September 25, 2017
Bank of Japan
Japan's Economy and Monetary Policy
Speech at a Meeting with Business Leaders in Osaka
Haruhiko Kuroda
Governor of the Bank of Japan
Introduction
It is my great pleasure to have the opportunity today to exchange views with a distinguished
gathering of business leaders in the Kansai region. I would like to take this opportunity to
express my sincerest gratitude for your cooperation with the various activities of the Bank
of Japan's branches in Osaka, Kobe, and Kyoto.
In my speech today, I would like to first explain the Bank's view on the recent developments
in economic activity and prices, and then talk about its thinking behind the conduct of
monetary policy.
I. Economic Developments
Let me start by talking about developments in Japan's economy. The economy is expanding
moderately, and the real GDP growth rate for the April-June quarter registered a firm
increase of 2.5 percent on an annualized basis. It is the first time in eleven years, since 2006,
that it has continued to mark positive growth for six consecutive quarters (Chart 1). Looking
ahead, the economy is likely to continue its moderate expansion. Some of the recent
characteristics of the economic expansion are as follows.
The first feature is that the economic growth has been led by both external and domestic
demand in a well-balanced manner. Looking at overseas economies, business sentiment in
the manufacturing sector has been on an improving trend in both the advanced and the
emerging economies, and the world trade volume has been recovering. Under such
circumstances, Japan's exports have been on an increasing trend, such as those of
automobile-related and capital goods (Chart 2). Regarding domestic demand, business fixed
investment has been on a moderate increasing trend as corporate profits have been at record
high levels. Private consumption has increased its resilience recently against the
background of steady improvement in the employment and income situation. Furthermore,
as the effects of the government's large-scale stimulus measures formulated last year have
been emerging lately, public investment has been increasing (Chart 3). The economy has
been expanding, not on the basis of a single factor, but rather supported by multiple factors
-- namely, external demand, domestic private demand, and domestic public demand -- in a
well-balanced manner. For this reason, the economic expansion can be expected to sustain
itself going forward.
The second feature of the recent economic expansion is that its effects have been spreading
to a wide range of economic entities. The differences in the degree of improvement in the
diffusion index (DI) for business conditions either by firm size or by region are not as large
as those during the recovery phase in the mid-2000s before the global financial crisis (Chart
4). The DI for the Kinki region had been below the national average from 2015 toward 2016,
but has been improving rapidly since the second half of 2016, reflecting a remarkable
recovery in overseas economies. Looking at the employment and income situation, the
current economic expansion has benefitted a wide range of households. The year-on-year
rate of increase in hourly wages of part-time employees, which are particularly sensitive to
the tightening of the labor market, has registered about 2.5 percent. This is higher than that
of full-time employees, implying that the difference in wage levels between part-time and
full-time employees has become smaller. There have been many cases where those who had
worked as part-timers but wanted to become employed as full-timers have been able to do
so. Moreover, the active job openings-to-applicants ratio of full-time employees exceeded 1
in June for the first time since the statistics started to be compiled in 2004 (Chart 5). As just
described, the economic expansion has been benefitting both full-time and part-time
employees. In the labor market as a whole, the unemployment rate has declined to around 3
percent, which is equivalent to virtually full employment, and the active job
openings-to-applicants ratio stands at 1.52, exceeding the highest figure during the bubble
period and reaching a level last seen as far back as in 1974 (Chart 6).
Triggered in part by the tightening of labor market conditions, it has become another feature
of Japan's economy of late that a wide range of firms and industries have been taking
measures to raise labor productivity. Since wage increases resulting from labor shortage
mean rises in labor costs for firms, many firms have been making various efforts to avoid
passing on a rise in labor costs directly to their customers. A typical example is labor-saving
and efficiency-improving investment with the use of information technology. In fact, in
labor-intensive sectors such as retailing as well as accommodations, eating and drinking
services, software investment has increased to a remarkable degree recently (Chart 7).
Furthermore, firms have been streamlining their business processes. For instance, some
supermarkets and chain restaurants have discontinued services late at night and early in the
morning, at which time the number of customers is relatively small, and instead allocated
their limited employees to daytime services. Even with reduced labor input due to shorter
business hours, sales will not decrease so much, thereby lifting firms' labor productivity.
Of these measures, increasing labor-saving and efficiency-improving investment has
certainly contributed to the recent growth in business fixed investment. In addition, from a
longer-term perspective, firms' various efforts are expected to play an important role in
raising Japan's growth potential. In Japan, it is essential to raise labor productivity to
compensate for the decline in labor force. Although this is not easy, firms' increasing efforts
of various kinds amid the widespread labor shortage of late have become a driving force
toward raising productivity, which is a long-standing challenge to Japan's economy.
II. Price Developments
Now I will move to price developments. The year-on-year rate of change in the consumer
price index (CPI) excluding fresh food has increased to around 0.5 percent recently, but that
which also excludes the effects of a rise in energy prices has been relatively weak,
remaining at around 0 percent (Chart 8). Looking ahead, the Bank of Japan projects that the
rate of change in the CPI is likely to continue on an uptrend and increase toward 2 percent.
In what follows, let me describe how this process will operate, especially from firms'
standpoint.
What lies behind the fact that inflation has been relatively weak despite the increase in labor
costs is firms' efforts to absorb the costs that I mentioned earlier. Specifically, many
Japanese firms have raised wages for their employees but kept the prices of products and
services unchanged, through labor-saving investment and streamlining of their business
processes, for example. It often is pointed out that one reason why firms do not raise their
sales prices is a kind of caution that, if they raise their prices but competitors do not, they
may lose customers and competitiveness in the market. Given that their competitors have
the same thought, perhaps all the competing firms wait and see what others will do and
none make the first move. This strategy itself would be reasonable for firms facing stiff
competition. At the same time, however, it also makes it unlikely that firms will raise their
sales prices by passing on increased costs to those prices as necessary.
What will happen going forward? Given that firms have already been working on
streamlining their business processes in many ways, it will gradually become difficult for
them to continue to absorb increases in wage costs through those measures. In addition to
continuing efforts to streamline their business processes, firms will need to reflect in their
sales prices the increased costs that they cannot absorb. Lately, it also seems to be becoming
more likely that competitors will follow suit when a firm moves toward increasing its prices.
This is because it is highly likely that, facing a tight labor market, every firm feels that it
has been reaching the limit to which it can absorb increasing labor costs. On the consumer
side, their perception of price rises seems to be changing gradually, as the employment and
income situation has improved due to the better labor market conditions. After one of the
major transportation companies announced this spring that it planned to raise the prices of
its delivery services, competitors followed suit. According to a news report, slightly more
than 30 percent of firms in the restaurant business are planning to raise the prices on their
menus within this fiscal year, mainly due to increases in labor costs. These developments
appear to show the possibility that firms' price-setting stance has been changing in response
to the tightening of the labor market and improvement in the economy.
These kinds of changes in firms' price-setting stance have not yet become widespread in the
entire economy. However, as firms' and consumers' stance on the passing on of costs
changes with the economy continuing to expand moderately, firms' attempts to raise sales
prices will likely gradually become more widespread across a broad range of industries.
Furthermore, as this process lifts actual prices, firms' and households' medium- to long-term
inflation expectations, or people's perception of future inflation, will increase. The Bank of
Japan projects that, through these mechanisms, the inflation rate is likely to increase
gradually toward the price stability target of 2 percent.
III. The Bank's Conduct of Monetary Policy
Next, I will elaborate on the Bank's thinking behind the conduct of monetary policy. As
stipulated in the Bank of Japan Act, the objective of the Bank's monetary policy is
"achieving price stability, thereby contributing to the sound development of the national
economy." The specific number representing "price stability" is "2 percent" in terms of the
year-on-year rate of change in the CPI.
For reasons why this needs to be 2 percent, I will explain three points in sequence: a bias in
price statistics, securing policy room for the future, and a global standard.
Let me start with a bias in price statistics. Although I am not going into detail since this
might be a bit technical, the inflation rate based on the CPI that the Bank refers to tends to
be higher than actual inflation. Given this, aiming at zero inflation in terms of the CPI
means aiming at negative inflation, in effect. Therefore, in order to ensure price stability, the
inflation rate should be sufficiently positive.
The next point regards securing policy room for the future. The level of nominal interest
rates is usually determined in accordance with that of inflation rates. Looking at the interest
rate levels around 2007, right before the global financial crisis, whereas the policy interest
rates in the United States and Europe were around 4 to 5 percent with inflation of around 2
percent, the policy interest rate in Japan, or the uncollateralized overnight call rate, was only
0.5 percent with almost zero inflation (Chart 9). In response to the global financial crisis,
which exerted a significantly negative impact on the global economy, the United States and
Europe counteracted this shock with monetary easing that pushed down the policy interest
rates by 4 to 5 percentage points to around 0 percent. On that occasion, although Japan also
reduced the policy interest rate to around 0 percent, as the United States and Europe did, it
was only able to exert limited monetary easing effects of 0.5 percentage point. As you
remember, the real GDP in Japan dropped more significantly than that in Europe and in the
United States, the epicenter of the crisis. This implies the possibility that the fact that Japan
had less room for policy responses in lowering interest rates became a contributing factor to
the severer downturn of the economy. With the level of nominal interest rates being high,
Japan's economy will have more policy room to mitigate the impact of future economic
downturns, or will be equipped with a sort of insurance for sustained economic growth.
So far, I have mentioned a bias in price statistics and securing policy room for the future,
but these alone do not give a good enough reason why the target level of inflation has to be
2 percent. There are some proposals advocated overseas that the target level of inflation
should be 3 to 4 percent in order to further increase policy room, although these proposals
themselves do not seem realistic. So, why is 2 percent considered most appropriate?
To answer this question, the third reason, a global standard, is key. Central banks in major
economies are currently conducting monetary policy with the aim of achieving around 2
percent inflation. Given this, the Bank of Japan's monetary policy conduct with the aim of
achieving 2 percent inflation is also likely to contribute to stable foreign exchange rates in
the long run. Foreign exchange rates fluctuate due to various factors in the short run, but
they are considered to reflect inflation differentials between at home and abroad in the long
run. From the long-run perspective, if the inflation rate at home remains stable at around the
same level as those in other major economies, stability in foreign exchange rates
consequently will be ensured.
For the preceding three reasons, the Bank sets the price stability target of 2 percent in terms
of the year-on-year rate of change in the CPI. However, some may feel uncomfortable about
Opinion Survey
aiming at a positive inflation rate of 2 percent. For example, in the Bank's
on the General Public's Views and
Behavior, a questionnaire survey of individuals, about 80
percent of respondents answered that price rises are rather unfavorable.
I would like to emphasize that what the Bank aims at in the conduct of monetary policy is
not simply an increase in inflation. It aims to achieve an economy with a virtuous cycle in
which the incomes of people increase firmly as the price stability target of 2 percent in
terms of the year-on-year rate of change in the CPI is achieved. The historical data show
that consumer prices and wages have generally been moving in parallel. In Japan in the
1980s and in the United States, with positive inflation, nominal wages generally increased
at a higher pace than the CPI (Chart 10). Given that developments in actual prices are
factored in at annual spring labor-management wage negotiations, the parallel relationship
between inflation and wage growth is easy to understand. In such an economic environment,
nominal interest rates usually will increase as well. Since interest rates are the rates of
return on investment for each economic activity within the economy as a whole, they are
expected to converge to the level consistent with the nominal growth rate of the country in
the medium to long run. In an economy with economic expansion and steady positive
inflation, both nominal wages and nominal interest rates increase, which means that the
incomes of wage and salary earners, and of those who are living off their deposits, will
increase.
I would like to underscore the fact that the Bank, through achieving the price stability target
of 2 percent, is aiming at realizing a well-balanced economy in which people's incomes
increase accordingly.
Conclusion
Lastly, I would like to conclude my speech by briefly explaining the Bank's recent conduct
of monetary policy.
The Bank has been implementing powerful monetary easing under "Quantitative and
Qualitative Monetary Easing (QQE) with Yield Curve Control," aiming to achieve the price
stability target of 2 percent. This policy framework was introduced exactly a year ago, and
at this meeting with you last year, I talked about the new policy, which had just been
introduced.
"QQE with Yield Curve Control" consists of two components. The first is an
inflation-overshooting commitment, in which the Bank commits itself to expanding the
monetary base until the year-on-year rate of increase in the actual CPI exceeds 2 percent
and stays above that level in a stable manner. The second component is yield curve control,
in which the Bank controls short- and long-term interest rates under the guideline for
market operations decided at every Monetary Policy Meeting. Looking back at the one year
since its introduction, Japan's long-term interest rate has been stable at around zero percent,
which is the target level, and bank lending rates as well as issuance rates for corporate
bonds have been at extremely low levels. Moreover, financial institutions' lending attitudes
as perceived by firms have remained positive both for large and small firms, and the
year-on-year rate of increase in the amount outstanding of bank lending has been in the
range of 3.0-3.5 percent recently. Such highly accommodative financial conditions, as well
as proactive initiatives by financial institutions, have been firmly supporting corporate
activities in Japan.
Although there is still a long way to go to achieve the price stability target of 2 percent, the
Bank will continue to persistently pursue powerful monetary easing with a view to
achieving the target at the earliest possible time.
Thank you.
Japan's Economy and Monetary Policy
Speech at a Meeting with Business Leaders in Osaka
September 25, 2017
Haruhiko Kuroda
Governor of the Bank of Japan
Chart 1
Real GDP
ann., tril. yen
540
530
Real GDP (level, s.a.)
520
510
500
490
480
470
460
CY
06 07 08 09 10 11 12 13 14 15 16 17
Source: Cabinet Office.
Chart 2
External Demand
Exports
Global Manufacturing PMI
s.a., DI s.a., CY 2015=100
112
60
Global economy
110
Advanced economies
58
Real exports
Emerging and commodity-exporting economies
108
106
56
104
54
102
100
52
98
50
96
94
48
92
46
90
CY 10 11 12 13 14 15 16 17 CY 10 11 12 13 14 15 16 17
Notes: 1. Figures in the left chart for the global economy are the "J.P. Morgan Global Manufacturing PMI." Figures for advanced economies as well as emerging and commodity-exporting
economies are calculated as the weighted averages of the Manufacturing PMI using PPP-adjusted GDP shares of world total GDP from the IMF as weights. Advanced economies consist
of the United States, the euro area, the United Kingdom, and Japan. Emerging and commodity-exporting economies consist of 16 countries and regions, such as China, South
Korea, Taiwan, Russia, and Brazil.
2. Figures for real exports are based on BOJ staff calculations. The figure for 2017/Q3 is the July-August average.
Sources: IHS Markit (© and database right IHS Markit Ltd 2017. All rights reserved.); Bank of Japan; Ministry of Finance, etc. 2
Chart 3
Domestic Demand
Corporate Profits and
Private Consumption Public Investment
Business Fixed Investment
s.a. , % s.a., tril. yen s.a., CY 2010=100 s.a., tril. yen s.a., tril. yen
8 95 108 27 32
Public construction
Consumption Activity Index
Ratio of current profits to sales
completed
(travel balance adjusted, real)
(all industries and enterprises,
7 90 (nominal, left scale)
106
left scale)
25 30
Public investment
Private non-residential
6 85
(real, right scale)
investment
104
(SNA, real, right scale)
23 28
5 80
102
21 26
4 75
100
3 70
19 24
98
2 65
17 22
96
1 60
94 15 20
0 55
CY 06 07 08 09 10 11 12 13 14 15 16 17
CY 01 03 05 07 09 11 13 15 17 CY 06 07 08 09 10 11 12 13 14 15 16 17
Notes: 1. Figures for corporate profits are based on the "Financial Statements Statistics of Corporations by Industry, Quarterly." Excluding "finance and insurance."
2. Figures for private consumption are based on BOJ staff calculations (as of September 7). Figures exclude inbound tourism consumption and include outbound tourism consumption.
The figure for 2017/Q3 is that for July.
3. The figure for public construction completed for 2017/Q3 is that for July.
4. Figures for private non-residential investment, public construction completed and public investment are annualized.
3
Sources: Ministry of Finance; Cabinet Office; Bank of Japan; Ministry of Land, Infrastructure, Transport and Tourism.
Chart 4
Business Conditions DI (Tankan)
By Firm Size By Region
DI ("favorable" - "unfavorable"), % points DI ("favorable" - "unfavorable"), % points
30
30
"Favorable"
20 "Favorable"
20
10 "Unfavorable"
10
"Unfavorable"
0
0
-10 -10
-20 -20
-30 -30
Range of responses by region
Large enterprises
-40 -40
Kinki region
Medium-sized enterprises
-50
-50
Japan (all industries and
Small enterprises
enterprises)
-60
-60
CY
05 06 07 08 09 10 11 12 13 14 15 16 17
CY 05 06 07 08 09 10 11 12 13 14 15 16 17
4
Source: Bank of Japan.
Chart 5
Employment and Income Situation (1)
Active Job Openings-to-Applicants
Hourly Cash Earnings
Ratio of Full-time Employees
y/y % chg.
s.a., ratio
4 1.1
Hourly cash earnings
Hourly scheduled cash earnings (part-time employees)
1.0
0.9
2
0.8
0.7
0
0.6
0.5
-2
0.4
0.3
0.2
-4
CY
06 07 08 09 10 11 12 13 14 15 16 17
Chart 6
Employment and Income Situation (2)
Active Job
Unemployment Rate
Openings-toApplicants Ratio
s.a., % s.a., ratio
1.6
6
1.5
1.4
1.3
5
1.2
1.1
1.0
4
0.9
0.8
0.7
3
0.6
0.5
0.4
0.3
2
CY CY 06 07 08 09 10 11 12 13 14 15 16 17
06 07 08 09 10 11 12 13 14 15 16 17
6
Sources: Ministry of Internal Affairs and Communications; Ministry of Health, Labour and Welfare.
Chart 7
Software Investment
FY 2005=100
180
All industries
170
160 Construction
150 Retailing
140 Accommodations, eating & drinking services
130
120
110
100
90
80
70
FY 05 06 07 08 09 10 11 12 13 14 15 16 17
Chart 8
Consumer Prices
y/y % chg.
2
Introduction of QQE
(April 2013)
1
0
-1
CPI (all items less fresh food)
CPI (all items less fresh food and energy)
-2
CY 10 11 12 13 14 15 16 17
Note: The CPI figures are adjusted for changes in the consumption tax rate.
8
Source: Ministry of Internal Affairs and Communications.
Chart 9
Monetary Policy Responses and Developments in Real GDP
after the Global Financial Crisis
Policy Interest Rates Real GDP
% s.a., 2008/Q2=100
115
7
Japan
6
110
United States
5
Euro area
105
4
United Kingdom
3 100
2
95
Japan
1
United States
90
0 Euro area
United Kingdom
-1 85
CY 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
CY 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Chart 10
Prices, Nominal Wages, and Nominal Interest Rates
United States
Japan
% %
12
12
Consumer prices
Consumer prices
Nominal wages (hourly earnings)
10 10
Nominal wages (hourly earnings)
Nominal interest rates
Nominal interest rates
8 8
6
6
4 4
2 2
0
0
-2 -2
1980s 1990s 2000s 2010s
1980s 1990s 2000s 2010s
Notes: 1. Figures for the 2010s are 2010-2016 averages. Figures for consumer prices and nominal wages are the averages of the year-on-year rates of change.
Notes: 2. Figures for consumer prices are the CPI (all items, adjusted for changes in the consumption tax rate) for Japan and the PCE deflator (all items) for the United States.
Notes: 3. Figures for nominal wages for the United States are "average hourly earnings of production and nonsupervisory employees: total private."
Notes: 4. Figures for nominal interest rates include those for policy interest rates.
10
Sources: Ministry of Internal Affairs and Communications; Ministry of Health, Labour and Welfare; Bank of Japan; BEA; BLS; Bloomberg.