September 2, 2020
Bank of Japan
Japan's Economy and Monetary Policy
Speech at a Meeting with Business Leaders in Saga
(via webcast)
WAKATABE Masazumi
Deputy Governor of the Bank of Japan
Introduction
Good morning. First of all, I would like to offer my heartfelt sympathies to those who are
suffering from the heavy rain that occurred in August 2019 and July this year. It would have
been better if I could visit Saga Prefecture and talk in person to deepen my understanding of
the regional economy, but it became difficult to do so due to the spread of the novel
coronavirus (COVID-19) and this meeting had to be held online. Anyway, it is my great
pleasure to meet you today, and I would like to take this chance to express my sincere
gratitude for your cooperation with the activities of the Bank of Japan's Saga Office and
Fukuoka Branch.
The COVID-19 pandemic has had a severe impact on the global economy. Not only
people's lives, but also employment, income, and business activities have been significantly
affected. In addition, from a long-term perspective, human beings have undergone
considerable development through globalization, urbanization, and a shift toward a service
economy; in other words, by people gathering and closely interacting with each other.
COVID-19 poses challenges to the driving force of such development.
How can we tackle these challenges? In my speech, I would like to focus on three points.
The first is developments since the outbreak of COVID-19; namely, how the Bank has
responded to date to the current economic crisis brought about by COVID-19. The second is
future developments; that is, how the crisis will affect the economy in the medium to long
run and how the Bank will conduct monetary policy. Lastly, I will talk about the current
situation of and outlook for Saga Prefecture's economy.
I. Current Economic Crisis and Monetary Policy Responses
Impact of COVID-19 and Policy Responses to Date
Let me start by looking back at the impact that COVID-19 has had on the economic and
financial sides and at the policy responses to date. COVID-19 spread worldwide within a
short period (Chart 1). The outbreak of COVID-19 was first identified in China and it
spread to almost every nation, from advanced economies such as Europe, the United States,
and Japan to emerging economies like India, as well as Central and South America. From
late February, when COVID-19 began to spread in Europe and the United States, investors'
risk sentiment deteriorated and global capital and financial markets became rapidly unstable
due to uncertainties over the outlook for the global economy and growing anxiety about
COVID-19.
Domestic and overseas economies were affected significantly (Chart 2). Many countries
conducted strict public health measures such as restrictions on going outside and suspension
of business and production activities. In Japan, the government declared a state of
emergency in April. These kinds of measures are effective in containing the spread of
infectious diseases, but at the same time they constrain economic activity substantially. As
these measures were taken, the global economy became depressed significantly. In addition,
firms' financial positions tightened rapidly due to a global plunge in their sales.
Governments and central banks around the world have responded to the current global crisis
swiftly and aggressively based on the lessons learned from the Global Financial Crisis. The
government of each country has conducted various economic measures at an unprecedented
scale, as seen in income support measures such as unemployment insurance and cash
payments, as well as support for corporate financing, which includes loan guarantees. In
Japan, the government has conducted economic measures with a project size of 234 trillion
yen -- equivalent to approximately 40 percent of the country's GDP -- which largely exceeds
the size of measures taken at the time of the Global Financial Crisis. Responses made by the
central bank of each country and region have two things in common. One is ensuring
stability in financial markets through large-scale provision of liquidity, mainly by
purchasing government bonds, and the other is support for financing, mainly of firms, such
as through funds-supplying measures to support lending as well as purchases of CP and
corporate bonds. In addition, six central banks, including the Federal Reserve and the Bank
of Japan, have cooperated to strengthen U.S. dollar funds-supplying operations, thereby
rapidly facilitating the provision of U.S. dollar funds to the market.
The Bank has swiftly enhanced monetary easing since March and implemented the
following three measures in response to the current phase (Charts 3 and 4). First, the Bank
introduced the Special Program to Support Financing in Response to the Novel Coronavirus
(COVID-19) in order to support financing, mainly of firms. The total size of this program is
about 120 trillion yen. Specifically, this program consists of (1) purchases of CP and
corporate bonds with the upper limit of about 20 trillion yen and (2) the Special
Funds-Supplying Operations to Facilitate Financing in Response to the Novel Coronavirus
(COVID-19), which will be about 100 trillion yen at maximum. Through this special
operation, the Bank provides funds on favorable terms to private financial institutions that
make loans in response to COVID-19. The operation also is applied to effectively
interest-free and unsecured loans, for which the government takes the credit risk, provided
mainly to small and medium-sized firms through private financial institutions. This
represents a case of cooperation between the Bank and the government to support financing,
mainly of firms.
Second, to maintain stability in financial markets, the Bank has adopted a framework
through which further ample yen and foreign currency funds can be provided in a flexible
manner. As for the yen funds, under yield curve control, the Bank decided to purchase a
necessary amount of Japanese government bonds (JGBs) without setting an upper limit.
Regarding foreign currency funds, the Bank has provided a large amount of U.S. dollar
funds through the strengthened U.S. dollar funds-supplying operations.
Third, the Bank has actively purchased exchange-traded funds (ETFs) and Japan real estate
investment trusts (J-REITs). The aim of this measure is to lower the risk premia in asset
markets, thereby preventing firms' and households' sentiment from deteriorating through
volatility in asset markets and supporting positive economic activity.
On May 22, Deputy Prime Minister and Finance Minister Aso and Bank of Japan Governor
Kuroda together released a statement on countermeasures responding to COVID-19,
making clear that the government and the Bank are "committed to making every effort to
facilitate corporate financing and maintain stability in financial markets and doing whatever
it takes to settle the situation, and will work together to bring the Japanese economy back
again on the post-pandemic solid growth track."1
The Bank's powerful monetary easing measures have had positive effects. Although
financial markets are still nervous, tension has eased recently (Chart 5). In March, reflecting
unstable conditions in global financial and capital markets, the volatility of stock prices
increased to a level observed for the first time since the Global Financial Crisis. However, it
has declined, although it remains at a high level compared with the pre-COVID-19 level.
U.S. dollar funding costs rose significantly due to an increased precautionary demand for
funds, but have decreased as a result of ample U.S. dollar funds provided through the
strengthened U.S. dollar funds-supplying operations. Since governments and central banks
around the world have responded swiftly and aggressively to the current crisis, global
financial and capital markets, including stock markets, U.S. dollar funding markets, and
foreign exchange markets, have regained stability within a relatively short period compared
with the Global Financial Crisis, and thus have been able to avoid significant fluctuations.
Corporate financing in Japan has continued to be under stress. That said, the environment
for external funding has remained accommodative due to various measures taken by the
Bank and the government as well as to active efforts made by financial institutions (Chart 6).
Issuance spreads for CP and corporate bonds expanded temporarily but have narrowed,
reflecting monetary easing. In this situation, the year-on-year rate of increase in their
amount outstanding has registered high growth exceeding 10 percent. In addition, financial
institutions' lending attitudes perceived by firms have remained accommodative and the
amount outstanding of bank lending has marked a considerable increase of around 6.5
percent on a year-on-year basis.
Current Situation of and Outlook for Economic Activity at Home and Abroad
Next, I will talk about the current situation of and outlook for economic activity at home
and abroad. Let me start with the global economy. Although it has been depressed
significantly, many countries have been resuming economic activities gradually while
containing the spread of COVID-19. The Global PMI has picked up from the bottom hit in
April. Under these circumstances, the International Monetary Fund (IMF), for example,
projects that the global economy will recover from the second half of 2020 (Chart 7). That
said, the recovery is expected to be only moderate, with preventive measures, including
voluntary ones, continuing to be taken, and the IMF states that "global GDP for the year
2021 as a whole is forecast to just exceed its 2019 level."
Similarly to the global economy, Japan's economy is still in an extremely severe situation
but economic activity has shown signs of a pick-up, although it remains at a low level. The
spread of COVID-19 has not yet subsided globally and there are extremely high
uncertainties over future developments. That said, Japan's economy is likely to improve
gradually from the second half of this year. As with the global economy, however,
preventive measures taken by firms and households will continue to act as a force
constraining economic activity while vigilance against COVID-19 continues. Thus, it will
likely take time for economic activity to return to the pre-COVID-19 level. The baseline
Outlook for Economic Activity and Prices
scenario in the Bank's July 2020 (Outlook
Report) assumes that the timing of Japan's real GDP returning to the level of fiscal 2019
will be around fiscal 2022.
As for prices, the year-on-year rate of change in the consumer price index (CPI) is expected
to be negative for the time being, mainly affected by COVID-19 and the past decline in
crude oil prices. Thereafter, it is likely to turn positive and accelerate gradually with the
economy improving (Chart 8). As presented in the July Outlook Report, the CPI is projected
to be in the ranges of minus 0.6 to minus 0.4 percent for fiscal 2020, 0.2 to 0.5 percent for
fiscal 2021, and 0.5 to 0.8 percent for fiscal 2022.
That said, the aforementioned outlook for economic activity and prices entails high
uncertainties and risks are skewed to the downside. First and foremost, the risk is
uncertainties over the consequences of COVID-19 and their impact on economic activity at
home and abroad. If strict public health measures are reinstated, reflecting developments in
COVID-19 in Japan, economic activity can be constrained to a large degree. The second
risk factor is that, if the real economy remains depressed and the challenge for economic
agents shifts from liquidity to a solvency problem, a vicious cycle will emerge in which the
real economy is pushed down further through the impact on the financial sector. Third,
attention also should be paid to the risks that medium- to long-term growth expectations of
firms and households will decline and that their spending attitudes will become cautious. It
is necessary to pay utmost attention to future developments regarding such risks. In addition
to these, there are various risks such as an intensifying tension between the United States
and China, geopolitical risks, the strengthening of protectionist moves, and natural disasters.
Once the risks to economic activity materialize, prices will be affected considerably as a
matter of course. Thus, since there are high uncertainties over the impact of COVID-19 on
economic activity and prices, for the time being, the Bank will closely monitor the impact
and will not hesitate to take additional easing measures if necessary.
II. Living with COVID-19 and Future Conduct of Monetary Policy
Characteristics of the COVID-19 Shock
So far, I have talked about economic developments and the policy responses to date, as well
as the baseline scenario of the outlook for economic activity and prices. Now, I will talk
somewhat in depth about future developments -- which entail extremely high uncertainties
-- while incorporating the medium- to long-term perspective. But before I move on to that, I
would like to point out the characteristics of the current economic crisis while comparing it
with past crises.
First, the current crisis was caused by an external shock; that is, the spread of a new
infectious disease.2 Taking past business cycles as an example, when a recession was due to
a temporary external shock, the pace of economic recovery seemed to be fast. However, it
should be noted that external shocks may persist due to the prolonged impact of COVID-19.
In addition, if the external shock leads to instability in financial markets or a financial crisis,
the current economic crisis may become more severe.
Second, the current crisis has originated from shocks to both aggregate demand and supply.
In economics, we usually distinguish shocks to the economy by whether they are shocks to
2
Krugman, a Distinguished Professor at the Graduate Center of the City University of New York,
suggests that past business cycles in the United States can be divided into two types: whether they
were caused by external shocks or internal shocks accompanying a financial crisis. He notes that the
economic recovery was fast when a shock was caused by external factors but took time when it was
by internal ones. For details, see Krugman, P., "The Audacity of Slope: How Fast a Recovery?"
webinar held by the Princeton Bendheim Center for Finance, May 15, 2020, 1:14:19,
https://www.youtube.com/watch?v=h1ZiTIou0_8.
aggregate demand or aggregate supply. That said, making such distinctions is not that
simple because aggregate demand and supply are related to each other. The negative supply
shocks -- caused by contracting COVID-19 and preventive measures such as short-time
work, temporary store closures, business suspension, restrictions on people's movement,
and ensuring social distancing -- may trigger the negative demand shocks through declines
in income and spending.3 In addition, the relation between aggregate demand and supply
may change depending on what kind of policy responses are to be made.
The third characteristic is regarding uncertainties. For example, it is uncertain how the
COVID-19 pandemic will turn out and whether effective vaccines and medicines will be
developed. Households and firms may be reluctant to spend when there are such
uncertainties.4
How will the COVID-19 shock, which has such characteristics, affect prices? Will they see
an inflationary or a deflationary trend? The experience of past economic crises shows that
prices will be deflationary when aggregate demand is lower than aggregate supply (Chart 9).
Looking at examples of past pandemics, Silvana Tenreyro, an external member of the
Monetary Policy Committee of the Bank of England, examined consumer prices in the
United Kingdom since the 13th century and observed that the inflation rate tended to fall
after a pandemic (Chart 10).5
3
Professor Guerrieri at the University of Chicago Booth School of Business and others suggest that,
theoretically, assuming economies with multiple corporate sectors and taking into account the
complementarity between the sectors, negative supply shocks can bring about negative changes in
demand that outweigh the shocks. For details, see Guerrieri, V. et al., "Macroeconomic Implications
of COVID-19: Can Negative Supply Shocks Cause Demand Shortages?" NBER Working Paper, no.
26918, 2020.
4
Bloom, N., "Fluctuations in Uncertainty," Journal of Economic Perspectives, vol. 28, no. 2 (Spring
2014): pp. 153-76; Morikawa, M., Sābisu rikkoku ron: Seijuku keizai o kasseika suru furontia
(Tokyo: Nikkei Business Publications, 2016), pp. 275-88; Barrero, J. and Bloom, N., "Economic
Uncertainty and the Recovery," paper presented at the 2020 Jackson Hole Economic Policy
Symposium hosted by the Federal Reserve Bank of Kansas City, August 28, 2020,
https://www.kansascityfed.org/~/media/files/publicat/sympos/2020/20200806bloom.pdf.
5
Tenreyro, S., "Covid-19 and the Economy: What Are the Lessons So Far?" speech given at the
London School of Economics webinar, July 15, 2020, https://www.bankofengland.co.uk/-/media
/boe/files/speech/2020/covid-19-and-the-economy-speech-silvana-tenreyro.pdf.
In addition, research that analyzed developments after past pandemics shows that the
natural rate of interest, which is an important factor to take into account when conducting
monetary policy, has a tendency to decline for about 20 years after a pandemic and take
about another two decades to return to the pre-pandemic level.6,7 Attention should be paid
to the fact that, deflationary pressure may be put on the economy unless real interest rates
are lowered in accordance with a decline in the natural rate of interest.
However, while history provides a useful guide, it should be used with care.8 This is
because the natural rate of interest is also affected by the following: the impact of
advancement in medical care and improvement in public health on the quality and quantity
of the labor force; demographic changes; lifestyle changes; and deepening international
interdependence. Moreover, one research study shows that large-scale fiscal policies will
put upward pressure on the natural rate of interest.9
That said, in the short run, the negative shocks to aggregate demand caused by COVID-19
may outweigh those to aggregate supply, and households and firms may become cautious
with their consumption and investment activities because of high uncertainties over
6
As for explanation of the natural rate of interest, see Wakatabe, M., "Japan's Economy and
Monetary Policy," speech at a meeting with business leaders in Aomori, June 27, 2019,
https://www.boj.or.jp/en/announcements/press/koen_2019/ko190627a.htm/.
7
A research paper examined the major European countries that experienced 19 pandemic events --
since the Black Death in the 14th century through the Hong Kong flu after WWII -- where more than
100,000 people died. The results show that the natural rate of interest declines by around 1.5 percent
for about 20 years after a pandemic and takes about another two decades to return to the
pre-pandemic level. For details, see Jordà, Ò., Singh, S. R., and Taylor, A. M., "Longer-Run
Economic Consequences of Pandemics," NBER Working Paper, no. 26934, 2020.
8
The following research paper discusses lessons learned from the experience of the influenza
pandemic that occurred in 1918, the so-called Spanish flu. Beach, B., Clay, K., and Saavedra, M. H.,
"The 1918 Influenza Pandemic and Its Lessons for COVID-19," NBER Working Paper, no. 27673,
2020. As for points to note in general when central bankers use history as a guide, see Saunders, A.,
"Thinking Historically," Bank Underground, July 30, 2020, https://bankunderground.co.uk
/2020/07/30/thinking-historically/#more-6698.
9
Goy, G. and van den End, J. W., "The Impact of the COVID-19 Crisis on the Equilibrium Interest
Rate," VoxEU, April 20, 2020, https://voxeu.org/article/impact-covid-19-crisis-equilibrium-interest
-rate.
COVID-19. Therefore, for the time being, it is necessary to be vigilant against the risk of a
decline in the inflation rate. In the medium to long run, attention also should be paid to
developments in growth and inflation expectations as well as the savings rate. In particular,
it should be noted that temporary external shocks could lead to persistent stagnation. Such
risk is what has been described as the secular stagnation hypothesis among major advanced
economies since before the outbreak of COVID-19, and it has been regarded as concern
over "Japanification." This time, COVID-19 also may bring about hysteresis effects such as
on people's attitudes and children's health.10 In order to address both upside and downside
risks to prices, the Bank considers it necessary to continue to strongly commit itself to
achieving the price stability target.
Economic Society during the COVID-19 Era
If effective vaccines and treatments are developed, the current crisis will end and economic
society may return to what it was before the pandemic. However, even if vaccines and
treatments become available, we may have to bear in mind the need to live with COVID-19.
As I mentioned at the beginning, the pandemic poses challenges to globalization,
urbanization, and the shift to a service economy. Human beings are social animals that like
to mingle, and through close interaction between people, we have created new ideas, raised
creativity and innovation, and improved productivity (Chart 11).11
10
Kozlowski, J., Veldkamp, L., and Venkateswaran, V., "Scarring Body and Mind: The Long-Term
Belief-Scarring Effects of COVID-19," NBER Working Paper, no. 27439, 2020; Aksoy, C. G.,
Eichengreen, B., and Saka, O., "The Political Scar of Epidemics," IZA Discussion Paper Series, no.
13351, 2020, http://ftp.iza.org/dp13351.pdf. As for the effects on children's health, see Beach, Clay,
and Saavedra, "The 1918 Influenza Pandemic and Its Lessons for COVID-19"; Nakata, D.,
"Pandemikku no chōki teki kadai: Kodomo e no eikyō o chūshin ni" in Korona kiki no keizaigaku:
Teigen to bunseki, eds. Kobayashi, K. and Morikawa, M. (Tokyo: Nikkei Business Publications,
2020), pp. 331-44.
11
Fujita, M. and Hamaguchi, N., "Bunmei to shi te no toshi to korona kiki" in Korona kiki no
keizaigaku, Kobayashi and Morikawa, pp. 301-14.
Essentially, innovation is born out of social relationships of the time, such as developments
in technology levels and social institutions, as well as human networks.12 Globalization is
another driving force behind improvement in productivity. When it comes to globalization,
what is often highlighted is the growing international interdependence of people, goods,
services, and money, but an important aspect we should not forget is the exchange of
knowledge. It is well known that productivity and quality of patent are affected, for example,
by exports and foreign direct investment of Japanese firms, research and development
(R&D) activities of foreign firms in Japan, and international joint research.13 Cities, too,
can essentially be regarded as places of knowledge creation where people interact with each
other.14
Will the COVID-19 pandemic bring these patterns to an end? Among economic scholars
and journalists, there have been active discussions about the demise of globalization,
urbanization, the shift to a service economy, and even capitalism. In my view, while these
patterns will be forcefully modified, they will not come to an end. The reason for this,
above all, is that one of humans' inherent qualities is that we are social animals that like to
mingle and try to stay connected in whatever ways possible. The current crisis has made it
clear that imports of daily necessities and health-related goods as well as the global
exchange of knowledge are extremely important. Above all, we are all waiting anxiously for
the R&D activities of researchers around the world searching for vaccines and treatments
for COVID-19 to bear fruit.
12
Potts, J., Innovation Commons: The Origin of Economic Growth (Oxford: Oxford University
Press, 2019).
13
According to Todō, Japanese firms can raise productivity by 2 percent through exports or foreign
direct investment and their productivity also can be improved through R&D activities of foreign
firms in Japan. He continues that data show that international joint research leads to a significant
increase in the number of citations of patents obtained by Japanese firms -- that is, improvement in
the quality of patents. For details, see Todō, Y., "Korona go no gurōbaru ka no yukue" in Korona kiki
no keizaigaku, Kobayashi and Morikawa, p. 115.
14
Glaeser, E., Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener,
Healthier, and Happier (New York: Penguin Press, 2011); Fujita and Hamaguchi, "Bunmei to shi te
no toshi to korona kiki"; Duranton, G. and Puga, D., "The Economics of Urban Density," Journal of
Economic Perspectives, vol. 34, no. 3 (Summer 2020): pp. 3-26.
However, it is likely that there will be adaptations to COVID-19 and to various changes
taking place in society. For example, global supply chains are likely to undergo
restructuring, taking national security and public health matters into consideration more
than before. Yet, excessive concentration of activities at home can also present a risk in an
emergency situation, so it is necessary to strike a balance with economic necessities and risk
factors such as natural disasters. While the restructuring of cities will likewise involve
striking a balance between decentralization and concentration, telework may redefine the
way people work and lead to migration from large cities to rural areas. In that case, however,
rural areas taking in such "migrants" will need to devise ways to make themselves more
attractive.
Evolution of Monetary Policy
Economic stabilization policy plays an essential role not only in mitigating fluctuations in
income and employment due to the COVID-19 shock but also, from a somewhat long-term
perspective, in making a desirable shift smoothly from the existing economy to one that is
compatible with infectious disease.15 Taking this point into account, I would like to talk
about what I consider important to the evolution of monetary policy.
Based on experiences at the time of the Global Financial Crisis and lessons learned, central
banks made swift responses to the current economic crisis and further cooperated with other
central banks and their respective governments. I will elaborate on each of these points in
what follows.
First, as for liquidity provisioning -- a main component of central banks' swift responses --
they have expanded its range and means, reflecting the characteristics of the current crisis.
At the time of the Global Financial Crisis, central banks evolved from being the lenders of
last resort -- put forward by Walter Bagehot -- to the market makers of last resort or the
global lenders of last resort.16 During the current crisis, a wide range of economic agents
suddenly faced the disappearance of demand and issues of financing. In reflection of this,
central banks provided liquidity, keeping in mind support for smooth financing of not only
financial institutions but also firms, sole proprietors, and households. In addition, the
strengthening of the U.S. dollar funds-supplying operations via the standing U.S. dollar
liquidity swap line arrangements is the outcome of international cooperation, since it was
led by information exchange between six major central banks including the Federal Reserve
and the Bank of Japan.
In order to support swift responses, the importance of high-frequency data, with their
advantage in terms of promptness, has become recognized. Besides daily data for prices or
sales, which have been used even before the current crisis, mobility information has started
to be used so that developments in eating and drinking services can be captured via data on
the nighttime populations of selected downtown areas, and developments in travel services
also can be grasped by investigating the number of visitors at Cultural World Heritage Sites
in Japan.17 However, at present, there are some challenges in using these high-frequency
data.18 For many of these data, the samples are biased and seasonal adjustments are not
conducted. Thus, there is room for improvement in the use of high-frequency data and they
should be regarded not as alternatives but as complements to official data. In addition,
background information with respect to changes in economic developments is necessary in
interpreting these data. The Bank has conducted interviews with firms while making use of
16
Nakaso, H., "Financial Crises and Central Banks' 'Lender of Last Resort' Function," remarks at
the Executive Forum hosted by the World Bank titled "Impact of the Financial Crises on Central
Bank Functions," April 22, 2013, https://www.boj.or.jp/en/announcements/press/koen_2013
/ko130423a.htm/.
17
See Boxes 1 and 2 in the April 2020 Outlook for Economic Activity and Prices
(https://www.boj.or.jp/en/mopo/outlook/gor2004b.pdf) and Boxes 1 and 3 in the July 2020 Outlook
for Economic Activity and Prices (https://www.boj.or.jp/en/mopo/outlook/gor2007b.pdf).
18
Regarding an example for those who see a great advantage in the use of high-frequency data, see
Haldane, A. G., "The Second Quarter," speech held on June 30, 2020,
https://www.bankofengland.co.uk/-/media/boe/files/speech/2020/the-second-quarter-speech-by-andy
-haldane.pdf. For cautious views on the use of such data, see "Why Real-Time Economic Data Need
to Be Treated with Caution," The Economist, July 23, 2020, https://www.economist.com
/finance-and-economics/2020/07/23/why-real-time-economic-data-need-to-be-treated-with-caution.
the network of its Head Office and branches, and the insights it obtains remain crucial. Thus,
in terms of making policy decisions, what is important is not only to look at official
statistics, interviews with firms, and historical analysis to grasp the medium- to long-term
trend in data but also to make effective use of high-frequency data as complements to these.
Second, it is essential for the governments and central banks to cooperate with each other in
terms of fiscal and monetary policies, while fulfilling their respective roles, in order to
address such economic crises as the current one. Basically, central banks can provide
liquidity through lending but cannot spend money. It is the private sector and the
governments that can spend money.19 The role of central banks is to conduct monetary
policy, while the governments are mainly in charge of fiscal policy and public health
measures concerning infectious diseases, as well as growth, trade, and urban policies.
Such cooperation will have positive effects on price developments as well. Assuming that
an infectious disease exerts downward pressure on the natural rate of interest, large-scale
fiscal policies may work to push up that rate. It is also important to raise people's growth
expectations by enhancing market environments mainly through regulatory reforms. In
particular, in order to further push forward with telework and digital transformation, what is
essential is investment in information and communication technology (ICT), as well as
investments in training of employees and reorganizing corporate structures, both of which
complement such technology. With investment in general remaining weak, ICT investment
in Japan has continued to stagnate since the 1990s (Chart 12).20 This investment should be
regarded positively as one with an eye on the future, not as a cost that should be cut.
Thus, with high uncertainties over developments in the economy that is currently facing the
significant COVID-19 shock, cooperation between central banks and their governments not
only can provide a sense of security to the people and financial markets but also can
enhance the synergistic effects; namely, of a so-called policy mix of monetary and fiscal
policies.
Third, while taking these factors into account, it is necessary to constantly have deep
discussions in order to improve monetary policy. Some other central banks have been
reviewing their monetary policy frameworks. For example, there have been discussions
over the "makeup strategies" in which central banks will compensate for past inflation
shortfalls with policy stances to generate higher inflation in the future. As a background to
their reviews of the frameworks, under the prolonged low growth, low inflation, and low
interest rate environment since the Global Financial Crisis, the natural rate of interest has
declined in advanced economies; consequently, the policy interest rates have easily reached
the lower