conduct of Monetary Policy After the COVID-19 Pandemic

## A.

Macroeconomic Policy Responses to the Pandemic and Lessons LearnedAs

the

global

economy

is

finally

making

progress

in

overcoming

post-pandemic

high inflation,

it

faces

a

new

risk --U.S.

tariff

policy,

the

outcome

of

which

is

being

closely watched.

Despite

the

significant

uncertainty

posed

by this

and

other factors,

the core challenge for many governments and central banks is the same: how to maintain near-full employment while keeping inflation rates close to the target level.

Regarding the conduct of monetary policy, major central banks face a common challenge: while monitoring economic conditions, they must adjust policy interest rates appropriately and, at the same time, reduce their balance sheets, which expanded as a result of unconventional policy, to an appropriate level.

This

means

that

central

banks

all have the task

of

managing

balance

sheets

that expanded significantly following the GFC while smoothly fulfilling their traditional mandate of maintaining price stability through policy interest rate adjustments.Let us remind ourselves why central banks' balance sheets expanded to their current levels and what the significance of this expansion is.

In essence, the expansion was the result of policy measures adopted to support economies that were shrinking due to the GFC and the pandemic,

and

it

can

be

assessed

that these measures certainly

achieved

their

purpose, considering that they served a particularly significant role in responding to the pandemic.When COVID-19 broke out across the world, governments imposed restrictions on economic activity to prevent the spread of infection.

In many cases, this gave rise to the need for income support for individuals and firms, which caused fiscal deficits to expand rapidly.

At the same time, to support rapidly shrinking economies, central banks such as in the United States and Europe halted monetary tightening -- which they had embarked on as their economies were recovering

from

the

downturn

triggered

by

the

GFC --and

instead

reverted

to

monetaryeasing.

However, because inflation had been low, most central banks in the United States and Europe had little room to lower interest rates.

Many monetary easing measures inevitably took the form of QE through the expansion of purchases of government bonds and other assets.

As a result, central banks' balance sheets expanded rapidly once again (Chart 14).In other words, the pandemic ultimately resulted in coordination between fiscal and monetary policy on a global scale, through fiscal expansion by governments and monetary easing by central banks.

This fiscal-monetary policy mix further amplified the demand-boosting effect of fiscal expansion by holding down interest rates through monetary easing.

In this context, Athanasios Orphanides -- economist and former governor of the Central Bank of Cyprus -noted that, with extraordinary fiscal expansions by governments during the pandemic, the expansion

of

central

banks'

balance sheets

through

asset

purchases

kept

the

cost

of government

debt

finance

low,

thereby

helping

to

both

prevent

economic

stagnation

and support reflation of the economy. 8The

expansionary

fiscal

policies

in

tandem

with

monetary

easing implemented

in

many countries during the pandemic presumably also led to the expansion of asset balances in the private sector.

That is, when a government increases its debt, those liabilities become assets for the private sector, and unless the government achieves a fiscal surplus, the assets will remain, even if the asset holders change.

This means that as long as private economic entities are

non-Ricardian, in the sense that

they do not expect the value of the assets to decline through future tax increases, part of the excess savings accumulated during the pandemic should be regarded as assets remaining permanently in the private sector.

Although the stock effect of government debt may have gradually declined, in that the real value of these asset balances

subsequently

diminished

due

to

inflation,

the

expansion

of

assets

in

the

private sector surely contributed to a certain extent to post-pandemic economic recovery. 98 Athanasios Orphanides, "The Power of Central Bank Balance Sheets," IMES Discussion Paper Series , no. 2021-E-10, Institute for Monetary and Economic Studies, Bank of Japan (August 2021). 9 The effect of the opposite situation, in which deflation promotes consumption through a rise in thereal value of assets, is known as the Pigou effect, taken from Arthur Cecil Pigou, who first proposed this theory.Provided that their purpose was to support and revive the economy, macroeconomic policy responses to the pandemic can be considered to have been quite successful.

This is because the

coordination

of

fiscal

and

monetary

policy

functioned

fully,

as

I

described.

Similar macroeconomic coordination was achieved temporarily after the GFC, but its impact was limited, since many countries and regions turned to fiscal austerity following the European sovereign debt crisis.

As a result, subsequently the global economy long remained mired in a state of secular stagnation with low growth, low inflation, and low interest rates.The lesson here is that we should not have underestimated the effects of macroeconomic coordination implemented after the pandemic's outbreak; the subsequent surge in inflation seen mainly in the United States and Europe indicates that the coordinated policies were actually far more effective in boosting demand than originally anticipated.

Until this high inflation

materialized,

many

experts

and

policymakers

paid

little

attention

to

the

risk

of inflation, being more concerned about the risk of deflation due to the pandemic.

Even after inflation picked up, it was initially assumed to be a temporary phenomenon.

This may have been because many experts remained firmly wedded to the secular stagnation hypothesis that low growth and low inflation cannot be reversed through macroeconomic policy.

## B.

A New Stage of Conventional Monetary PolicyOnce it became clear that post-pandemic high inflation was not merely temporary, central banks

in

the

United

States

and

Europe

rapidly

shifted their

monetary

policy

to

contain inflation.

That is, they discontinued QE and returned to the conventional policy of raising policy interest rates.

Globally, central banks kept interest rates high by means of policy rate hikes over a period of roughly two years, from around spring 2022 to around summer 2024, although the period in question varied by country and region.Central banks, including those in the United States and Europe, seem to have transitioned seamlessly from unconventional to conventional policy, but how was this possible?

This is an

important

issue,

since

the

"exit

problem" --that

is,

the

concern

that,

while

adopting unconventional monetary policy was easy, exiting from it might be difficult -- had long been a topic of debate among experts.

Reality has shown, however, that the transition itself did notpose any particular challenges: many central banks, such as those in the United States and Europe, steadily raised policy interest rates, and inflation was indeed contained (Chart 15).The reason the transition in the monetary policy regimes was so smooth is that the way central banks adjusted policy interest rates differed substantially before and after the introduction of unconventional policy.

Before the introduction, the banks controlled the money market rate as

the

policy

interest

rate

by

adjusting

the

amount

of

funds

through

daily

money

market operations.

To guide the money market rate toward the target level, reserve balances held by financial

institutions at

the

central

bank

were

kept

close

to

the

minimum

needed.

This

is because, if reserve balances exceed the required amount, there will be a surplus of funds in the market, causing the money market rate to fall below the target level.Following the outbreak of the GFC in 2008, the U.S. Federal Reserve (FRB) and the Bank of England (BOE) were among the first to implement QE.

In April 2013, the Bank of Japan introduced QQE as part of its large-scale monetary easing policy.

Moreover, the European Central Bank (ECB), which had already implemented a negative interest rate policy, began full-fledged QE in March 2015.

After the onset of the pandemic in 2020, central banks in Canada, Australia, New Zealand, and other countries likewise began QE.

As a result of their asset purchases, the reserve balances and balance sheets of central banks expanded (Chart 14).

Therefore, to raise policy interest rates in the same manner as they did prior to QE, central banks need to return their reserve balances close to pre-QE levels by selling assets.

However, selling assets on such a scale all at once carries extremely high risks, as it could disrupt the financial markets.This led central banks to adopt the approach of controlling policy interest rates by setting and then raising or lowering the interest rate applied to reserve balances -- that is, the interest rate on current account balances held by financial institutions at the central bank -- and in that way adjusting the money market rate as the policy interest rate. 10 If a central bank pays a certain amount of interest on reserve balances, much of the excess funds held by financial10 In some countries and regions, financial institutions are required to deposit a certain amount of reserves at the central bank.

In many of these cases, including in Japan, the interest rate is only applied to excess reserves.

However, for the sake of simplicity, this speech assumes that the interest rate is applied to the total amount of reserve balances.institutions will presumably be absorbed into reserve balances through interbank lending and borrowing,

thus

preventing

the

money

market

rate

from

falling

significantly

below

the interest rate on reserve balances.

In practice, the lower bound on the money market rate is slightly below the interest rate on reserve balances, on account of costs for the intermediation of funds among financial institutions and other factors (Chart 16).

The point is that, if a central bank intends to adjust the money market rate as the policy interest rate, it simply needs to adjust the interest rate on reserve balances, rather than adjust the supply of funds.Adopting this approach, the FRB raised its policy interest rate in December 2015 for the first time

since

halting

QE.

Following

the

pandemic,

other

central

banks

also

ended

QE

and returned to interest rate policy, similarly taking the approach of adjusting policy interest rates by guiding the interest rate on reserve balances.

In that sense, this new approach to controlling policy interest rates has spread rapidly among major central banks and is now one of their standard methods.It is important to note that, while this current standard method may be novel, it is essentially a

conventional

monetary

policy

measure,

in

that

it

seeks

to

ensure

price

and

economic stability by adjusting the policy interest rate.

In the history of economic thought, the role of interest rate adjustments in price stability is said to have been first proposed by the British economist Henry Thornton, who was active around the beginning of the 19th century.

Back then, however, the BOE -- which had begun to function in practice as a central bank -- set the de

facto

policy

rate

mainly

through

the

discounting

of

commercial

bills,

and

Thornton's discussion of monetary policy was based on this premise. 11 In other words, it is natural for specific methods of monetary policy conduct to evolve over time.

## C.

Basic Concept of Balance Sheet PolicyAs I have described, under the current policy regime, unlike before the GFC, the amount of a

central

bank's

reserve

balances

and the

size

of its

balance

sheet

do

not

directly

impose restrictions on its monetary policy.

Large reserve balances or a large balance sheet does not make

it

more

difficult

to

contain

inflation

through

monetary

tightening.

This

is

because raising the interest rate on reserve balances can serve as a way to tighten monetary policy.11 Henry Thornton, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain (1802).On the other hand, this does not mean that it is appropriate for a central bank to maintain an excessively large balance sheet.

That is, a central bank is allowed to intervene in markets only to the extent that this is necessary for fulfilling its basic mandate of maintaining price and financial market stability.

In other circumstances, it is preferable for the central bank to be market-neutral, meaning it should exert as little influence on the markets as possible.

From this perspective, a central bank with an excessively large balance sheet should reduce the amount outstanding of its assets with due consideration to market stability, and thus leave the determination of asset prices to the markets as much as possible.That said, in the process of reducing the balance sheet, a central bank must be most careful not to impede the core component of monetary policy, namely, controlling the money market rate.

This concern is not merely hypothetical: in 2019, when the United States was in the midst

of

quantitative

tightening,

money

market

rates

actually

rose

sharply

(Chart

17).

Confronted with this situation,

the

FRB attempted to

stabilize

the

market

by

temporarily supplying liquidity and ultimately halted quantitative tightening altogether.This experience demonstrates that, when adopting a monetary policy approach that involves guiding the interest rate on reserve balances as a policy tool, a central bank must carefully monitor whether it holds a necessary amount of reserve balances to adequately control the money market rate.

When the interest rate on reserve balances rises, financial institutions profit

more

from

holding funds

in

central

bank

current

accounts.

Thus,

their

demand

for reserves, or the amount of funds they seek to hold in the current accounts, increases.

Moreover, uncertainties arise regarding financial institutions' demand for reserves, as such demand is influenced

by,

for

example,

regulatory

requirements or market

structures.

Therefore,

if

a central bank engages in excessive quantitative tightening and reduces the supply of reserves too much relative to demand, it may not be able to adequately control the money market rate.

That is the essence of what happened in 2019 in the United States.Another reason why it is appropriate for a central bank to maintain ample reserve balances is financial market efficiency.

As in the case of the United States, when money market rates deviate

substantially

from

the

interest

rate

on

reserve

balances,

the

opportunity

cost

for financial

institutions

to

hold

reserves

increases

accordingly.

Conversely,

to

minimize

thisopportunity cost, it is necessary that a central bank firmly control the money market rate via the interest rate on reserve balances by maintaining ample reserve balances. 12The Bank of Japan's reserve balances and balance sheet remain significantly large, and it is currently unlikely that the money market rate will deviate from its lower bound.

For the time being, therefore, the Bank can move forward with reducing its balance sheet without facing this issue.

However, even if the balance sheet's shrinking to an appropriate size is a long way off, controlling the money market rate will likely be the most important challenge for the Bank.

## IV.

Toward the Establishment of the 2 Percent Inflation NormMany major central banks have come close to successfully containing high inflation and are currently making careful adjustments to their monetary policy to achieve both price stability and sustainable economic growth.

By contrast, it was not until March 2024 -- when these central banks were already in their final phase of monetary tightening -- that the Bank of Japan returned to implementing conventional policy.

This was owing to the existence of the zero norm with regard to prices and wages, a situation unique to Japan's economy.

It is true that post-pandemic global inflation acted as a so-called big push that played a role in starting to break down the zero norm.

However, prices and wages in Japan stopped rising in the second half

of

1990,

when

severe

deflation

occurred,

and

subsequently

barely

rose

for

nearly

a quarter of a century.

Considering this context, before changing its monetary policy, the Bank needed to carefully examine whether the zero norm, which had been as solid as bedrock, had been

sufficiently

eroded,

and

whether

the

rigidity

of

prices

and

wages had

been

truly overcome.Price

developments

in

the

post-pandemic

period

also

reveal

how

the

situation

in

Japan differed from other economies.

In many countries and regions, high inflation in the wake of the pandemic first emerged as a surge in producer prices, and most of this surge was passed on

directly

to

consumer

prices.

When

producer

prices

rose

in

Japan,

however,

the

pass-12 This issue is frequently discussed in connection with the Friedman rule regarding the opportunity costs of holding money.

See Lorie Logan, "Ample Reserves and the Friedman Rule," keynote speech at the ECB Conference on Money Markets, Frankfurt am Main, November 10, 2023.through to consumer prices was limited (Chart 8).

This suggests that, fearing that sales would decline if they raised prices, many firms that sell products to consumers did not pass on the cost increases to selling prices immediately, but instead bore the cost increases themselves, at

least

temporarily.

That

said,

corporate

profits

have

been

growing

on

the

whole,

which should be interpreted as a gradual progression of cost pass-through (Chart 18).

The fact that the rise in producer prices has mostly been reflected in a corresponding rise in consumer prices when inflation began rising again in the second half of 2024, with a certain time lag, is also evidence that it is becoming easier for firms to pass on cost increases to prices.Another phenomenon unique to Japan associated with the zero norm is that expected inflation rates

for

a

long

time

remained

below

the

2

percent

inflation

target.

If

their

inflation expectations are anchored at around the inflation target, people see deviations of the observed inflation rate from the target rate as only temporary.

In such an environment, it is easier for a central bank to bring the observed inflation rate back to the inflation target, since people generally make decisions based on the targeted inflation rate.

This is evident by how high inflation stemming from the pandemic subsided in about two years.

In Japan, however, where the zero norm was entrenched, firms and households acted on the premise of zero inflation, which

resulted

in

prices

and

wages

barely

rising.

In

this

situation,

even

if

prices rose temporarily due to cost-push factors, it was difficult to realize the stable achievement of 2 percent inflation.Even

in Japan,

however, various indicators of inflation expectations are gradually approaching 2 percent in the current inflationary phase (Chart 19).

This signifies that now, during

the

prolonged

period of

inflation

exceeding 2

percent,

firms and

households have started to slowly factor in inflation.

In other words, it seems clear that people are acting on the assumption that the economy will not return to zero inflation.

Many corporate managers used to believe that they could not raise wages because they could not raise prices, and made actual business decisions based on this belief.

Recently, however, many firms have expressed their intention to continue raising wages to an extent significantly exceeding the 2 percent inflation target.

Stable achievement of the 2 percent target will finally become possible when such wage-setting behavior of firms is established as a new norm.Japan's economy is in the midst of shifting away from the zero norm and adapting to the new 2 percent norm.

In this process, the recent rise in prices has taken a toll on households, as they have not experienced inflation for a long time.

One reason why this has been a burden for households is that the current inflation was triggered by cost-push factors resulting from a rise in import prices, and price increases exceeding wage growth were inevitably prolonged.

Since the rise in import prices has already slowed, the rate of increase not only in producer prices but also in consumer prices will probably slow as well, as the price pass-through of cost

increases

peaks

out.

Still,

it

may

take

some

more

time

for

real

wages --which

are calculated by excluding the effects of inflation from nominal wages -- to turn to an uptrend.I

personally

believe

that

the

Bank

needs

to flexibly adjust

its

monetary

policy while examining price developments, in response to economic developments at home and abroad at the time.

This is because, now that Japan's economy is making progress in overcoming the zero norm, it is increasingly important from the standpoint of price and economic stability for the Bank to adjust the degree of monetary accommodation with appropriate timing.

When Japan's economy was experiencing prolonged zero inflation, downside risks to prices required more attention than upside risks, and maintaining accommodative financial conditions was therefore a top priority.

In the current situation, however, where it is likely that

the labor market is close to full employment and that the output gap has almost reached 0 percent, it is necessary to consider not only downside risks but also upside risks.

When focusing only on the domestic economic situation, I believe Japan will, in the not-too-distant future, require a new policy perspective that addresses the upside risks.

On the other hand, as Japan's economy faces significant downside risks stemming from the U.S. tariff policy, it is necessary that the Bank assess underlying inflation as carefully as possible for the time being.Thank you.

## Transformation of the Global Economy and Developments in Monetary PolicySpeech at a Meeting Held by the Sapporo Chamber of Commerce and IndustrySeptember 29, 2025NOGUCHI Asahi Member of the Policy Board Bank of Japan

## Central Bank Policy Interest Rates%Note: Figures for the Federal Reserve (FRB) are the upper limits of the target range for the federal funds rate.

Figures for the European Central Bank (ECB) are the interest rates on the main refinancing operations.Sources: Bank of England (BOE); ECB; FRB; Reserve Bank of Australia (RBA); Bank of Japan.Chart 1

## 10-Year Government Bond Yields%Source: Bloomberg.Chart 3 High Inflation in the United States and EuropeUnited StatesUnited KingdomGermanyNote: Figures for Germany prior to reunification are those for the former West Germany.

Figures for the United Kingdom prior to 1989 are from data compiled by the BOE, and those from 1989 onward are from Office for National Statistics (ONS) data.

Sources: BOE; OECD; ONS.

## Job Vacancies in the United Statesratio of job vacancies to unemployed personsChart 5 Prices and Wages in the United Statesy/y % chg.Note: Figures for nominal wages are for hourly wages.

Source: BLS.

## Prices and Wages in the United Kingdomy/y % chg.Note: Figures for nominal wages are for weekly wages (excluding bonuses).

Source: ONS.

## Employment Situation in JapanChart 7

## Number of Employed Persons and Unemployment RateLabor Market Conditions s.a., mil. personsinverted, DI ("excessive employment" - "insufficient employment"), % pointsSources: Ministry of Internal Affairs and Communications; Bank of Japan.

## Prices in Japany/y % chg.Sources: Ministry of Internal Affairs and Communications; Bank of Japan.

## Distribution of Consumer Price ChangesChart 9JapanUnited StatesNote: Figures for Japan are based on items excluding fresh food and energy.

Those for the United States are based on items excluding energy.

Sources: BLS; Ministry of Internal Affairs and Communications.

## Price Revisions in Japan

## Share of Items for Which Prices Were Unchanged

## Frequency of Price Revisionsweight in the CPI for all items less fresh food, %% per month- Notes: 1.

In the left panel, figures are the share of items for which year-on-year price changes were within plus or minus 0.5 percent.

The figure for fiscal 2025 is the April-July average.Source: Ministry of Internal Affairs and Communications.2.

In the right panel, figures are calculated based on the proportion of cities where the average price of individual items changed from the previous month (12-month backward moving averages).

Data exclude fresh food, electricity, manufactured and piped gas, water charges, and housing rent.

Temporary price changes due to, for example, consumption tax hikes and special sales are not incorporated.

## Distribution of Consumer Price Changes in JapanChart 11

## All Items Less Fresh Food and EnergySource: Ministry of Internal Affairs and Communications.

## General Services Less Housing Rentshare of the number of items, %

## Wage Growth in Japany/y % chg.Note: Figures from 1994 to 2013 are those published by the Central Labour Relations Commission, while those from 2014 to 2025 are figures released by the Japanese Trade Union Confederation (Rengo).Sources: Central Labour Relations Commission; Rengo.

## Services Producer Prices in JapanChart 13y/y % chg.y/y % chg.Note: Figures exclude the effects of consumption tax hikes.Source: Bank of Japan.

## Central Bank Balance Sheets%

## Ratio to Nominal GDPNote: BOC stands for Bank of Canada.Sources: Data from central banks and statistical authorities.

## Prices and Policy Interest RatesUnited StatesUnited Kingdom%Sources: BOE; ECB; FRB; OECD; ONS.%Chart 15Euro Area%

## Money Market Rate in Japan%%Source: Bank of Japan.Chart 17

## Money Market Rates in the United States

## Repo MarketFederal Funds (FF) Market%deviation from the lower limit of the FF target range, %bil.

USDNote: In the right panel, figures for IOER from July 29, 2021, onward are the figures for interest on reserve balances (IORB).

Source: Federal Reserve Economic Data (FRED).

## Corporate Profits in Japans.a., tril. yens.a., tril. yenNote: Figures exclude the finance and insurance industries.

Source: Ministry of Finance.

## Inflation Expectations in JapanIndicated by MarketsChart 19Estimated by BOJ, by Type of Economic Agent%%Note: In the left panel, the BEI (break-even inflation) rate is the yield spread between fixed-rate coupon-bearing JGBs and inflation-indexed JGBs.The dotted line represents the rate calculated based on inflation-indexed

JGBs issued before October 2013.

Sources: Bloomberg; Consensus Economics Inc., Consensus Forecasts ; QUICK, QUICK Monthly Market Survey ; Bank of Japan.