March 27, 2024
Bank of Japan
Economic Activity, Prices,
and Monetary Policy in Japan
Speech at a Meeting with Local Leaders in Aomori
TAMURA Naoki
Member of the Policy Board
I. Economic Activity and Prices
A. Economic Activity
I will begin my speech by talking about recent developments in economic activity in Japan.
The Bank of Japan assesses that the economy has recovered moderately, although some
weakness has been seen in part. I would like to raise two points that I am concerned about
recently. The first is about developments in private consumption. Despite high prices, private
consumption has continued to increase at a moderate pace, due in part to pent-up demand
from the COVID-19 pandemic (Chart 1). However, consumption of nondurable goods, such
as food and clothes, has followed a decreasing trend in real terms after excluding price rises,
reflecting a recent shift toward inexpensive products. My understanding is that consumption
has started to show signs of owing to high prices, as an increase in wages has not
waning,
been catching up with price rises. The second concern is about business fixed investment. On
the back of corporate profits having been at high levels on the whole, the business fixed
investment plans for fiscal 2023 in the Tankan (Short-Term Economic Survey of Enterprises
in Japan) indicate that investment is likely to increase clearly (Chart 2). Meanwhile, the actual
data for fixed investment in the GDP statistics up to December 2023 somewhat lack strength,
even taking into account that the normal assumption is that actual data decline from the
projection. On the other hand, the remaining orders for machinery and construction have
Chart 1: Private Consumption
Consumption Activity Index Nominal Wages
s.a., CY 2019 = 100 y/y % chg.
110 6
Nominal wages
CPI (less imputed rent)
100 4
90 2
80 0
Total real private
consumption
Services
70 -2
Nondurable goods
60 -4
CY 19 20 21 22 23 24 CY 19 20 21 22 23 24
Chart 2: Business Fixed Investment
Planned and Actual Investment Remaining Orders
y/y % chg.
20 tril. yen tril. yen
40 30
Machinery (excluding orders
for ships, left scale)
10
Construction (right scale)
35
25
0
30
20
Tankan (planned investment in
-10
25
current fiscal year as of the
December survey of each year)
Private nonresidential
investment (SNA, nominal)
-20 20 15
FY 07 10 13 16 19 22 CY 19 20 21 22 23
Notes: 1. In the left panel, the Tankan figures include software and R&D investments and exclude land purchasing expenses. Figures are for all
industries including financial institutions.
2. In the left panel, the figure for private nonresidential investment for fiscal 2023 is the 2023/Q2-Q4 average.
3. In the right panel, figures for "construction" are based on the survey of 50 major construction companies.
Sources: Cabinet Office; Ministry of Land, Infrastructure, Transport and Tourism; Bank of Japan.
stayed on an increasing trend, and thus I consider that firms are faced with a lack of supply
capacity, in that they receive orders but cannot manufacture, mainly due to labor shortages,
although there is demand for business fixed investment.
In terms of the median of the Bank of Japan Policy Board members' forecasts -- as presented
in the January 2024 Outlook for Economic Activity and Prices (Outlook Report) -- Japan's
real GDP growth rate is expected to be at 1.8 percent for fiscal 2023, 1.2 percent for fiscal
2024, and 1.0 percent for fiscal 2025; the economy is projected to grow at a pace above its
potential (Chart 3). Despite the recent concerns that I described earlier, when looking a little
further ahead of Japan's economic development, private consumption is likely to be
underpinned by an increase in wage growth coupled with the government's economic
measures as inflation subsides. Business fixed investment is likely to follow its long-term
uptrend despite some supply-side constraints. This is due to firm demand for fixed investment,
such as investment to address labor shortages and digital-related investment, as well as
investments associated with the green transformation and with strengthening supply chains.
In addition, inbound tourism demand is expected to keep rising. Thus, there is little concern
that the medium- to long-term outlook for Japan's economy will be undermined.
Chart 3: The Bank's Forecasts for Real GDP
s.a., ann., tril. yen
580
570
FY 2025
+1.0%
560
FY 2024
550
+1.2%
540
FY 2023
+1.8%
530
520
510
500
490
FY 13 14 15 16 17 18 19 20 21 22 23 24 25
Note: The forecasts presented are the medians of the Policy Board members' forecasts in the January 2024 Outlook Report. The values of real GDP
for fiscal 2023 onward are calculated by multiplying the actual figure for fiscal 2022 by all successive projected growth rates for each year.
Sources: Cabinet Office; Bank of Japan.
B. Price Developments
Turning to Japan's price developments, the year-on-year rate of increase in the consumer price
index (CPI) for all items excluding fresh food has been in the range of 2.5-3.0 percent, albeit
lower than before, and that for all items excluding fresh food and energy, for which prices
fluctuate significantly, has been at around 3 percent (Chart 4). The contribution of goods
prices to the rate of increase in the CPI has been declining due to the waning effects of the
pass-through to consumer prices of cost increases led by the past rise in import prices. On the
other hand, increases in services prices have been pushing up the CPI. At the beginning of
the current inflationary phase, most firms reported that, although they were able to pass on
raw material cost increases to selling prices, they could not go further to pass on a rise in
personnel expenses. Thereafter, however, firms' moves to pass on the rise in personnel
expenses to prices have been spreading gradually, and these have been reflected in the
increases in services prices, for which personnel expenses account for a large proportion of
costs. In my view, such developments indicate that firms' price-setting behavior has changed
clearly in Japan.
Chart 4: Consumer Prices
y/y % chg.
5
Energy
4 Food
Goods (less food)
Services
3
CPI (less fresh food)
CPI (less fresh food and energy)
2
1
0
-1
-2
19 20 21 22 23 24
CY
Source: Ministry of Internal Affairs and Communications.
In terms of the median of the Policy Board members' forecasts, the CPI (all items less fresh
food) is projected to see a year-on-year rate of increase of 2.8 percent for fiscal 2023, 2.4
percent for fiscal 2024, and 1.8 percent for fiscal 2025 (Chart 5). In order to realize this
outlook, it is important that a virtuous cycle between wages and prices be achieved, and that
such cycle continue to operate.
Chart 5: The Bank's Forecasts for the CPI
y/y % chg.
5
FY 2023
+2.8%
4
FY 2024
+2.4%
3
FY 2025
+1.8%
2
1
0
-1
FY 13 14 15 16 17 18 19 20 21 22 23 24 25
Notes: 1. Figures are the CPI for all items less fresh food, excluding the effects of the consumption tax hikes.
▼
2. The locations of , △, and in the chart indicate the figures for each Policy Board member's forecasts. The risk balance assessed by each
Policy Board member is shown by the following shapes: indicates that a member assesses "upside and downside risks as being generally
△ ▼
balanced," indicates that a member assesses "risks are skewed to the upside," and indicates that a member assesses "risks are skewed
to the downside." The dotted lines show the medians of the Policy Board members' forecasts presented in the January 2024 Outlook Report.
Sources: Ministry of Internal Affairs and Communications; Bank of Japan.
I think that this year's wage growth is highly likely to surpass the previous year's substantial
growth. The provisional aggregate results of the annual spring labor-management wage
negotiations this year, which were released in late March, reveal that the wage growth rate is
significantly higher than the results for the previous year, including among small and
medium-sized firms (Chart 6). Likewise, a survey targeting small and medium-sized firms
shows that the number of firms that are positive about raising wages has been increasing
further. In addition, anecdotal information from firms -- which is gathered through the Bank's
Head Office and branches -- suggests that a wider range of firms have actually been raising
wages. I think that this is mainly because firms are feeling the need to retain and recruit human
resources in response to labor shortages. Of course, it is also true that some firms claim that
they do not have the resources for wage hikes or that it is difficult to pass on wage hikes to
prices. However, taking into account recent data and anecdotal information, as well as the
change in firms' price- and wage-setting behavior and ongoing labor shortages that I talked
about earlier, I believe that there is a good chance of the virtuous cycle between wages and
prices continuing to operate.
Chart 6: Developments in Wage Revisions
Results of the Annual Spring Survey on Plans for Wage Increases for Next
Wage Negotiations (Small and Medium-Sized Firms)
Labor-Management Fiscal Year
y/y % chg.
6
Actual regular wage increase
Feb.
5
Actual base pay increase
2022
CPI inflation
4
Rengo's second set
of aggregate results
Feb.
3
2023
2
1
Jan.
2024
0
0 25 50 75 100
-1
percentage of respondents
Have plans for wage increases
-2
Undecided or no answer
CY 91 95 99 03 07 11 15 19 23
Have no plans for wage increases
II. Conduct of Monetary Policy
A. Changes in the Monetary Policy Framework
Now, I would like to turn to the Bank's conduct of monetary policy. The Bank continued with
large-scale monetary easing, aiming to achieve the price stability target of 2 percent in a
sustainable and stable manner. At the Monetary Policy Meeting held on March 18 and 19,
2024, the Bank changed its monetary policy framework that had been in effect to date, given
as
the confirmation that the virtuous cycle between wages and prices has become more solid,
I noted earlier, and also because
it can be judged that it is now within sight that the price
stability target of 2 percent will be achieved in a sustainable and stable manner toward the
end of the projection period of the January 2024 Outlook Report, which covers from fiscal
2023 through fiscal 2025 (Chart 7).
Chart 7: Changes in the Monetary Policy Framework (March 2024)
 As recent data and anecdotal information have gradually shown that the virtuous cycle between wages and prices has
become more solid, the Bank judged
it came in sight that the price stability target of 2 percent would be achieved in a
sustainable and stable manner toward the end of the projection period of the January 2024 Outlook Report. It considers
that its large-scale monetary easing measures have fulfilled their roles, including the negative interest rate policy and
the yield curve control.
 With the price stability target, the Bank will conduct monetary policy as appropriate,
guiding the short-term interest
in response to developments in economic activity and prices as well as financial conditions
rate as a primary policy tool,
from the perspective of sustainable and stable achievement of the target. Given the current outlook for economic activity
and prices, it anticipates that
accommodative financial conditions will be maintained for the time being.
Short-term interest rate
Long-term interest rates
(uncollateralized overnight call rate)
<Before> <After> <Before> <After>
%
%
0.3
Upper bound for 10-year In the case of a rapid rise in long-term interest
Rate on the current account
JGB yields as a reference rates, the Bank will make nimble responses,
0.2 balances (+0.1%)
such as increasing the amount of JGB purchases
0.1
1.0
Around 0.1% increase
The Bank will continue its
0.0
JGB purchases with broadly
the same amount as before
-0.1 (Guideline for market operations)
0.0
The Bank will encourage the rate to
-0.2
Rate on the Policy-Rate
Target level of 10-year JGB
remain
Balances (-0.1%)
at around 0 to 0.1%
yields (around 0 percent)
-0.3
March MPM
March MPM
(The rate had been in
the range of -0.1 to 0%)
The Bank will discontinue purchases
ETFs and J-REITs
Specifically, the Bank has set the uncollateralized overnight call rate as the policy interest
rate and will encourage that rate to remain at around 0 to 0.1 percent by applying an interest
rate of 0.1 percent to current account balances held by financial institutions at the Bank. This
means that the interest rate level will increase by around 0.1 percentage point, given that the
rate was in the range of minus 0.1 to 0 percent before the policy change.
The Bank has removed the target level of long-term yields and the upper bound for these
yields as a reference on Japanese government bonds (JGBs), both of which were set to control
interest rates. The Bank will continue its JGB purchases with broadly the same amount as
before, and in the case of a rapid rise in long-term interest rates, it will nimbly respond by,
for example, increasing the amount of JGB purchases. Such JGB purchases will be regarded
as ways to avoid bringing about discontinuous changes, instead of as an active monetary
policy tool.
Furthermore, the Bank has discontinued purchases of exchange-traded funds (ETFs) and
Japan real estate investment trusts (J-REITs), which had been rarely made following the
improvement in market environment.
With these changes in the monetary policy framework, I believe that the Bank has exited from
the so-called new phase of monetary policy implemented to date, which included the negative
interest rate policy and yield curve control, and has taken its first step toward the
normalization of monetary policy. It will continue to conduct monetary policy as appropriate
in response to developments in economic activity and prices as well as financial conditions,
from the perspective of sustainable and stable achievement of the 2 percent price stability
target. Given the current outlook for economic activity and prices, the Bank anticipates that
accommodative financial conditions will be maintained for the time being.
B. A Look Back at the Past 25 Years: A State without Meaningful Interest Rates
As the Bank has taken its first step toward the normalization of monetary policy, let me briefly
look back at the Bank's monetary easing, which it has been carrying out over a long period,
since the late 1990s, when Japan's economy fell into deflation. I would also like to consider
the functions of interest rates -- the main vehicle of monetary policy -- while sharing what I
perceived as a financial practitioner before becoming a member of the Bank's Policy Board.
Let me note developments in short-term interest rates, the conventional monetary policy tool.
The uncollateralized overnight call rate hovered in the range of around 4-8 percent from the
late 1980s to the early 1990s, a period before the collapse of the bubble economy (Chart 8).
In the late 1990s, however, it fell to around 0.5 percent, ushering Japan into a state without
meaningful interest rates. Subsequently, with the start of the Bank's zero interest rate policy
and its introduction of the negative interest rate policy, the rate declined to 0 percent and then
into negative territory. Meanwhile, the Bank also has kept long-term interest rates at low
levels through unconventional measures, including its commitment aimed at generating
policy duration effects, quantitative easing, and yield curve control.
Chart 8: Market Interest Rates and Consumer Prices
%
10
Short-term interest rate (uncollateralized overnight call rate)
8
Long-term interest rate (10-year JGB yields)
CPI (less fresh food), y/y chg.
6
4
2
0
-2
-4
CY 85 90 95 00 05 10 15 20
Note: Figures for the CPI (less fresh food) exclude the effects of the consumption tax hikes.
Sources: Ministry of Finance; Ministry of Internal Affairs and Communications; Bank of Japan.
Amid sluggish economic growth and mounting financial instability in the wake of the
bubble's collapse, I think that monetary easing was effective to some extent in supporting the
economy in the course of moving into the state without meaningful interest rates. Regarding
the effects of further monetary easing once Japan reached that state, it is true that borrowing
firms experienced a certain advantage in terms of lower funding costs, and that there were
positive effects in terms of higher stock and real estate prices and a correction of the excessive
appreciation of the yen. However, looking back, I had little sense that a marginal, few tenths
of a percentage point decline in interest rates stimulated business fixed investment or
otherwise invigorated corporate activity. My understanding is that the function of interest
rates -- in terms of raising or lowering interest rates to adjust demand and affect prices -- was
limited in the state without meaningful interest rates.
Various side effects have also been caused by unprecedented monetary easing carried out over
such a long period of time. Side effects themselves are unavoidable, and policy decisions
should be made based on the balance of positive effects against side effects. Having said that,
I would like to note two side effects relating to interest rate functions that I find concerning
(Chart 9).
Chart 9: Side Effects Relating to Interest Rate Functions
in a State without Meaningful Interest Rates
The hurdle rate function acts to urge firms to concentrate their business
resources to businesses with high added value that generate profitability
that is higher than borrowing interest rates, thereby stimulating business
(1) Weakening of the
metabolism.
hurdle rate function
⇒
In a state without meaningful interest rates, it is likely that the
of interest rates
channeling of funds into businesses with relatively low productivity
has impeded advances in business metabolism.
The level of long-term yields on JGBs and how it changes provide a
(2) Weakening of the
signal for how the market sees factors such as the future state of
signaling effects
economic activity and prices and the government's fiscal condition.
of interest rates
⇒
The signaling effects have not been fully exerted.
The first side effect is a weakening of the hurdle rate function of interest rates, which acts to
stimulate business metabolism. If the borrowing interest rate for a firm is high, the firm, in
order to survive, is pressured to concentrate its business resources in areas that earn enough
profits to cover that interest cost; in other words, businesses with high added value. However,
if the borrowing interest rate is low, the firm has the option of continuing with businesses
with relatively low added value. In sum, in an environment where an interest rate functions
effectively as a hurdle rate, funds will gravitate toward highly productive businesses,
consequently stimulating business metabolism. This will make resource allocation more
efficient from a macroeconomic perspective. Conversely, in an environment of the
government's support measures and continued low interest rates, it is likely that the
channeling of funds into businesses with relatively low productivity has impeded advances
in business metabolism. In fact, entry and exit rates of firms in Japan have remained low
compared to other major countries, and labor productivity growth also has remained
lackluster (Chart 10).
Chart 10: Entry-Exit Rates and Productivity in Major Economies
Entry and Exit Rates Labor Productivity
<Entry Rate> <Exit Rate>
% 10 thous. USD, 2015 PPPs
16
14
Japan
Japan
United States
14
United Kingdom
United States
Germany
United Kingdom
12
12
Germany
10
8
10
6
4 8
2
0 6
CY 08 11 14 17 20 08 11 14 17 20 CY 90 95 00 05 10 15 20
Notes: 1. In the left panel, figures for Japan are on a fiscal-year basis. There is a discontinuity between the figures for Germany up to 2020 and
those of 2021 due to changes to the definition.
2. In the right panel, figures represent GDP per person employed at constant prices.
Sources: Eurostat; OECD; Small and Medium Enterprise Agency; U.K. Office for National Statistics; U.S. Census Bureau.
The second side effect relating to interest rate functions is a weakening of the signaling effects
of interest rates freely determined by the market. The level of long-term yields on JGBs and
how it changes provide a signal for how the market sees factors such as the future state of
economic activity and prices and the government's fiscal condition. However, with the Bank's
large-scale JGB purchases, the signaling effects have not been fully exerted.
Of course, even if the hurdle rate function of interest rates is weakened, firms can nonetheless
take action in pursuit of higher productivity. Likewise, even if the signaling effects are
weakened, it is possible to make appropriate judgments on such factors as the future state of
economic activity and prices and the government's fiscal condition, based on various
information other than developments in long-term yields. Finance only plays a behind-the-
scenes role in the economy, providing funds like a flow of blood -- firms, the government,
and other economic entities are the economy's principle drivers. In a state without meaningful
interest rates or no positive interest rates, however, the functions interest rates ought to fulfill
have been weakened, and this should be fully recognized.
C. Toward the Normalization of Monetary Policy
I have said that the Bank has taken its first step toward the normalization of monetary policy.
So, what does the normalization look like? In my view, the ultimate goal is, with the price
stability target of 2 percent, to return interest rates to a level where they can perform their
functions -- that is, where raising or lowering interest rates can act to adjust demand and affect
prices -- and at the same time to recover the hurdle rate function and signaling effects I
mentioned earlier.
Although the Bank has changed its monetary policy framework, the state without meaningful
short-term interest rates I spoke about earlier has not changed, and long-term interest rates
have not reached the point where they are entirely determined by market. Consequently, even
though the Bank has taken its first step and the situation will be better than it has been, the
kind of side effects I mentioned earlier seems to remain. I believe that it is crucial for the
Bank to steer future policy conduct in order to proceed deliberately but steadily with monetary
policy normalization and thereby successfully unwind the unprecedented large-scale
monetary easing, with the fundamental premise that the Bank will do so in response to
developments in economic activity and prices as well as financial conditions.
Thank you.