Koji Ishida: Recent economic and financial developments in Japan
Summary of a speech by Mr Koji Ishida, Member of the Policy Board of the Bank of Japan, at
a meeting with business leaders, Kagoshima, 21 June 2012.
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I. Economic activity and prices in Japan
A. Recent developments
1. Japan's economy
First, I will talk about recent developments in economic activity and prices in Japan.
Economic conditions in Japan worsened sharply in the wake of the severe global contraction
that followed the failure of Lehman Brothers in 2008. Thereafter, the economy showed signs
of recovery as a result of various policy measures taken as well as efforts made nationwide,
but it plunged again due to the Great East Japan Earthquake, which occurred on March 11,
2011. This was followed by additional shocks such as the European debt problem and the
flooding in Thailand, making the year 2011 an extremely severe one for Japan's economy.
Since the beginning of 2012, Japan's economic activity has started picking up moderately as
domestic demand remains firm, supported mainly by reconstruction-related demand after the
earthquake. Public investment has been increasing with the progress in the implementation
of government budgets earmarked for reconstruction related to the disaster. Business fixed
investment has been on a moderate increasing trend with corporate profits improving.
Against the background of improvement in consumer sentiment, private consumption has
continued to increase moderately due to the effects of measures to stimulate demand for
automobiles. A high degree of uncertainty remains regarding exports, but they have shown
signs of a pick-up. Reflecting these developments in demand, production has started picking
up moderately.
Price developments in terms of the consumer price index (CPI; all items less fresh food)
indicate that, after reaching a historical trough of minus 2.4 percent in the middle of 2009, the
year-on-year rate of decline has continued to slow. In recent months, the rate of change has
been at around 0 percent.
2. Overseas economies
Next, I will talk about recent developments in overseas economies.
With regard to the U.S. economy, business fixed investment is maintaining its uptrend,
supported by firm corporate profits, and private consumption is also increasing moderately.
The employment situation continues to recover modestly as a whole so far, although it
appears that the effects of the boost from a record-breaking warm winter are starting to
dissipate.
On the other hand, the economic activity in the euro area has been sluggish despite signs of
a pick-up in exports, because domestic demand there has been stagnant reflecting severe
fiscal financial conditions in some peripheral countries, and this has acted as a drag on
economic activity. Meanwhile, disparities among countries regarding economic sentiment are
widening further. For example, the unemployment rate for April had registered a historically
low level of 5.4 percent in Germany since the reunification of East and West Germany,
whereas that in Spain was over 20 percent for all workers and over 50 percent for those
aged 15-24.
Emerging and commodity-exporting economies have been maintaining somewhat high
growth rates as a whole, but the pace of growth has been slowing somewhat recently. The
Chinese economy continues to show relatively high growth; however, exports have been
negatively affected by the sluggishness in the European economy, and the rates of increase
particularly in durable goods consumption and private real estate investment have
decelerated to some extent, due in part to the effects of measures to restrain the increase in
real estate transactions and monetary tightening implemented so far. In the NIEs and the
ASEAN countries, the pace of economic growth has begun to pick up, reflecting the
restoration following the damage caused by the flooding in Thailand, in a situation where
private consumption and business fixed investment remain firm.
Overseas economies on the whole still have not emerged from a deceleration phase, but
some improvement has been observed, including the recovery, albeit at a moderate pace, of
the U.S. economy and some emerging economies.
B. Outlook for Japan's economy and prices
I will now turn to the outlook for Japan's economy. Semiannually, in April and October, the
Bank of Japan releases the Outlook for Economic Activity and Prices, known as the Outlook
Report, in which it makes public its forecasts for economic activity and prices for the next two
to three years. According to the projections in the Outlook Report that the Bank released in
April this year, the economy is expected to return to a moderate recovery path in the first half
of fiscal 2012 as the pace of recovery in overseas economies picks up, led by emerging and
commodity-exporting economies, and as reconstruction-related demand after the earthquake
gradually strengthens.
With the economy moderately recovering, the outlook for prices in terms of the year-on-year
rate of change in the CPI is expected to gradually rise to a range of above 0.5 percent and
less than 1 percent toward the latter half of the projection period through fiscal 2013 as the
aggregate supply and demand balance improves.
Expressing this outlook in terms of the median of individual Policy Board members' forecasts,
Japan's real GDP growth rate is projected to be 2.3 percent for fiscal 2012 and 1.7 percent
for fiscal 2013. The year-on-year rate of change in the CPI is expected to be 0.3 percent and
0.7 percent for fiscal 2012 and 2013, respectively.
Looking at the current state of Japan's economy, while the pace of recovery in overseas
economies has been slower than expected in the April 2012 Outlook Report, domestic
demand in Japan has been relatively stronger, and therefore Japan's economy as a whole so
far is generally in line with the forecast in the April Outlook Report.
C. Uncertainties about the outlook
The outlook I have just mentioned is the scenario for economic activity and prices considered
to be the most likely by the Bank, or the baseline scenario. In the April 2012 Outlook Report,
the Bank raised the following four risk factors concerning this outlook as warranting attention:
developments in overseas economies, especially the European debt problem; uncertainty
with regard to reconstruction-related demand; possible changes in firms' and households'
medium- to long-term growth expectations reflecting the shift of production sites to overseas
as well as problems concerning the supply and demand of electric power; and problems
regarding Japan's fiscal sustainability.
At present, the chief concern is developments in overseas economies, especially the
European debt problem. Tensions in global financial markets rose rapidly in the second half
of 2011, but eased somewhat from the start of 2012 due to the massive liquidity provision by
the European Central Bank (ECB), in addition to the decision on the second financial support
program for Greece by the European Union (EU) and the International Monetary Fund (IMF),
the signing of the European Fiscal Compact by EU member states, and the agreement to
raise the lending capacity of the European Financial Stability Facility (EFSF) and the
European Stability Mechanism (ESM). From February to March 2012 in particular, sentiment
in global markets was "risk on," leading to purchasing of stocks and selling of the yen.
However, market sentiment thereafter shifted gradually to a "risk off" mode and risk aversion
among global investors has been increasing again as a result of growing concerns about the
political situation in Greece, as well as the health of Spanish banks and the consequent
deterioration in Spain's fiscal condition. Yields on government bonds issued by countries with
debt problems have risen, while yields declined on Japanese, German, and U.S. government
bonds, which are regarded as safe assets. Stock prices have fallen and the yen has resumed
its rise in the foreign exchange market.
The efforts made by Germany and other core European countries are expected to ultimately
help avert a significant worsening of the problems in Europe, leading to a period of brief
respite. However, a comprehensive solution will take quite a while. This is because at the
root of the European debt problem lies a structural problem: countries with large disparities in
fiscal conditions and economic strength share a single currency without having an integrated
fiscal policy, making it difficult to adjust imbalances in these countries.
A key element in the Bank's baseline scenario for Japan's economy is that, while domestic
demand supports the economy, external demand will strengthen, prompting the virtuous
circle of production, income, and spending to start operating before reconstruction-related
demand begins to decline. The economy is very likely to follow this main scenario, barring an
unexpected worsening of the situation in Europe. This is because the U.S. economy is
expected to continue growing at a moderate pace, and the growth rate of the Chinese
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economy one of the main emerging and commodity-exporting economies is expected to
stop decelerating, with the economy likely heading toward a recovery due to the fine-tuning
of the current set of restrictive policies.
If the European and U.S. economies become unstable, however, this would weigh heavily on
emerging and commodity-exporting economies, exerting a large negative impact on Japan.
Therefore, due attention should be paid to developments in the United States and Europe.
II. The bank's conduct of monetary policy
Next, I will outline the measures currently implemented by the Bank to pursue powerful
monetary easing. The Bank recognizes that Japan's economy faces the critical challenge of
overcoming deflation and returning to a sustainable growth path with price stability.
A. Pursuit of powerful monetary easing
Based on this recognition, the Bank has been pursuing powerful monetary easing through
the comprehensive monetary easing measures.
In February this year, the Bank introduced "the price stability goal in the medium to long
term" and announced that it would pursue powerful monetary easing until the price stability
goal was in sight. With the aim of achieving the goal of a 1 percent year-on-year rate of
increase in the CPI, the Bank announced that it would encourage a decline in longer-term
market interest rates and a reduction in various risk premiums. Specifically, the Bank
announced that it would (1) continue its virtually zero interest rate policy of encouraging the
policy interest rate to remain at around 0 to 0.1 percent; and (2) implement the Asset
Purchase Program (hereafter the Program) mainly through the purchase of various financial
assets, such as government securities, commercial paper (CP), corporate bonds,
exchange-traded funds (ETFs), and Japan real estate investment trusts (J-REITs).
Since the establishment of the Program in October 2010, the Bank has expanded its size
successively. After the start of 2012, the Bank increased it in February and April, and the
outstanding amount of the asset purchase is to reach about 65 trillion yen by around the end
of 2012 and about 70 trillion yen by around the end of June 2013. The outstanding amount of
the Program stands at approximately 51 trillion yen as of June 10, and thus the Bank will
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increase it by approximately 14 trillion yen at a pace exceeding 2 trillion yen per month on
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average by the end of this year. The amount of the Bank's purchases of assets, including
those of Japanese government bonds (JGBs) conducted regularly at the pace of
1.8 trillion yen per month, will total as much as 4 trillion yen per month on average.
Due to such pursuit of powerful monetary easing, market interest rates in Japan have been
moving at an extremely low level. For example, yields on JGBs with maturities of up to three
years have been at around 0.1 percent, which is almost equivalent to money market interest
rates, and those on ten-year JGBs have been below 0.9 percent. In these circumstances,
firms' funding costs, as measured by lending rates, and credit spreads in corporate bond and
CP markets, have both been moving at low levels. These rates, unlike those in the European
and U.S. markets, have been stable at low levels even when market concerns about the
European debt problem intensified significantly. The Bank will continue to pursue powerful
monetary easing with the aim of achieving the goal of a 1 percent year-on-year rate of
increase in the CPI so that firms and households can gain easier access to loans at a lower
interest rate.
B. The bank's efforts to strengthen the foundations for economic growth
I will now talk about the fund-provisioning measure to support strengthening the foundations
for economic growth (hereafter the Growth-Supporting Funding Facility), which has been
implemented concurrently with the Bank's measures to pursue powerful monetary easing.
The measure was introduced in June 2010 with the aim of supplying long-term funds at a low
interest rate to financial institutions in accordance with their efforts in terms of lending and
investment to strengthen the foundations for economic growth. The initial ceiling of the total
amount of loans was set at 3 trillion yen. Subsequently, in June 2011, the Bank established a
500 billion yen new line of credit, separate from the existing one, for equity investments and
asset-based lending (ABL), in which assets such as accounts receivables and inventories
are used as collateral, based on the consideration that it was essential for the Bank to devise
ways to encourage the provision of equity-like funds, such as equity investments, and of
loans without conventional collateral or guarantees. In March 2012, the Bank decided to
enhance the Growth-Supporting Funding Facility by (1) increasing the ceiling for the total
amount of loans from 3 trillion yen to 3.5 trillion yen; and (2) establishing special rules for a
new lending arrangement of 500 billion yen for small-lot investments and loans, as well as
those for a new U.S. dollar lending arrangement of 12 billion U.S. dollars (equivalent to
1 trillion yen) for foreign currency-denominated investments and loans.
Looking at the amount of loans disbursed so far under the Growth-Supporting Funding
Facility, the outstanding balance of the total loans stands at approximately 3.2 trillion yen as
of the beginning of June 2012. With regard to loan disbursement under the special rules for
the U.S. dollar lending arrangement, the first disbursement of loans is to take place in
September 2012. A breakdown of financial institutions' individual investment or lending in
April 2010-March 2012 by the areas for strengthening the foundations for economic growth
shows that their investment and loans covered a wide range of areas; in particular, almost
30 percent of the total funds was provided to environment and energy business and almost
20 percent was provided to medical, nursing care, and other health-related business.
The Bank expects that this facility will act as a catalyst to promote financial institutions' loans
without conventional collateral such as real estate collateral as well as investment and
lending to growth areas using long-term funds provided at a low interest rate. The Bank
expects that this will lead to an increase in the number of entrepreneurs and firms starting
new businesses, and that this will in turn enhance the growth potential of Japan's economy.
III. Growth strategy for japan
These are the recent economic and financial developments and the Bank's policy measures
taken in response. I will now take a look at Japan's economy from a longer-term perspective.
Similar to Europe, Japan faces a structural problem, although in Japan's case the problem is
declining growth rates amid population aging. I will also touch upon this issue.
A. Growth rates in the past two decades
Looking back at Japan's economic growth from a long-term perspective, the annualized GDP
growth rate averaged more than 10 percent during the high-growth period of the 1960s. In
the 1970s and 1980s, the rate did not reach double-digit figures but was stable, averaging an
annualized 4 to 5 percent. Subsequently, the economic bubble burst and low growth ensued,
moving around 1.5 percent in the 1990s and falling below 1 percent during the 2000s.
The stagnation of the 1990s can be largely attributed to the bursting of the economic bubble
and malfunctioning of the financial system. It was widely believed that the economy would
regain strength once the nonperforming-loan (NPL) problem was resolved. In reality,
however, economic growth did not return to the previous levels, even after the mid-2000s,
when the NPL problem had largely been resolved. The periods of persistent low growth
during the 1990s and 2000s have together been called the "two lost decades,'' but I believe
the slumps in these two periods had different causes.
Contributions to economic growth come from increases in both labor productivity and the
labor force. Growth in labor productivity, measured by the rate of growth in real GDP per
worker, had been on a downward trend throughout the 1990s and has been sluggish
recently, although it remains narrowly in positive territory. The labor force measured by the
rate of change in the number of workers, on the other hand, started to decline in the 2000s.
The lackluster economic performance during these two decades reflects the different
contributions of these two factors.
Turning to the issue of future growth, if we assume that the current labor force participation
rate in Japan does not change, then the number of workers based on the long-term
demographic forecast is expected to decline by 0.6 percent during the 2010s, and further by
1.2 percent during the 2030s. Assuming that productivity growth remains at around
1 percent, which has been the average over the past two decades, the growth rate from 2010
onward may be forecast at an annualized average of about 0 to 0.5 percent. During the
2030s, negative growth is likely to become the norm.
B. Measures to counter the declining population
Given that this situation is clearly foreseeable, the utmost efforts must be made to improve it.
Currently, the real GDP growth rate per worker is fairly high in Japan compared with other
countries. If no action is taken, however, the rate per capita will decline as a result of the
lower ratio of workers to population caused by population aging. Real GDP growth per capita
serves as a benchmark of national wealth. Thus, it is possible that the current standard of
living and welfare, achieved through hard work over many decades, will not be enjoyed by
our children and grandchildren. In order to avert this situation, it is imperative to increase
labor productivity per worker and ensure that the number of workers is maintained despite
the declining population.
1. Increasing labor productivity
In order to raise labor productivity, it is generally agreed that the following steps must be
taken: (1) develop new technology, products, and services; (2) ensure the full application of
information technology, while redistributing resources from sectors and firms with low
productivity to those with higher productivity; and (3) facilitate regeneration of industries. I will
not elaborate on this broad subject today, but will focus instead on the issue of measures to
halt the decline in the number of workers.
2. Increasing the number of workers
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As often pointed out in the past, given the declining population which is an undeniable and
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unavoidable development it is necessary to increase the labor participation of women and
create job opportunities for the elderly in order to stop the number of workers from declining.
a. Women
In 2011, the number of Japanese women aged 25-64 without jobs and not seeking
employment averaged as many as 10 million (women under 24 are assumed to be at school
and are excluded). A breakdown of the labor force participation rate by age group shows that
the rate dips in Japan for women in their 30s, indicating the burden of raising children.
Consequently, the data represented in a line graph are "M-shaped." There has been an
increase in recent years in the number of nursery schools to address the serious shortage in
Japan of such schools, which has prevented mothers from working. Some consider this an
aspect of social welfare policy, but I believe it is also an economic policy for growth.
Raising children in Japan, which used to be seen as a mother's full-time role at home, could
be passed on to those undertaking it as a job, allowing mothers to continue their jobs outside
the home. This would be a division of labor at work. Subsequently, the number of jobs would
expand, and together with a rise in income, payers of taxes and social insurance premiums
would increase, contributing greatly to the growth strategy. Furthermore, it is not just an
increase in the number of nursery schools in Japan that is needed for the raising of children.
Schools and employers need to take steps to remove various obstacles in the way of working
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mothers. Families described as "double income with two kids" a term heard
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recently could become the basic unit of society, and existing structures and systems should
be changed so that women would feel secure in their balance of work and raising children.
The removal of some of the barriers to having children would raise the labor force
participation rate of women, and also help stop the decrease in the birth rate.
b. The elderly
The share of the elderly seeking employment falls sharply in Japan from 65 years of age
onward. Statistics show that in 2011 the labor force participation rate averaged 78 percent for
people aged 50-59 and 60 percent for those aged 60-64. It went down to 38 percent for
those aged 65-69, and declined further to 23 percent for those aged 70-74. This trend could
be attributed to the fact that in Japan corporate pensions are paid from the age of 60, and the
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widely held perception that the elderly who are often defined as those aged 65 years or
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more do not work or are not expected to work.
Many studies, however, show that the percentage of healthy people aged 65 or more is
increasing. Data from the World Health Organization (WHO) as of 2007 revealed that healthy
life expectancy, which is the average number of years a person can expect to live in full
health, was 76 years in Japan, the highest in the world. Another study shows that the
capacity of judgment and understanding, acquired through education and training, peaks at
around 60 and gradually declines thereafter. Apparently, however, findings show that such
capacity for those in their 80s roughly equals that of people in their mid-20s. In fact, in the
agricultural sector 60 percent of workers are aged 65 or above, and in the fishing sector the
proportion is more than 30 percent. This is evidence of the capability of people at 65 or more
to continue to work. According to the Organisation for Economic Co-operation and
Development (OECD), an increasing number of countries have raised the pension age to
67 or above.
Therefore, although it is not immediately possible, it seems necessary to change Japanese
society's definition and perception of the elderly. If the nation's working-age population is
redefined to include the population up to 69 years of age, the number of employable
population would increase by slightly less than 8 million. The working-age population up to
64 years of age is 82 million at present and is expected to decline. If the population up to
69 years of age is included in the working-age population, we would have approximately ten
more years before it approached the present level of 82 million and started to decrease. In
order to bring about the acceptance of new social perceptions of age and work that I have
just mentioned, it is necessary to change various social structures and systems substantially.
In Japan, with its rapidly aging population and fall in childbirth, it is essential to construct
cooperative networks and systems that encourage older members of society to join forces
with the rest of the working population.
C. Increasing job opportunities
In order to both increase the labor participation rate of women and draw on the labor of the
elderly, it is necessary to significantly expand the number of available jobs. Various opinions
have been expressed on how to deal with the current decrease in the workforce caused by
population aging with fewer children. Among them is the suggestion that Japan should
accept more immigrant labor from overseas. At present, however, there are not enough job
opportunities on offer to meet an increase in the workforce. Although improvements have
been made recently, the ratio of job offers to applicants in April 2012 was 0.79, while the
unemployment rate was 4.6 percent. The number of unemployed was 3.15 million
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(seasonally unadjusted), and if figures are added for the hidden unemployed who are
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willing to work but not actively seeking a job the total number of unemployed amounts to
about 7.53 million.1 To promote growth of the economy, new job openings must be created to
accommodate these unemployed people, in addition to more women and the elderly.
In view of the current imbalance between supply and demand of goods and services, with
demand falling short of supply, it is necessary to respond to the changing social structure
and create demand by replacing old products and services with new ones. The structure of
consumption, or spending patterns, has also changed largely reflecting the population aging
with fewer children. The outcome of competition among firms now depends on how they
adapt to such changes. New job opportunities will be created in the process of such
corporate endeavors.
It is also essential to seek overseas demand, since the population in Japan is declining.
Rapidly expanding Asian markets are located close to Japan. In view of an expected rise in
income levels in the area, these markets are likely to become extremely important for
high-quality goods produced in Japan that offer superior features in terms of safety and
reliability, although production of "volume-zone," widely used goods, may have to be done
overseas. Moreover, looking further ahead, it is very likely that Japan will be able to offer
products and services developed for its aging society to other Asian nations, since their
populations too are bound to mature. With this favorable outlook in mind, stepping up
investment for growth would lead to a larger flow of funds, an expanded job market, and
ultimately sound economic growth in Japan as well as Asia.
D. Regional areas
Viewed from a different perspective, the decline of the population is likely to have a larger
effect on regional areas than on urban ones. If job opportunities in these areas are
insufficient, youthful job seekers will leave, causing a population drain and leading to a
further shrinkage of regional economies. To respond to this situation, it is important to make
full use of the resources unique to each region, in addition to human resources of the elderly
and women: for example, to draw on the labor of the elderly in the areas of nursing care,
where demand is growing, or of childcare; and to revitalize the primary industry. Business
opportunities may also lie in agricultural and food industries in rural Japan. It is possible that
the supply-demand conditions for food will tighten worldwide reflecting the rapid growth of
emerging economies, and as the income levels of emerging economies rise, demand is likely
to increase for Japan's expensive but safe, reliable, and high-quality food products, in which
the country has a competitive edge. Efforts to expand exports of agricultural and marine
products to other Asian countries could bear fruit through, for example, selective breeding of
grain species and improvement in aquaculture technology by means of effectively utilizing
fallow and abandoned fields, as well as Japan's coastline, which is the sixth longest in the
world. The agricultural and fisheries industries by themselves account for a relatively small
share of Japan's GDP, but if related businesses such as food processing, transportation, and
distribution are included, they contribute a great deal to regional economies.
Furthermore, regional areas in Japan possess scenic and cultural resources unrivaled by
many other countries: you can find mountains, volcanoes, hot springs, valleys, beaches,
lakes, a mild climate with four seasons, historic sites, cultural events such as festivals, and
safe towns with hospitable people, all in this small country. Unfortunately, despite such
abundant tourist attractions, Japan ranks only 30th or so in terms of the number of foreign
tourists. Considered another way, however, this implies that there is much room for growth in
tourism. If Japan's regional areas could capture tourism demand from other countries in Asia
that have a great potential for growth, this would have a significant impact on employment.
In order to strengthen such efforts, local governments need to take detailed measures.
Support from local financial institutions is also important, as funds from various sources will
be required. As I mentioned earlier, the Bank supports the efforts of financial institutions
through the Growth-Supporting Funding Facility. The amount of funds provided through the
facility to such businesses as tourism and to childcare services is still small, and there is
much room to increase the funding provided to these businesses as well as to others. The
Bank thus expects greater use of the facility.