Economic Activity, Prices,
and Monetary Policy in Japan
Speech at a Meeting with Local Leaders in Gunma
(via webcast)
KATAOKA Goushi
Member of the Policy Board
I. Economic Activity and Prices
A. Overseas Economies
I would like to start my speech by looking at developments in overseas economies.
In 2020, developments in the global economy took an unexpected turn after the novel
coronavirus (COVID-19) began to spread worldwide. Chart 1 shows that the number of
confirmed new cases has generally stayed at a high level, although having declined after a
resurgence since last autumn, mainly in advanced economies such as the United States and
the euro area. Under these circumstances, the global economy has picked up on the whole,
although the impact of the resurgence of COVID-19 has been seen in part. The pace of the
pick-up, however, has been moderate. While production activity and the trade volume of the
manufacturing industry continue to recover, downward pressure has been exerted on the
services industry, which is heavily affected by COVID-19.
Chart 1 Daily Confirmed New Cases of COVID-19
1,000 cases 1,000 cases
400 4
United States (left scale) Euro area (left scale)
350
Other (left scale) China (right scale)
300 3
250
200 2
150
100 1
50
0 0
Jan. Jan. 2020 Apr. Jul. Oct. Jan. Jan. 2021
Notes: 1. Figures are 7-day backward moving averages.
2. Figures for the United States are based on data from the Centers for Disease Control and
Prevention (CDC), while those for the euro area and "Other" are based on data from the World
Health Organization (WHO). For China, there is a discontinuity in the data for February 17 to
19 of 2020 due to the difference in the basis compared with other periods, and figures for
March 16 onward are based on data released by the Chinese government (those before March
16 are based on WHO data).
Source: CEIC.
As for the outlook, for the time being the pace of recovery is expected to be moderate on the
whole. It is also likely to vary across countries and regions depending on the severity of the
spread of COVID-19 and the impact of public health measures, as well as of macroeconomic
policies taken by the respective governments and central banks.
Chart 2 shows the January 2021 World Economic Outlook (WEO) Update released by the
International Monetary Fund (IMF) as compared with the Update released a year ago, before
the worldwide spread of COVID-19. Looking at developments by country and region, the
Chinese economy has achieved an expansion of domestic demand through increases in
employment and income while successfully capturing external demand. China's real GDP
growth rate has already surpassed its pre-pandemic level, and is expected to grow roughly in
line with the January 2020 WEO projection. This is likely to be attributed to China's early
containment of COVID-19 and the government's effective economic measures. In contrast,
advanced economies as well as emerging market and developing economies other than China
have seen a delay in economic recovery, and the real GDP growth rates of these economies
are expected to return to pre-pandemic levels only in the second half of 2021. Moreover, there
are various risk factors with respect to the outlook for the global economy, such as
developments regarding COVID-19, geopolitical factors, and climate change issues. Thus,
accompanying downside risks continue to warrant particular attention.
Chart 2 World Economic Outlook (IMF)
2019/Q4=100
125
China (Jan. 2021 WEO Update) China (Jan. 2020 WEO Update)
AEs (Jan. 2021 WEO Update) AEs (Jan. 2020 WEO Update)
120
EMDEs (Jan. 2021 WEO Update) EMDEs (Jan. 2020 WEO Update)
115
110
105
100
95
90
85
80
2019/Q4 2019/Q420/Q1 Q3 21/Q1 Q3 22/Q1 Q3
Note: WEO = World Economic Outlook; AEs = advanced economies; EMDEs = emerging market and
developing economies excluding China.
Source: IMF, "World Economic Outlook Update (January 2020, January 2021)."
B. Japan's Economy
Next, I would like to turn to Japan's overall economic trends, starting with real GDP growth
rates.
In Chart 3, the line graph shows developments in the real GDP growth rate and the bar graph
shows the contribution of demand components, such as consumption and investment, to the
growth rate. The first preliminary estimate for the October-December quarter of 2020 marked
a real GDP growth rate of 3.0 percent on a quarter-on-quarter basis and 12.7 percent on an
annualized basis. The economy registered positive growth for the second consecutive quarter,
with private consumption, exports, business fixed investment, and public demand all
contributing to the positive growth. Nevertheless, the annual real GDP growth rate for 2020
was minus 4.8 percent, demonstrating that economic recovery from the plunge for the April-
June quarter was still weak.
Chart 3 Real GDP Growth Rate and Breakdown by Demand Component
s.a., ann., q/q % chg.
30
25
20
15
10
5
0
-5
-10
-15
Private consumption Private business fixed investment, etc.
-20
Government spending Exports
-25
Imports Change in inventories, etc.
-30
Real GDP
-35
CY 2013 14 15 16 17 18 19 20
Source: Cabinet Office, "Quarterly Estimates of GDP for October-December 2020 (First Preliminary
Estimates)."
Chart 4 shows the outlook for Japan's economy. As presented in the January 2021 Outlook
for Economic Activity and Prices (Outlook Report), the medians of the Bank of Japan Policy
Board members' forecasts for real GDP growth rates are minus 5.6 percent for fiscal 2020,
3.9 percent for fiscal 2021, and 1.8 percent for fiscal 2022. Japan's economy is likely to follow
an improving trend from the second half of 2020, with the impact of COVID-19 waning
gradually, but the pace is expected to be only moderate while vigilance against COVID-19
continues. Thereafter, as the impact subsides globally, the economy is projected to keep
improving further, with overseas economies returning to a steady growth path.
Chart 4 Outlook for Economic Activity and Prices
medians of Policy Board members' forecasts, y/y % chg.
CPI (all items
Real GDP
less fresh food)
Fiscal 2020
-5.6 -0.5
Fiscal 2021
+3.9 +0.5
Fiscal 2022
+1.8 +0.7
Source: Bank of Japan, "Outlook for Economic Activity and Prices (January 2021)."
Having said that, risks to the outlook seem to be skewed to the downside, mainly due to the
impact of COVID-19. In particular, the future course of COVID-19 at home and abroad as
well as accompanying downside risks to economic activity and prices continue to warrant
close attention.
I would now like to examine developments in major GDP components such as private
consumption, business fixed investment, and exports.
Let me start with private consumption. As Chart 5 shows, from March through May 2020,
the period when COVID-19 started to spread nationwide, there was a marked decline in real
consumption -- mainly services consumption, such as tourism, accommodation, eating and
drinking, and recreation. Thereafter, while goods consumption has recovered to the level seen
at the start of 2020, services consumption has been slow to pick up, due in part to the impact
of the resurgence of COVID-19. Given uncertainty as to when the pandemic will subside,
consumption will likely remain weak for some time.
Chart 5 Real Consumption
CY 2019=100
120
110
104.6
100
98.2
93.3
90
87.3
80
Durable goods
70 Non-durable goods
Services
Overall (Consumption Activity Index, real)
60
CY 2013 14 15 16 17 18 19 20
Source: Bank of Japan, "Consumption Activity Index."
Let us take a closer look at developments in the employment situation, which underpin private
consumption. As presented in the left panel of Chart 6, the unemployment rate, after having
climbed to 3.1 percent, improved slightly to 2.9 percent; however, the rate remains at a high
level compared with that prior to the COVID-19 outbreak. To examine in more detail changes
in the number of employed persons, Chart 7 compares the number of employed persons by
gender and age group between the average for the 2013-2019 period and the total for 2020,
with the latter reflecting the impact of COVID-19. The chart reveals that, for each age group,
in 2020 the number of employed persons started to trend downward. This is primarily
attributed to the decrease in the number of non-regular employees, with the younger
generations and women exhibiting significant changes. Yet, for women aged 25-64, there was
an increase in the number of regular employees, despite the extent of the decrease in the
number of non-regular employees. As can be seen in the right panel of Chart 6, the year-on-
year rate of change in nominal wages has been negative since April 2020. In particular, it saw
a larger decline again at the end of 2020, primarily reflecting a decrease in special cash
earnings; how this will affect future consumption is a matter of concern.
Chart 6 Labor Market Conditions
Unemployment Rate
Nominal Wages
and Labor Force Participation Rate
y/y % chg.
%
%
6 65 3
64 2
5
63 1
4
62 0
61
-1
3
60 -2
Contractual cash earnings
2
59 -3 Special cash earnings
Unemployment rate (left scale)
Total cash earnings
Labor force participation rate (right scale)
1 58
-4
CY 2016
CY 85 1985 90 95 00 05 10 15 20 16 17 18 19 20
Source: Ministry of Internal Affairs and Note: Figures are based on continuing
Communications, "Labour Force Survey observations following the sample revisions
(Basic Tabulation)." of the Monthly Labour Survey.
Source: Ministry of Health, Labour and Welfare,
"Monthly Labour Survey."
Chart 7 Changes in Number of Employed Persons
Male Female
10,000 persons
10,000 persons
30
40
20
20
10
0
0
-20
-10
-40
-20
-30
-60
Past CY Past CY Past CY
Past CY Past CY Past CY
average 2020 average 2020 average 2020
average 2020 average 2020 average 2020
15-24 years old 25-64 years old 65 years old
15-24 years old 25-64 years old 65 years old
and above
and above
Regular employees Non-regular employees Other workers Total
Note: Figures show the change in the annual average number of employed persons over the year.
Figures for "Past average" are averages for the period from 2013 through 2019. Figures for
"Other workers" include self-employed workers and executives of corporations.
Source: Ministry of Internal Affairs and Communications, "Labour Force Survey (Detailed Tabulation)."
I will now shift to business fixed investment. As shown in Chart 8, although the business
fixed investment ratio, which represents the share of the amount outstanding of business fixed
investment to nominal GDP, has recently been picking up somewhat, the level remains below
that observed until 2019. Firms' perception of their production capacity, as indicated by the
production capacity diffusion index (DI) in the Bank's Tankan (Short-Term Economic Survey
of Enterprises in Japan), has shifted toward being significantly "excessive," in line with the
spread of COVID-19. Looking at the business fixed investment plan in the December 2020
Tankan, as shown in Chart 9, the investment plans of manufacturing firms turned negative on
a year-on-year basis for fiscal 2020. The plans of nonmanufacturing firms also fell further
into negative territory. These developments suggest that business fixed investment will
remain weak for the time being.
Chart 8 Business Fixed Investment Ratio
DI ("excessive capacity" minus "insufficient capacity"),
%
% points, reversed
17 -10
-5
capacity
Insufficient
0
16
5
capacity
Excessive
10
15
15
20
Business fixed investment ratio (left scale)
Production capacity DI (right scale)
14 25
CY
2005 07 09 11 13 15 17 19
Note: Figures for "Business fixed investment ratio" represent the ratio of nominal private non-
residential investment to nominal GDP. Figures for "Production capacity DI" are those for large
enterprises of all industries.
Sources: Cabinet Office, "Quarterly Estimates of GDP for October-December 2020 (First Preliminary
Estimates)"; Bank of Japan, "Tankan."
Chart 9 Developments in Business Fixed Investment Plans
Manufacturing Nonmanufacturing
y/y % chg. y/y % chg.
15
15
10 10
5 5
0
0
-5
-5
Mar. June Sep. Dec. Forecast Actual Mar. June Sep. Dec. Forecast Actual
survey survey survey survey
survey survey survey survey
FY 2017 FY 2018 FY 2019 FY 2020 Average (FY 2017 - 2019)
Note: Figures are for all enterprises, including software and R&D investments and excluding land
purchasing expenses.
Source: Bank of Japan, "Tankan."
Lastly, let me turn to exports. As can be seen in Chart 10, real exports saw a significant drop
in the April-June quarter of 2020 when the impact of COVID-19 intensified. This drop is
evident in exports to Europe and the United States, and in exports of automobile-related goods,
IT-related goods, and capital goods. Thereafter, exports saw an upturn, and as of the end of
2020, generally recovered to the level posted before the impact of COVID-19 grew most
intense. IT-related exports have since continued the firm recovery trend into 2021 to date.
Regarding the outlook, exports are likely to remain on an increasing trend, particularly for
IT-related goods and capital goods, on the premise that recovery in the Chinese and U.S.
economies will continue.
Chart 10 Real Exports
Breakdown by Region Breakdown by Type of Goods
s.a., CY 2019=100
s.a., CY 2019=100
140
120
United States
130
110
EU
120 China
100
Real exports
110
90
100
80
90
70
80
Automobile-related goods
60
70
IT-related goods
50
60
Capital goods
50 40
CY 15 2015 16 17 18 19 20 21 15 16 17 18 19 20 21
CY 2015
Source: Bank of Japan, "Developments in Real Exports and Real Imports."
C. Recent Developments and Outlook for Prices
Next, I will move on to price developments.
The observed year-on-year rate of change in the consumer price index (CPI) for January 2021
was minus 0.6 percent for all items less fresh food and 0.1 percent for all items less fresh food
and energy, as seen in the left panel of Chart 11. The right panel shows developments in the
indicators for capturing the underlying trend in the CPI. It shows that the underlying inflation
trend has been declining moderately, with the trimmed mean decreasing further into negative
territory and other measures of underlying inflation showing smaller growth.
Chart 11 Consumer Prices
Consumer Price Index Measures of Underlying Inflation
y/y % chg. % points
y/y % chg.
2.0 50
2.0
1.5 1.5
1.0 25
1.0
0.5 0.5
0.0 0.0 0
-0.5
-0.5
-1.0 -1.0 -25
CPI (less fresh food)
Trimmed mean (left scale)
-1.5 -1.5
CPI (less fresh food and energy) Weighted median (left scale)
CPI estimates (less fresh food, energy, and policy effects) Diffusion index (right scale)
-2.0
-2.0 -50
CY 2011 11 12 13 14 15 16 17 18 19 20 21 CY 2011 11 12 13 14 15 16 17 18 19 20 21
Notes: 1. In the left panel, figures are adjusted for consumption tax hikes and the introduction of free
preschool education. In addition to the above, figures for "CPI estimates (less fresh food,
energy, and policy effects)" also exclude the effects of policies concerning the provision of
free higher education and the "Go To Travel" campaign.
2. In the right panel, "Diffusion index" is defined as the share of increasing items minus that of
decreasing items.
Sources: Ministry of Internal Affairs and Communications, "Consumer Price Index"; Bank of Japan,
"Measures of Underlying Inflation."
Turning to the outlook for prices, according to the medians of the Policy Board members'
forecasts presented in the January 2021 Outlook Report, the year-on-year rate of change in
the CPI (all items less fresh food) is expected to increase gradually from minus 0.5 percent
for fiscal 2020 to 0.5 percent for fiscal 2021, and to 0.7 percent for fiscal 2022, as shown in
Chart 4. If we look at the output gap and medium- to long-term inflation expectations -- both
of which affect the underlying trend in prices -- the output gap, shown in the left panel of
Chart 12, continues to indicate a significant excess supply, although the gap itself had
narrowed after having recorded an excess supply of over 4 percent in the April-June quarter
of 2020. Inflation expectations have declined since the end of 2019, as confirmed in the right
panel of the chart. Bearing in mind that the pace of economic recovery is likely to be modest,
with uncertainty over when the spread of COVID-19 will subside, it is difficult to project at
this stage that the inflation rate will gather momentum toward approaching the 2 percent price
stability target, with the output gap shifting to excess demand and inflation expectations
rising.1
Chart 12 Output Gap and Inflation Expectations
Output Gap Synthetic Indicators of Inflation Expectations
y/y % chg.
%, % points
6 2.0
Labor input gap Capital input gap Output gap Firms, households, and experts (QUICK Survey)
Firms, households, and experts (Consensus Forecasts)
4
Firms, households, and experts (inflation swap rate)
1.5
2
1.0
0
-2
0.5
-4
0.0
-6
CY 2010 10 11 12 13 14 15 16 17 18 19 20
CY 85 1985 88 91 94 97 00 03 06 09 12 15 18
Note: In the right panel, inflation expectations of firms are taken from the Tankan (output prices DI),
and those of households are taken from the Opinion Survey on the General Public's Views and
Behavior (average of responses for annual inflation expectations between minus 5 percent and
plus 5 percent). For experts' inflation expectations, the QUICK Survey, the Consensus Forecasts,
and the inflation swap rate are used.
Sources: Consensus Economics Inc., "Consensus Forecasts"; QUICK Corp., "QUICK Monthly Market
Survey <Bonds>"; Bloomberg; Bank of Japan.
II. Conduct of Monetary Policy
Let me first outline the Bank's current monetary policy, based on the outlook for economic
activity and prices that I have described. I would then like to express my opinion about the
Bank's monetary policy conduct.
1
As for the outlook, some factors could put upward pressure on prices. Real disposable income and
savings rates have increased significantly on the back of the impact of COVID-19 and the
government's economic measures. When the pandemic subsides, savings rates are likely to return to
pre-pandemic levels. Accordingly, the inflation rate may rise if consumption and investment, both of
which have been constrained so far, see an upsurge.
A. Outline of the Current Monetary Policy
The Bank conducts monetary policy under the framework of Quantitative and Qualitative
Monetary Easing (QQE) with Yield Curve Control, aiming to achieve the 2 percent price
stability target. This current framework consists of three measures: yield curve control, the
purchase of risk assets, and the Bank's public commitment regarding the future conduct of
monetary policy.
In addition to these measures, the Bank has taken the following three actions to address the
pandemic since March 2020, as shown in Chart 13: (1) the Special Program to Support
Financing in Response to the Novel Coronavirus (COVID-19) to provide support mainly for
corporate financing; (2) an ample and flexible provision of funds to ensure stability in
financial markets; and (3) active purchases of exchange-traded funds (ETFs) and Japan real
estate investment trusts (J-REITs) to lower the risk premia in asset markets. I hold the view
that these actions taken in response to COVID-19 have thus far contained the disturbance in
the financial and capital markets and produced some positive effects on financing, mainly of
firms.
Chart 13 Actions Taken by the Bank to Address COVID-19
(1) Supporting Corporate Financing
Program to Support Financing in Response to COVID-19
•Special Purchases of CP and corporate bonds: maximum amount outstanding of about
20 tril. yen (previous amount outstanding of about 5 tril. yen)
• Special Funds-Supplying Operations to Facilitate Financing in Response to
COVID-19
(2) Stabilizing Financial Markets
and Flexible Provision of Yen and Foreign Currency Funds
•Ample Further active purchases of JGBs and T-Bills
•
Enhancement of the U.S. Dollar Funds-Supplying Operations
(3) Actively Purchasing ETFs and J-REITs
ETFs: annual pace of about 6 tril. yen
 annual pace with the upper limit of about 12 tril. yen for the time being
J-REITs: annual pace of about 90 bil. yen
 annual pace with the upper limit of about 180 bil. yen for the time being
However, with the moderate pace of economic improvement and significant downside risks,
financing, mainly of firms, is likely to remain under stress for the time being. To address this
situation, the Bank decided at the December 2020 Monetary Policy Meeting (MPM) to extend
the duration of the Special Program by six months until the end of September 2021, thereby
continuing to support financing, mainly of firms.
The Bank will continue to closely monitor the impact of COVID-19 and not hesitate to take
additional easing measures -- including further extension of the Special Program -- if
necessary. Moreover, as a forward-looking approach, the Bank has decided to conduct an
assessment for further effective and sustainable monetary easing, with a view to supporting
the economy and thereby achieving the price stability target of 2 percent. Based on the
premise that the Bank will maintain the current framework of QQE with Yield Curve Control,
it will assess various measures and make public its findings, likely at the March 2021 MPM.
B. My View on the Conduct of Monetary Policy
I voted for the Bank to take the aforementioned actions in response to COVID-19, but I have
continued to dissent from the majority decision on the following two measures: yield curve
control and the Bank's commitment regarding the future conduct of monetary policy. This
was based on my view that it is necessary not only to support financing and provide liquidity
but also to implement measures to contain any downward pressure that may be exerted on
prices and thereby support Japan's economy to return to a powerful growth path.
I would first like to present my view on the transmission channels through which changes in
the number of confirmed cases of COVID-19 and subsequent public health measures affect
economic activity and prices. A surge in the number of COVID-19 cases, for example, will
lead to the tightening of public health measures. This will in turn not only curb private
consumption directly but could also dampen private consumption and firms' fixed investment
indirectly, through deterioration in consumer sentiment and increased uncertainty over
economic and financial conditions. These developments will exert downward pressure on
prices through deterioration in the output gap toward excess supply.
Judging from a model that assumes the aforementioned transmission channels and estimating
future price developments based on Japan's situation regarding COVID-19 to date, the risk of
prices becoming stagnant has increased further. If the timing of a turnaround in the output
gap toward excess demand is delayed due to the resurgence of COVID-19, prices are expected
to remain under downward pressure for a longer period, compared with a scenario in which
there is no resurgence. Moreover, given that the formation of inflation expectations is highly
adaptive in Japan, the longer the rate of inflation remains stagnant, the less likely inflation
expectations are to rise. As I have explained, if there are repeated resurgences of COVID-19,
prices are expected to remain stagnant for a protracted period, with both the output gap and
inflation expectations being pushed down.
Based on this recognition, I consider that the Bank needs to strengthen monetary easing in
terms of yield curve control and its commitment regarding the future conduct of monetary
policy. As for yield curve control, with a view to encouraging firms to make investment for
growth, such as through active business fixed investment for the post-COVID-19 era, it is
appropriate for the Bank to lower short- and long-term interest rates by actively purchasing
Japanese government bonds (JGBs). I believe that supporting investment for growth through
monetary easing does not necessarily involve a trade-off with the spread of COVID-19. In
terms of the Bank's commitment regarding the future conduct of monetary policy, in order to
avoid Japan's economy returning to deflation, further coordination of fiscal and monetary
policy is necessary, and it is appropriate for the Bank to revise the forward guidance for the
policy rates to make such guidance more powerful by relating it to the price stability target,
so as to enable the Bank to take actions based on concrete conditions.
As for the assessment for further effective and sustainable monetary easing, I consider it
necessary first and foremost to thoroughly analyze and examine the effects on economic
activity and prices in terms of each measure -- namely, yield curve control, the purchase of
risk assets, forward guidance for policy rates, and the inflation-overshooting commitment. In
addition, the Bank needs to take into account the current situation, in which it is difficult to
envision the path for achieving the price stability target, with economic activity and prices
remaining under downward pressure for a prolonged period due to the impact of the spread
of COVID-19. On this basis, I believe that it is necessary for the Bank to carefully assess the
current measures, and then, together with the findings of such assessment, consider and
explain its future strategies. As a member of the Policy Board of the Bank, I will continue to
do my utmost to achieve and maintain the price stability target.
Thank you.