March 24, 2017
Bank of Japan
"Quantitative and Qualitative Monetary Easing
with Yield Curve Control":
After Half a Year since Its Introduction
Speech at a Reuters Newsmaker Event in Tokyo
Haruhiko Kuroda
Governor of the Bank of Japan
Introduction
I would like to express my sincerest gratitude for the opportunity today to explain the Bank's
monetary policy.
Half a year has passed since the Bank introduced "Quantitative and Qualitative Monetary
Easing (QQE) with Yield Curve Control" in September 2016. This new framework has been
working smoothly. Today, looking back at developments in the global economy and the
global financial markets since 2015, I would like to explain the background to and thinking
behind the adoption of the new policy framework, following the introduction of a negative
interest rate. Then, I would like to talk about the current situation of and outlook for Japan's
economy, as well as the Bank's stance on monetary policy going forward.
I. The Background to the Adoption of "QQE with Yield Curve Control" and Thinking
behind It
A. Turbulence in Global Financial Markets and the Introduction of a Negative Interest Rate
Turbulence in Global Financial Markets
Let me look back at developments in the global financial markets since summer 2015.
Investors' risk sentiment started to worsen against the background of the slowdown in
emerging economies, including China, and uncertainties regarding those economies. In
particular, after the turn of 2016, the global financial markets rapidly became destabilized due
to heightened concerns regarding emerging economies, which were triggered by the
significant decline in the Shanghai stock prices (Chart 1). The decline in commodity prices,
including crude oil prices, exacerbated the situation. Under such circumstances, pessimistic
views about the outlook for the global economy prevailed, such as the "secular stagnation"
hypothesis. Major economies faced the common policy challenges of how to address low
growth, as well as low inflation under low interest rates, and this topic was hotly debated at
international fora such as the Group of Twenty (G-20) Finance Ministers and Central Bank
Governors Meeting.
Naturally, such headwinds for the global economy had a significant negative impact on
Japan's economy as well. In financial markets, the yen appreciated and stock prices declined.
On the inflation front, the year-on-year rate of change in the consumer price index (CPI)
excluding fresh food turned negative in 2016 for the first time in three years, due to the effects
of the decline in crude oil prices since summer 2014. Inflation expectations -- which play a
key role in achieving the price stability target of 2 percent -- weakened, reflecting the
headwinds for the global economy that I mentioned earlier, after having remained more or
less flat amid the significant decline in crude oil prices (Chart 2).
The Introduction of a Negative Interest Rate and Its Effects
It was against these backgrounds that the Bank introduced "QQE with a Negative Interest
Rate" in January 2016 in order to address these strong headwinds and achieve the price
stability target of 2 percent.
To reduce real interest rates amid weakening inflation expectations, nominal interest rates
needed to be lowered further. The negative interest rate aimed at an additional reduction in
the levels of short- and long-term interest rates by pushing down the short end of the yield
curve, in combination with purchases of Japanese government bonds (JGBs).
The introduction of a negative interest rate produced significant effects in terms of lowering
nominal interest rates. Specifically, JGB yields declined considerably across the entire yield
curve (Chart 3). As a consequence, lending rates as well as issuance rates for CP and
corporate bonds also declined clearly. The lending attitude of financial institutions became
more positive. There was no doubt that the negative interest rate made financial conditions
more accommodative, supporting firms' and households' economic activities in Japan against
the headwinds for the global economy.
At the same time, however, it became necessary to take account of the impact of the negative
interest rate on the functioning of financial intermediation in a broad sense as the yield curve
had headed toward flattening by more than expected. Specifically, Banks' basic business
model consists of raising short-term funds and investing in long-term assets, and there was
little room for declines in interest rates on deposits, which are the main funding tools. This
means that the flattening of the yield curve at a low level reduces the spread between deposit
and lending rates, thereby squeezing banks' profits. If profits were squeezed for a long period
of time, this would affect their financial soundness cumulatively and exert adverse effects on
the functioning of financial intermediation. In addition, an excessive decline in the levels of
interest rates such as those with long and super-long maturities lowers the rate of return on
insurance and pension products and might have a negative impact on economic activity by
leading to a deterioration in people's sentiment.
B. Thinking behind "QQE with Yield Curve Control"
Based on such recognition, the Bank conducted in September 2016 a comprehensive
assessment of developments in economic activity and prices as well as policy effects since the
introduction of QQE. In light of the findings of the assessment, it introduced "QQE with
Yield Curve Control" as a means of enhancing and strengthening the previous policy
frameworks. The new framework consists of two components (Chart 4).
The first is an inflation-overshooting commitment. Specifically, this is a commitment that 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 that level in a stable manner. The key point
is that the commitment is based on the observed CPI, and not the outlook. 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. Considering that it
takes some time for monetary policy to have an impact on economic activity and prices, it is
exceptional for a central bank to make such a strong commitment that is based on the
observed CPI. Since the global financial crisis, the Federal Reserve in the United States and
some other central banks introduced "forward guidance," in which a central bank provides
information about the future course of monetary policy. It is common for a central bank to
design the forward guidance based on its forecast. However, in Japan, where the observed
CPI has been below 2 percent for a long period, in order to raise inflation expectations to
around 2 percent and anchor them firmly at that level, it is essential that the public actually
experiences inflation at or above 2 percent for some time and thereby the perception takes
hold among them that prices of goods and services tend to go up every year by around 2
percent. With this in mind, the Bank committed itself to continue with large-scale monetary
expansion until such situation is achieved through this unique inflation-overshooting
commitment.
The second component of the new policy framework is yield curve control. Under this
framework, the Bank sets the levels of short- and long-term interest rates as the operating
targets in the guideline for market operations, instead of the amount of increase in the
monetary base and the amount of JGB purchases in the previous frameworks. It will facilitate
the formation of a yield curve that is considered most appropriate for maintaining the
momentum toward achieving the price stability target of 2 percent, taking account of
developments in economic activity and prices as well as financial conditions. In the current
guideline for market operations, the Bank sets the short-term policy interest rate at minus 0.1
percent and the target level of the 10-year JGB yields at around 0 percent.
Yield curve control is designed to enable the Bank to conduct monetary policy in a more
flexible manner, depending on the situation, compared to the previous frameworks in which
the amount of JGB purchases was fixed. For example, the impact of a unit amount of the
Bank's JGB purchases on long-term yields varies depending on the economic and inflation
conditions as well as the state of the JGB market. In the previous frameworks that set the
amount of JGB purchases as the operating target, the yield curve could deviate either upward
or downward from the one that the Bank deemed appropriate. In contrast, yield curve control
-- by setting the specific target level of the 10-year JGB yields -- enables the Bank to conduct
JGB purchases in a flexible and effective manner to achieve the target, making the policy
framework more sustainable.
It often is argued that the Bank's JGB purchases are approaching the limit. My response to
this argument is as follows. First of all, the Bank has been conducting JGB purchases
smoothly so far, and I do not think it will face difficulties in the near future. Even if JGBs to
be purchased by the Bank become scarce at some point in the future as the supply-demand
conditions in the JGB market tighten, the impact of a unit amount of its JGB purchases on
long-term yields accordingly should become more significant, with all else being equal. Put
differently, the Bank can have the same degree of effect in lowering interest rates with a
smaller amount of JGB purchases. In financial markets, some argue that the Bank will have
difficulties with JGB purchases in the future and lose its control over long-term interest rates
eventually. That will not happen. In fact, yield curve control is designed to be highly
sustainable.
II. Improvement in the Global Economy and Current Situation of and Outlook for
Japan's Economy
A. Current Business Conditions and Outlook
Next, I would like to talk about developments in the global economy since the second half of
last year, as well as the current situation of and outlook for Japan's economy and prices amid
these global economic developments.
Up until around last autumn, financial markets were dominated by pessimistic views
regarding the outlook for the global economy. With the benefit of hindsight, it appears that the
global economy hit bottom in the first half of last year. Since the middle of last year, various
economic indicators have improved, and a salient feature is that improvement in
manufacturing activities and international trade has become clear in both advanced and
emerging economies (Chart 5). The global economy since the outbreak of the global financial
crisis has been characterized by what has been labeled "slow trade," a phenomenon of the
trade volume having remained sluggish relative to the economic growth rate, but this trend
now appears to be changing. In addition, following the presidential election in the United
States, business sentiment -- especially among U.S. firms -- has greatly increased, reflecting
expectations that the growth rate will accelerate on the basis of proactive economic policies
by the new administration. As a result, the growth momentum of the global economy is
steadily gathering pace (Chart 6).
Amid these favorable developments in the global economy, improvements have been
observed in Japan's economy as well. One is that a pick-up in exports and production is
becoming evident. Against the backdrop of strong global IT-related demand and progress in
inventory and capital stock adjustments in emerging economies, the range of items in which
exports are increasing has steadily widened and the growth in exports is gradually becoming
more sustained. Production is picking up as well, reflecting moderate increases in domestic
and overseas demand as well as progress in inventory adjustments. Under these
circumstances, corporate profits are improving and business fixed investment is on a
moderate increasing trend.
Another is that private consumption is picking up. Despite steady improvements in the
employment and income situation, such as the drop in the unemployment rate to about 3
percent and moderate wage growth, private consumption showed relatively weak
developments in the first half of last year. This was likely due mainly to the impact on
consumer sentiment of the negative wealth effects resulting from the decline in stock prices.
In recent months, consumer sentiment has been improving steadily, partly due to the recovery
in stock prices, and the Consumption Activity Index (CAI), which the Bank compiles by
combining various sales and supply-side statistics, has picked up since last summer (Chart 7).
Japan's economy is more firmly making steps toward a recovery. Going forward, with the
virtuous cycle from income to spending being maintained in both the corporate and
household sectors, the economy is likely to continue growing at a pace above its potential.
B. The Current Situation of and Outlook for Prices
Next, I would like to turn to inflation. As mentioned earlier, partly as a result of the decline in
crude oil prices, the year-on-year rate of change in the CPI excluding fresh food had been in
negative territory during 2016, and most recently it is 0.1 percent. However, looking at the
year-on-year rate of change in the CPI excluding fresh food and energy, while this was around
minus 0.5 percent before the introduction of QQE, it turned positive in autumn 2013 and has
remained so for more than three years since then. This is the first time this has occurred since
Japan's economy fell into deflation in the late 1990s. Japan is no longer in deflation, which is
commonly defined as a sustained decline in general prices (Chart 8).
That being said, even in terms of the CPI excluding fresh food and energy, the rate of increase
in prices has been slowing since the beginning of last year, and stagnant in recent months.
This is perhaps because firms have refrained from revising prices upward in response to the
lackluster private consumption mentioned earlier, and because the yen's appreciation during
last year affected the prices of consumer durable goods and other items.
As a result, recent price developments have been somewhat sluggish, but we believe that the
momentum toward achieving the price stability target of 2 percent has been maintained and
the year-on-year rate of change in the CPI excluding fresh food is likely to increase toward 2
percent. Let me mention three channels for higher inflation going forward. First,
improvement in the output gap, as seen in the tightening of labor market conditions, will lead
to an increase in the inflation rate mainly through wage increases. Second, energy prices will
start to push up the CPI, while the downward pressure of the past yen appreciation will
gradually abate. Third, these developments, with the Bank's strong commitment to achieving
the price stability target of 2 percent, will lead to higher medium- to long-term inflation
expectations among the public.
Let me elaborate on these factors. The tightening of labor market conditions is exerting
upward pressure on wages. As I have mentioned repeatedly, the Bank aims at a moderate rise
in the CPI inflation accompanied by a rise in corporate profits and wages. Recently, private
consumption is picking up amid the steady improvement in the employment and income
situation. If this situation continues, firms are expected to be more proactive in their price
setting again.
Meanwhile, the contribution of energy prices to the year-on-year rate of change in the CPI,
which was more than minus 1 percentage point, has been shrinking gradually and is currently
more or less neutral. Going forward, assuming that crude oil prices will remain roughly flat,
as indicated by prices in futures markets, the contribution will turn slightly positive in fiscal
2017. It should be noted, however, that this will be temporary and fall off again in fiscal 2018.
The Bank does not intend to achieve the 2 percent target by simply depending on rising
energy prices. In order to achieve the 2 percent price stability target in a sustainable manner, it
is necessary for actual increases in prices to lead to higher medium- to long-term inflation
expectations through the adaptive formation mechanism, resulting in an increase in the
underlying trend of the inflation rate.
III. The Bank's Stance on Monetary Policy Going Forward
Lastly, I would like to explain the Bank's stance on monetary policy going forward.
As I explained earlier, yield curve control can facilitate the formation of the yield curve that is
deemed most appropriate for maintaining the momentum toward achieving the price stability
target of 2 percent, taking account of developments in economic activity and prices as well as
financial conditions. The Bank will continue to conduct monetary policy based on this
principle.
Let me elaborate on this point. In assessing developments in economic activity and prices, the
Bank takes into account both its outlook for those developments and risk factors as presented
in the Outlook for Economic Activity and Prices (Outlook Report). Regarding financial
conditions, it takes into consideration the effects of the prevailing interest rate environment
on the functioning of financial intermediation.
Based on this framework, the current situation can be explained as follows. With regard to
economic and price developments, there is still a long way to go to achieve the price stability
target of 2 percent, although an improvement has been observed. As described in the January
2017 Outlook Report, the momentum toward achieving the 2 percent target is maintained but
not yet sufficiently firm. As for risk factors, risks to both economic activity and prices are
skewed to the downside, and developments in medium- to long-term inflation expectations
warrant particular attention. According to the Policy Board members' forecasts for prices
presented in the Outlook Report, which are higher than those of private-sector economists,
the timing of the year-on-year rate of change in the CPI reaching 2 percent will likely be
around fiscal 2018. Taking all of these elements into account, there is no reason to reduce the
level of monetary accommodation at the moment in terms of economic and price
developments. In this regard, let me add that the Bank's monetary policy should be designed
to achieve the price stability target of 2 percent, responding to the situation in Japan's
economy. The Bank will not raise the target level of the long-term interest rates just because
of a rise in such rates in other countries.
Next, let me make an assessment of the current situation in terms of financial conditions, or
the effects on the functioning of financial intermediation. There is no need for now to raise
interest rates, either in terms of the short-term policy interest rate or the target level of the
long-term interest rates. The investment environment for insurance and pension products has
become more favorable as super-long-term interest rates have increased compared to those in
September 2016 (Chart 9). Banks have maintained their positive lending attitude, although
yields in the short- to medium-term zone -- which affect banks' profits to a large extent -- have
remained negative and the spread between deposit and lending rates has been on a declining
trend (Chart 10). The amount outstanding of bank lending has been increasing at an annual
rate of around 2.5 percent to 3.0 percent. These developments show that the functioning of
financial intermediation for supporting economic activity has not been impaired.
Nevertheless, the effects of low interest rates on the functioning of financial intermediation
would be cumulative with the passage of time. The Bank will continue to examine such
effects while keeping in close communication with financial institutions.
Let me summarize our assessment. From any of three aspects -- the economy, prices, and
financial conditions -- it is obvious that the Bank should maintain the current yield curve and
thereby make the most of the improvement in the global economy, with a view to achieving
the price stability target of 2 percent at the earliest possible time.
I would like to add one thing on this point. The guideline for market operations is decided at
each Monetary Policy Meeting in line with the thinking that I have just explained. The
conduct of market operations including JGB purchases is determined practically to
implement the guideline in a smooth manner. As a result, such factors as the amount of JGB
purchases at each individual auction may vary depending on financial market conditions.
However, this has no implications for monetary policy going forward.
Conclusion
Since the introduction of QQE in April 2013, the Bank has reviewed the framework of
monetary easing several times, in response to changes in the environment. However, there
has been absolutely no change in its commitment to achieving the price stability target of 2
percent at the earliest possible time. I believe that "QQE with Yield Curve Control,"
consisting of an "inflation-overshooting commitment" and "yield curve control," is the best
possible framework that we can devise at present, given the situation in Japan -- the formation
mechanism of inflation expectations, transmission channels of monetary easing, and the
conditions in the financial system. Under this framework, the Bank will realize the maximum
effects of monetary easing.
Thank you very much for your attention.
"Quantitative and Qualitative Monetary Easing
with Yield Curve Control":
After Half a Year since Its Introduction
Speech at a Reuters Newsmaker Event in Tokyo
March 24, 2017
Haruhiko Kuroda
Governor of the Bank of Japan
Chart 1
Developments in International Financial Markets
Stock Prices in Major Economies Crude Oil Prices (WTI)
The beginning of 2014=100
$/bbl
140 110
Japan (Nikkei 225 Stock Average)
United States (S&P 500)
100
130 Europe (EURO STOXX 50)
90
80
120
70
110
60
50
100
40
90
30
20
80
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17
Chart 2
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.
2
Sources: Consensus Economics Inc., "Consensus Forecasts"; Bank of Japan.
Chart 3
Changes in JGB Yield Curve since the Introduction
of QQE with a Negative Interest Rate
%
2.0
April 3, 2013 (the day before the decision to introduce QQE)
January 28, 2016 (the day before the decision to introduce QQE with a Negative Interest Rate)
1.5
July 27, 2016 (the bottom of 10-year JGB yields)
1.0
0.5
0.0
-0.5
0 1 2 3 4 5 6 7 8 9 10 15 20 30 40
year
Residual maturity
Chart 4
QQE with Yield Curve Control
Inflation-Overshooting Commitment
Yield Curve Control
%
Inflation Rate
1.2
Recent shape of
1.0
JGB yield curve
0.8
Short-term Target level of
policy interest the long-term
0.6
interest rate
rate
2%
"minus 0.1 "around zero
percent" percent"
0.4
0.2
0.0
-0.2
-0.4
0 1 2 3 4 5 6 7 8 9 10 15 20 30 40
year
Residual maturity
Expansion of monetary base continues
Source: Bloomberg. 4
Chart 5
Manufacturing Conditions
Manufacturing PMI
s.a., DI
60
Global economy
Advanced economies
Emerging and commodity-exporting economies
55
50
45
CY 10 11 12 13 14 15 16 17
Note: Figures for the global economy are the J.P.Morgan Global Manufacturing PMI. Figures for advanced economies as well as emerging and
Notes:commodity-exporting economies are calculated as the weighted averages of the Manufacturing PMI using PPP-adjusted GDP shares of
Notes:world total GDP from the IMF as weights. 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.
Sources: IMF; IHS Markit (© and database right IHS Markit Ltd 2017. All rights reserved.); Haver. 5
Chart 6
World Economic Outlook Released by the IMF
World Real GDP Growth Rate
y/y % chg.
6
2004-2007 average: +5.3%
5
+3.6
+3.4
4
3
+ 3.2
+ 3.1
1990-2003 average: +3.3%
2
IMF projection
1
(Jan. 2017)
0
-1
CY 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Source: IMF. 6
Chart 7
Consumption Activity Index
s.a., CY 2010=100
108
Consumption Activity Index (adjusting travel balance, real)
106
104
102
100
98
96
94
CY 05 06 07 08 09 10 11 12 13 14 15 16 17
Chart 8
Consumer Prices
y/y % chg.
2
Introduction of QQE
(April 2013)
1
0
-1 CPI (all items less fresh food and energy)
CPI (all items less fresh food)
-2
CY 10 11 12 13 14 15 16 17
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. 8
Chart 9
Super-long-term JGB Yields
%
2.5
10-year
Introduction of QQE Introduction of QQE with a
20-year
Negative Interest Rate
30-year
2.0
40-year
Introduction of
1.5
QQE with
Yield Curve
Control
1.0
0.5
0.0
-0.5
CY 13 14 15 16 17
Chart 10
Lending Attitudes of Financial Institutions
Lending Policies of Large Banks
Lending Attitude of Financial Institutions
(Senior Loan Officer Opinion Survey on Bank
as Perceived by Firms (Tankan)
Lending Practices at Large Japanese Banks)
DI ("accommodative" - "severe"), % points DI for credit standards, % points
40 40
Large enterprises Small enterprises Eased credit standards
over the past 3 months
30
30
20
20
10
10
0
0
-10
Large firms Small firms
Households
-20 -10
CY 06 07 08 09 10 11 12 13 14 15 16 06 07 08 09 10 11 12 13 14 15 16 17
CY
Notes: 1. Data from the Tankan are based on all industries.
Notes :2. DI for credit standards is calculated as follows.
×
DI = ( percentage of respondents selecting "eased considerably" + percentage of respondents selecting "eased somewhat" 0.5 )
×
- ( percentage of respondents selecting "tightened considerably" + percentage of respondents selecting "tightened somewhat" 0.5 )
10
Source: Bank of Japan.