M a y 1 9 , 2 0 2 3
Bank of Japan
Basic Thinking on Monetary Policy
and the Outlook for Economic Activity and Prices
Speech at a Meeting Held by the Naigai Josei Chosa Kai
(Research Institute of Japan)
UEDA Kazuo
Governor of the Bank of Japan
Introduction
It is my great pleasure to have the opportunity to address you today at the Naigai Josei
Chosa Kai.
This is my first speech since assuming office as Governor of the Bank of Japan. As I fulfill
my duties as governor over the next five years, one of the things I will endeavor to do is to
make logical decisions and provide explanations as clearly as possible. Monetary policy
exerts its intended effects by working on financial markets and people's behavior at large.
Therefore, it is important for the Bank to gain the public's understanding of the thinking
underlying the Bank's policy conduct and the background to its policy decisions. Since the
economy is driven by a complex interplay of a variety of factors and monetary policy
involves specialized and technical aspects, I will try to provide clear and detailed
explanations, unraveling the complexities one by one.
I have been an economist for nearly 50 years. Academics focus on a particular aspect of
what is actually happening and construct theories designed for that aspect. In contrast,
central bank policymakers are confronted with the actual complexities of the economy and
need to make timely and appropriate decisions, so the perspectives of the two groups
naturally differ. However, economic theory provides a useful perspective for understanding
economic phenomena, and conversely, insights gained from the policy field can lead to the
development of new theories. Economic theory and policy practice evolve in a closely
interrelated manner, and I am committed to implementing the practice of monetary policy
responsibly, while keeping the theoretical basis in mind.
Today, as a first step, I would like to share with you the Bank's basic thinking on monetary
policy, including the course of policy conduct to date. I will also talk about the Bank's
current conduct of monetary policy, referring to the Outlook for Economic Activity and
Prices (Outlook Report) released at the end of April.
I. The Basic Thinking on Monetary Policy
The Bank is currently conducting monetary easing, with the aim of achieving the
large-scale
price stability target of 2 percent. The last time I was involved in the Bank's monetary
policy conduct was from 1998 to 2005 as a Policy Board member. 1998 was the year that
the new Bank of Japan Act came into effect and monetary policy was implemented under a
new framework, including the Monetary Policy Meetings; it was also the year when
deflation began. It is no exaggeration to say that the 25 years since then have been marked
by a battle toward achieving price stability. In the following, I would like to explain the
Bank's basic thinking on monetary policy, while also referring to this history.
Transmission Mechanisms of Monetary Policy
Let me start with the mechanisms through which monetary policy affects prices. Today, I
will explain a somewhat simplified version of the main mechanisms, focusing on two
(Chart 1).
The first mechanism concerns the relationship between interest rates and economic activity.
The starting point for monetary policy is interest rates. The Bank raises or lowers interest
rates to influence economic activity. For example, when the Bank lowers interest rates, the
borrowing rates at which firms make business fixed investment and households purchase
homes also decline, thereby stimulating demand. This creates employment and boosts
economic activity. Conversely, an increase in interest rates works in the direction of
reducing demand and suppressing economic activity and employment.
The second mechanism concerns the relationship between economic activity and prices.
Prices are thought to be determined by the balance between supply of and demand for goods
and services in the economy as a whole, or the output gap. When the economy is booming
and demand is high, there is a higher probability of a rise in the inflation rate. Conversely,
when the economy is sluggish and demand is weak, the inflation rate falls. This relationship
between the inflation rate and the output gap is known as the "Phillips curve" in economics.
It is named after the New Zealand economist William Phillips, who first discovered the
relationship between the nominal wage growth rate and the unemployment rate in the late
1950s. Since then, it has become an important framework for explaining the relationship
between prices and economic activity.
Once the position and shape of the Phillips curve are identified, it becomes clear how
monetary policy should be conducted. To adjust the output gap to a level that corresponds to
the inflation target, monetary policy should be tightened if the inflation rate is above the
target, and conversely should be eased if it is below the target. This is the simple yet most
fundamental principle of monetary policy.
Of course, monetary policy in practice is not that straightforward. This is partly because the
position of the Phillips curve can change and the inflation rate can temporarily deviate from
the curve (Chart 2).
I will explain two factors behind these developments here: inflation expectations and
temporary supply shocks. Inflation expectations refer to people's expectations about the
future rate of inflation. When firms set prices for goods and services, they consider not only
supply and demand at that point in time, but also their expectations for prices in the future.
For example, when setting the price of ramen noodles, firms make their outlooks for the
price of ingredients and the wages of workers and add an appropriate profit
part-time
margin to determine the price. Since frequent price changes may confuse customers, prices
are not revised that frequently. Therefore, if raw material prices and wages are
part-time
expected to rise, firms will set correspondingly higher prices in advance. In other words, for
a given current supply and demand environment, higher inflation expectations will lead to
higher inflation, and vice versa. Applying this to the Phillips curve, changes in inflation
expectations will cause the curve itself to shift up or down.
What about the other factor, temporary supply shocks? A typical example is a sharp rise in
crude oil prices, such as that seen last year due to supply concerns associated with the
situation surrounding Ukraine. International commodity prices such as crude oil prices are
determined regardless of the domestic output gap in Japan. However, since crude oil is
widely used as an energy source and raw material, a rise in the price of crude oil will not
only increase the price of gasoline, but also the prices of various goods and services,
including If such developments are not sustained and instead are temporary, the
dining-out.
observed inflation rate will rise briefly to a greater extent than what can be explained by the
output gap and thereafter move back to somewhere on the original Phillips curve again as
the effects of the supply shock fade away. Needless to say, if inflation expectations rise due
to a supply shock, this could shift the Phillips curve upward, and thus the two factors are
interrelated. The rise in inflation brought through these developments is known as the
effects of the supply shock.
second-round
So far, I have talked about the basic framework of monetary policy. Next, I would like to
explain in detail changes in the environment surrounding prices over the past 25 years and
the Bank's policy responses, using the framework of the Phillips curve.
The "Two Challenges" since the Bursting of the Bubble Economy
Let me turn the clock back to the 1990s. Monetary policy faced major challenges in the two
mechanisms I mentioned earlier; namely, the relationship between interest rates and
economic activity and that between economic activity and prices (Chart 3). First, in terms of
interest rates and economic activity, monetary policy faced the lower bound on interest rates.
As a result of a series of policy rate cuts following the bursting of the bubble economy,
interest rates fell to almost zero percent by the late 1990s. This meant that it was
short-term
no longer possible to stimulate the economy by lowering interest rates further. Second, in
terms of economic activity and prices, as wage growth and the rate of inflation declined, a
mindset and behavior based on the assumption that wages and prices will not rise have
taken hold in Japan. In terms of inflation expectations, this corresponds to a situation where
these have become entrenched at a low level.
How did the actual Phillips curve change during this period (Chart 4)? Two developments
can be noted here. First, the economy deteriorated substantially following the bursting of
the bubble economy. Since there was little room to lower interest rates, monetary easing
measures lacked sufficient power to boost the economy. As a result, the output gap
deteriorated, moving down to the left along the Phillips curve, which put downward
pressure on the inflation rate. Second, the Phillips curve itself shifted downward as a result
of a decline in people's inflation expectations, meaning that the inflation rate that could be
achieved with the same output gap was lower. Due to these two developments, a situation
where the economy and prices stagnate for a prolonged period took hold.
Unconventional Monetary Policy as a Means of Overcoming the Two Challenges
Faced with this situation, the Bank devised a variety of measures, which later were to be
called "unconventional monetary policy" (Chart 5).
First, in 1999, the Bank made a commitment to continue with monetary easing so as to
generate the policy duration effect and thereby influence interest rates. While
longer-term
interest rates, the conventional monetary policy tool, were already at zero
short-term
percent, the Bank committed to maintaining interest rates at zero percent "until
short-term
deflationary concern is dispelled." The policy duration effect exerted through this
commitment was intended to create the expectation that interest rates would
short-term
remain at zero percent into the future. The idea was that interest rates, which
longer-term
reflect expectations for future interest rates, would also decline, thus providing
short-term
additional economic stimulus. This approach has since been widely adopted by other central
banks and has come to be called "forward guidance."
Next, in 2001, as a further easing measure, the Bank introduced quantitative easing, which
increased the amount of funds supplied to financial institutions. Since there were concerns
over financial instability at that time, supplying large amounts of funds to the market had
the effect of supporting the economy through improving banks' liquidity and reducing the
negative impact from the financial side. However, because this policy was simply the
exchange of assets that were economically similar in nature that is, the purchase of
--
treasury bills to supply current account deposits at the Bank my understanding is that it
--
had only a limited stimulative effect on the economy in this regard.
Subsequently, in the aftermath of the Global Financial Crisis in 2008, the Federal Reserve
introduced a policy of purchases of bonds, such as government bonds
large-scale long-term
and securities. The purchases of government bonds and
mortgage-backed large-scale
securities, which are risk assets, were intended to have a positive impact
mortgage-backed
on the economy the former by pushing down even interest rates than forward
-- longer-term
guidance and the latter by reducing risk premiums. Since then, quantitative easing has come
to mainly refer to policies that directly lower interest rates by purchasing
long-term
government bonds, rather than those that simply supply a large amount of funds.
long-term
Furthermore, in 2013, the Bank introduced quantitative and qualitative monetary easing
(QQE). This policy incorporated to the greatest extent possible the unconventional
monetary policy experience gained until then both at home and abroad, such as making
clear the Bank's stance on the future policy conduct, pushing down interest rates
long-term
through large-scale purchases of government bonds, and strengthening the impact of
lowering risk premiums in stock markets through an increase in purchases of exchange
traded funds (ETFs). This, together with measures by the government, had been effective in
pushing up economic activity and prices even under the first challenge the lower bound
--
on interest rates and Japan's economy achieved a situation where it was no longer in
--
deflation, in the sense of a sustained decline in prices (Chart 6). There have also been
changes in inflation expectations and wage growth, as seen in the fact that base pay, which
virtually stopped rising during the deflationary period, has started to increase again since
2014. However, I must add that it gradually became clear that the second challenge the
--
entrenched mindset that prices and wages were unlikely to rise would take more time to
--
overcome.
Review of Monetary Policy over the Past 25 Years from a Broad Perspective
As described, the Bank has devised various monetary policy measures, with Japan's
economy facing the challenge of deflation and the need to transform the mindset and
behavior based on the assumption of low inflation, as the aftereffect of deflation. However,
since the conduct of these measures had no precedent, practice may have preceded theory in
some respects. In this sense, there remains some room for further analysis regarding, for
example, the positive effects and side effects of the measures. Furthermore, although I
spoke earlier about macroeconomic developments during the past 25 years in a very
simplified manner, in practice, the various factors are intricately intertwined, such as
problems in the financial system after the bursting of the bubble economy, rapid advances in
deregulation and globalization, and demographic changes. Moreover, the series of monetary
easing measures has been implemented in response to such developments in economic
activity, prices, and financial conditions. Therefore, the positive effects and side effects of
the easing measures should be understood and examined in the context of interaction with
these developments.
Based on these considerations, the Bank decided at its Monetary Policy Meeting last month
to conduct a review of its monetary policy over the past 25 years from a broad perspective
(Chart 7). The purpose of the review is to further deepen the Bank's understanding of the
interaction between monetary policy, economic activity, and various other factors, and to
gain insights that will be useful for future policy conduct. The Bank intends to steadily
work on this project and spend a sufficient amount of time of around one to one and a half
years, drawing on the knowledge it has gained from its experience to date and the research
that has accumulated in the academic community in Japan and abroad.
II. Outlook for Economic Activity and Prices and the Conduct of Monetary Policy
So far, I have described the basic thinking on and history of monetary policy. I would now
like to change the subject and talk about the outlook for economic activity and prices and
the conduct of monetary policy for the time being. I will begin with an overview of
developments in economic activity and prices in Japan, based on the Outlook Report that
was just published at the end of April.
Outlook for Economic Activity and Prices
Japan's economy has picked up (Chart 8). Currently, what is driving the economy is
pent-up
demand; that is, the materialization of demand that had been suppressed during the
pandemic. This consists mainly of demand for services, including inbound tourism, and
business fixed investment. The economy is expected to continue recovering moderately
until around the middle of fiscal 2023, mainly due to such materialization of
pent-up
demand.
Thereafter, the main driver of improvement in the economy is expected to shift from
demand to a more sustainable factor of a virtuous cycle from income to spending.
pent-up
The rate of wage increases in this year's annual spring wage negotiations
labor-management
appears to be significantly higher than that of last year. This is likely to boost private
consumption through improvement in household incomes. Moreover, it is expected that the
impact of past high commodity prices will wane and overseas economies will pick up again.
Under these circumstances, corporate profits are likely to improve and business fixed
investment to increase further. The increase in demand at home and abroad is projected to
lead to further increases in wages and corporate profits, creating a virtuous cycle. As a result,
the output gap, one of the factors that determine prices, which is currently slightly negative,
is expected to turn positive around the middle of fiscal 2023 and expand moderately
thereafter.
Next, let me turn to prices. The rate of change in the consumer price index
year-on-year
(CPI) for all items less fresh food has been at 3.4 percent, owing to the effects of a
to consumer prices of cost increases led by a rise in import prices (Chart 9).
pass-through
The main reason why the rate has come down from a peak of around 4 percent in January is
that the government's economic measures have pushed down energy prices. Looking ahead,
it is expected that the effects of the will wane and the CPI inflation rate will
pass-through
decelerate to a level below 2 percent toward the middle of fiscal 2023. In fact, the
rate of change in the import price index has turned negative recently. It is
year-on-year
expected that, after running below 2 percent, the rate of increase in the CPI will accelerate
again moderately, albeit with fluctuations, as the output gap improves and as to
medium-
inflation expectations and wage growth rise, accompanied by changes in factors
long-term
such as firms' and behavior. However, the uncertainties surrounding this
price- wage-setting
outlook are extremely high.
I would like to raise two key points regarding the economic and price outlooks. The first
concerns overseas economies (Chart 10). The main scenario is that overseas economies will
pick up again as global inflationary pressures, which increased significantly last year,
decline. However, there are persistent concerns in the market over whether it will be
possible to contain inflation and maintain economic growth simultaneously. Although
central banks in the United States and Europe have been raising interest rates rapidly since
last year, there is still a high level of concern about the risk of inflation rates remaining high
through wage increases. Since early spring, there have been phases when market
participants' risk sentiment deteriorated, mainly due to the effects of issues surrounding
some financial institutions in the United States and Europe. Attention needs to be paid to the
risk that global financial conditions will tighten further, mainly through adjustments in asset
prices, fluctuations in foreign exchange markets, changes in financial institutions' lending
positions, and capital outflows from emerging economies, leading overseas economies to
deviate downward from the baseline scenario.
The second point concerns wage increases (Chart 11). The base pay increase following this
year's annual spring labor-management wage negotiations is expected to mark its highest
level in three decades. This is the result of a combination of various factors, including
widespread moves to reflect higher prices in wages that were partly due to calls from the
government and various sectors, efforts by firms facing labor shortages to recruit and retain
employees, and the fact that an overall favorable environment surrounding corporate profits
has allowed firms to secure the resources to raise wages. With regard to the outlook, labor
market conditions are more likely to tighten further as it becomes difficult for the labor
force participation of women and seniors, which has supported labor supply to date, to see
an additional increase. On the other hand, wage developments also depend on various
factors, including the future course of overseas economies and the domestic economy, as
well as developments in moves to pass on higher labor costs to selling prices. The Bank will
carefully examine whether the wage increases will be sustained and whether they will take
hold.
Conduct of Monetary Policy for the Time Being and the Bank's Thinking
At the Monetary Policy Meeting held at the end of April, the Bank decided to continue with
its existing monetary easing in the form of QQE with Yield Curve Control. I would like to
explain the Bank's thinking behind this decision in response to questions that are often
asked.
(1) Why continue with monetary easing even though the inflation rate is above the 2 percent
target?
Since last year, a question that is often asked is why the Bank continues to pursue monetary
easing when CPI inflation is above 2 percent. The answer to this question is that the Bank
aims to achieve price stability in a sustainable and stable manner. The main reason prices
are currently rising at a rate above 3 percent is not strength of demand, but factors
cost-push
originating from overseas. In terms of the Phillips curve I mentioned earlier, this can be
interpreted as a temporary upward deviation (Chart 12). Since inflation puts
cost-push
downward pressure on real income and corporate profits, it places a burden on households
and firms. However, tightening monetary policy in an attempt to rein in such inflation will
worsen the economic and employment situations. As a result, households and firms will
have to shoulder a different kind of burden and the inflation rate will be even lower once the
cost-push factors have abated. The Bank aims to achieve the price stability target of 2
percent in a sustainable and stable manner, accompanied by wage increases. To this end, it
is necessary for the Bank to support economic activity by continuing with monetary easing.
(2) How is an underlying inflation trend assessed?
The second question is how an underlying inflation trend is assessed. One way, for example,
is to construct indicators that make it easier to gauge the trend in prices by excluding items
with large price fluctuations or by performing certain statistical processing.
short-term
However, in a situation such as the current one, where the price of a wide range of items
fluctuates due to the impact of rising import prices, such an impact cannot be completely
eliminated. As much as policymakers and economists struggle with this problem, there is
unfortunately no "ideal indicator" that can be used on its own to assess the underlying
inflation trend. Therefore, what is required is to make a comprehensive assessment, not only
by taking the various price indicators and their individual characteristics into account, but
also by examining factors that shape prices, such as the output gap, inflation expectations,
and wage growth, as well as considering anecdotal information from firms.
(3) Given that base pay is expected to increase substantially and inflation is projected to
approach 2 percent, can't it be said that there is an increasing possibility that the target
will be achieved?
There is no doubt that this year's large increase in base pay is a tailwind for achieving the 2
percent target. The Outlook Report also shows that the underlying rate of inflation is
expected to near 2 percent through fiscal 2025. Therefore, the third question is, if this is the
case, isn't the possibility of achieving the price stability target getting higher?
Regarding developments in wages, it is necessary to examine whether wage increases will
be sustained and whether they will take hold, including the extent to which they spread to
small and firms. Moreover, although the underlying rate of inflation is
medium-sized
expected to gradually increase toward the price stability target, it is likely to take some more
time. Furthermore, this outlook is based on the assumption that the output gap will improve
and that to inflation expectations and wage growth will rise. In order to
medium- long-term
achieve the price stability target of 2 percent, it is necessary for inflation expectations to rise
and the Phillips curve to shift upward (Chart 13). The Bank aims to achieve this situation
amid a virtuous cycle where both wages and prices increase. Although it projects in its
Outlook Report that Japan's price developments will gradually approach this situation, the
uncertainties surrounding the outlook for prices are high, as mentioned earlier, as risks to
economic activity are considered to be skewed to the downside for the time being,
especially with regard to overseas economies. The Bank therefore judges that, at this point
in time, achieving the price stability target of 2 percent in a sustainable and stable manner
has not yet come in sight.
(4) How are side effects evaluated?
Needless to say, it is necessary to pay close attention not only to the positive effects but also
to the side effects of conducting monetary easing over a long period. The fourth question
therefore is: what are the Bank's thoughts on this point?
One of the side effects often pointed out is that conducting monetary easing over a long
period undermines the functioning of financial intermediation. In this context, the Bank's
assessment is that Japan's financial institutions are well capitalized and have ample liquidity,
and that financial intermediation has continued to function smoothly. In fact, lending by
financial institutions has recently seen a rate increase of more than 3 percent.
year-on-year
Moreover, financial institutions' lending attitudes as perceived by firms have remained
accommodative. In regard to the impact on the functioning of the bond market, various data
and surveys suggest that market functioning has deteriorated to a certain extent. However,
in addition to taking measures such as expanding the range of Japanese government
10-year
bond (JGB) yield fluctuations last December, the Bank has deliberated on the specifics of
daily market operations, such as temporary lending of JGBs. On top of this, overseas
interest rates have declined, and the Bank's assessment therefore is that some improvement
in the market functioning has been observed recently, such as the relatively smooth shape of
the yield curve.
In any case, it is important not to focus on and evaluate the side effects of monetary easing
only, but to consider the balance with its positive effects on economic activity and prices,
such as whether and to what extent the side effects offset or outweigh the positive effects.
The Bank's Thinking on the Future Conduct of Monetary Policy
As mentioned, it is necessary for the Bank to firmly continue with monetary easing at this
stage. In this regard, the Bank decided at its Monetary Policy Meeting last month to clearly
express its basic stance that, with the extremely high uncertainties surrounding economies
and financial markets at home and abroad, it would patiently continue with monetary easing
while nimbly responding to developments in economic activity and prices as well as
financial conditions, and that by doing so, it would aim to achieve the price stability target
of 2 percent in a sustainable and stable manner, accompanied by wage increases (Chart 7).
In addition to expressing its basic stance, the Bank, based on changes in the assessment of
risks associated with the pandemic and other factors, has reexamined and clarified its stance
on the future conduct of monetary policy. The expression regarding its stance on the policy
rates related to the pandemic was deleted because it became unsuitable in view of the
reclassification of under the Infectious Disease Control Law and a decline in the
COVID-19
risk of affecting economies and financial markets at home and abroad. Although
COVID-19
risks associated with the pandemic have decreased, the uncertainties surrounding economies
and financial markets at home and abroad are extremely high. The Bank's stance of
patiently continuing with monetary easing therefore is unchanged. Under these
circumstances, the Bank will continue to maintain the stability of financing, mainly of firms,
and financial markets, and will not hesitate to take additional easing measures if necessary.
The Bank will continue with monetary easing under yield curve control.
large-scale
Conduct of monetary policy can be viewed as the process of identifying realistic options
and selecting the most appropriate one in the face of various constraints and uncertainties
regarding developments in economic activity and prices, as well as financial conditions. On
this point, when conducting monetary policy, there is an approach that places importance on
the social welfare implications of each of the various future paths of the economy, based on
the assumption that the economy entails uncertainties. This approach is known as the risk
management approach, which was advocated by former Federal Reserve Chairman Alan
Greenspan. Applying this to the current situation in Japan, the cost of impeding the nascent
developments toward achieving the 2 percent price stability target, which are finally in sight,
by making hasty policy changes would likely be extremely high. While there is an opposite
risk that inflation will remain above 2 percent if a change in policy falls behind the curve,
the cost of waiting for underlying inflation to rise until it can be judged that 2 percent
inflation has fully taken hold is not as large as the cost of making hasty policy changes. In
this sense, it is appropriate to take time to decide on adjustments to monetary easing toward
a future exit. The Bank will carefully support these nascent developments to mature and aim
to achieve the price stability target of 2 percent in a sustainable and stable manner,
accompanied by wage increases.
Thank you very much for your attention.
Basic Thinking on Monetary Policy
and the Outlook for Economic Activity and Prices
Speech at a Meeting Held by the Naigai Josei Chosa Kai
(Research Institute of Japan)
May 19, 2023
UEDA Kazuo
Governor of the Bank of Japan
Introduction
I. The Basic Thinking on Monetary Policy
II. Outlook for Economic Activity and Prices
and the Conduct of Monetary Policy
Mechanisms of Conventional Monetary Policy
(2) Relationship between Economic Activity
(1) Relationship between Interest Rates
(Represented by the Phillips
and Prices
and Economic Activity
Curve)
inflation rate, %
3
Central banks
Monetary Monetary
tightening easing
Interest rate hikes Interest rate cuts
2 percent target
2
Firms and households
Decrease Increase
in demand in demand
Deterioration Improvement
in the output gap
in the output gap
Deterioration Improvement 1
-3 -2 -1 0 1 2 3
in the output gap in the output gap
output gap, %
1
Chart 2
I. The Basic Thinking on Monetary Policy
Determinants of Inflation Other than the Output Gap
and Their Effects
Inflation Expectations Temporary Supply Shocks
inflation rate, % inflation rate, %
4
4
Temporary deviation
3
from the Phillips curve
3
2
Upward or downward
shift in
1
the Phillips curve
2
0
-1 1
-3 -2 -1 0 1 2 3 -3 -2 -1 0 1 2 3
output gap, % output gap, %
The Two Challenges
since the Bursting of the Bubble Economy
(2) The Entrenched Mindset and Behavior
(1) Lower Bound on Interest Rates Based on the Assumption That Wages
and Prices Will Not Rise
Overnight Rate Inflation Expectations
y/y % chg. y/y % chg.
%
9 8
4
Inflation expectations (left scale)
8
CPI inflation (left scale)
3 6
7 Wage growth (right scale)
6
2 4
5
4 1 2
3
0 0
2
1
-1 -2
0
-1 -2 -4
FY 90 91 92 93 94 95 96 97 98 99 00 01 FY 90 91 92 93 94 95 96 97 98 99 00 01
Notes: 1. In the left-hand chart, figures are monthly averages of the uncollateralized overnight call rate.
2. In the right-hand chart, figures for inflation expectations are economists' forecasts for 6 to 10 years ahead. Figures for CPI inflation are for all items excluding the effects of
the consumption tax hike. Figures for wage growth before the January-March quarter of 1991 are for establishments with 30 or more employees, while figures from that quarter
onward are for establishments with 5 or more employees.
Sources: Bank of Japan; Consensus Economics Inc., "Consensus Forecasts"; Ministry of Internal Affairs and Communications; Ministry of Health, Labour and Welfare. 3
Chart 4
I. The Basic Thinking on Monetary Policy
Changes in the Phillips Curve
through the Deflationary Period
CPI (less