November 14, 2016
Bank of Japan
Japan's Economy and Monetary Policy
Speech at a Meeting with Business Leaders in Nagoya
Haruhiko Kuroda
Governor of the Bank of Japan
Introduction
It is my great pleasure to have the opportunity today to exchange views with administrative,
financial, and business leaders in the Chubu region. I would like to take this opportunity to
express my sincerest gratitude for your cooperation with the Bank of Japan's Nagoya
Branch.
At the September Monetary Policy Meeting (MPM), the Bank conducted a comprehensive
assessment of monetary easing measures implemented since the introduction of quantitative
and qualitative monetary easing (QQE) and, based on its findings, decided to introduce
"QQE with Yield Curve Control." The new policy framework consists of two major
components: the first is "yield curve control," in which the Bank facilitates the formation of
the yield curve that is deemed most appropriate with a view to maintaining the momentum
toward achieving the price stability target of 2 percent, and the second is an
"inflation-overshooting commitment," in which the Bank commits itself to expanding the
monetary base until the year-on-year rate of increase in the observed consumer price index
(CPI) exceeds the price stability target of 2 percent and stays above the target in a stable
manner.
Almost two months have passed since the introduction of the Bank's new policy framework,
and it appears to have been perceived as positive by market participants. Looking at
developments in long- and short-term interest rates, the yield curve for Japanese
government bonds (JGBs) has been formed smoothly and stably in line with the guideline
for market operations -- in which the short-term policy interest rate is set at minus 0.1
percent and the target level of 10-year JGB yields at around 0 percent (Chart 1). Turning to
other developments in the financial markets, the yen has depreciated somewhat against the
U.S. dollar in the foreign exchange market, amid the heightening speculation over the
policy rate hike in the United States. In this situation, stock prices have been relatively firm.
Meanwhile, in response to the outcome of the U.S. presidential election, the yen had
appreciated and stock prices had declined, both to a large degree temporarily, but thereafter
reverted to situations of a depreciation and an increase, respectively. The Bank will continue
to carefully monitor market developments.
At the MPM held at the beginning of November, the Bank released its projections through
fiscal 2018 in the Outlook for Economic Activity and Prices (Outlook Report). Today, I
would like to explain the Bank's projections for economic activity and prices based on this
Outlook Report, as well as its thinking on the conduct of monetary policy.
I. The Current Situation of and Outlook for Japan's Economic Activity and Prices
To begin with, let me make three points on the outlook for Japan's economy. Please refer to
Chart 2.
The first point is that extremely powerful economic stimulus measures are being
implemented, both on the monetary and fiscal sides. The Bank will adhere to powerful
monetary easing under the new policy framework in order to achieve the price stability
target of 2 percent, while the government will steadily implement its large-scale stimulus
measures, amounting to 28 trillion yen in project size, with the Diet's recent approval of the
supplementary budget. Synergy effects are produced in a case where a government
proactively carries out fiscal spending while a central bank provides accommodative
financial conditions with a view to achieving its price stability target; this is known to make
the stimulative effects on economic activity more powerful. Indeed, such effects of the
so-called policy mix are expected to be seen going forward.
The second point is that, on the back of the effects of a policy mix as well as the recovery in
overseas economies, Japan's economy is likely to expand moderately, with a virtuous cycle
from income to spending being maintained in both the corporate and household sectors.
Specifically, as indicated in red in the chart, it is likely to continue growing at a pace above
its potential through the projection period -- that is, through fiscal 2018 -- at around 1
percent.
Third, on the price front, the year-on-year rate of change in the CPI for all items less fresh
food is likely to be slightly negative or about 0 percent for the time being, as shown in blue
in the chart. Thereafter, the rate of change is expected to increase toward 2 percent in the
second half of the projection period in line with an improvement in the output gap, as will
likely be evidenced by a further decline in the unemployment rate, and a rise in medium- to
long-term inflation expectations.
In what follows, I will explain the outlook for economic activity and prices in more detail.
A. The Current Situation of Economic Activity and Its Outlook
Developments in the Corporate Sector
Looking at developments in the corporate sector, exports and production have been sluggish
recently, due mainly to the effects of the slowdown in emerging economies. Exports, mainly
automobile-related exports, to advanced economies have remained on a steady increasing
trend, whereas those to emerging economies have been sluggish, especially of capital goods.
Exports as a whole have therefore been flat. Against this background, production also has
been almost flat.
In terms of corporate profits, profits of manufacturing firms have been negatively affected
by the slowdown in emerging economies and the yen's appreciation (Chart 3). Nevertheless,
those of all industries, including nonmanufacturing firms, have been at a level close to
record highs, reflecting an improvement in the terms of trade resulting from the low crude
Tankan
oil prices. The diffusion index (DI) for business conditions in the September 2016
(Short-Term Economic Survey of Enterprises in Japan) has generally stayed at a favorable
level. Against this backdrop, firms, including large manufacturers, have maintained their
positive fixed investment stance.
With regard to the outlook, although overseas economies are projected to remain slightly
subdued for some time, they are expected to gradually increase their growth rates as
advanced economies continue growing steadily and the effects of such steady growth spread
to emerging economies. Against this background, exports and production are expected to
start increasing moderately. Business fixed investment may be affected temporarily partly
by the slowdown in overseas economies and the past yen appreciation. However, it is likely
to continue increasing moderately as the highly accommodative financial conditions
continue and growth expectations rise moderately.
Developments in the Household Sector
Next, I would like to turn to developments in the household sector. Positive developments
in the corporate sector have steadily exerted positive effects on the employment and income
situation (Chart 4). The tightening trend of labor market conditions has become more
evident and the latest active job openings-to-applicants ratio was 1.38 times, marking the
highest level seen since 1991. The unemployment rate has been about 3 percent, which is
virtually "full employment." A perception of labor shortage suggested by the employment
Tankan
conditions DI in the September has heightened further. Against this background,
wages have increased moderately.
Despite such improvements in the employment and income situation, private consumption
has lacked momentum somewhat. Looking back, private consumption was relatively weak
in the first half of 2016, due mainly to the negative wealth effects brought about by the
decline in stock prices. However, various sales statistics show that it has started to pick up
recently, despite being affected by bad weather conditions such as typhoons. Confidence
indicators related to private consumption also have been picking up (Chart 5). Based on this
situation, private consumption is expected to increase moderately on the back of the
continued steady improvement in the employment and income situation.
B. The Current Situation of Prices and Their Outlook
Next, I would like to touch on price developments. The year-on-year rate of change in the
CPI for all items less fresh food has been slightly negative due to the effects of the decline
in energy prices (Chart 6). Meanwhile, that for all items less fresh food and energy has
remained positive for exactly three years since October 2013. This is the first time since the
late 1990s, when Japan's economy fell into deflation, that the inflation rate has been positive
for such a long period. However, it has slowed recently. This is mainly attributable to the
fact that prices, such as for durable goods, have declined due to the effects of the past
appreciation of the yen, and that firms' price-setting stance has become slightly cautious,
reflecting weakness in private consumption in the first half of 2016.
The year-on-year rate of change in the CPI for all items less fresh food is likely to be
slightly negative or about 0 percent for the time being, and increase toward 2 percent in the
second half of the projection period -- that is, through fiscal 2018. The following four points
can be highlighted as the background to this outlook.
The first point is with regard to developments in energy prices, such as crude oil prices. The
downward pressure of the past decline in energy prices on the CPI is expected to dissipate
going forward and the negative contribution of energy items is estimated to reach around 0
percentage point in early 2017 (Chart 7). Therefore, the CPI for all items less fresh food --
for which the year-on-year rate of change is currently minus 0.5 percent -- is expected to
reduce its rate of decline rapidly and turn positive.
The second point is that, as I have explained earlier, private consumption has bottomed out
recently on the back of improvement in the employment and income situation, and is
expected to increase moderately. With such developments, firms' price-setting stance is
expected to revert to raising prices.
The third point is that labor market conditions are expected to further tighten, exerting
upward pressure on wages accordingly. In this context, how the labor-management wage
negotiations next spring develop warrants particular attention. Corporate profits have been
at a level close to record highs, and labor market conditions have tightened, as evidenced by
the fact that the unemployment rate has declined to around 3 percent. Under these
circumstances, the environment for wage increases is certainly well established.
The fourth point is that, as the Bank pursues powerful monetary easing under its
"inflation-overshooting commitment," inflation expectations will likely rise. I will elaborate
on this later.
In this manner, it is the Bank's assessment that, despite the recent weakness in price
developments, the momentum toward achieving the price stability target of 2 percent seems
to be maintained. However, risks to both economic activity and prices are skewed to the
downside, particularly those regarding overseas factors. Moreover, the projections for prices
in the October 2016 Outlook Report have been revised slightly downward compared with
those in July, and the timing of the year-on-year rate of change in the CPI reaching around 2
percent will likely be around fiscal 2018. The momentum toward achieving the 2 percent
target is somewhat weaker than the previous outlook, and thus developments in prices
warrant careful attention going forward. The major reason behind these downward revisions
lies in developments in medium- to long-term inflation expectations. Let me now move on
to this point.
II. Inflation Expectations and the Conduct of Monetary Policy
To put it simply, inflation expectations are people's outlook for prices, or their perception of
future price developments. In a situation where the price stability target of 2 percent is
achieved in a stable manner, people will share the view that annual inflation will be around
2 percent, and such view will be a key determinant of prices of goods and services, as well
as wages. With the aim of dramatically changing the deflationary mindset that had been
entrenched among people and raising inflation expectations to 2 percent, the Bank -- under
QQE introduced in April 2013 -- has strongly and clearly committed itself to achieving the
price stability target and conducted large-scale monetary expansion to underpin this
commitment.
After the introduction of QQE, inflation expectations increased significantly through around
summer 2014 (Chart 8). This clearly shows that monetary policy is effective in raising
inflation expectations. Thereafter, however, with headwinds such as a significant decline in
crude oil prices, weak demand following the consumption tax hike, and volatility in global
financial markets reflecting the slowdown in emerging economies, inflation expectations
resumed their decline from summer 2015 and have remained in a weakening phase. In
Japan, where deflation has been persistent for a prolonged period, inflation expectation
formation still tends to be largely affected by developments in observed inflation rates. As
observed inflation rates had actually declined before the conversion in people's perception
about inflation toward 2 percent, the decline in actual inflation seemed to have brought
inflation expectations down as well.
In order to address this situation, the Bank judged it necessary to adopt more forceful
measures to raise inflation expectations and introduced an "inflation-overshooting
commitment." Specifically, under this commitment, the Bank will continue expanding the
monetary base until the year-on-year rate of increase in the observed CPI exceeds 2 percent
and stays above the target in a stable manner. The price stability target needs to be achieved
on average over the business cycle. Thus, it naturally is assumed that there would be phases
when the observed CPI exceeds 2 percent. As it takes some time for monetary policy to
have an impact on economic activity and prices, it is exceptional for the central bank to
make such a strong commitment that is based on the observed CPI. Through this
exceptional commitment, the Bank aims to enhance the credibility of achieving 2 percent
among the public.
Let me elaborate on this point. Given that the inflation rate in Japan has been lower than 2
percent for a long period, it is necessary for the public to experience the process whereby
the inflation rate actually exceeds 2 percent before converging to the 2 percent target.
Through such experience, the perception that annual inflation will be around 2 percent will
take hold among the public. The Bank committed itself to continue with large-scale
monetary expansion until this process is completed. The new policy framework is designed
to enable the Bank to pursue monetary easing in a flexible manner through yield curve
control. Under "QQE with Yield Curve Control," the Bank will pursue powerful monetary
easing and make policy adjustments as appropriate, taking account of developments in
economic activity and prices as well as financial conditions, with a view to maintaining the
momentum toward achieving the price stability target of 2 percent.
As described in the Bank's "Comprehensive Assessment," the annual labor-management
wage negotiations in Japan tend to be influenced by the inflation rate in the preceding year,
and this is one of the reasons why inflation expectations are affected by the past inflation
rate. On the other hand, in Europe and the United States, medium- to long-term inflation
expectations that are anchored by central banks' price stability targets are the crucial factor
that determines wages. As I mentioned earlier, labor market conditions are likely to
continue tightening and the inflation rate will increase steadily toward 2 percent as the Bank
pursues aggressive monetary easing. In the course of Japan's economy experiencing such a
significant change, making proactive investment in human capital, including determining
wages based on the 2 percent inflation benchmark, will benefit individual firms in terms of
medium- to long-run management, not to mention that it is crucial for Japan's economy as a
whole.
Conclusion
In concluding, let me touch on the economy of the Chubu region. The economy centered on
Nagoya is the core of Japan's manufacturing. Challenges taken by many industries and
firms in anticipation of future potential can become the driving force for raising Japan's
potential growth rate, which is at a low level currently. For example, in the automobile
industry, which is the leading industry of the region, initiatives to introduce next-generation
technology -- such as environmentally friendly features as well as automatic- and
safe-driving systems -- are proceeding rapidly. In addition, in aircraft-related industries,
formation of industrial clusters in the region is starting to make steady progress, and there
are increasing numbers of cases where small and medium-sized parts manufacturers are
working in an integrated manner in terms of receiving orders and producing parts.
Furthermore, such proactive production activities by manufacturers are inducing fixed
investment by a wide range of firms, including nonmanufacturers. I would like to close my
speech by expressing my sincere hope that these dynamic initiatives by the industrial sector,
combined with financial institutions' and the local government's support, will lead to further
growth and development of the Chubu region.
Thank you.
Japan's Economy and Monetary Policy
Speech at a Meeting with Business Leaders in Nagoya
November 14, 2016
Haruhiko Kuroda
Governor of the Bank of Japan
Chart 1
Developments in Financial Markets
Changes in JGB Yield Curve Exchange Rates and Stock Prices
% yen yen/U.S.dollar
1.0 20,000 125
Depreciation Nikkei 225 Stock Average
of the yen (left scale)
September 20, 2016 (the day before the decision to
0.8 Yen/U.S. dollar (right scale)
introduce QQE with yield curve control)
19,000 120
Appreciation
0.6
of the yen
18,000 115
The latest data
0.4
17,000 110
0.2
16,000 105
0.0
15,000 100
-0.2
14,000 95
-0.4
Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16
0 1 2 3 4 5 6 7 8 9 10 15 20 30 40
year
residual maturity
Chart 2
Outlook for Economic Activity and Prices
(as of October 2016)
y/y % chg.
CPI
Real GDP
(all items less fresh food)
Fiscal 2016
+1.0 -0.1
Forecasts made in
+1.0 +0.1
July 2016
Fiscal 2017
+1.3 +1.5
Forecasts made in
+1.3 +1.7
July 2016
Fiscal 2018
+0.9 +1.7
Forecasts made in
+0.9 +1.9
July 2016
Note: Figures indicate the median of the Policy Board members' forecasts (point estimates).
Source: Bank of Japan. 2
Chart 3
Corporate Profits and Business Fixed Investment
Business Fixed Investment Plans
Current Profits
(Tankan, Large Enterprises )
s.a., tril. yen y/y % chg.
20
12
FY 2015
FY 2014
10
15
8
FY 2013
6
10
4
5
2
FY 2016
0
0
All industries
Average of historical data
-2
Manufacturing
(FY 2000-2015)
Nonmanufacturing
-5 -4
CY05 06 07 08 09 10 11 12 13 14 15 16 Mar. June Sept. Dec. Forecast Actual
Chart 4
Labor Market Conditions
Unemployment Rate and
Tankan: Employment Conditions DI
Active Job Openings-to-Applicants Ratio
DI ("excessive" - "insufficient"), % points
s.a., % s.a., times
6 1.5 30
Unemployment rate (left scale)
"Excessive"
Active job openings-to-applicants ratio (right scale)
20
5 1.2
"Insufficient"
10
4 0.9 0
-10
3 0.6
All enterprises
-20
Large enterprises
Small enterprises
2 0.3 -30
05 06 07 08 09 10 11 12 13 14 15 16 05 06 07 08 09 10 11 12 13 14 15 16
CY CY
Sources: Ministry of Internal Affairs and Communications; Ministry of Health, Labour and Welfare; Bank of Japan. 4
Chart 5
Confidence Indicators Related to Private Consumption
DI for Judgement of Current Conditions
Consumer Confidence Index
(Economy Watchers Survey)
s.a., DI
s.a.
60
55
DI for judgement of current conditions
(household activity)
55
50
Improved
50
45 45
40
40
35
35 30
25
Worsened
30
20
Chart 6
Consumer Prices
y/y % chg.
3
CPI (all items less fresh food and energy)
2
CPI (all items less fresh food)
1
0
-1
-2
-3
07 08 09 10 11 12 13 14 15 16
CY
Note: Figures for the CPI (all items less fresh food and energy) are calculated by the Research and Statistics Department, Bank of Japan. Figures
for the CPI are adjusted to exclude the estimated effects of changes in the consumption tax rate.
Source: Ministry of Internal Affairs and Communications.
6
Chart 7
Consumer Price Index and Energy Prices
y/y % chg.
3
Items other than energy
Energy (petroleum products, electricity, and gas, manufactured & piped)
2
CPI (all items less fresh food)
1
0
-1
-2
-3
CY 0 7 0 8 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6
Note: Figures for the CPI are adjusted to exclude the estimated effects of changes in the consumption tax rate.
Source: Ministry of Internal Affairs and Communications.
Chart 8
Inflation Expectations after the Introduction of QQE
y/y % chg.
2.0
Destabilization
Beginning of a of financial
Introduction of
Consumption markets amid
downtrend in
1.8
QQE
concern about
tax hike crude oil prices
Synthetic indicator of firms', households', and
emerging
economists' inflation expectations
economies
1.6
▼ ▼ ▼ ▼
1.4
1.2
1.0
0.8
0.6
0.4
0.2
07 08 09 10 11 12 13 14 15 16
CY
Notes: 1. Inflation expectations of firms, households, and economists are represented by the Tankan, the "Opinion Survey,"
and the "Consensus Forecasts," respectively.
Notes: 2. Semiannual data from the "Consensus Forecasts" up through 2014/Q2 are linearly interpolated. "Opinion Survey" figures exclude
inflation expectations by respondents whose annual inflation expectations were +5% percent or greater and -5% percent or smaller.
The output prices DI in the Tankan represents the difference between the share of firms that raised prices in the preceding three months
and the share of firms that lowered prices.
8
Sources: Consensus Economics Inc., "Consensus Forecasts"; Bank of Japan.