November 18, 2024
Bank of Japan
Japan's Economy and Monetary Policy
Speech at a Meeting with Business Leaders in Nagoya
UEDA Kazuo
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 Tokai region. I would like to take this chance to express
my sincerest gratitude for your cooperation with the various activities of the Bank of Japan's
Nagoya Branch.
The Bank makes a projection for Japan's economic activity and prices every quarter, which
is released in the Outlook for Economic Activity and Prices (Outlook Report). Today, I
would like to talk about the Bank's view on Japan's economic activity and prices and
explain its thinking behind the recent conduct of monetary policy, with reference to the
latest Outlook Report decided at the Monetary Policy Meeting (MPM) held in October.
I. Economic Activity and Prices
Current Situation of and Outlook for Economic Activity
Let me start by talking about economic developments. Japan's economy has recovered
moderately, although some weakness has been seen in part.
Looking at the corporate sector, the positive developments of an improvement in corporate
profits leading to an increase in business fixed investment have continued. As shown in
Chart 1, business sentiment in the September Tankan Economic Survey of
(Short-Term
Enterprises in Japan) improved slightly overall for both large and small firms, although
sentiment in some industries was negatively affected by the typhoon seen at the end of
August. Corporate profits have been on an increasing trend, including for small and
firms. Business fixed investment plans for fiscal 2024 show that firms have
medium-sized
maintained an active investment stance. Looking at a breakdown of business fixed
investment, a key feature of the current phase is that, in addition to investment induced by
the increase in domestic and external demand, investment for future growth such as
--
research and development (R&D) investment and investment related to digitalization and
decarbonization has increased. investment projects are likely to be less
-- Long-term
susceptible to demand fluctuations, and thus it is highly likely that business fixed
short-term
investment will continue on an increasing trend.
Next, let me turn to the household sector. Looking at private consumption in Chart 2, since
last year, due to the impact of price rises, consumption of nondurable goods such as food
products and daily necessities has been declining and indicators of household sentiment
have been relatively weak. Recently, however, the overall trend in private consumption has
returned to a moderate increasing trend. The reason for this positive -- albeit not strong --
development in private consumption seems to be the clear increase in nominal wages, on
the back of a rise in scheduled cash earnings reflecting the results of this year's annual
spring wage negotiations and an increase in summer bonuses supported
labor-management
by high levels of corporate profits.
As described, income has been rising in both the corporate and household sectors, and the
virtuous cycle in which this rise leads to higher spending is gradually intensifying. Since
these developments will likely continue to gain momentum, the Bank projects in the latest
Outlook Report that real GDP will continue to grow at a rate of around 1 percent in the next
fiscal year and beyond, as shown in Chart 3.
Current Situation of and Outlook for Prices
Next, I will move on to developments in prices. As shown in Chart 4, the rate
year-on-year
of increase in the consumer price index (CPI) for all items excluding fresh food was 2.4
percent in September 2024. Looking at the breakdown, the rates of increase in
year-on-year
the prices of food products and of other goods, which had been pushing up overall prices
substantially until last year, have continued on a declining trend as the impact of the past
rise in import prices has eased. On the other hand, the rate of increase in the
year-on-year
prices of services, in which labor costs account for a larger share of costs than in goods, has
been stable. This indicates that the driving force for price increases has been shifting from
factors stemming from the rise in import prices to domestic wage increases. The
cost-push
preliminary October CPI data for Tokyo's 23 wards, which are released ahead of the
national data, also indicate price revisions for a variety of items, including services, that
were carried out mainly on the back of wage increases price
-- "beginning-of-the-period
hikes" in the second half of the fiscal year.
Looking at the outlook for prices, the rate of increase in the CPI for all items
year-on-year
excluding fresh food is likely to be 2.5 percent for fiscal 2024 and then be at around 2
percent for fiscal 2025 and 2026. While the effects of a to consumer prices of
pass-through
cost increases led by the past rise in import prices are expected to continue to wane,
inflationary pressure stemming from wage increases is projected to strengthen as an
improvement in economic activity and solid growth in wages continue. It appears that
underlying inflation that is, the trend in inflation excluding fluctuations due to,
-- short-term
for example, the rise in import prices is currently below 2 percent. That said, underlying
--
inflation is likely to continue rising moderately and, in the second half of the projection
period through fiscal 2026, to be at a level that is generally consistent with the price
stability target of 2 percent.
II. Risks to Economic Activity and Prices
While so far I have talked about the current situation of and outlook for economic activity
and prices, I think there are high uncertainties surrounding this baseline scenario. Two key
factors regarding the outlook are (1) whether overseas economies will follow a moderate
growth path and (2) whether wages will continue to rise and whether the virtuous cycle
between wages and prices will continue to intensify. Let me discuss these two factors in
turn.
Developments in Overseas Economies and Financial and Capital Markets
I will start by discussing the first factor: overseas economies. As shown in Chart 5, the
International Monetary Fund (IMF) projects in its latest World Economic Outlook (WEO)
that the global economy will sustain growth in the range of percent through 2025,
3.0-3.5
which is more or less unchanged from its previous projection in July. While the baseline
scenario for overseas economies going forward is that they will continue to register
moderate growth, whether this scenario will be realized continues to warrant attention. At
the Group of Twenty (G20) meeting held last month, participants shared the view that
uncertainties regarding the outlook for the global economy have heightened recently.
Regarding the U.S. economy, there was a series of indicators this summer suggesting a
slowdown in the labor market. Since then, some statistics have shown positive
developments, and it has become more likely that the economy will achieve a soft landing,
in which the inflation rate declines toward 2 percent while a significant slowdown in the
economy is avoided. Nevertheless, it is necessary to continue to carefully monitor the
situation. Productivity in the U.S. economy has increased since the pandemic,
COVID-19
partly due to growth in the number of business startups in new industries and the active use
of artificial intelligence (AI). In addition, the rising number of immigrants among other
factors has increased the labor supply, and the economic trend in the United States seems to
be firm. Having said that, excess savings accumulated in the United States during the
pandemic, which have been one of the factors supporting solid private consumption there,
have declined, and the possibility that the impact of rapid policy interest rate hikes to date
will push down economic activity in the country, with a lag, continues to warrant attention.
On the other hand, the risk of developments in the opposite direction cannot be ruled out
--
that is, a resurgence of inflation as a result of, for example, future economic developments
and policy conduct. The Bank of Japan will carefully assess developments in the U.S.
economy, keeping both upside and downside risks in mind.
Turning to the Chinese economy, the markets there, particularly the real estate market, have
continued to undergo adjustments and the effects of these adjustments have spread to
private consumption. Although the economy is projected to continue to see moderate
growth, reflecting government support and other factors, there are high uncertainties
surrounding the future pace of growth. Moreover, exports in China have increased on the
back of a rise in inventory adjustment pressure on some goods brought about by the
developments in domestic demand I just mentioned, and it is necessary to pay attention to
factors including the effects of this increase in exports on other economies.
Attention to geopolitical risks also continues to be warranted. Depending on factors such as
the course of the situation surrounding Ukraine and the Middle East, downward pressure on
overseas economies could heighten, while the prices of grains and other commodities could
also fluctuate significantly. From a somewhat perspective, the heightened
long-term
geopolitical risks could change the trend of globalization, which has supported the growth
of the global economy to date.
Global financial and capital markets have shown nervousness from the summer onward.
Market sentiment has improved more recently, mainly because concerns over the U.S.
economy have receded. That said, the markets remain susceptible to, for example, economic
indicators of the various economies and media reports regarding geopolitical risks. The
Bank of Japan will continue to pay attention to whether fluctuations in global financial and
capital markets will affect economic activity and prices in Japan.
Virtuous Cycle between Wages and Prices
Next, I would like to turn to the second factor, whether wages will continue to rise and
whether the virtuous cycle between wages and prices will continue to intensify.
The environment surrounding wages is shown in Chart 6. Labor market conditions have
been tight for firms across a wide range of industries and sizes, partly due to the structural
factor of demographic changes. In particular, large firms are increasingly eager to hire
regular employees, and labor shortages, especially of younger employees, have become
more pronounced. Corporate profits, as explained earlier, have continued on an improving
trend. Meanwhile, the minimum wage for this fiscal year increased by more than 5 percent
year on year, the largest increase on record, and is expected to continue to rise, which would
prompt wages in general to rise as well.
In October, the Japanese Trade Union Confederation (Rengo) announced its basic policy for
next year's annual spring wage negotiations, calling for all firms to raise
labor-management
wages by 5 percent or more and for labor unions such as those for small and
--
firms to actively demand wage increases to address wage disparities. In
medium-sized --
addition, positive statements have come from the management side, mainly of large firms,
that they will continue to implement solid wage hikes. Due in part to initiatives to date by
both labor and management, nominal wages have steadily increased since 2022. However,
looking at scheduled cash earnings of employees in the Monthly Labour Survey,
full-time
for example, the cumulative increase so far has yet to catch up with the increase in prices
over this period.
Of course, on an individual basis, many firms, particularly small and ones,
medium-sized
have reported that the profit environment has been challenging and that continuing to raise
wages is difficult. For wage hikes to spread to these firms and a wide range of other firms, it
is critical to ensure that increases in wage costs are appropriately reflected in selling prices
and, more generally, that wages and selling prices are set on the assumption that both wages
and overall prices will continue to rise moderately. Please take a look at Chart 7. Indicators
of inflation expectations and other factors suggest that the view that prices will rise
moderately over the medium to long term is gradually taking hold among households and
firms. Moreover, among firms, there is also a growing recognition of the need to raise
wages to address labor shortages. The Bank will pay attention to developments in
wage negotiations going forward and to how wage increases will affect
labor-management
prices, particularly with regard to whether prices of services, in which labor costs account
for a large share of costs, will rise firmly.
I think that achieving the environment in which both wages and prices rise moderately will
be of great benefit to Japan's economy, as it will make it easier for firms to take positive
actions. On this basis, to strengthen the economy, it is essential for productivity in Japan as
a whole to increase, through initiatives by firms in particular to capitalize on this
environment, and for higher productivity to feed into a sustained rise in real wages. In this
regard, I consider it very encouraging that investment in anticipation of future growth, as
mentioned earlier, has increased further recently, including in areas. The
digital-related
Bank will support such positive actions by firms through the sustainable and stable
achievement of the price stability target of 2 percent.
III. The Bank's Conduct of Monetary Policy
Next, I will talk about the Bank's conduct of monetary policy.
The Bank changed its monetary easing framework this March, discontinuing the
large-scale
negative interest rate policy and yield curve control, judging that it was now within sight
that the price stability target of 2 percent would be achieved in a sustainable and stable
manner. In July, the Bank then decided on a plan for the reduction of its purchase amount of
Japanese government bonds (JGBs) and raised the target level of the interest rate
short-term
to around 0.25 percent.
Regarding the future conduct of monetary policy, if the outlook for economic activity and
prices that I have outlined today is realized, the Bank will accordingly continue to raise the
policy interest rate and adjust the degree of monetary accommodation.
However, monetary policy will continue to firmly support economic activity. Please take a
look at Chart 8. Monetary policy affects economic activity mainly through changes in real
interest rates, that is, nominal interest rates minus the expected rates of inflation. Looking at
the levels of real interest rates, since nominal interest rates have been maintained at
extremely low levels despite favorable price developments, real interest rates have been
negative and even lower than in the 2010s, and thus the degree of monetary accommodation
can be judged to have actually increased. Going forward, I think that gradually adjusting the
degree of accommodation in line with improvement in economic activity and prices will
support economic growth and contribute to achieving the price stability target in
long-term
a sustainable and stable manner.
The actual timing of the adjustments will continue to depend on developments in economic
activity and prices as well as financial conditions going forward. The Bank needs to pay due
attention to various risk factors, such as those pointed out in the latest Outlook Report,
including the course of overseas economies, particularly the U.S. economy, and
developments in financial and capital markets. On this basis, it also needs to examine how
these factors will affect the outlook for Japan's economic activity and prices, the risks
surrounding them, and the likelihood of realizing the outlook. At each MPM, the Bank will
make policy decisions based on its latest assessment of the current state of and outlook for
economic activity and prices with reference to, for example, the data and information
available at the time of each meeting.
Concluding Remarks
In closing, I would like to touch on initiatives conducted with an eye to the future in the
Tokai region.
The Tokai region has been a monozukuri (manufacturing) center with strong supply chains,
especially in the automobile industry. Capitalizing on these strengths, the region has led the
growth in Japan's economy through various innovations.
Firms in the region have actively invested in R&D with an eye to the future. An emerging
trend is the growing momentum toward open innovation through collaboration with
universities, startups, and other entities, and financial institutions have supported these
initiatives. The local government also has become involved, and as part of its efforts to
further promote the collaboration of industry, government, academia, and finance, one of
the largest startup support centers in Japan opened in the Tokai region in October. Moreover,
a global startup event is planned to be held here for the first time next year.
Promoting innovation is important not only in terms of growth in Japan's economy through
higher productivity, but also in terms of addressing to issues, including
medium- long-term
climate change. Achieving carbon neutrality requires innovation across a wide range of
areas. In the Tokai region, various initiatives have made steady progress, such as the
electrification of vehicles, the more widespread utilization of hydrogen and ammonia
technologies for decarbonization in society, and carbon recycling that is, making efficient
--
use of carbon dioxide as a resource.
I would like to close today by expressing my hope that the efforts of the Tokai region will
bear fruit, and that its economy will continue to develop and lead the way in the sustainable
growth of Japan's economy. Thank you very much for your attention.
Japan's Economy and Monetary Policy
Speech at a Meeting with Business Leaders in Nagoya
November 18, 2024
UEDA Kazuo
Governor of the Bank of Japan
Introduction
I. Economic Activity and Prices
II. Risks to Economic Activity and Prices
III. The Bank's Conduct of Monetary Policy
Concluding Remarks
Corporate Sector
Business Conditions (Tankan) Corporate Profits Business Fixed Investment
DI ("favorable" - "unfavorable"), % points y/y % chg.
s.a., tril. yen
30
18 15
Planned investment in the
Large firms
September 2024 survey
16
20
Small and medium-sized firms : +10.3%
10
14
10
5
12
0
0
10
-10
8
-5
-20
6
-10
"Favorable"
-30
4
Large firms
-15
-40
2
Small firms
"Unfavorable"
-50 0 -20
CY
CY 07 09 11 13 15 17 19 21 23 07 09 11 13 15 17 19 21 23 FY 08 10 12 14 16 18 20 22 24
Notes: 1. In the middle chart, figures are current profits based on the Financial Statements Statistics of Corporations by Industry, Quarterly and exclude "finance and insurance." Figures from
2009/Q2 onward exclude pure holding companies.
2. In the right-hand chart, figures are based on the Tankan, including software and R&D investments and excluding land purchasing expenses. R&D investment is not included before
the March 2017 survey. Figures are for all industries including financial institutions.
Sources: Bank of Japan; Ministry of Finance.
1
Chart 2
I. Economic Activity and Prices
Household Sector
Private Consumption Nominal Wages
y/y % chg.
s.a., CY 2019 = 100
105
4
100
Scheduled cash earnings of full-time employees
3
95
90
2
85
1
80
Total real private consumption
75
Of which, services
0
(travel, dining-out, etc.)
70
Of which, nondurable goods (food
products, clothes, daily necessities, etc.)
-1
65
CY 19 20 21 22 23 24
CY 19 20 21 22 23 24
Notes: 1. In the left-hand chart, figures for total real private consumption are the real Consumption Activity Index (travel balance adjusted) based on staff calculations, which exclude inbound
tourism consumption and include outbound tourism consumption.
2. In the right-hand chart, figures are based on continuing observations following the sample revisions.
Sources: Bank of Japan; Ministry of Health, Labour and Welfare.
The BOJ's Forecasts for Real GDP
(Oct. 2024 Outlook Report)
Forecasts
Developments over Time
s.a., ann., tril. yen y/y % chg.
580 2.0
570
1.5
560
+1.1%
+1.0%
550 1.0
+0.6%
540
0.5
530
520 0.0
510
-0.5
500
490
-1.0
FY 13 14 15 16 17 18 19 20 21 22 23 24 FY 24 25 26
Note: In the right-hand chart, the forecasts presented are the medians of the Policy Board members' forecasts.
Sources: Cabinet Office; Bank of Japan.
3
Chart 4
I. Economic Activity and Prices
Developments in Consumer Prices
Developments over Time Forecasts
y/y % chg.
y/y % chg.
5 5
Energy
Food products
4 4
Goods (less food products)
Services
CPI (less fresh food)
3
3
+2.5%
Sept. 2024
CPI (less fresh food and energy)
+2.1%
+2.4%
+1.9%
2
+2.1% 2
+2.0%
+1.9% +1.9%
1
1
0 0
CPI (less fresh food)
-1 -1
CPI (less fresh food and energy)
-2
-2
CY 19 20 21 22 23 24 FY
Overseas Economies
Global Growth Rate
U.S. Economy
(IMF's October 2024 WEO)
y/y % chg.
y/y % chg.
%
7 16 10
IMF projections
6
14
5 8
12
4
10
6
3
2 8
1 4
6
0
4
-1 2
2
Unemployment rate (left scale)
-2
CPI (all items, right scale)
0 0
-3
CY 19 20 21 22 23 24
CY 00 02 04 06 08 10 12 14 16 18 20 22 24 26
Sources: IMF; Haver.
5
Chart 6
II. Risks to Economic Activity and Prices
Environment Surrounding Wages
Developments in the
Labor Market Conditions Projection for Labor Input
Minimum Wage
inverted, DI ("excessive" - "insufficient"),
% points y/y % chg.
mil. persons yen
-50
100 6 2,000
(1) Aged 15-64
FY 2024: +5.1%
(working-age population)
Minimum wage
1,800
90 (2) Employed persons
5
Projection (level, right scale)
-40
"Insufficient"
Minimum wage
1,600
80
(rate of increase, left scale)
4
-30
1,400
1,055 yen
70
"Excessive"
3
1,200
-20
60
2 1,000
50
-10
800
30
1
(1) - (2)
Projection
600
20
0
0
10 400
Large firms
10
-1
Small firms
200
0
20 -2 0
-10
CY
10 12 14 16 18 20 22 24 FY FY 03 06 09 12 15 18 21 24
Changes in Firms' and Households' Mindset
Regarding Wages and Prices
Share of Establishments That Are Planning to
Inflation Expectations
"Improve Wages" to Address Labor Shortages
multiple answers allowed, %
%
60
2.5
Composite index of inflation expectations
(10-year ahead)
<Large enterprises> <Small enterprises>
Sub-index for households
50
2.0
Sub-index for firms
Sub-index for economists and market
participants 40
1.5
30
1.0
20
0.5
10
0
0.0
Aug-22 Aug-23 Aug-24 Aug-22 Aug-23 Aug-24
CY 12 14 16 18 20 22 24
Notes: 1. For details of the approach on which the left-hand chart is based, see Box 4 of the April 2024 Outlook Report.
2. In the right-hand chart, figures are based on the Survey on Labour Economy Trend. Figures represent the share of establishments that answered that they are planning to "improve
working conditions (wages) of current employees" as a measure to address labor shortages for the year ahead. Large enterprises are enterprises with 1,000 or more employees.
Small enterprises are enterprises with 30 to 299 employees.
Sources: Ministry of Health, Labour and Welfare; Bank of Japan; QUICK, "QUICK Monthly Market Survey <Bonds>"; Consensus Economics Inc., "Consensus Forecasts"; Bloomberg.
7
Chart 8
III. The Bank's Conduct of Monetary Policy
Financial Conditions
Real Interest Rate (1-Year) Real Interest Rate (10-Year)
%
%
1.5 1.5
Real interest rate
1.0
Real interest rate
1.0
Nominal interest rate
Nominal interest rate
0.5
0.5
0.0
-0.5 0.0
-1.0
-0.5
-1.5
-1.0
-2.0
-2.5 -1.5
10 12 14 16 18 20 22 24 10 12 14 16 18 20 22 24
CY CY
Note: Figures for the real interest rate for each maturity are calculated as government bond yields minus the composite index of inflation expectations (staff estimates) for the
corresponding maturity.
Sources: Bank of Japan; QUICK, "QUICK Monthly Market Survey <Bonds>"; Consensus Economics Inc., "Consensus Forecasts"; Bloomberg.