November 15, 2021
Bank of Japan
Japan's Economy and Monetary Policy
Speech at a Meeting with Business Leaders in Nagoya
KURODA Haruhiko
Governor of the Bank of Japan
Introduction
It is my great pleasure to have the opportunity today to exchange views with a distinguished
gathering of business leaders in the Tokai region. I would like to take this chance to express
my sincerest gratitude for your cooperation with activities of the Bank of Japan's Nagoya
Branch. We had to exchange views online since the outbreak of the novel coronavirus
(COVID-19) last year, but today are able to hold an in-person meeting for the first time in a
year and nine months, given the recent low level of confirmed cases. I am grateful to meet
with you face-to-face at this gathering.
Although economic activity in Japan had been considerably constrained by the successive
waves of COVID-19 since last year, positive signs toward normalization of economic
activity are at last starting to be seen due to the widespread vaccinations and a substantial
decline in the number of confirmed cases of COVID-19. At the same time, however, the
global resumption of economic activity has triggered a new issue of supply-side constraints,
which have caused shortages in raw materials and parts. Today, while elaborating on these
points, I would like to explain the Bank's view on Japan's economic activity and prices
Outlook for Economic Activity and Prices
based on the (Outlook Report) released last
month, as well as its thinking behind the recent conduct of monetary policy.
I. Economic Developments
Let me start by talking about the current situation for Japan's economy and its outlook
(Chart 1). The economy has continued to pick up from the bottom hit in spring last year, but
the recovery has been somewhat slower than initially expected. Due to the spread of the
Delta variant in summer, private consumption was stagnant for a protracted period, mainly
for face-to-face services. Exports and production, which had been increasing firmly to date,
have been somewhat weak recently due to delays in the procurement of parts that reflect the
spread of COVID-19 in Southeast Asia. The outlook for Japan's economy is that, for the
time being, downward pressure stemming from vigilance against COVID-19 is likely to
remain on services consumption, and exports and production are expected to remain in a
temporary deceleration phase due to supply-side constraints. The economic growth rate for
this fiscal year therefore has been revised slightly downward from the July forecast of 3.8
percent to 3.4 percent in the October forecast.
However, the Bank considers that the mechanism for economic recovery has been
maintained. Although the corporate sector has been affected by supply-side constraints,
profits and sentiment have continued on an improving trend and firms have been steadily
undertaking business fixed investment, partly because demand has been solid. Amid such
firmness maintained in the corporate sector, the improving trend in the overall economy,
including the household sector, is expected to become quite evident in the first half of 2022,
when the impact of COVID-19 and supply-side constraints is projected to wane. Under
these circumstances, Japan's real GDP is expected to generally recover to the pre-pandemic
level (or the 2019 level) in the first half of 2022, while lagging somewhat behind the
recovery in the United States and Europe. Thereafter, as the resumption of economic
activity progresses while public health is being protected, Japan's economy is expected to
follow a growth path that outpaces its potential growth rate, supported by relatively high
growth in overseas economies and accommodative financial conditions.
In relation to the outlook for Japan's economy I just outlined, attention is needed for the
time being on (1) whether services consumption will recover steadily during the COVID-19
era and (2) whether supply-side constraints will head toward a resolution on the back of
continued firm recovery in overseas economies. Let me elaborate on these two points.
Recovery in Services Consumption during the COVID-19 Era
Services consumption had been strongly pushed down by COVID-19 (Chart 2). Due to the
spread of the highly contagious Delta variant in summer, the number of confirmed cases
surged and people's vigilance against COVID-19 heightened. As a result, eating and
drinking as well as accommodation services inevitably became subdued to a level that was
roughly 40 percent below the pre-pandemic level. The key for the economic outlook is
whether face-to-face services consumption no longer remains stagnant and instead sees a
full-fledged recovery.
In this regard, Japan's fully-vaccinated rate has risen steadily and is now above 70 percent,
exceeding the levels in Europe and the United States. On the back of a plunge in the number
of confirmed cases, various restrictions have been eased in stages since last month. In
addition, with the use of vaccination certificates, for example, efforts have been made to
gradually resume consumption activities while protecting public health. Meanwhile,
employee income has turned to an increase, reflecting a pick-up in economic activity. These
developments suggest that the groundwork has been laid for a full-fledged recovery in
services consumption in Japan. Therefore, as people's vigilance against COVID-19 wanes,
it is highly likely that a recovery trend in services consumption will become pronounced.
Attention is being paid in particular to consumption by senior households, which accounts
for nearly 40 percent of overall private consumption (Chart 3). High-frequency data based
on credit card transactions suggest that seniors had been very cautious in terms of services
consumption even though they were ahead of other age groups with respect to progress with
vaccinations. However, since the second half of September, when the spread of COVID-19
Economy Watchers Survey
subsided, services consumption by seniors has picked up. The
conducted at the end of October also shows that business sentiment of consumption-related
firms has clearly improved, mainly for those in the services sector including food and
beverage-related firms. That said, these positive developments have been seen only for the
last month or two. There also remains a possibility of a repeated resurgence of COVID-19
even after the widespread vaccinations. It is therefore necessary to pay attention to whether
households' vigilance against COVID-19 will wane.
Overseas Economies and Supply-Side Constraints
Next, let me move on to developments in overseas economies and the effects of supply-side
constraints. Overseas economies, albeit with variation across countries and regions, have
continued to recover firmly on the whole, supported by progress with vaccinations and
aggressive macroeconomic policies in advanced economies (Chart 4). The International
Monetary Fund (IMF) projects that the global economy will continue to register very high
growth of 5.9 percent for 2021 and 4.9 percent for 2022, which contrasts with the negative
growth seen last year. Although the projected growth rate for 2021 was revised slightly
downward from the forecast made in July, there is no change to the projection that the
global economy will grow well above the long-term average of 3.5 percent for two years in
a row. However, the recovery in the global economy at an unprecedented rate is creating
various frictions in various areas. That is, it has caused supply-side constraints, such as parts
and labor shortages as well as bottlenecks in logistics.
Due to supply-side constraints on parts, Japan's production and exports have been under
downward pressure, mainly for the automobile-related sector. When looking at supply-side
constraints Japan's economy face, it is necessary to divide them into two causes: (1) the
supply-chain disruptions due to the spread of COVID-19 in Southeast Asia and (2) the
problem that supply has not been able to keep up with the surge in demand, mainly for
semiconductors (Chart 5). The first cause was triggered by temporary factory shutdowns in
Southeast Asia due to the rapid spread of the Delta variant in summer. The resultant delays
in the procurement of parts have had a significant impact through the global supply chain on
overseas and Japanese production and trade activities in the automobile-related sector in
particular. However, as the spread of COVID-19 has subsided since September in Southeast
Asia, production activity in the region has gradually resumed and the bottlenecks brought
about by the supply-chain disruptions are expected to be resolved within the next few
months. On the other hand, the second cause of supply-side constraints, which is supply
shortages stemming from the surge in demand, will eventually be resolved but may take a
certain amount of time. In particular, demand for semiconductors has expanded
considerably because of the existing trend of acceleration in digitalization since before the
pandemic, as seen in the spread of 5G networks and electrification of vehicles, and because
of an increase in online demand due to the adaptation to a new lifestyle. In order to meet the
strong demand, enhancing supply capacity, mainly through business fixed investment, is
essential, and it is natural to think that this will take a considerable amount of time.
Given that demand has remained, it is expected that, in Japan, a recovery in production to
catch up with demand and the restocking of inventories that have been reduced to a large
degree will boost production activity. In addition, business fixed investment toward raising
supply capacity is projected to get underway gradually. Against this background, Japan's
production and trade activities are likely to continue recovering firmly on the whole, after
temporarily decelerating due to supply-side constraints.
However, it is necessary to pay attention to a risk that, if supply-side constraints are
prolonged globally by more than expected, this will bring about deceleration in overseas
economies and cost increases and thereby negatively affect Japan's exports and corporate
profits. In addition, in terms of a risk to overseas economies, it should be noted that the
Chinese economy, which recovered ahead of other economies from a decline caused by
COVID-19, has shown a deceleration in its growth pace recently, partly because of power
shortages and the debt problems in the real estate sector. The Bank will closely monitor how
these risks of globally prolonged supply-side constraints and deceleration in the Chinese
economy will affect global financial markets and Japan's economy.
II. Price Developments
Let me move on to current developments in prices and the outlook for them. Prices of a
wide range of commodities, such as crude oil and natural gas, have increased clearly of late
because global demand has surged, while on the supply side crude oil production has
continued to be reduced (Chart 6). Due to labor shortage and the stagnation of logistics, in
addition to the rise in commodity prices, upward pressure on general prices has increased
notably in the United States and Europe. Similarly, on the back of the rise in commodity
prices, the producer price index (PPI) in Japan -- which captures prices of goods traded
within the domestic corporate sector -- has increased to 8 percent on a year-on-year basis
for the first time since 1981. On the other hand, the consumer price index (CPI) for all items
excluding fresh food has moved out of negative territory but has been only at around 0
percent in Japan (Chart 7). One factor behind this is that Japanese firms have sufficient
supply capacity. Since long-term employment has taken hold in Japan, most of the firms
have hoarded their employees even during the COVID-19 pandemic, partly on the back of
employment adjustment subsidies and various measures to support corporate financing.
This contrasts with U.S. firms, which conducted large-scale job cuts and layoffs
immediately after the outbreak of COVID-19. Labor hoarding has enabled Japanese firms to
maintain capacity to swiftly increase supply even when demand has risen due to the
resumption of economic activity.
Another factor behind the low CPI in Japan is firms' cautious price-setting stance. When
Japanese firms face supply-side constraints, they rarely announce price rises or allocate
limited goods by giving preference to customers who are tolerant of higher prices. Instead,
they tend to put priority on long-term relationships with the customers and try to meet their
demand as much as possible by keeping selling prices unchanged while asking for
understanding regarding delivery delays.
Nevertheless, a detailed look at Japan's CPI shows that the year-on-year rate of change has
increased moderately in positive territory when temporary factors, such as the effects of a
reduction in mobile phone charges and of energy prices, are excluded. Recently, firms in
industries such as food products and food services have been passing cost increases of raw
materials on to their selling prices. In addition, some firms in the services industry have
started trying to set their prices in accordance with demand while employing the method of
dynamic pricing, through which higher prices are charged at a time of increased demand
(Chart 8). Meanwhile, firms' and households' inflation expectations have turned to a pick-up,
more or less recovering to the pre-pandemic level. The rate of change in wages has
increased gradually, mainly for industries with labor shortage.
In the outlook, the year-on-year rate of change in the CPI is likely to increase moderately in
positive territory for the time being, reflecting a rise in energy prices. Thereafter, it is
projected to increase gradually to about 1 percent as the output gap turns positive around the
middle of next year.
III. The Bank's Conduct of Monetary Policy
Now, I would like to talk about the Bank's conduct of monetary policy.
Looking back at Japan's financial conditions immediately after the outbreak of COVID-19
in spring last year, precautionary demand for liquidity surged due to heightened
uncertainties over the future and financial positions deteriorated, mainly of small and
medium-sized firms (Chart 9). In order to address this situation, the Bank has supported
financial positions, mainly of firms, since March 2020. Namely, as a temporary measure, it
introduced the Special Program consisting of the Special Funds-Supplying Operations to
Facilitate Financing in Response to the Novel Coronavirus (COVID-19) and an increase in
purchases of CP and corporate bonds. Owing to the Bank's responses, together with the
government's measures and financial institutions' efforts, financial conditions have
remained accommodative on the whole. Specifically, precautionary demand for liquidity,
which surged immediately after the outbreak of COVID-19, has subsided to a significant
degree, as seen in repayment of loans by large firms. The environment for external funding,
such as bank borrowing and the issuance of CP and corporate bonds, has remained
favorable, as evidenced by lending and issuance rates being at around the same extremely
low levels as those prior to the pandemic (Chart 10). That said, the results of the Tankan
(Short-Term Economic Survey of Enterprises in Japan) and other surveys show that
weakness has remained in financial positions of some small and medium-sized firms in, for
example, the face-to-face services industry that have been significantly affected by
COVID-19. In sum, stress on corporate financing stemming from COVID-19 seems to have
become limited to firms in industries facing subdued sales as well as small and
medium-sized ones.
Given that economic developments at home and abroad are expected to continue to be
affected by the situation of COVID-19 for a while, the Bank will closely monitor the impact
of COVID-19 and will not hesitate to take additional easing measures if necessary. Recently,
some central banks abroad have taken steps toward reducing monetary accommodation. The
reasons behind this differ depending on economic and price developments in the respective
countries and regions, but what they have in common is that their actions are based on the
mandate of central banks to achieve the inflation target. In this regard, as presented in the
October Outlook Report, it is likely that the inflation rate in Japan will increase gradually
toward fiscal 2023, by which time the pandemic is expected to have ended, but will not
reach the price stability target of 2 percent by then. Given this outlook, let me underscore
that the Bank still needs to persistently continue with powerful monetary easing under the
current Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control,
with a view to achieving the price stability target.
Conclusion
Lastly, I would like to touch on economic developments in the Tokai region from a
medium- to long-term perspective. Digitalization and actions toward addressing climate
change have been progressing on a global basis, and these will have a large impact on the
regional economy. For instance, in light of a global rise in awareness of the need to address
climate change, efforts toward achieving carbon neutrality have become active at home and
abroad. In this situation, firms in this region have been pushing forward with various
actions, such as active research and development investment. In order to achieve carbon
neutrality, however, not only efforts made by individual firms but also cooperation among
industry, financial institutions, and government agencies are essential. The Bank will
provide support for these efforts and actions through the Funds-Supplying Operations to
Support Financing for Climate Change Responses.
The Tokai region has been supporting Japan's economy and leading the world in the field of
manufacturing. I am confident that this will remain the case in the future. I would like to
close by expressing my hope for further development of the region's economy. Thank you
very much for your attention.
Japan's Economy and Monetary Policy
Speech at a Meeting with Business Leaders in Nagoya
November 15, 2021
KURODA Haruhiko
Governor of the Bank of Japan
Introduction
I. Economic Developments
II. Price Developments
III. The Bank's Conduct of Monetary Policy
Conclusion
The Bank's Forecasts for Economic Activity
(October 2021 Outlook Report)
Real GDP
s.a., ann., tril. yen
580
FY 2023
+1.3%
570
FY 2022
+2.9%
560
CY 2019 average
550
540
FY 2021
+3.4%
530
FY 2021 FY 2022 FY 2023
520
July
+3.8% +2.7% +1.3%
510
Forecasts
October
500 +3.4% +2.9% +1.3%
Forecasts
490
FY 15 16 17 18 19 20 21 22 23 24
Note: Percentage figures indicate the medians of the Policy Board members' forecasts (point estimates).
Sources: Cabinet Office; Bank of Japan.
1
Chart 2
I. Economic Developments
Impact of COVID-19 on Services Sector
Level of Economic Activity in
COVID-19 Vaccination Rate
Services Sector
s.a., CY 2019 = 100
%
110
80
Japan
100
70
United States
90
60
European Union
Accommodations,
80
50
eating and
drinking services
70
40
Services for
60 30
amusement and
hobbies
50 20
Nonmanufacturing
40 10
30 0
Jan. July Jul. Jan. Jul. July Jan. July Jul. Dec. Feb. Apr. Jun. Aug. Oct.
June
19 20
21
Recent Developments in Services Consumption
Developments in Services Consumption Confidence Indicator
by Age (Economy Watchers Survey)
current conditons DI (level), s.a.
change from baseline, %
50
60
40
Aged 20-39
50
30
Aged 40-64
40
Aged 65-89
20
10
30
0
20
-10
Food and
-20
10
beverage
Services
-30
0
-40
Household
activity-related
-50
-10
Jan. July Jan. July Oct.
Jan. Jan. Jan. Oct.
20 21
19 20 21
Note: In the left-hand chart, figures are from the reference series in JCB Consumption NOW, which take changes in the number of consumers into account. Figures are the arithmetic
averages of the corresponding age groups in five-year increments. The baseline is the average for the corresponding half of the month for 2016 through 2018.
Sources: Nowcast Inc./ JCB, Co., Ltd., "JCB Consumption NOW"; Cabinet Office.
3
Chart 4
I. Economic Developments
Global Economy
Global Growth Rate
Delivery Delays Index (PMI)
(IMF Forecasts in the World Economic Outlook)
s.a., DI
CY 2022:
y/y % chg.
85
7
+4.9%
6
CY 2021:
80
+5.9% Longer delivery times
5
75
4
70
3
CY 2019:
2 Average from
65
+2.8%
1980 through 2019:
1
+3.5%
60
0
55
-1
CY 2020:
-2
50
-3.1%
Japan
-3
45
United States
-4
IMF forecasts
40
-5 Euro area
(October 2021 WEO)
-6
35
CY
00 02 04 06 08 10 12 14 16 18 20 22
CY 19 20 21
Supply-Side Constraints
Confirmed New Cases of COVID-19
World Semiconductor Demand (WSTS)
in Southeast Asia
7-day moving average, persons per 100,000 population s.a., bil. dollars
160
80
CY 2022
Malaysia
70
140
CY 2021
World semiconductor shipments
Thailand
60
120
Forecasts as of Aug. 2021
50
Vietnam
100
40
Trend from CY 2000 to CY 2017
CY 2020
80
30
60
20
40
10
0 20
00 04 08 12 16 20
Jan. Mar. May. May Jul. Sept. Sep. Nov. CY
July
21
Note: In the right-hand chart, figures are based on staff calculations using World Semiconductor Trade Statistics (WSTS) data.
Source: Haver.
5
Chart 6
II. Price Developments
Commodity Prices and
Prices of Transactions among Businesses
International Commodity Prices
Producer Prices in Japan
monthly avg., CY 2015 = 100
y/y % chg.
300 10
Crude oil (Dubai)
8
6
Copper
4
200
2
0
-2
100
-4
-6
-8
-10
Chart 7
II. Price Developments
Price Developments
Japan's CPI
Consumer Prices
Excluding Temporary Factors
y/y % chg. y/y % chg.
7
1.5
Japan (CPI)
6
United States (CPI)
5
1.0
Euro area (HICP)
4
3
0.5
2
1
0.0
0
-1
-0.5
-2
CY 16 17 18 19 20 21
CY 19 20 21
Notes: 1. In the left-hand chart, figures for Japan are the CPI for all items excluding fresh food.
2. In the right-hand chart, figures are staff estimates and exclude (1) the effects of the consumption tax hike and policies concerning the provision of free education, (2) the effects of
the "Go To Travel" campaign, which covers a portion of domestic travel expenses, and (3) mobile phone charges, from the CPI (all items less fresh food and energy).
Sources: Haver; Ministry of Internal Affairs and Communications.
7
Chart 8
II. Price Developments
Outlook for Prices
The Bank's Forecasts for
Inflation Expectations
CPI (All Items Less Fresh Food)
y/y % chg.
y/y, ann. avg., %
2
2.5
Households (over the next 5 years)
FY 2023
+1.0%
Firms (5 years ahead) FY 2022
2.0
+0.9%
1
Market participants (QUICK, 2 to 10 years ahead)
1.5
0
FY 2021
1.0
+0.0%
-1
0.5
0.0 -2
CY 10 11 12 13 14 15 16 17 18 19 20 21
15 16 17 18 19 20 21 22 23 24
FY
Notes: 1. In the left-hand chart, figures for households are from the Opinion Survey on the General Public's Views and Behavior, estimated using the modified Carlson-Parkin method.
Figures for firms show the inflation outlook of enterprises for general prices (all industries and enterprises, average) in the Tankan.
2. In the right-hand chart, figures exclude the direct effects of the consumption tax hike in April 2014. Percentage figures indicate the medians of the Policy Board members' forecasts
(point estimates) presented in the October 2021 Outlook Report.
Sources: Bank of Japan; QUICK, "QUICK Monthly Market Survey <Bonds>"; Ministry of Internal Affairs and Communications.
Chart 9
III. The Bank's Conduct of Monetary Policy
The Bank's Measures in Response to COVID-19
Firms' Financial Positions (Tankan)
Measures in Response to COVID-19
DI ("easy" - "tight"), % points
30
Supporting Corporate Financing
Special Program to Support Financing in
20
Response to COVID-19
Purchases of CP and corporate bonds: amount outstanding of
10
about 20 tril. yen at maximum (previous amount outstanding
of about 5 tril. yen)
Special Funds-Supplying Operations to Facilitate Financing
0
in Response to COVID-19
⇒The Bank extended the duration until the end
of March 2022(decided in June 2021)
-10
Stabilizing Financial Markets
-20 All enterprises and industries
Ample and Flexible Provision of Yen and
Small enterprises in all industries
Foreign Currency Funds
-30
Small enterprises in face-to-face
services industry
Purchases of ETFs and J-REITs
-40
CY 07 09 11 13 15 17 19 21
Note: In the left-hand chart, figures for small enterprises in face-to-face services industry are the weighted averages of the DI for retailing, transport & postal activities, services for
individuals, and accommodations, eating & drinking services.
Source: Bank of Japan.
9
Chart 10
III. The Bank's Conduct of Monetary Policy
Funding Environment
Issuance Yields for CP and Issuance Conditions for CP Amount Outstanding of
Corporate Bonds (Tankan) Bank Lending
DI ("easy" - "severe"), % points y/y % chg.
%
2.0 60
8
CP (3-month)
1.8
40 6
Corporate bonds (AA)
1.6
1.4
20 4
1.2
2
1.0 0
Easy
0.8
0
-20
0.6
Severe
0.4
-2
-40
0.2
-4
-60
0.0
CY
05 07 09 11 13 15 17 19 21
CY 08 10 12 14 16 18 20
CY 05 07 09 11 13 15 17 19 21