November 14, 2022
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 the various activities of the Bank of Japan's
Nagoya Branch.
The Bank makes a projection for Japan's economic activity and prices every quarter, which
Outlook for Economic Activity and Prices
is released in the (Outlook Report). Today, I
would like to talk about the Bank's view on Japan's economic activity and prices and
explain its thinking behind the recent conduct of monetary policy, with reference to the
latest Outlook Report decided at the Monetary Policy Meeting held in October.
I. Economic Developments
Let me start by talking about economic developments. Japan's economy has picked up as
the resumption of economic activity has progressed while public health has been protected
from the novel coronavirus (COVID-19). Various factors have exerted downward pressure
on the economy, including COVID-19, high commodity prices, and rising consumer prices.
However, both the household and corporate sectors have remained resilient.
First, let me speak about developments in the household sector. This past summer, Japan
experienced a seventh wave of COVID-19, surpassing the previous peak in the number of
confirmed new cases by a wide margin. However, the impact of this on services
consumption such as dining-out and travel seems to have been limited compared with past
phases of COVID-19 surges, partly because no pandemic-related restrictions were imposed
(Chart 1). On the other hand, successive price hikes have been made for energy and daily
necessities, particularly food, leading consumer sentiment to become more cautious. Still,
private consumption has continued to increase moderately, mainly supported by relatively
large increases in summer bonuses and by pent-up demand fueled by household savings that
have accumulated during the pandemic.
In the corporate sector, exports and production have followed an upward trend, albeit with
fluctuations (Chart 2). Supply-side constraints on parts intensified in the first half of this
year but have been waning on the whole, with the exception of some parts, such as
semiconductors used in automobiles. In addition, exports and production of capital goods
have increased, mainly on the back of strong demand for semiconductor production
equipment based on projections that digital-related demand will expand in the medium to
long term. Meanwhile, higher raw material costs have put downward pressure on business
performance. That said, overall corporate profits have been above pre-pandemic levels and
at record highs, although the situation varies across firms depending on their size and
industry. Reflecting such high levels of profits, the business fixed investment plan in the
Tankan
September (Short-Term Economic Survey of Enterprises in Japan) shows that
planned investment for fiscal 2022 increases by 15 percent from fiscal 2021, suggesting an
aggressive investment stance among firms. This also reflects firms' moves to increase green
and digital-related investments over the medium to long term.
These developments in both sectors are projected to continue and it is highly likely that
Japan's economy will continue to recover, with the impact of COVID-19 and supply-side
constraints waning. In the latest Outlook Report, the Bank projects that the economy will
continue to grow at a relatively high rate in the range of 1.5-2.0 percent from fiscal 2023
(Chart 3).
Nevertheless, uncertainties over the outlook for Japan's economy have heightened.
Particular attention is warranted on risks surrounding developments in overseas economic
activity and prices. Looking at the Purchasing Managers' Index (PMI), which measures
business sentiment, the respective indexes for selected major economies -- namely, the
United States, the euro area, and China -- have been under 50, the break-even point between
improvement and deterioration in business conditions (Chart 4). The International Monetary
World
Fund (IMF) revised its global economic outlook downward in the October 2022
Economic Outlook
(WEO), presenting its view that more than a third of the global economy
will likely contract and fall into recession this year or next.
The slowdowns in overseas economies are attributable to rapid inflation and the monetary
tightening measures taken to contain it. In the United States, although the year-on-year rate
of change in the consumer price index (CPI) has decelerated somewhat recently, it is still at
around 8 percent, and prices have risen not only for energy and food but also for a wide
range of items (Chart 5). In the euro area, the inflation rate has continued to accelerate,
exceeding 10 percent in the latest reading. In this situation, the Federal Reserve and the
European Central Bank (ECB) have raised their policy interest rates by around 2-4
percentage points since this spring. These hikes have been made to bring the inflation rates
down toward their 2 percent targets, but market participants have expressed concern over
whether it is possible to contain inflation and maintain economic growth simultaneously. In
fact, some have pointed out that monetary tightening runs the risk of slowing the U.S. and
euro area economies by more than expected, while there is also awareness that insufficient
tightening carries the risk of keeping inflation elevated. Even in the latter case, significant
tightening will eventually be needed, which will end up putting greater downward pressure
on these economies. It is necessary to carefully monitor the impact of such developments on
global financial markets; for example, adjustments in asset prices and capital outflows from
emerging economies.
Other risks surrounding overseas economies include developments in prices of commodities,
including grains. International commodity prices have declined recently, in reflection of
concern over a slowdown in the global economy, but they may turn to an increase again
depending on factors such as developments in the situation surrounding Ukraine.
Moreover, vigilance against the course of COVID-19 at home and abroad is still warranted.
Although the seventh wave of COVID-19 this summer ended up having a limited impact,
constraints on economic activity may intensify again depending on the course of COVID-19
in Japan.
According to the IMF's October WEO that I referred to earlier, Japan is projected to have
the highest growth rate among the Group of Seven (G7) economies next year (Chart 6).
There are two factors that underlie the projections, where Japan's economy will continue to
recover while overseas economies will slow.
The first is the difference in the timing of the resumption of economic activity. In Japan, as
a result of prolonged vigilance against COVID-19 compared with overseas economies,
pent-up demand, such as for dining-out and travel, will start to materialize clearly going
forward (Chart 7). The government's domestic travel discount program was launched last
month to support such materialization. The further relaxation of international border
controls, also initiated last month, is expected to bring back inbound tourism demand.
Moreover, the comprehensive economic measures recently formulated by the government
will contribute to economic growth.
The second factor is that highly accommodative financial conditions have been maintained
in Japan through continued monetary easing, while monetary policy has been tightened at
rapid paces overseas (Chart 8). Funding costs for Japanese firms have been at extremely
low levels, even as overseas interest rates have increased significantly. Firms' funding
demand for working capital has increased recently in reflection of the resumption of
economic activity and raw material cost increases. In this situation, financial institutions
have maintained an active lending stance and firms' financial positions have continued on
an improving trend, including for small and medium-sized firms.
II. Price Developments
I will now turn to price developments in Japan. The latest figure for the year-on-year rate of
change in the CPI for all items excluding fresh food, which is for September, was 3.0
percent due to rises in prices of such items as energy, food, and durable goods (Chart 9).
The rate of change is projected to increase further toward the end of the year, partly because
prices of a wide range of products were raised in October, which starts the second half of
the fiscal year in Japan. The cause of the rising inflation rate is that cost increases due to a
rise in import prices, which reflects higher international commodity prices and the yen's
depreciation, have been passed on to prices of items.
That said, the inflation rate is expected to decelerate gradually from the beginning of next
year. International commodity prices are lower than a while ago, and the effects of the
pass-through to consumer prices of cost increases led by the rise in import prices are likely
to wane. The Bank forecasts that the rate of change in the CPI will be at around 3 percent
for this fiscal year but then around 1.5 percent from fiscal 2023. Projections that inflation
will fall below 2 percent are made not only by the Bank but also by others, including the
IMF and private-sector economists (Chart 10).
Of course, as with the outlook for economic activity, the outlook for prices is subject to high
uncertainties, including developments in international commodity prices and foreign
exchange rates, both of which have brought about upward pressure of costs to date. In
addition, although Japanese firms had long been cautious about raising prices, those for a
wide range of products have been raised recently. Close attention to firms' price-setting
behavior going forward is warranted.
How firms' wage-setting behavior will evolve is also important. In this regard, it is
projected that labor market conditions will tighten as the output gap improves (Chart 11). In
particular, labor demand in the services industry is expected to recover with the impact of
COVID-19 waning. Therefore, wages of non-regular employees, which account for a large
share of those working in the services industry, are expected to rise. This could gradually
spill over to wages of regular employees, such as at small and medium-sized firms.
Moreover, tightening labor market conditions may lead to wage increases through, for
example, reallocation of labor to areas with higher productivity.
From a somewhat long-term perspective, even though the working-age population in Japan
has been declining, the total number of employees has grown by more than 4 million over
the nearly ten years since 2013, mainly due to an increase in the labor force participation of
women and seniors. The labor force participation rate of women in Japan has become
higher than in the United States. The flip side is that room for additional labor supply is
gradually shrinking in Japan. In this situation, it is likely that momentum for wage increases
will also come from the labor supply side in the future.
In addition to such labor market conditions, the rises in prices to date will likely be reflected
to a considerable extent in the outcomes of the next annual spring labor-management wage
negotiations. It is necessary to examine future wage developments carefully since they are
also affected by economic developments at home and abroad.
III. The Bank's Conduct of Monetary Policy
Now, I would like to talk about the Bank's conduct of monetary policy, based on the
economic and price developments I have described. At its Monetary Policy Meeting last
month, the Bank decided to continue with monetary easing.
Since April this year, the year-on-year rate of change in the CPI has been above 2 percent,
and it registered around 3 percent in the latest reading. How monetary policy is conducted
to address inflation should differ depending on the extent of inflation and on what underlies
it.
In this regard, in the United States, for instance, the economy reopened at a relatively early
stage after the onset of the pandemic, and consumption activities have remained robust. At
the same time, labor supply has been slow to recover, especially among seniors. As labor
market conditions have tightened due to substantial excess demand, not only the inflation
rate but also the wage growth rate has risen significantly. Under these circumstances,
increases in services prices, which tend to reflect wage growth, have pushed up overall
inflation (Chart 12). The inflation rate has remained at a level significantly above the 2
percent target of the Federal Reserve in a situation where wages and prices have increased
simultaneously. Against this background, it has decided to rapidly tighten monetary policy
to suppress demand and thereby lower the inflation rate.
Turning to economies in the euro area, although demand there has not been as strong as in
the United States, people's inflation expectations have risen amid ongoing elevated inflation
of around 10 percent, mainly led by energy prices. This has raised concerns about the risk of
a so-called wage-price spiral, where higher inflation expectations make employees demand
higher wage increases, leading to higher labor costs for firms and upward pressure on prices.
The ECB has prioritized containing inflation and has decided to tighten monetary policy
while accepting the risk of its adverse impact on the economies to some extent.
Japan's situation differs from both of these. Japan's economy is still on its way to recovery
from the pandemic and the output gap has remained in negative territory. The Bank projects
that the output gap will turn positive at some point in the second half of this fiscal year with
a recovery in the economy. The inflation rate, however, has not risen from the demand side
at present. Although it is currently above 2 percent due to the pass-through to consumer
prices of cost increases led by the rise in import prices, the rate is projected to decline to
below 2 percent from fiscal 2023 with the effects of this pass-through waning, as I
mentioned earlier.
Also, as I explained today, there have been extremely high uncertainties for economic and
price developments at home and abroad and for financial market developments. The Bank
will closely examine the outlook for economic activity and prices, as well as the upside and
downside risks to the outlook. Based on the assessments, it will conduct appropriate
monetary policy. At present, the Bank deems that it should continue with monetary easing
and thereby firmly support economic activity. By doing so, it aims to provide a favorable
environment for firms to raise wages and to achieve the price stability target in a sustainable
and stable manner, accompanied by wage increases.
Concluding Remarks
In closing, I would like to make two points about the Tokai region's economy from a
medium- to long-term perspective.
The first point concerns efforts toward achieving carbon neutrality, which I touched on at
last year's meeting. I have heard about progress in various initiatives over the past year in
this region. In its industrial sector, firms have been working to visualize carbon emissions in
the supply chain by using Internet of Things (IoT) technology. Other efforts they have been
making include investment in equipment with high energy efficiency and revisions to their
production processes to reduce carbon emissions. Financial institutions have been
supporting such efforts through financing and have been enhancing their functions of
consultation services and solution proposals so as to help client firms achieve
decarbonization. Meanwhile, local governments have been developing frameworks to
strengthen collaboration between industry and financial institutions. In such ways, all those
in the region are working together to take on the challenging task of navigating this period
of major change.
My second point concerns efforts to enhance the industrial competitiveness through
promoting innovation. Besides collaboration among industry, government agencies, and
academic institutions in the region, there have been various efforts to this end, such as
collaboration with foreign startup support organizations and universities and enhancement
of the funding environment by means of funds that Aichi Prefecture partly contributes to.
Furthermore, Japan's largest base for supporting startups is scheduled to open in Nagoya in
2024. As seen in these initiatives, the public and private sectors have been actively working
monozukuri
together to encourage the advancement of -- which means manufacturing in
Japanese and is the field in which firms in the Tokai region have a competitive advantage --
and foster the next generation of industry.
Achieving carbon neutrality and giving a boost to startups are extremely important issues
not only for the Tokai region but also for Japan's economy as a whole. I hope this region
will continue to lead the sustainable growth of Japan's economy by continuing to take on
various challenging efforts like those I just mentioned.
Visiting here after a year has passed, I was pleased to see the vitality of cities on the back of
ongoing redevelopment, and was impressed by the progress in urban development that will
make the region increasingly appealing. I would like to close by expressing my hope that
the various forward-thinking efforts you are taking on will bear fruit and that the region's
economy will develop further. Thank you very much for your attention.
Economy
Japan's and Monetary Policy
Speech at a Meeting with Business Leaders in Nagoya
November 14, 2022
KURODA Haruhiko
Governor of the Bank of Japan
Introduction
I. Economic Developments
II. Price Developments
III. The Bank's Conduct of Monetary Policy
Concluding Remarks
Private Consumption
Consumption Activity Index Consumption of Services
s.a., CY 2018 = 100
s.a., CY 2018 = 100
120
110
100
100
80
90
60
80
40
70
20
Total number of overnight guests
Total real private consumption
(excluding inbound visitors)
Sales in the food services industry
Services
0
60
CY 18 19 20 21 22
CY 18 19 20 21 22
Note: In the left-hand chart, figures for total real private consumption are for the real Consumption Activity Index and are based on staff calculations. The figures exclude inbound tourism
consumption and include outbound tourism consumption.
Sources: Bank of Japan; Japan Tourism Agency; Japan Foodservice Association, "Market Trend Survey of the Food Services Industry."
1
Chart 2
I. Economic Developments
Exports, Production, and Current Profits
Exports and Production Current Profits
s.a., CY 2018 = 100
s.a., tril. yen
110
16
Large firms
105
14
Small and medium-sized firms
100
12
95
10
90 8
85 6
80 4
Industrial production
75 2
Real exports
70 0
CY 18 19 20 21 22 CY
07 09 11 13 15 17 19 21
Note: In the right-hand chart, figures are based on the Excluding "finance and insurance." Figures from 2009/Q2
Financial Statements Statistics of Corporations by Industry, Quarterly.
onward exclude pure holding companies.
Sources: Ministry of Economy, Trade and Industry; Bank of Japan; Ministry of Finance.
The BOJ's Forecasts for Real GDP
(October 2022 Outlook Report)
FY 2024
s.a., ann., tril. yen
580
+1.5%
570
560
FY 2023
550
+1.9%
540
530
FY 2022
+2.0%
520
510
500
490
480
470
FY 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Note: The forecasts presented are the medians of the Policy Board members' forecasts. The values of real GDP for fiscal 2022 onward are calculated by multiplying the actual figure for fiscal
2021 by all successive projected growth rates for each year.
Sources: Cabinet Office; Bank of Japan.
3
Chart 4
I. Economic Developments
Developments in the Global Economy
Composite PMIs for Major Economies
s.a., DI
70
60
50
40
30
Japan United States
20
Euro area China
10
CY 18 19 20 21 22
Note: The Composite PMI is a weighted average of the Manufacturing Output Index and the Services Business Activity Index. Figures for Japan are the au Jibun Bank Japan Those for
PMI.
China are the Caixin China PMI.
Source: Copyright © 2022 by S&P Global Market Intelligence, a division of S&P Global Inc. All rights reserved.
Inflation and Policy Interest Rates in Major Economies
Inflation Policy Interest Rates
y/y % chg.
%
12 4.0
Japan Japan
3.5
10
United States United States
3.0
8
Euro area
2.5 Euro area
2.0
6
1.5
4
1.0
0.5
2
0.0
0
-0.5
-2
-1.0
15 16 17 18 19 20 21 22 CY
CY 15 16 17 18 19 20 21 22
Notes: 1. In the left-hand chart, figures for Japan are the CPI for all items less fresh food, excluding the effects of the consumption tax hikes, etc. Those for the United States are the CPI for all
items. Those for the euro area are the HICP for all items.
2. In the right-hand chart, figures for Japan are the rates applied to financial institutions' current accounts (the Policy-Rate Balances) at the Bank of Japan. Those for the United States are
the medians of the target ranges for the federal funds rate. Those for the euro area are the rates on the deposit facility.
Sources: Ministry of Internal Affairs and Communications; Haver; Bloomberg.
5
Chart 6
I. Economic Developments
IMF Forecasts (October 2022
World Economic Outlook)
Growth Rate Forecasts for 2023
for the G7 Economies
%
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
Japan Canada United States France United Kingdom Italy Germany
Source: IMF.
Chart 7
I. Economic Developments
Pent-Up Demand and Inbound Tourism Demand
Private Consumption and
Number of Inbound Visitors
Disposable Income
s.a., CY 2018 = 100
s.a., ann., mil. persons
115
35
110
30
105
25
100
20
95
15
90
10
85
Consumption Activity Index
5
(travel balance adjusted, real)
80
Disposable income, etc. (SNA, real)
75 0
CY 18 19 20 21 22 CY 18 19 20 21 22
Note: In the left-hand chart, figures for the Consumption Activity Index (travel balance adjusted) are based on staff calculations. The figures exclude inbound tourism consumption and include
outbound tourism consumption. "Disposable income, etc." consists of disposable income and adjustment for the change in pension entitlements, and the real values for it are obtained using
the deflator of consumption of households.
Sources: Bank of Japan; Cabinet Office; Japan National Tourism Organization (JNTO).
7
Chart 8
I. Economic Developments
Financial Conditions
Lending Attitudes of
Firms' Financial Positions
Financial Institutions
DI ("accommodative" - "severe"), % points
DI ("easy" - "tight"), % points
30
25
"Accommodative" "Easy"
25
20
20
15
"Severe" "Tight"
15
10
10
5
5
0
0
-5
-5
Manufacturing
Manufacturing
-10
-10
Nonmanufacturing
Nonmanufacturing
-15
-15
-20 -20
CY 07 09 11 13 15 17 19 21 CY 07 09 11 13 15 17 19 21
Chart 9
II. Price Developments
The BOJ's Forecasts for the CPI
(October 2022 Outlook Report)
FY 2022
y/y % chg.
3.5
+2.9%
3.0
FY 2023 FY 2024
2.5
+1.6% +1.6%
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
FY 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Note: Figures are the CPI for all items less fresh food, excluding the effects of the consumption tax hikes, etc. The forecasts presented are the medians of the Policy Board members' forecasts.
Sources: Ministry of Internal Affairs and Communications; Bank of Japan.
9
Chart 10
II. Price Developments
Forecasts for Japan's CPI
by the IMF, Private-Sector Economists, and the BOJ
y/y % chg.
2022 2023 2024
IMF
+2.0 +1.4 +1.0
(All items, calendar year)
Private-sector
economists +2.7 +1.5 +1.0
(Less fresh food, fiscal year)
Bank of Japan
+2.9 +1.6 +1.6
(Less fresh food, fiscal year)
Note: Figures for the IMF and the Bank of Japan are forecasts as of October 2022. Those for private-sector economists are forecasts as of November. Figures for the IMF, private-sector
economists, and the Bank of Japan are from the World Economic Outlook, the ESP Forecast, and the Outlook Report, respectively.
Sources: IMF; Japan Center for Economic Research, "ESP Forecast"; Bank of Japan.
Chart 11
II. Price Developments
Employment Situation
Working-Age Population and
DIs for Employment Conditions
Number of Employees
inverted, DI ("excessive employment"
- "insufficient employment"), % points cumulative chg. from CY 2010, mil. persons
-50
6
Manufacturing
Forecast
-40
4
Nonmanufacturing
-30
2
-20 0
"Insufficient"
-10
-2
"Excessive"
0
-4
Number of employees
10
-6
Working-age population
20 -8
CY 18 19 20 21 22 10 11 12 13 14 15 16 17 18 19 20 21
CY
Sources: Bank of Japan; Ministry of Internal Affairs and Communications.
11
Chart 12
III. The Bank's Conduct of Monetary Policy
Inflation in Major Economies
United States Euro Area Japan
y/y % chg. y/y % chg. y/y % chg.
11 11 11
Energy <7%> Energy <11%> Temporary factors
10 10 10
Services <63%> Services <42%>
9 9 9
Energy <7%>
8 Goods <30%> 8 Goods <47%> 8
Services <50%>
7 7 7
CPI <100%> HICP <100%>
Goods <40%>
6 6 6
CPI (less fresh food) <100%>
5 5
5
4 4 4
3 3 3
2 2 2
1 1 1
0 0 0
-1 -1 -1
-2 -2
-2
CY CY
CY 18 19 20 21 22 18 19 20 21 22 18 19 20 21 22