Takako Masai: Economic activity, prices, and monetary policy in
Japan
Speech by Mr Takako Masai, Member of the Policy Board of the Bank of Japan, at a meeting with
business leaders, Ehime, 31 August 2017.
* * *
I. Developments in economic activity and prices
I would like to start my speech with a look at developments in economic activity and prices.
At the Monetary Policy Meeting held on July 19 and 20, 2017, the Bank of Japan published
the Outlook for Economic Activity and Prices, or the Outlook Report. In this report, the Bank
presented its projections for Japan's economic activity and prices through fiscal 2019.
I will explain developments in economic activity and prices by presenting the main content of the
Outlook Report.
A. Overseas economies
Let me first touch on developments in overseas economies. The Bank's assessment is that
overseas economies have continued to grow at a moderate pace on the whole.
In terms of the outlook, advanced economies are projected to continue growing steadily and a
recovery in emerging economies is likely to take hold on the back of the steady growth in
advanced economies and the effects of policy measures taken by emerging economies. A
similar view was presented in the World Economic Outlook (WEO) Update released in July 2017
by the International Monetary Fund (IMF).
Looking at developments by major region, the U.S. economy has continued to recover, mainly in
household spending, owing to a steady improvement in the employment and income situation. As
for the outlook, the economy is expected to continue to see firm growth driven by domestic
private demand.
The European economy will likely follow a moderate recovery trend, while uncertainty
-associated with political issues such as those regarding negotiations on the United Kingdom's
exit from the European Union (EU) and with the European debt problem, including the financial
sector -- is likely to be a burden on economic activity.
The Chinese economy will likely continue to broadly follow a stable growth path as authorities
conduct fiscal and monetary policy in a timely manner.
Other emerging economies and commodity-exporting economies have picked up on the whole,
reflecting in particular a pick-up in exports, a bottoming out of commodity prices, and the effects
of these economies' stimulus measures. These economies are likely to increase gradually, due
mainly to the spread of the effects of steady growth in advanced economies.
B. Japan's economy and price developments
1. Current situation
Now I would like to discuss developments in economic activity and prices in Japan.
The Bank's assessment is that Japan's economy is expanding moderately, with a virtuous cycle
from income to spending operating. In fiscal 2017 to date, the Bank has revised its economic
assessment upward twice. These revisions are based on its judgment that a positive output gap
has taken hold, as evidenced by the fact that industrial production has been on an increasing
trend, reflecting the increases in demand both at home and abroad, and that labor market
conditions have continued to tighten steadily.
On the domestic demand side, business fixed investment has been on a moderate increasing
trend, with corporate profits and business sentiment improving and across a wider range of
industries. According to the June 2017 Tankan (Short-Term Economic Survey of Enterprises in
Japan), business plans for fiscal 2017, especially those of large enterprises, showed firms' solid
stance. This is evidenced by, for example, the fact that fixed investment on a basis close to GDP
definition saw a year-on-year increase of 5.9 percent -- a level clearly exceeding the past average
of 4.3 percent for the June Tankan surveys during the period of fiscal 2004-2016. Private
consumption has increased its resilience against the background of steady improvement in the
employment and income situation, and housing investment has been more or less flat. Exports
have been on an increasing trend against the backdrop of developments in overseas economies
that I mentioned earlier.
On the price front, the year-on-year rate of change in the consumer price index (CPI) for all items
less fresh food is in the range of 0.0-0.5 percent.
2. Outlook
I will now look at the outlook for Japan's economy during the projection period, which covers from
fiscal 2017 through fiscal 2019. The economy is likely to continue its moderate expansion.
Domestic demand is likely to follow an uptrend on the back of highly accommodative financial
conditions and fiscal spending through the government's large-scale stimulus measures.
Exports are expected to continue their moderate increasing trend along with the improvement in
overseas economies. Reflecting this outlook, Japan's economy is likely to maintain growth at a
pace above its potential mainly through fiscal 2018. In fiscal 2019, it is expected to continue
expanding, although the growth pace is projected to decelerate due to a cyclical slowdown in
business fixed investment and the effects of the scheduled consumption tax hike. Looking at the
medians of the Policy Board members' forecasts in the July 2017 Outlook Report, the real GDP
growth rate is projected to be 1.8 percent for fiscal 2017, 1.4 percent for fiscal 2018, and 0.7
percent for fiscal 2019.
Let me explain the outlook in detail by major component. Business fixed investment is likely to
continue increasing moderately. This is because, in a situation where extremely stimulative
financial conditions are maintained, fixed investment will be positively affected by (1) high levels
of corporate profits, (2) fiscal measures including projects conducted under the Fiscal
Investment and Loan Program and tax reductions for capital investment, and (3) moderate
improvement in growth expectations. Specifically, an increase is likely to be seen in investment,
particularly (1) that related to the Olympic Games and urban redevelopment projects, (2) in
efficiency-improving and labor-saving machinery and equipment in order to deal with labor
shortages, and (3) in research and development for growth areas. Private consumption is
expected to continue increasing moderately as the employment and income situation continues
to improve, and housing investment is expected to remain more or less flat. Exports are likely to
be firm as a trend for the time being, underpinned by those of capital goods and IT-related goods
-- in which Japan has a comparative advantage. Thereafter, they are expected to continue their
moderate increasing trend, due mainly to the improvement in overseas economies, albeit with a
decline in IT-related demand following the current increase. Industrial production is projected to
continue on a moderate increasing trend -- despite being affected by the cycle of global demand
for IT-related goods -- as the recovery in emerging economies takes hold and the effects of the
set of stimulus measures become evident.
The year-on-year rate of change in the CPI (all items less fresh food) is likely to increase toward
around 2 percent. This is because, although upward pressure of energy prices is likely to wane
gradually, firms are likely to gradually shift their stance toward raising wages and prices with an
improvement in the output gap, and inflation expectations are expected to accelerate moderately.
Looking at the medians of the Policy Board members' forecasts in the July 2017 Outlook Report,
the year-on-year rate of change in the CPI (all items less fresh food) is projected to be 1.1
percent for fiscal 2017, 1.5 percent for fiscal 2018, and -- on a basis excluding the effects of the
scheduled consumption tax hike -- 1.8 percent for fiscal 2019.
II. The Bank's monetary policy
Next, I will talk about the Bank's monetary policy.
A. Quantitative and qualitative monetary easing (QQE) with yield curve control
At the Monetary Policy Meeting held in September 2016, with a view to achieving the price
stability target of 2 percent at the earliest possible time, the Bank decided to introduce QQE with
Yield Curve Control as a means of strengthening the framework for monetary easing. This
consists of two major components.
The first is an "inflation-overshooting commitment" in which the Bank commits itself to continuing
to expand the monetary base until the year-on-year rate of increase in the observed CPI exceeds
the price stability target of 2 percent and stays above the target in a stable manner. Japan's
economy has suffered from deflation for more than 15 years, since the late 1990s, with the
yearon-year rate of change in the CPI being about zero or slightly negative. It seems that one of the
reasons why it has been taking time for the deflationary mindset to be dispelled in Japan is that
households and firms have been adaptive to the deflationary environment. Given this, I believe it
is important that the Bank demonstrate its unwavering determination through such a
commitment so that the perception that prices of goods and services are supposed to go up
every year by around 2 percent becomes firmly entrenched among people.
The second component is "yield curve control" in which the Bank controls short-term and
longterm interest rates. In the current framework, it sets the short-term policy interest rate and the
target level of the 10-year Japanese government bond (JGB) yields as its operating targets. At
present, in the guideline for market operations, the Bank sets the short-term rate at minus 0.1
percent and the target level at around 0 percent, and conducts JGB purchases so as to achieve
this target level. Almost a year has passed since the Bank introduced QQE with Yield Curve
Control. Under this framework, the yield curve has been formed smoothly so far in a manner
consistent with the guideline for market operations.
Since the introduction of QQE in 2013, the basic transmission channel of monetary easing has
been the reduction in real interest rates, and the current framework -- QQE with Yield Curve
Control -- is designed to amplify monetary easing effects when the outlook for economic activity
and prices improves. In that case, there would be upward pressure on interest rates in
accordance with such improvement. The degree of monetary easing will increase if the Bank
contains such upward pressure and thereby maintains the shape of the yield curve.
B. Toward achieving the price stability target
The Bank projects that the timing of the year-on-year rate of change in the CPI reaching about 2
percent will be around fiscal 2019. In the Outlook Report, the Bank has delayed such timing
several times, and I acknowledge that there is some criticism on this point. The Bank certainly
aims to achieve the price stability target of 2 percent at the earliest possible time, and the delay in
such timing is not desirable. However, what I believe is important for the Bank is -- in the event
that the 2 percent price stability target cannot be achieved due to economic and price
developments at the time -- to thoroughly explain the reasons behind the target not being
achieved and to implement monetary policy so that the economy will follow a path toward the
target. After all, it is well known that the policy framework of inflation targeting is expected to
perform the role of a communication tool.
As I mentioned earlier, the year-on-year rate of change in the CPI is in the range of 0.0-0.5
percent, meaning that there is still a long way to go to achieve the price stability target of 2
percent. Nevertheless, my view is that the momentum toward achieving the target has started to
steadily increase. In this regard, let me highlight two points.
First, although it has been said that wages have not been increasing as expected, scheduled
cash earnings have continued to rise for more than two years. Let me also note that, as
scheduled cash earnings have been rising steadily at small firms, where the majority of workers
are employed, a clearly increasing number of households can now feel that their wages actually
have been rising. This is highly important in terms of raising people's inflation expectations.
The second point is that there clearly has been a growing impetus toward raising productivity,
due in part to labor shortages. As I noted earlier, investment that serves a positive purpose
-such as that in efficiency-improving and labor-saving machinery and equipment, and in research
and development for growth areas -- is expected to further rise, and this will likely contribute to
improving productivity. Moreover, it has become easier for firms to take advantage of such new
information technologies as artificial intelligence (AI) and the Internet of Things (IoT). Let me also
mention that the government's latest growth strategy, the Investments for the Future Strategy
2017 -- which was decided by the Cabinet in June 2017 -- emphasizes the importance of
promoting comprehensive policies with the aim of improving productivity in the economic society.
In addition to such policy measures being steadily pursued by the government, the Bank's
initiatives to maintain highly accommodative financial conditions and ensure the overcoming of
deflation will continue to foster positive developments among firms. In my view, this will lead to
improvement in productivity and ultimately to a rise in the potential growth rate.
The initiatives of the public and private sectors, such as those just mentioned, have been carried
out in a remarkably wide range of fields. The promotion of women's participation in the economy
-- the next topic I will touch upon -- is one example.
III. Women's participation in the economy and increase in Japan's growth potential
In April 2016, the Act on Promotion of Women's Participation and Advancement in the Workplace
was fully enforced. Since then, it has become a mandate for business entities to formulate and
make public their action plans that incorporate numerical goals toward promoting women's
participation in the workplace, and to disclose information on women's job choices. While the Act
has been enacted as a temporary legislation with a 10-year term limit, it aims at actively providing
women with opportunities for employment and promotion. In that sense, it clearly differs from
past ones for which the key element was a ban on gender discrimination. Let me note that
business entities that are mandated to disclose information in accordance with the Act include
government agencies, local governments, and large private-sector corporations. The Bank also
has disclosed information in accordance with the Act, and in May 2017, it gained the highest level
of the "Eruboshi" award -- a certification from the Ministry of Health, Labour, and Welfare for
excellent implementation of initiatives toward promoting women's participation and advancement
in the workplace.
With the full enforcement of the Act, Japan has entered a new stage of women's participation in
the economy. Such participation is placed at the center of the government's Japan Revitalization
Strategy, and is essential in terms of increasing the growth potential.
A. Women's participation expected to increase labor supply
The labor force participation rate of women by age group in Japan has been known to form an
Mshaped curve, where the rate temporarily dips for the age group in which many women
experience childbirth and provide childcare. Recently, however, women in this age group seem
to be increasingly participating in the labor force, and the temporary dip in the rate clearly has
moderated. Looking at the breakdown of the number of workers by gender over the past five
years, that for women has been increasing -- despite the decline in the overall working-age
population -- and therefore it can be assessed that women's participation in the labor force has
been progressing smoothly. Furthermore, such developments have been spreading across
Japan. I should note that the estimated number of women who wish to work still stands at about
2.74 million, which shows that women continue to constitute a considerably large potential labor
force. Japan's economy currently faces severe labor shortages, and a worsening of this situation
is inevitable amid the further decline in the working-age population. The Organisation for
Economic Co-operation and Development (OECD) estimates that, if women's labor participation
rate in Japan were to remain the same over the next 20 years, the labor supply would contract by
17 percent; meanwhile, if women's participation rate were to converge with that of men over the
next 20 years, the fall in labor supply would be limited to 5 percent. As a result, GDP would
1
increase by almost 20 percent over the two decades.
B. Expectations for improving firms' competitiveness
In addition to the impact on labor supply of women's participation in the workplace, improving
firms' competitiveness through the promotion of such participation will become more important.
In the annex to the Regional Economic Report released in June 2017, the Bank introduced some
recent initiatives taken by firms to raise productivity through the following two innovations
2
associated with the promotion of women's participation in the workplace.
First was an initiative -- through product innovation -- that created potential demand by making
use of women's viewpoint and sensibility in developing and providing new products and services.
The annex presented examples of a case in which firms succeeded in discovering demand that
led to boosting their corporate performance, such as the following: a hotel that had commonly
been used for business trips conducted a renovation of guest rooms and a renewal of amenity
goods by adopting suggestions from women employees, and this led to acquiring female
tourists. I think that having such a successful experience even once will enable firms to take a
more positive stance toward going through the trials and errors of reforming their business
models.
Second was an initiative -- through process innovation -- that consequently led to improvement in
business efficiency as a result of measures implemented in the process of promoting women's
participation in the workplace, such as redressing of long working hours and labor-saving
investment. It may seem that redressing of long working hours spurs labor shortages. However,
the annex in fact presented an example of efforts made by firms in which they eliminated tasks
that fell short of being necessary, as a result of the fact that working hours were forcibly
shortened and there was no choice but to reduce the amount of work.
C. Opportunity to increase the economic growth potential
I would like to highlight again that, at present, not only are firms facing the challenge of labor
shortages, but they also have more opportunity to take advantage of such information
technologies as AI and the IoT. In other words, there is an environment in which firms are
encouraged to reform their business models. One option for firms at this time is to aim at starting
a business revolution by using women's participation and advancement in the workplace as a
driving force, as this momentum is increasing, due in part to the government's support that I
mentioned earlier.
men stays the same from 2011 to 2030 at the rate observed in 2010 while that for women gradually increases
from 2011 to 2030, reaching the 2010 rate for men by 2030. For details, see OECD (2014), Japan: Advancing
the Third Arrow for a Resilient Economy and Inclusive Growth, OECD Publishing, Paris.
dx.doi.org/10.1787/9789264215955-en.
2The annex to the Regional Economic Report is available only in Japanese.