Koji Ishida: Economic activity and prices in Japan and monetary policy
Speech by Mr Koji Ishida, Member of the Policy Board of the Bank of Japan, at a meeting
with business leaders, Saitama, 26 February 2014.
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I. Monetary policy
A. Introduction of the price stability target and the joint statement by the
government and the Bank of Japan
First, I would like to describe the status of the Bank of Japan's monetary policy conduct in
January 2013. At the Monetary Policy Meeting (MPM) held on January 21 and 22, 2013, the
Bank decided to introduce the price stability target of 2 percent in terms of the year-on-year
rate of change in the consumer price index (CPI). At the same time, it released a joint
statement with the government, which clearly stated that the government and the Bank would
strengthen their policy coordination and work together to overcome deflation early and
achieve sustainable economic growth with price stability. In the statement, the Bank
announced that, under the price stability target, it would pursue monetary easing and aim to
achieve this target at the earliest possible time. Concurrently, the government announced
that it would not only flexibly manage macroeconomic policy but also formulate measures for
strengthening the competitiveness and growth potential of Japan's economy, and promote
them strongly. The government also announced that it would steadily promote measures
aimed at establishing a sustainable fiscal structure with a view to ensuring the credibility of
fiscal management.
B. Quantitative and Qualitative Monetary Easing (QQE)
Now I would like to talk about the Bank's current monetary policy measures.
At the MPM held on April 3 and 4, 2013, the Bank introduced QQE to achieve the price
stability target of 2 percent in terms of the year-on-year rate of change in the CPI at the
earliest possible time, with a time horizon of about two years. The features of this new
monetary policy measure are as follows. First, with a view to pursuing quantitative monetary
easing, the Bank changed the main operating target for money market operations from the
uncollateralized overnight call rate to the monetary base, which is the total amount of money
the Bank directly supplies to the economy. On this basis, the Bank is increasing the
monetary base - defined as the sum of banknotes in circulation, coins in circulation, and
current account deposits held by financial institutions at the Bank - at an annual pace of
about 60-70 trillion yen. Second, the Bank is purchasing Japanese government bonds
(JGBs) as the primary means of increasing the monetary base, so that their amount
outstanding will increase at an annual pace of about 50 trillion yen. Moreover, the average
remaining maturity of the Bank's JGB purchases has been extended from slightly less than
three years to about seven years - equivalent to the average maturity of the amount
outstanding of JGBs issued. Third, in addition to JGBs, with a view to lowering risk premiums
of asset prices, the Bank is purchasing exchange-traded funds (ETFs) and Japan real estate
investment trusts (J-REITs) so that their amounts outstanding will increase at an annual pace
of about 1 trillion yen and 30 billion yen, respectively. And fourth, the Bank will continue with
QQE, aiming to achieve the price stability target of 2 percent, as long as it is necessary to
maintain the target in a stable manner. It will examine both upside and downside risks to
economic activity and prices, and make adjustments as appropriate.
So far, I have explained the basic framework of QQE. Almost a year has passed since QQE
was introduced in April 2013. The amount outstanding of the monetary base has increased
from 138 trillion yen at the end of 2012 to 202 trillion yen at the end of 2013, and has been
accumulating smoothly toward 270 trillion yen, the amount projected at end-2014. The
amount outstanding of JGBs has also been accumulating smoothly toward 190 trillion yen,
the amount projected at end-2014, increasing from 89 trillion yen at the end of 2012 to
142 trillion yen at the end of 2013.
C. Loan support program
In addition to implementing QQE, the Bank has been employing the Loan Support Program
to promote financial institutions' use of the large scale monetary base - supplied by the Bank
through its aggressive monetary easing - for their efforts to increase the amount of bank
lending and strengthen the growth potential of Japan's economy. At the MPM held on
February 17 and 18, 2014, the Bank decided to double the scale of the Loan Support
Program and to extend its application period by one year. The Loan Support Program
consists of two measures: the fund-provisioning measure to stimulate bank lending (hereafter
the Stimulating Bank Lending Facility) and the fund-provisioning measure to support
strengthening the foundations for economic growth (hereafter the Growth-Supporting
Funding Facility). Specifically, under the former, the Bank decided to enable financial
institutions to borrow funds from the Bank up to an amount that is twice as much as the net
increase in their lending. As for the latter, the Bank decided to double the maximum amount
of its fund-provisioning under the main rules from 3.5 trillion yen to 7 trillion yen. Under these
facilities, financial institutions will be able to borrow funds at a fixed rate of 0.1 percent per
annum for four years.
Thus far, the Loan Support Program has supported financial institutions' efforts to increase
the total amount of their lending and has produced positive effects as a catalyst in regard to
firms' and financial institutions' efforts to strengthen the foundations for Japan's economic
growth. The Bank expects that the enhancements made at the February MPM will further
promote financial institutions' actions as well as stimulate firms' and households' demand for
credit, with a view to encouraging banks' lending and strengthening the foundations for
economic growth.
D. Developments in financial conditions and financial markets
Reflecting such policy measures, financial conditions in Japan are accommodative. Firms'
funding costs have been hovering at low levels, with long-term average contract interest
rates on new loans and discounts recording a historic low. Issuing conditions for CP and
corporate bonds have also been favorable. In addition, in a situation where the year-on-year
rate of change in bank lending continues to increase, loans provided by shinkin banks have
also been recording year-on-year positive growth since summer 2013. Firms have continued
to see financial institutions' lending attitudes as improving. Firms' financial positions have
also improved regardless of firm size. This was evidenced by the diffusion index for financial
positions of small firms: the proportion of firms responding that their financial positions were
"easy" exceeded the proportion of those responding that they were "tight" for the first time
since the bubble period of the early 1990s.
Turning to developments in financial markets, yields on 10-year JGBs - the benchmark
longterm interest rate - have been stable at a low level of around 0.6 percent as the Bank
proceeds with its JGB purchases. Given that the year-on-year rate of increase in the CPI is
currently around 11⁄4 percent, long-term real interest rates are presumed to be in negative
territory. As for foreign exchange rates, the yen has been depreciating, albeit with some
fluctuations. Stock prices have been trending upward.
Meanwhile, according to the money stock statistics, the growth rates of investment trusts and
pecuniary trusts have been at high levels, indicating that money holders such as households
have been increasing their risk assets.
As I have described, accommodative financial conditions seem to have recently been
effectively stimulating private demand, and such conditions appear to be forming the basis
for Japan's economy to overcome the negative effects of the consumption tax hikes and for a
virtuous cycle among production, income, and spending to operate firmly.
II. Developments in economic activity and prices
A. Overseas economies
Next, I will talk about developments in economic activity and prices.
Overseas economies - mainly advanced economies - are starting to recover, although the
performance remains lackluster in some parts. The growth rate of the global economy in
2014, released in January by the International Monetary Fund (IMF), is projected to
accelerate to 3.7 percent from 3.0 percent for 2013. Naturally, the growth rates in emerging
and commodity-exporting economies are higher than those in advanced economies.
However, advanced economies are projected to show stronger growth momentum than
emerging and commodity-exporting economies in 2014, compared to a year earlier.
Among advanced economies, the growth rate of the U.S. economy is projected to accelerate
in 2014 compared to the previous year. Inevitably the growth rate of the U.S. economy in the
January-March quarter of 2014 will be adversely affected by the record winter snowstorm
since December 2013. However, in a situation where balance-sheet adjustments in the
household sector seem to have mostly been completed and the fiscal drag has faded,
production and private demand are expected to remain firm and the economic recovery is
expected to become widespread from the spring. With regard to the employment situation,
although some current data showed weakness reflecting the effects of the winter snowstorm,
the improving trend remained, as evidenced by a declining trend in the unemployment rate.
As for the euro area, in 2014 the economy is projected to emerge from negative growth.
Concerns persist over further disinflation, but business and household sentiment continues to
improve in a situation where financial markets have stabilized, and production has been
picking up, albeit moderately.
Whereas improvements are observed in advanced economies as I described, the situation
varies among emerging and commodity-exporting economies. First, the Chinese economy
has continued to see stable growth, albeit at a slower pace than before, maintaining a
yearon-year growth rate of 7.5-8.0 percent in the October-December quarter of 2013. The
Purchasing Managers' Index (PMI) for manufacturing activity has recently shown some
weakness, but the Chinese economy is expected to basically maintain stable growth at
around the current pace under state control. Among other emerging and
commodityexporting economies, economic developments in the NIEs are picking up, particularly in
exports, as the effects of the economic recovery in advanced economies spread to them. In
contrast, growth momentum in the ASEAN countries has remained weak because of their
relatively limited ability to profit from the recovery in advanced economies. In particular, there
are concerns about the impact of unstable political situations in some of these countries on
trade with Japan, for example.
Among emerging and commodity-exporting economies, some of them - which have
structural vulnerabilities such as current account deficits - saw nervousness in their markets
at one point as the Federal Reserve proceeded to reduce the pace of its asset purchases,
but the situation recently regained stability.
B. Japan's economic activity and prices
1. Current situation
a. Economic activity
Now, I will discuss Japan's economic activity.
The Bank's current assessment is that Japan's economy has continued to recover
moderately. Moreover, a front-loaded increase in demand prior to the consumption tax hike
has recently been observed.
Real GDP for the October-December quarter of 2013, released on February 17, 2014,
showed quarter-on-quarter growth of 0.3 percent, representing the fourth consecutive
quarter of positive growth. By component, private demand for the quarter, including private
consumption and business fixed investment, recorded a higher growth rate than in the
July-September quarter. As for private consumption, consumption of goods such as
durable goods increased partly reflecting the front-loaded increase in demand prior to the
consumption tax hike amid the improvement in the employment and income situation
evidenced by the increase in winter bonus payments. Business fixed investment, which had
previously been lacking momentum compared to firms' annual fixed investment plans and
the improving trend of their profits, rose noticeably at last in the October-December
quarter. In contrast, exports have lacked momentum to date despite the recovery trend in
overseas economies, mainly advanced economies, and movements in the foreign
exchange market. As imports grew substantially, net exports continued to significantly push
down the GDP growth rate, as they had in the July-September quarter.
Although only a handful of economic indicators have been released for the period starting in
January 2014, the seasonally adjusted number of new passenger-car registrations - a
consumption-related indicator - increased rather substantially by 6.9 percent for January on
a month-on-month basis, suggesting the possibility that the front-loaded increase in demand
prior to the consumption tax hike is becoming pronounced. Meanwhile, real exports for
January declined by 2.3 percent overall, presumably due to a drop in exports to China.
Indices of industrial production for January, which reflected these developments in domestic
and external demand, are scheduled for release on February 28. According to the Survey of
Production Forecast in Manufacturing released in January, production for January was
expected to show relatively stronger growth led by production to meet domestic demand.
b. Prices
Regarding developments in prices, the year-on-year rate of increase in the CPI (all items less
fresh food) for December 2013 climbed from the previous month to 1.3 percent. Through the
latter half of 2013, rises in prices of energy-related items such as petroleum products -
reflecting movements in crude oil prices and foreign exchange rates - contributed to the rise
in prices. However, price increases have gradually been observed in other items recently,
while private consumption has remained resilient, indicating that such increases are steadily
becoming widespread. In fact, the year-on-year rate of increase in the CPI (all items less
food and energy) rose to 0.7 percent for December 2013, representing the strongest growth
since August 1998.
2. Outlook for economic activity
In terms of economic activity, while domestic demand, particularly private consumption, is
likely to maintain firmness as external demand is expected to increase - albeit moderately -
a virtuous cycle among production, income, and spending is likely to be maintained. As for
prices, whereas the upward contribution from price movements in energy-related items is
likely to diminish gradually, the boosting effect of an improvement in the aggregate supply
and demand balance accompanied by an economic recovery is expected to spread.
Consequently, the year-on-year rate of increase in the CPI (all items less fresh food),
excluding the direct effects of the consumption tax hike, is likely to be around 11⁄4 percent for
some time.
As I mentioned, Japan's economy is likely to continue a moderate recovery as a trend, while
it will be affected by the front-loaded increase and subsequent decline in demand prior to and
after the consumption tax hike. For the time being, I will pay attention to the following points.
a. The effects of the consumption tax hike
The first point for attention is the effects of the consumption tax hike. The front-loaded
increase in demand prior to the consumption tax hike has already been observed to a
considerable extent in durable consumer goods, mainly houses, passenger cars, and white
goods. If the scale of the front-loaded increase in demand is greater than expected toward
the end of fiscal 2013, the subsequent decline in April and beyond will be all the more
substantial.
It is inevitable that the consumption tax hike will have adverse effects on households' real
income. Nevertheless, while the economy as a whole will be underpinned by the
government's economic measures, an increase is likely in exports and business fixed
investment - which have lacked momentum to date. Therefore, even if the economy
temporarily posts negative growth for the April-June quarter of 2014, the recovery trend itself
is unlikely to dissipate.
Meanwhile, I consider it necessary to carefully assess the underlying trend of various
indicators scheduled for release over the period through the first half of fiscal 2014, given
that they are likely to show large fluctuations, both upward and downward, due to the
consumption tax hike.
b. Risks for overseas economies and developments in exports
The second point for attention is risks for overseas economies and developments in exports.
Overseas economies - mainly advanced economies - are starting to recover, but a high
degree of uncertainty is likely to remain over the outlook for some emerging and
commodityexporting economies with structural vulnerabilities such as fiscal and current account deficits.
Although the markets are currently calming down, it is necessary to monitor whether such
risks in these economies will materialize and affect the global economy.
Exports are expected to offset a temporary fallback in demand that is likely to be observed
from April 2014 following the consumption tax hike, and are expected to play their traditional
role as the trigger of a virtuous economic cycle. However, they lack some momentum at the
moment. As background to this lack of momentum, a number of issues have been raised for
discussion concerning both cyclical and structural problems, such as the pace of the
recovery in overseas economies and the shift of manufacturing firms' production sites to
overseas. I am also monitoring whether exports, which have significant spillover effects on
business fixed investment, will act as a driving force of Japan's economy as expected from
fiscal 2014 onward.
c. The employment and income situation
The third point for attention is developments in the employment and income situation of
households. With regard to the recent situation, supply and demand conditions in the labor
market have continued to improve steadily, as shown by the fact that the active job
openingsto-applicants ratio rose to 1.03 in December 2013. Employee income has also picked up
moderately because, while total cash earnings per employee have generally bottomed out,
the year-on-year rate of increase in the number of regular employees has expanded.
For domestic demand, particularly private consumption, to maintain its firmness concurrently
with a rise in prices, it is essential that the virtuous cycle of improvement continue in the
employment and income situation supporting consumption. I intend to monitor the results of
this spring's wage negotiations and the extent to which employee income as a whole
improves, including the degree to which the number of employees increases.
III. Achieving the price stability target
A. Forecasts for prices through fiscal 2015
Thus far, I have outlined the Bank's assessment of Japan's recent economic activity and
prices. Based on this assessment, the Bank compiled and released the Policy Board
members' forecasts for economic activity and prices through fiscal 2015. In terms of the
medians of the members' forecasts for prices, the year-on-year rate of change in the CPI (all
items less fresh food) is expected to register 0.7 percent for fiscal 2013. Excluding the effects
of the consumption tax hikes, it is projected to reach 1.3 percent and 1.9 percent for fiscal
2014 and 2015, respectively. It is likely to reach around 2 percent - the price stability target -
toward the latter half of the projection period, that is, through fiscal 2015.
B. The price stability target and price indices
The Bank judges that the basic indicator used to express the price stability target must be a
price index that comprehensively covers goods and services consumed by households and
that the general public at large is accustomed to. To this end, the Bank views the CPI for all
items as important. However, since the CPI for all items can be affected by temporary
fluctuations of some of its components, the Bank uses the CPI (all items less fresh food) to
identify the underlying trend of inflation; fresh food is excluded from the index because it is a
highly volatile component.
To grasp the underlying trend in the CPI, the Bank also examines reference indices such as
the CPI (all items less food and energy), the Laspeyres chain index (all items less fresh
food), and the 10 percent trimmed mean. As for other price indices, the CPI (all items less
imputed rent) is used as a deflator to convert nominal figures into real ones in statistics
relating to household consumption expenditures. This price index was adopted because it
was considered to be the one most suitable for measuring actual household consumption
expenditures, given that imputed rent on owner-occupied homes is not actually paid.
In the long run, each of these price indices shows the same movements as the overall index,
but at each point in time they could move somewhat differently, reflecting temporary factors.
For example, the year-on-year rates of growth for December 2013 in the CPI (all items less
fresh food) and the CPI (all items less food and energy) were 1.3 percent and 0.7 percent,
respectively - as I mentioned earlier - while that in the CPI for all items was 1.6 percent, the
Laspeyres chain index (all items less fresh food) was 1.2 percent, the 10 percent trimmed
mean was 0.8 percent, and the CPI (all items less imputed rent) was 2.0 percent.
The Bank judges it necessary to assess price developments comprehensively by monitoring
a wide range of price indices such as those just mentioned. It seeks to achieve the price
stability target at the earliest possible time and maintain it in a stable manner. In this way, it
seeks to fulfill its mission of "achieving price stability, thereby contributing to the sound
development of the national economy", as stipulated in the Bank of Japan Act.