Opening Remarks at the 2022 BOJ-IMES Conference
Hosted by the Institute for Monetary and
Economic Studies, Bank of Japan
I. Introduction
It is my great pleasure to welcome you all to the 2022 BOJ-IMES Conference. On behalf of
the conference organizers, I would like to thank you all for your participation.
This is the 27th conference since its start in 1983. Due to the continuing effects of COVID-
19, the conference is being held online, as last year. The previous conference was very fruitful
with lively and wide-ranging discussions on the theme of "Adapting to the New Normal:
Perspectives and Policy Challenges after the COVID-19 Pandemic." Since then, however, the
environment surrounding central banks has changed dramatically. Given these developments,
the themes for discussion appear to have expanded rapidly. That is why I think this is the ideal
opportunity for central banks, international institutions, and academia to gather and exchange
opinions.
Against this background, the theme of this year's conference is "New Dimensions and
Frontiers in Central Banking." Now I would like to provide an overview of the theme,
focusing on the new dimensions faced by central banks and the frontiers they are developing.
II. New Dimensions in Central Banking
First of all, I would like to point out two challenges currently facing central banks.
A Surge in Inflation
The first challenge is a global surge in inflation. For most central bankers and researchers,
this is not something they could have imagined at the emergence of COVID-19. The unique
feature of inflation this time is that both supply and demand inflationary factors have occurred
at the same time. On the supply side, constraints on production capacity have given rise to
inflationary pressure. These constraints include disruptions to the supply of raw materials, a
shortage of semiconductors, and labor shortages. On the demand side, as economic activity
has recovered globally since last year, solid demand from households has materialized. A shift
in demand from services to goods has occurred amid the continued pandemic. These two
factors have brought about upward inflationary pressure, especially on the price of goods
including the price of commodities.
That said, when it comes to these supply and demand effects, there are both similarities and
differences between countries. For example, in Japan, household pent-up demand has been
limited and the recovery of aggregate demand has been slower than in Europe and the United
States. On the supply side, the constraints may not be as severe as in the United States. While
shortages of intermediate inputs have had some impact, labor supply has room to expand
thanks to so-called labor hoarding during the pandemic. Differences in labor supply stance
have also resulted in differences in wage growth between countries. In Japan, wages have
risen, but the rate of increase has remained moderate. Also, the recent surge in commodity
prices due to supply factors puts greater downward pressure on the economies of commodity-
importing countries through a decline in household real income and corporate profits. In this
situation, attention will be focused on how firms pass increasing costs on to prices and how
they determine the level of price increases that households are willing to accept.
Given these differences in the supply and demand effects, the appropriate monetary policy
response will also differ between countries. A common challenge for each country is to
determine the magnitude and persistence of the inflationary pressure. In doing so, it will be
important to capture the relationship between three prices, namely, the price of goods and
services, wages, and commodity prices.
A Surge in Geopolitical Risk
Another challenge facing central banks is the surge in geopolitical risk triggered by the
Russian invasion of Ukraine. This has induced a further increase in commodity prices. And it
has increased inflation worldwide. In addition, uncertainties over geopolitical risk are
extremely high. These uncertainties could put downward pressure on the global economy by
shrinking trade and damaging confidence. In addition to the real economy, close attention has
to be paid to financial market sentiment, the global financial system, and cybersecurity.
Furthermore, if views on geopolitical risk were to change permanently, this could have a
longer-term impact on the global economy through structural changes in trade and capital
flows. Recognizing how extremely uncertain and fast moving the current situation is, central
banks are required to implement the appropriate policy measures.
III. Frontiers in Central Banking
In addition to these challenges, new challenges have emerged in the frontiers that central
banks should develop. I would like to point out three areas.
Structural Change in the Economy
The first frontier is the acceleration of structural changes in the economy amid the prolonged
pandemic. The digitalization and automation of society and the economy were in progress
even before the pandemic, and having been accelerated by the pandemic, they have expanded
and deepened rapidly. Along with this, a restructuring of supply chains has been observed.
Also, since the effects of the pandemic were regressive, income inequality appears to have
increased further, above its already increasing trend in some advanced economies. The fiscal
burden for dealing with this issue has also increased. From an economic perspective, these
structural changes may affect the potential growth rate, the natural interest rate, and the
Phillips curve. The structural changes may have implications for the effectiveness of
monetary policy and the appropriate responses. Central banks should therefore pay close
attention to the changing economic structure and its potential impact on prices and the real
economy.
Climate Change Responses
The second frontier is climate change response, which has become a new domain for central
banks. This is an area in which considerable effort has been made since the last conference.
Stimulating and wide-ranging discussions have taken place at international forums such as
the Network of Central Banks and Supervisors for Greening the Financial System (NGFS).
The Bank of Japan published its comprehensive strategy on climate change in July 2021. The
Bank also introduced its Climate Response Financing Operations and has been actively
engaged in a wide range of initiatives, including research.
In principle, it is the governments' industrial and fiscal policies that play the primary role in
addressing climate change issues. However, it is also important to consider how to make use
of market mechanisms to ensure the effectiveness of these policies. One example is the
emissions trading systems introduced in the EU and elsewhere. In Japan, national-level plans
have been launched. The role of markets in evaluating firms' efforts to tackle climate change
is also important. In this way, the market function can promote changes in firms' behavior.
For example, the Bank of Japan's Climate Response Financing Operations make use of
financial institutions' expertise in assessing firms in the area of climate change. The financing
operations also require financial institutions to disclose relevant information as a condition
for supplying funds. These measures have been designed to help use market discipline in an
effective way. The role of central banks may be considered from the perspective of market
initiatives, such as promoting the development of financial markets related to climate change.
The Transformation of the Monetary System
The third frontier is the transformation of the monetary system, induced by digitalization.
Many central banks are working on the issues surrounding central bank digital currency
(CBDC). The Bank of Japan has been testing the technical feasibility of the functions and
features required for CBDC. Specifically, in April this year, the Bank of Japan moved from
Proof of Concept Phase 1, aimed at testing the basic functions of CBDC, to Proof of Concept
Phase 2, in which additional functions are added and tested.
However, the broader issue is how to build a monetary system in the digital age. We have
seen the emergence of private digital currencies and stablecoins in addition to the increasing
interest in CBDC. There is no doubt that we have entered a period of transformation for the
monetary system. Considering the future of the monetary system can lead to exploring the
potential for growth. One area with the potential to create new demand is combining the
monetary system with the information system that supports business. In addition, given the
cross-border role of money, the future of the monetary system should be considered globally
as well as domestically. Central banks are required to engage in designing and building the
new monetary system globally while examining the possible effects of future changes to
money on monetary policy and financial stability.
IV. Conclusion
Let me wrap up. Since last May, the situation facing central banks has changed rapidly and
the efforts in the frontiers of central banking have advanced significantly. This year's
conference is being held for three days to provide enough time for discussion. The conference
has been organized with a view to deepening our understanding of the wide range of
challenges I have outlined.
In the Mayekawa Lecture, I am looking forward to fresh insights, courtesy of Professor
Kenneth Rogoff, regarding the new dimensions and frontiers in central banking. In the
keynote speech, Professor Carl Walsh will be discussing the mechanism of the current surge
in inflation and its implications for monetary policy. Also, the presentation sessions feature
cutting-edge papers covering a wide range of topics in the frontiers of monetary policy, such
as economic inequality, climate change, digital currencies, and automation of the economy,
all of which are crucial topics for current central banking. Building on these discussions, we
can look forward to lively exchanges with experts from central banks and international
institutions in the policy panel on the final day of the conference.
In a rapidly changing world filled with uncertainty, a common challenge for central banks is
how to adapt to this changing environment. To overcome these challenges, central banks need
to be nimble, agile, and smart. I am sure that the insights gained from the contributions to this
conference will ensure that central banks are all fit and ready to face those challenges.
Thank you.