December 26, 2016
Bank of Japan
A New Phase of the Global Economy
and Challenges Facing Japan's Economy
Speech at the Meeting of Councillors of Nippon Keidanren
(Japan Business Federation) in Tokyo
Haruhiko Kuroda
Governor of the Bank of Japan
Introduction
It is a great honor to have this opportunity to address such a distinguished gathering of
business leaders in Japan today.
2017 is now just a week away. Today, to round off 2016, I would like to take a look back at
this year's economic developments. Then, from a somewhat longer-term perspective, I
would like to talk about the current phase of the global economy, and close my speech by
touching on challenges facing Japan's economy, looking ahead to next year.
I. The Global Economy in 2016
Reviewing 2016, it started off with volatile global financial markets. Specifically, Shanghai
stock prices declined significantly at the beginning of the year, reflecting uncertainties
regarding developments in the renminbi, and this led to a rapid worsening of investors' risk
sentiment. These developments in emerging economies brought about declines in stock
prices and long-term interest rates in major advanced economies. At the Group of Twenty
(G-20) Finance Ministers and Central Bank Governors Meeting held in Shanghai in late
February, the member countries agreed to cooperate in addressing volatility in financial
markets and the heightening of uncertainties in the global economy. Due in part to this,
global financial markets had stabilized temporarily. However, a "risk-off" mode in global
financial markets continued thereafter through autumn, partly reflecting the United
Kingdom's referendum in late June, in which the majority voted to leave the European
Union (EU). On the growth and inflation front, the trend decline in the growth rate -- the
so-called secular stagnation hypothesis -- and the global decline in inflation rate have been
hotly debated. Many of you may have an impression that 2016 was a year in which
pessimistic views on the global economy prevailed.
However, actual data indicate that the global economy is not as bad as it appears. The pace
of growth in advanced economies has accelerated recently, mainly led by the solid U.S.
economy (Chart 1). There are increasing expectations of acceleration in the U.S. economy's
growth rate going forward, reflecting the outcome of the presidential election. In fact,
various economic indicators actually continued to improve steadily even before the election.
In emerging and commodity-exporting economies, the growth momentum is picking up,
albeit moderately, due in part to the effects of their policy measures. The global economy as
a whole appears to be turning upward. Let me remind you of the fact that the International
Monetary Fund (IMF), for the first time in a while, did not make downward revisions in its
World Economic Outlook (WEO) in October, and that the Organisation for Economic
Co-operation and Development (OECD) revised upward its Economic Outlook released last
month (Chart 2).
From a somewhat longer-term perspective, the global economy seems to have finally
moved out of its adjustment phase after the global financial crisis, often dubbed the Lehman
shock, and is entering a new phase. In what follows, I will touch on changes underway in
the global economy while looking back at developments after the global financial crisis.
II. The Global Economy after the Global Financial Crisis
After the global financial crisis started in autumn 2008, the growth rate of the global
economy significantly decelerated. A salient feature of this recession was the deceleration in
growth of the world trade volume, the slowdown in the manufacturing sector, and the
decline in business fixed investment. For example, the recent growth in the world trade
volume, calculated by summing up the import volumes of the world's countries, has been
well below the average growth rate before the global financial crisis (Chart 3). Since the
global financial crisis, the level of the world trade volume also has deviated substantially
downward from the trend suggested by the globally-aggregated real GDP. This deceleration
in growth of the world trade volume is called "slow trade," which well characterizes the
global economy after the global financial crisis.
Economists and policymakers including the Bank's staff are conducting various analyses on
factors behind the slow trade. Although there is no consensus at present, structural factors
such as the pause in the expansion of the global supply chain and the progress of
internalization in China seem to have played an important role, in addition to a cyclical
decline in demand. The breakdown by region and item shows that the decline was
conspicuous in emerging economies and capital goods. The downward deviation from the
trend in real imports was larger in emerging economies than in advanced economies (Chart
4). Looking at the global real imports by item, the decline in the imports of capital goods is
significant. These facts suggest that the deceleration in growth of the world trade volume
was largely driven by the sluggish demand in business fixed investment, mainly in
emerging economies. The continued decline in global demand for capital goods has had a
significant negative impact on the manufacturing sector in Japan, which has a comparative
advantage in capital goods.
With the slow trade continuing, advanced economies' exports to emerging economies have
been sluggish, leading to lower production activities in the manufacturing sector. As the
manufacturing sector tends to play a significant role in leading the business cycle in many
economies, its slowdown has weighed on the recovery in advanced economies. In this
situation, the recovery during the past few years in these economies -- the United States and
Europe in particular -- has been led largely by an acceleration in household expenditures
amid a lack of momentum in corporate expenditures (Chart 5).
Fortunately, there have been signs of improvement recently. Having been weak since 2015,
the purchasing managers' index (PMI) -- which represents the overall business conditions in
the manufacturing sector -- has improved clearly of late in the advanced economies as well
as the emerging and commodity-exporting economies (Chart 6). Looking at imports in
emerging economies, those in the Chinese and the ASEAN economies bottomed out and
then picked up. Given that the weakness in emerging economies' imports had accounted for
the major part of the slow trade, the ongoing recovery in their imports is likely to have a
positive impact on a wide range of advanced economies' manufacturing sectors.
On the macroeconomic policy front, aggressive monetary easing was introduced mainly in
advanced economies by employing so-called unconventional measures such as quantitative
easing (QE) -- or large-scale purchases of assets including government bonds -- and the
negative interest rate policy. With regard to fiscal policy, the G-20 countries provided strong
fiscal stimulus in a coordinated manner immediately after the start of the global financial
crisis. Thereafter, some countries -- those in Europe in particular -- conducted fiscal policies
in a neutral or somewhat contracting manner for a while. This year, with the heightening of
global uncertainties, the G-20 and the IMF agreed to take a three-pronged approach that
uses all policy tools -- monetary, fiscal, and structural -- individually and collectively, with a
view to achieving strong, sustainable, balanced, and inclusive growth. In fact, the
authorities in each economy have been supporting their respective economic growth.
Let me summarize the recent developments in the global economy. The growth momentum
has been picking up in emerging economies; in advanced economies, reflecting this
development, the economic recovery that had been led by the household sector is now
spreading to the corporate sector, including manufacturing. Commodity prices such as crude
oil prices bottomed out in the first half of the year and turned to an increase thereafter,
reflecting the recovery in global demand (Chart 7). The global economy seems to be finally
entering a new phase, by putting the negative legacy of the global financial crisis behind it,
although considerable uncertainties lie ahead.
III. Japan's Economy amid the Global Economic Developments
Now, let me turn to Japan's economy amid the global economic developments that I've just
explained. The global financial crisis that started in 2008 exerted a considerable impact on
Japan's economy. As you all know, it was triggered by concerns over the stability of
financial systems as subprime mortgage-related losses spread in the United States and
Europe. It should be noted that the downturn in the real economy in Japan was more
significant than that at the epicenter of the crisis -- namely, the United States and Europe --
although losses at financial institutions were rather limited and the soundness of financial
systems was well maintained (Chart 8). There seem to have been two factors behind that
development. First, as I mentioned earlier, manufacturing -- in which Japan has a
competitive advantage -- was stagnant on a global basis, as seen in particular with the
decline in demand for capital goods. Second, the yen appreciated in an excessive manner,
exerting a significant negative impact on Japan's economy, mainly on manufacturing. This
was because the yen had been perceived as a safe haven currency in the global financial
markets, in addition to the fact that there had been little room for further reduction in
interest rates in Japan.
Under these circumstances, Japan's economy was put in an unfavorable situation. The Bank
responded by lowering the short-term policy interest rate -- which already had declined to
as low as 0.5 percent -- to 0.1 percent. In addition, it undertook new policy initiatives
including the purchases of risk assets such as CP, which we call "comprehensive monetary
easing." Despite these efforts, Japan's economy did not get out of deflation, as the Bank was
not able to provide sufficient monetary stimulus given the limited room for lowering the
short-term interest rates.
It was against this background that the Bank introduced in April 2013 an unprecedentedly
large-scale monetary easing, quantitative and qualitative monetary easing (QQE), in order
to achieve the price stability target of 2 percent at the earliest possible time. The main
transmission mechanism of QQE is lowering the real interest rates by (1) exerting
downward pressure on the interest rates across the entire yield curve through massive
purchases of Japanese government bonds (JGBs) and (2) raising people's inflation
expectations through the Bank's strong and clear commitment. Thereafter, the Bank has
pursued further monetary easing as appropriate; it expanded QQE in October 2014,
followed by the introduction of the negative interest rate policy in January 2016. Thanks to
a series of powerful monetary stimulus measures, Japan's economy has improved
significantly during a period of more than three and a half years (Chart 9). The excessive
appreciation of the yen has been fairly corrected and stock prices have increased
substantially. Corporate profits have marked their historical high levels and business fixed
investment has recovered. With regard to the employment and income situation, the
unemployment rate has declined to as low as 3 percent, which is virtually full employment,
and wages have continued to rise moderately. On the price front, Japan's economy is no
longer in deflation, which is commonly defined as a sustained decline in general prices,
although there remain the effects on inflation of a significant fall in crude oil prices.
That being said, in the first half of 2016, private consumption showed relatively weak
developments in some indicators, mainly reflecting the negative wealth effects stemming
from the decline in stock prices and the deterioration of consumer sentiment. As for
business activity, exports and industrial production remained sluggish, reflecting the effects
of the slowdown in emerging economies and the yen's appreciation, as well as supply-side
constraints that were mainly due to the Kumamoto Earthquake. Against this backdrop, the
momentum of price increases slowed moderately. However, the recent economic indicators
suggest that the economy has been improving (Chart 10). An increasing number of
indicators suggest a pick-up in private consumption. For example, the consumption activity
index (CAI) -- which is calculated by compiling various sales and supply-side statistics --
has been increasing steadily in recent months, after showing weakness in the first half of the
year. Various surveys on consumer confidence, including the Economy Watchers Survey,
have been improving. Looking ahead, private consumption is likely to increase moderately
as the employment and income situation continues to improve steadily. Regarding employee
income, the labor share in the aggregate output has been on a declining trend in recent years,
being below the long-term average, with corporate profits staying at high levels. Meanwhile,
a variety of indicators for the labor market -- such as the unemployment rate, the active job
openings-to-applicants ratio, and the diffusion index (DI) for employment conditions in the
Tankan (Short-Term Economic Survey of Enterprises in Japan) -- suggest that the labor
market conditions have tightened. Thus, the conditions for wage increases largely have been
met. Wages are labor costs for individual firms. From the macroeconomic viewpoint,
however, they are employee income, which is the source of households' purchasing power.
As wages and employee income rise on a sustainable basis, private consumption will be
firmer. With regard to business activity, Japan's exports and production have increased
recently, on the back of recovery in demand from emerging economies that I've mentioned.
By taking account of these improvements, the Bank has made an upward revision to its
assessment of economic conditions at the latest Monetary Policy Meeting (MPM) for the
first time in a while.
In sum, Japan's economy had struggled against the headwinds of the global economy. As the
global economy is entering a new phase, Japan's economy is now able to move further
forward, supported by the tailwind.
IV. Challenges Facing Japan's Economy: Looking Ahead to 2017
Lastly, I would like to touch on challenges facing Japan's economy, looking ahead to next
year. As I have explained today, the global economy is entering a new phase. With the
tailwind of the global economy, good business opportunities are arising. In this situation, it
is imperative to get ahead of your rivals both at home and abroad. Fortunately, advanced
technology, including that related to IoT (Internet of Things), AI (Artificial Intelligence),
and big data, will become available for commercial use in a wide range of areas, facilitating
new types of products and services.
It is understandable that many people still have pessimistic views on the future of Japan's
economy from a longer-term perspective after a long period of deflation and low growth.
However, it is you in business management who can discover new growth opportunities in
any situation. Joseph A. Schumpeter, an economist who emphasized the role of firms'
innovation as the fundamental element of economic growth, presents the following
statement in his well-known work, The Theory of Economic Development.
[I]nnovations in the economic system do not as a rule take place in such a way that
first new wants arise spontaneously in consumers and then the productive apparatus
swings round through their pressure.
It is [...] the producer who as a rule initiates economic change, and consumers are
educated by him if necessary; they are, as it were, taught to want new things....
As Schumpeter notes, I think it is extremely important for Japan's economic growth that
firms be innovative in various aspects and create demand for new products and services,
thereby seizing on consumers' potential needs.
In terms of macroeconomic policy, it is crucial to create a favorable economic environment
in which firms can make the most of the global tailwind. On the fiscal front, the government
compiled the Economic Measures for Realizing Investment for the Future in August 2016,
and it plans to fully implement the measures in the near future. With regard to the structural
policy, the government is working on various initiatives, such as regulatory and institutional
reforms to raise Japan's growth potential, including the promotion of working-style reforms
in the labor market. These measures provide an environment that promotes firms'
innovation and will lead to enhancement of Japan's growth potential in the medium to long
run.
On the monetary policy front, at the MPM in September, the Bank conducted a
comprehensive assessment on monetary easing measures implemented since the
introduction of QQE; based on its findings, it introduced a new policy framework called
"QQE with Yield Curve Control." This new framework consists of two components: yield
curve control and an inflation-overshooting commitment. I believe that it can further
strengthen the effects of the tailwind that pushes up the economy and prices. For example,
when the government increases fiscal expenditure, the interest rates tend to increase,
thereby restraining private-sector investment. This is the so-called crowding-out effect.
However, as the Bank contains a rise in short- and long-term interest rates, this effect can be
avoided. When higher growth and inflation are expected, thanks to efforts by businesses and
the government's initiatives to strengthen economic growth, keeping interest rates low will
further push up growth and inflation going forward. In the current globalized financial
markets, as improvement in the global economy becomes evident, there would be upward
pressure on long-term interest rates in Japan. In fact, since last month, the long-term interest
rates in the United States have been rising significantly, having spillover effects on
long-term interest rates in many other countries. Under these circumstances, 10-year JGB
yields have been stable at around 0 percent. This shows clearly that the yield curve control
by the Bank has exerted its intended effects. By implementing this policy framework in an
appropriate manner, the Bank can take advantage of the recovery momentum of the global
economy to produce an even greater driving force for Japan's economy. As it encourages
firms' proactive activities and thereby leads to expectations of higher growth, the driving
force can be strengthened further in a virtuous cycle.
At the same time, the Bank commits itself to continuing with large-scale monetary easing
until the year-on-year rate of increase in the observed CPI exceeds 2 percent and stays
above that level in a stable manner. This is what we call the inflation-overshooting
commitment -- the other component of the new policy framework. Thanks to three and a
half years of monetary easing, Japan's economy is no longer in deflation. I believe most of
you share the view that the current state of Japan's economy is better than it was four years
ago; that is, at year-end 2012. Nevertheless, the 2 percent inflation goal, which is the global
standard, has not been achieved yet. In order to ensure that Japan never falls back into
deflation, it is necessary to achieve 2 percent inflation in this round of monetary easing.
Some argue that the price stability target of 2 percent is too high considering the current
situation of Japan's economy. As I explained earlier, however, Japan's economy had very
limited room for monetary easing at the time of the Lehman shock, unlike the U.S. and
European economies, precisely because Japan was the only country in deflation.
Considering this painful experience, it is essential to secure some room for monetary policy
responses by achieving the global standard of about 2 percent inflation and thereby raising
the interest rate that is neutral to the economy. In fact, among central banks and academic
economists outside of Japan, it is hotly debated whether 2 percent inflation is sufficient to
secure room for policy responses, and some even argue that the target should be raised to 3
or 4 percent. This episode shows that the risk of falling into deflation and thereby losing the
effectiveness of monetary policy is widely recognized given the experiences in Japan, as
well as those in other economies after the global financial crisis. In relation to this, it is
argued in Japan that the Bank should aim at a lower inflation rate, instead of the global
standard of 2 percent, as Japan's potential growth rate is lower than that of other economies.
However, I believe that the logic should work in the opposite direction. In theory, the
interest rate that is neutral to economic activity is the sum of the potential growth rate and
medium- to long-term inflation rate. In order to secure room for monetary easing, a low
potential growth rate should be the reason for aiming at a higher inflation rate. It can never
be the reason for being satisfied with a lower inflation rate. The lower the potential growth
rate, the greater the risk of falling into deflation, necessitating a larger buffer for monetary
policy. Let me reiterate that the Bank's 2 percent target is the global standard and that the
inflation-overshooting commitment is designed to clarify the Bank's stance that it certainly
will achieve this target.
2016 has been a tough year, both for businesses and the Bank. Fortunately, the headwind is
turning into a tailwind. I am convinced that the coming new year will be one in which
Japan's economy will take a big step forward toward overcoming deflation. I would like to
close by expressing my hope that your business initiatives will make this happen. Thank
you very much for your attention.
A New Phase of the Global Economy
and Challenges Facing Japan's Economy
Speech at the Meeting of Councillors of Nippon Keidanren
(Japan Business Federation) in Tokyo
December 26, 2016
Haruhiko Kuroda
Governor of the Bank of Japan
Chart 1
World Economic Growth Rate
s.a., ann., q/q % chg.
10
8
6
4
2
0
-2
World economy
-4
Advanced economies
-6
Emerging and commodity-exporting
-8
economies
-10
CY 07 08 09 10 11 12 13 14 15 16
Chart 2
IMF World Economic Outlook
World Real GDP Growth Rate
Projections for Major Economies
(as of October 2016)
y/y % chg.
y/y % chg.
6
Projections
2014 2015
2016 2017
+3.4
5
3.1 3.4
World
3.4 3.2
(0.0) (0.0)
+3.1
1.6 1.8
Advanced economies 4
1.9 2.1
(-0.2) (0.0)
1.6 2.2
United States 2.4 2.6
3
(-0.6) (-0.3)
1.7 1.5
Euro area 1.1 2.0
(0.1) (0.1)
2
0.5 0.6
Japan
0.0 0.5
IMF projection
(0.2) (0.5)
(Oct. 2016)
Emerging market and
4.2 4.6
1
4.6 4.0
developing economies
(0.1) (0.0)
6.6 6.2
China
7.3 6.9
0
(0.0) (0.0)
4.8 5.1
ASEAN5 4.6 4.8
(0.0) (0.0)
-1
CY 90 92 94 96 98 00 02 04 06 08 10 12 14 16 17
Notes: 1. ASEAN5 are Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.
Notes: 2. Figures in parentheses are the differences from the July 2016 WEO projections.
Source: IMF. 2
Chart 3
World Trade Volume
Level of World Trade Volume
Growth of World Trade Volume
y/y % chg.
CY 2005=100
20 220
2003-2006
200
15
average
180
10
160
5
140
0 120
100
-5
80
-10
World trade volume
60
Trend implied by real GDP
-15
World real GDP
40
World trade volume
20
-20
CY 95 97 99 01 03 05 07 09 11 13 15
CY 95 97 99 01 03 05 07 09 11 13 15
Chart 4
Breakdown of World Trade Volume (Real Imports)
by Region and Item
Changes in Real Imports by Item
Real Imports of Advanced Economies
CY 2000-2007 average=100
Primary materials
150
Trend implied by real GDP
140
Consumer goods
Real imports
(nondurable)
130
Intermediate goods
120
(transport parts and accessories)
110
Capital and consumer goods
100
(transport equipment)
90
Decelerating
Fuels
80
Consumer goods
CY
01 03 05 07 09 11 13 15
(durable)
Intermediate goods
Real Imports of Emerging Economies
(processed materials)
CY 2000-2007 average=100
240 Intermediate goods
Trend implied by real GDP
220 (chemical processed materials)
200
Real imports
Intermediate goods
180 (parts and accessories)
160
Capital goods
140 (excluding transport equipment)
120
0.0 -0.5 -1.0 -1.5 -2.0 -2.5
100
% points
80
Note: Figures are contributions to the difference in the growth rate
60
of world trade volume between 2012-2014 and 2004-2006.
01 03 05 07 09 11 13 15
CY
4
Sources: CPB Netherlands Bureau for Economic Policy Analysis; Haver; CEIC; UN Comtrade.
Chart 5
Corporate and Household Expenditures in Advanced Economies
y/y % chg. y/y % chg.
30 4
3
20
2
10
1
0 0
-1
-10
-2
Corporate expenditures (left scale)
-20
-3
Household expenditures (right scale)
-30 -4
CY
Chart 6
Manufacturing PMI and Imports of Emerging Economies
Imports of China
y/y % chg.
Global Manufacturing PMI
30
Others
Total
25
s.a., DI
NIEs and ASEAN
20
60
Japan
15
EU
United States
1050
55
-5
-10
-15
50
-20
-25
CY 13 14 15 16
45
Imports of ASEAN
s.a., q/q % chg.
15
Others
Total
Global economy
40
NIEs and ASEAN
10
Japan
Advanced economies China
5 EU
35
United States
Emerging and
0
commodityexporting economies
-5
30
CY 05 06 07 08 09 10 11 12 13 14 15 16
-10
CY 10 11 12 13 14 15 16
Notes: 1. Figures for the global economy are the J.P.Morgan Global Manufacturing PMI. Figures for the advanced economies PMI as well as the emerging and
Notes: 1. commodity-exporting economies PMI are calculated as the weighted averages of the Manufacturing PMI using PPP-adjusted GDP shares of
Notes: 1. world total GDP released by the IMF. Advanced economies consist of the United States, the euro area, the United Kingdom, and Japan.
Emerging and commodity-exporting economies consist of 17 countries and regions, including China, South Korea, Taiwan, Russia, and Brazil.
2. Figures for imports show the breakdown by country and region of origin.
6
Sources: IMF; IHS Markit(© and database right IHS Markit Ltd 2016. All rights reserved.); Haver; CEIC.
Chart 7
Commodity Prices
International Commodity Price Index and Crude Oil Prices
$/bbl
CY 1967=100
350 120
330 110
CRB index (left scale) Dubai oil (right scale)
310 100
290 90
270 80
250 70
230 60
210 50
190 40
170 30
150 20
Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16
Sources: Bloomberg; Nikkei Inc. 7
Chart 8
Real GDP Developments in Advanced Economies
after the Global Financial Crisis
s.a., 2007/Q1=100
106
104
102
100
98
96
Japan
94
United States
92 Euro area
United Kingdom
90
CY 07 08 09 10 11
Sources: Cabinet Office; Haver. 8
Chart 9
Economic and Price Developments after the Introduction of
Quantitative and Qualitative Monetary Easing (QQE)
Corporate Profits and
Exchange Rates and Stock Prices
Business Fixed Investment
yen/U.S.dollar thous.yen
s.a., % s.a., ann., tril.yen
130 21
6.5 85
Yen/U.S.dollar (left scale)
6.0
19
120
80
5.5
Nikkei 225 Stock Average
17
110 5.0
(right scale)
75
15
4.5
100
Ratio of current profits
4.0
13
70
to sales (left scale)
90 3.5
11
Private non-residential
3.0
65
80 Introduction of QQE
investment (SNA, real,
9
2.5
right scale)
70 7 2.0 60
CY 10 11 12 13 14 15 16 10 11 12 13 14 15 16
CY
Unemployment Rate Nominal Wages and Prices
y/y % chg.
s.a., %
5.5 3
2
5.0
1
4.5
0
4.0
-1
3.5
-2
Hourly cash earnings
3.0
-3
CPI (all items less fresh food and energy)
2.5 -4
10 11 12 13 14 15 16 10 11 12 13 14 15 16
CY CY
Chart 10
Current Economic Activity in Japan
Indicators related to Indicators related to
Private Consumption Exports and Industrial Production
s.a., CY 2010=100 s.a., CY 2010=100
110
106
108
Consumption Activity Index (real)
105
106
104
104
102
103 100
98
102
96
94
Real exports
101
92
90
100
CY 13 14 15 16
CY 13 14 15 16
s.a., DI s.a., CY 2010=100
60 102
101
55
100
50
99
45
98
97
40
96
35 Economy Watchers Survey
95
(DI for current economic conditions) Indicies of Industrial Production
30 94
CY 13 14 15 16
CY 13 14 15 16
Note: The Consumption Activity Index is adjusted for travel balance.
Sources: Bank of Japan; Ministry of Finance; Cabinet Office; Ministry of Economy, Trade and Industry. 10