September 25, 2019
Bank of Japan
Economic Activity, Prices,
and Monetary Policy in Japan
Speech at a Meeting with Business Leaders in Mie
Takako Masai
Member of the Policy Board
I. Developments in Economic Activity and Prices
I would like to start my speech with a look at developments in economic activity and prices.
Following the discussion at the Monetary Policy Meeting (MPM) held on July 29 and 30,
2019, the Bank of Japan published the Outlook for Economic Activity and Prices, or the
Outlook Report. In this report, the Bank presented its projections for Japan's economic
activity and prices through fiscal 2021.
I will explain developments in economic activity and prices by presenting the main content
of the Outlook Report.
A. Overseas Economies
Let me first touch on developments in overseas economies. The Bank assesses that,
although overseas economies have been growing moderately on the whole, slowdowns have
continued to be observed.
Private consumption has been firm on the whole, mainly due to the favorable employment
and income situation. However, the effects of trade friction are becoming evident in the
form of deceleration in the pace of increase in the world trade volume, and it is confirmed
that this, together with adjustments in the cycle for goods, has led to a
IT-related
deterioration in business sentiment and a decline in the propensity toward investment,
particularly in the manufacturing sector. Indeed, the Global Purchasing Managers' Index
(PMI) for manufacturing has been below the 50 mark and continued to decline since May
2019 that is, four consecutive months while the U.S. ISM Manufacturing Index also
-- --
fell below 50 in August for the first time since August 2016 that is, about three years.
--
My view is that other central banks and international organizations have been sharing
concerns about this situation. For instance, the G20 Osaka Leaders' Declaration adopted in
June 2019 states that "[global economic] growth remains low and risks remain tilted to the
downside." According to the World Economic Outlook (WEO) Update released in July 2019
by the International Monetary Fund (IMF), the growth rate of the global economy is
projected to decelerate to 3.2 percent in 2019 but pick up to 3.5 percent about the same
--
level as the past average in 2020; however, these projections were revised downward
--
from the previous ones made in the April 2019 WEO, marking the fourth consecutive
downward revision. Moreover, it was indicated by the IMF itself that the projections are
"precarious" and presume that progress will be made toward resolving trade policy
differences.
Looking at developments by major region, the U.S. economy has continued to be
underpinned by the household sector against the backdrop of solid growth in employment
and income. Although economic growth in some countries such as France is being
-- --
underpinned by consumption, the European economy as a whole, in contrast, has seen
moves to defer investment, partly against the backdrop of uncertainty over political
developments, and there are no signs of the business sentiment of manufacturing firms
--
especially those in Germany bottoming out. With regard to Germany in particular, the
--
Deutsche Bundesbank assessed that the growth rate of the economy for the
July-September
quarter of 2019 could be negative for the second consecutive quarter, following the
quarter. The Chinese economy has continued to see stable growth on the whole,
April-June
but weakness has been observed in manufacturing, as suggested by such indicators as
industrial output for which growth for July was at its lowest level in about ten and a half
--
years and decelerated further in August. In other emerging and
commodity-exporting
economies, such as the NIEs and ASEAN economies, effects of adjustments in
IT-related
goods, for example, have been observed.
In terms of the outlook for overseas economies, slowdowns are likely to continue for the
time being; thereafter, however, such economies are expected to grow moderately on the
whole, with the growth rates rising somewhat, partly due to the effects of each economy's
stimulus measures and a in manufacturing, where relatively weak developments
pick-up
have been observed mainly in and capital goods. Nevertheless, there are concerns
IT-related
that, with the Brexit deadline approaching, global financial market conditions might
suddenly change depending on the outcome of negotiations on the United Kingdom's exit
from the European Union (EU), and I am of the view that downside risks to business
activity remain significant, mainly for manufacturing, with trade issues becoming chronic,
particularly between the United States and China. Accordingly, I am paying particular
attention to the timing and the pace of the pick-up in overseas economies.
B. Japan's Economy
1. Current situation
Now I would like to move on to developments in Japan's economy.
The Bank assesses that Japan's economy has been on a moderate expanding trend, with a
virtuous cycle from income to spending operating, although exports, production, and
business sentiment have been affected by the slowdown in overseas economies. The
assessment of the underlying trend as a whole is unchanged from the previous Outlook
Report released in April 2019, but the slowdown in overseas economies seems to be
affecting not only exports and production, as has been seen to date, but also the business
sentiment of some firms as well as manufacturers' machinery investment, among others. In
the meantime, domestic demand, such as business fixed investment, has maintained its
firmness, mainly in nonmanufacturing, and private consumption has been increasing
moderately, albeit with fluctuations; thus, the output gap has remained positive and the real
GDP growth rate for the quarter of 2019, which was released in August, was 1.3
April-June
percent on an annualized basis, registering a positive figure for the third
quarter-on-quarter
consecutive quarter.
Looking at developments by major expenditure item, with corporate profits staying at
relatively high levels on the whole, the uptrend in business fixed investment has been
maintained, mainly in investment intended for domestic capacity expansion, that aiming at
saving labor in order to deal with labor shortage, and that in research and development for
growth areas. Especially in nonmanufacturing, an increase has been observed in
construction of logistics facilities, reflecting the expansion of business, and of
e-commerce
accommodation facilities to meet the demand of inbound visitors. Meanwhile, according to
the Financial Statements Statistics of Corporations by Industry, Quarterly, business fixed
investment by manufacturing firms for the quarter of 2019 was minus 6.9
April-June
percent on a basis, falling below the previous year's level for the first time in
year-on-year
two years, due mainly to the effects of trade issues. Private consumption has maintained its
moderate increasing trend with labor market conditions remaining tight and the income
situation continuing to improve, albeit with fluctuations resulting from weather conditions.
Exports have continued to show some weakness, mainly reflecting the effects of the
slowdown in overseas economies. As a result of this situation, production mainly of
export-related goods has exhibited some weak developments, but industrial production as a
whole has been more or less flat. In these circumstances, business sentiment has been
weakening somewhat, mainly in manufacturing.
2. Baseline scenario of the outlook for economic activity
Japan's economy is likely to continue on an expanding trend throughout the projection
period, which covers from fiscal 2019 through fiscal 2021.
In fiscal 2019, exports are projected to continue showing some weakness for the time being,
reflecting the slowdown in overseas economies, and business fixed investment also is likely
to decelerate somewhat, mainly for manufacturing. Thereafter, exports are projected to
return to their moderate increasing trend, with the growth rates of overseas economies rising
gradually. The rate of increase in business fixed investment is expected to rise somewhat
due to increases, for example, in investment. Private consumption is likely to
labor-saving
be pushed down for some time due to the effects of the scheduled consumption tax hike, but
is expected to continue increasing as the employment and income situation continues to
improve. Public investment also is likely to increase, reflecting Olympic
Games-related
demand and expansion in expenditure such as for national resilience.
In fiscal 2020, the pace of increase in exports is expected to accelerate, with the growth
rates of overseas economies rising, and government spending accompanying the hosting of
the Olympic Games is expected to underpin the economy. Business fixed investment is
likely to maintain a moderate uptrend. Private consumption and housing investment are
expected to head gradually toward a recovery from a decline after the scheduled
consumption tax hike.
In fiscal 2021, private consumption and housing investment are projected to increase
because the effects of the reactionary decline to the scheduled consumption tax hike are
likely to dissipate, although Olympic expenditure which had been
Games-related --
increasing -- will have been completed. Exports and business fixed investment are likely to
maintain their moderate uptrend.
In terms of the medians of the Policy Board members' forecasts in the July Outlook Report,
the real GDP growth rate is 0.7 percent for fiscal 2019, 0.9 percent for fiscal 2020, and 1.1
percent for fiscal 2021.
3. Uncertainties regarding the baseline scenario for economic activity
There are various uncertainties regarding the baseline scenario of the outlook for Japan's
economic activity, and I would like to explain two points to which I currently pay particular
attention.
First is the risk that the timing of the bottoming out of external demand will delay. Since the
latter half of 2018, I have assessed that risks are tilted to the downside, particularly those
regarding developments in overseas economies. Recently, due to political factors such as
the strengthening of protectionist moves, downside risks seem to be increasing further. I am
concerned that this could affect the timing of the bottoming out of external demand through
various channels including disruptions in financial markets and a reduction in firms'
incentive to invest caused by developments in trade.
Second is the effects of the consumption tax hike scheduled to take place in October 2019.
The planned increase in the tax rate is smaller than that at the time of the previous hike in
April 2014, and the government plans to implement measures such as a reduced tax rate, a
point reward program when using cashless payments, and more flexibly passing on the rise
in the consumption tax to sales prices. Taking these into consideration, the baseline scenario
is that the negative impact of the tax hike on the growth rates will be smaller than that of the
previous hike. Nevertheless, I am paying attention to future consumption, together with
possible further heightening in the current geopolitical risks.
I would like to carefully examine the situation, including these two points, in the upcoming
October Outlook Report.
C. Price Developments
1. Current situation
Next, I will turn to price developments in Japan.
The year-on-year rate of increase in the consumer price index (CPI) for all items less fresh
food is currently at around 0.5 percent; it seems to have hit a lull somewhat in the uptrend,
as the effects of energy price drops have started to appear. Nevertheless, the general public's
gut feeling seems to be that prices are rising gradually. I believe that this is affected by the
rise in prices of food products, which are staple purchases. Actually, the rate of
year-on-year
change in the CPI saw an acceleration in its growth for an increasing number of food
products since early spring; in addition, the Unit Value Price Index released by Hitotsubashi
University Consumer Purchase Index) and the Nikkei Index,
(SRI-Hitotsubashi CPINow-T
both of which are calculated based on (POS) data collected at supermarkets,
point-of-sales
for example, maintained their high growth.
As described in the Comprehensive Assessment: Developments in Economic Activity and
Prices as well as Policy Effects since the Introduction of Quantitative and Qualitative
Monetary Easing (QQE), which was released by the Bank in September 2016, the adaptive
component plays a considerably larger role in Japan than in other countries in the formation
of inflation expectations, which means that inflation expectations tend to be influenced by
past inflation rates. A similar trend has been confirmed by subsequent studies.1 In other
words, it is important to make cumulative efforts to raise inflation rates; as Gertler pointed
out, for an economy that barely has a history of inflation being anchored at a targeted rate,
"they [individuals] have to see it to believe it."2 From this viewpoint, my understanding of
the several signs of changes that recently have started to appear is that they are arising in a
situation where we gradually are taking positive steps.
In fact, in contrast to the rate of increase in the CPI for all items less fresh food
year-on-year
that I mentioned earlier, that for all items less fresh food and energy has remained flat at a
level around 0.5 percent since the beginning of this fiscal year. In addition, signs of changes
albeit slight seem to have appeared in view of the fact that price rises by firms are
-- --
beginning to spread to a broader range of products, and given other data, such as the
CPI, which excludes extreme relative price changes. Turning to inflation
trimmed-mean
expectations, the expected inflation rate for the next five years surpassed 1 percent for the
first time since 2013, according to an estimation by the Bank's staff based on the results of
the Opinion Survey on the General Public's Views and Behavior.
The fact that the adaptive component is playing a considerably large role can be explained
by people's mindset and behavior based on the assumption that wages and prices will not
increase easily having been deeply entrenched. I assume that households are gaining
cumulative experiences through rises in base pay for six consecutive years and in the
rate of increase in employee income on a quarterly basis for 26 quarters in a
year-on-year
row, although the rates of increase are modest. As a matter of fact, households' tolerance of
price rises, which the Bank's staff calculated, seems to have been on an improving trend,
and I am of the view that these also are signs of positive changes.
As I have explained so far, I have the sense that, although we still have some distance to go
to achieve the price stability target of 2 percent, there are some signs that the momentum
toward achieving the target could strengthen again. In other words, I feel that we are
approaching an important phase where firms' and households' tolerance of price rises could
improve, and expected inflation rates could rise further. Therefore, I believe that it is
extremely important to encourage this development.
2. Baseline scenario of the outlook for prices
With regard to the outlook for prices, the year-on-year rate of change in the CPI for all
items less fresh food is likely to increase gradually toward 2 percent, mainly on the back of
the output gap remaining positive and to inflation expectations rising.
medium- long-term
The medians of the Policy Board members' forecasts of the rate of change in
year-on-year
the CPI for all items less fresh food presented in the July Outlook Report was 1.0 percent
for fiscal 2019, 1.3 percent for fiscal 2020, and 1.6 percent for fiscal 2021.
3. Risks to prices
Specific risk factors to prices are developments in firms' and households' to
medium-
inflation expectations, the fact that the responsiveness of prices of some items to
long-term
the output gap is low, and developments in foreign exchange rates and international
commodity prices going forward. My recent concern is that, amid significant downside
risks concerning overseas economies, negative effects would be exerted on prices through
the third risk factor in the case of disruptions in global financial markets.
II. The Bank's Monetary Policy
Next, I will talk about the Bank's monetary policy.
A. Current Monetary Policy Framework
The Bank has set the price stability target at 2 percent in terms of the rate of
year-on-year
change in the CPI and is conducting monetary policy to achieve this target at the earliest
possible time. Specifically, under the framework of QQE with Yield Curve Control, it has
supported the economic activity of firms and households by maintaining highly
accommodative financial conditions.
This framework mainly consists of four components: yield curve control, purchases of risky
assets, an commitment, and forward guidance for policy rates. The
inflation-overshooting
first component, yield curve control, is a policy under which the Bank aims to keep
short-
and interest rates stable at low levels. Namely, in the guideline for market
long-term
operations, the Bank sets the short-term policy interest rate at minus 0.1 percent and the
target level of Japanese government bond (JGB) yields at around 0 percent, and
10-year
conducts JGB purchases so as to achieve this target level. The second component is
purchases of risky assets; with a view to lowering risk premia of asset prices, the Bank
purchases funds (ETFs) and Japan real estate investment trusts
exchange-traded (J-REITs)
so that their amounts outstanding will increase at annual paces of about 6 trillion yen and
about 90 billion yen, respectively. The third component, the
inflation-overshooting
commitment, is a policy under which the Bank commits itself to continuing to expand the
monetary base the total amount of money the Bank directly supplies to the economy
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until the rate of increase in the observed CPI exceeds 2 percent and stays
year-on-year
above that level in a stable manner. The fourth component, forward guidance for policy
rates, presents the Bank's stance of maintaining the current extremely low levels of
short-
and interest rates for an extended period of time, at least through around spring
long-term
2020, taking into account uncertainties regarding economic activity and prices including
developments in overseas economies and the effects of the scheduled consumption tax hike.
B. Persistently Continuing with Powerful Monetary Easing
The Bank introduced QQE in April 2013 and has continued with powerful monetary easing.
However, as it gradually became clear that it likely would still take time to achieve the price
stability target of 2 percent, it decided to strengthen the framework for QQE with Yield
Curve Control in July 2018. Specifically, it decided to enhance the sustainability of
powerful monetary easing by (1) strengthening its commitment to achieving the price
stability target by introducing forward guidance for policy rates and (2) conducting market
operations and asset purchases in a more flexible manner. To elaborate on the second point,
the Bank announced that, in purchasing JGBs, the yields might move upward and
downward to some extent, mainly depending on developments in economic activity and
prices. It also decided to conduct such purchases in a flexible manner so that their amount
outstanding would increase at an annual pace of about 80 trillion yen. Furthermore, it
decided to purchase ETFs and so that their amounts outstanding would increase at
J-REITs
annual paces of about 6 trillion yen and about 90 billion yen, respectively. At the same time,
with a view to lowering risk premia of asset prices in an appropriate manner, the Bank
announced that it might increase or decrease the amount of purchases depending on market
conditions. By allowing for some elasticity in the monetary policy framework, the Bank can
respond flexibly to some extent to developments in financial markets.
Moreover, in April 2019, the Bank made clearer its policy stance to persistently continue
with powerful monetary easing. Specifically, regarding its forward guidance for policy rates,
the Bank added developments in overseas economies as a factor to consider when judging
whether it would maintain the current extremely low levels of and interest
short- long-term
rates; in addition, it clearly presented a point of reference for the expression "for an
extended period of time" as at least through around spring 2020. Furthermore, in order to
contribute to smooth implementation of and asset purchases as well as
fund-provisioning
secure market functioning, the Bank decided to take the following measures and initiative:
(1) expand eligible collateral for the Bank's provision of credit; (2) improve the use of the
Measure to Support Strengthening the Foundations for Economic
Fund-Provisioning
Growth; (3) relax the terms and conditions for the Securities Lending Facility (SLF); and
(4) consider introducing an ETF lending facility.
The Bank will persistently continue with powerful monetary easing in a sustainable manner
under the framework of QQE with Yield Curve Control by devising measures considered
necessary at the time and strengthening the framework.
C. Coping with Current Uncertainties
My understanding is that global financial markets as a whole remain risk averse, and this
development seems to be strengthening recently amid rapid alternation between pessimism
and optimism due to factors of a very strong political nature. For example, in Germany,
interest rates on all instruments from overnight loans to government bonds
30-year
temporarily became negative, and in Switzerland, interest rates on all instruments up to
government bonds were negative at one point. In the United States, yields on
50-year
Treasuries have fallen close to the lowest levels marked after the global financial
10-year
crisis; market participants seem to have various interpretations of the implication of an
inverted yield curve, which has been observed since with yields on
mid-August, 10-year
Treasuries declining below those on Treasuries. In the meantime, major economies'
2-year
central banks, such as the Federal Reserve and the European Central Bank (ECB), have
shifted to a more accommodative policy stance so as to prevent uncertainties over the global
economy from affecting domestic and regional economic activity and prices. In this respect,
the Bank considers it important to thoroughly examine risks to overseas economies and
carefully assess how those risks could affect Japan's economic activity and prices. Based on
such examination, the Bank, like other central banks, will not hesitate to take additional
easing measures if there is a greater possibility that the momentum toward achieving the
price stability target will be lost.
To clarify its intention, in the July 2019 Statement on Monetary Policy, the Bank presented
its stance that it "will not hesitate to take additional easing measures if there is a greater
possibility that the momentum toward achieving the price stability target will be lost."
Moreover, in the statement released on September 19, the Bank judged that it was becoming
necessary to pay closer attention to the possibility that the momentum toward achieving the
price stability target would be lost. Based on this judgment, it added an expression that,
taking this situation into account, it would reexamine economic and price developments at
the next MPM, when it will discuss the October Outlook Report.
Actual economic conditions faced by central banks are extremely complex and change
dynamically in the course of time. On this point, at the Jackson Hole symposium in 2018,
there was discussion about implications for monetary policy arising from various
structural changes that have occurred in recent years, including digital innovation and an
increase in types of assets such as software, intellectual property, and brand
non-tangible
equity. Moreover, at the Jackson Hole symposium held this year, Federal Reserve
Chairman Jerome Powell pointed to recent uncertainties as a new challenge for monetary
policy management.3 In fact, a strengthening of protectionist moves recently appears to
be one of the factors that makes the situation even more complicated.
I intend to continue to conduct monetary policy appropriately toward achieving the price
stability target while considering all conceivable adverse effects and positive effects from
every angle as well as taking full consideration of these notable changes in the
environment and risks on which to place emphasis.
See Jerome H. Powell, "Challenges for Monetary Policy: Remarks at a symposium hosted
by the Federal Reserve Bank of Kansas City," Federal Reserve Bank of Kansas City, August 2019,
https://www.federalreserve.gov/newsevents/speech/files/powell20190823a.pdf.