Japan's Economy and Monetary Policy
Remarks at the Ninth Japan Securities Summit in London
Takako Masai
Member of the Policy Board
It is a great honor to have the opportunity today to be a panel member at the ninth Japan
Securities Summit.
Japan's economy had been suffering from deflation for more than 15 years, since the late
1990s, with the year-on-year rate of change in the consumer price index (CPI) being about
zero or slightly negative. In such circumstances, the Bank of Japan has been conducting
monetary policies in various unconventional ways for nearly 20 years (Chart 1).
Looking back, in 1998, now nearly 20 years ago, Japan's policy interest rate -- which at that
time was the uncollateralized overnight call rate -- already had been lowered to close to zero,
at 0.25 percent. Given that economic activity and prices did not improve even in this
situation, the Bank introduced a zero interest rate policy in February 1999. Thereafter, it
introduced a quantitative easing policy, in which the operating target was the outstanding
balance of current accounts at the Bank. Later, it also implemented a comprehensive
monetary easing policy, in which it purchased assets such as CP, corporate bonds,
exchange-traded funds (ETFs), and Japan real estate investment trusts (J-REITs). The Bank
continues to make these asset purchases to the present, and with respect to ETFs and
J-REITs, it has significantly increased the amount of purchases since 2013. Meanwhile, it
also introduced the Fund-Provisioning Measure to Support Strengthening the Foundations
for Economic Growth as well as the Fund-Provisioning Measure to Stimulate Bank Lending,
and these also continue to this day. As illustrated, the Bank has pursued monetary easing by
making full use of various means. As a result, accommodative financial conditions have
been realized in Japan. Such accommodative financial conditions have underpinned the
economy, and the Bank's large-scale fund-provisioning measures have contributed -- in
certain phases -- to maintaining financial system stability and preventing the economy from
falling into a deflationary spiral. Nevertheless, it is true that at the same time there
continued to be mild deflation. Therefore, the Bank made a strong and clear commitment to
ensuring the economy's exit from deflation -- which had lasted for nearly 15 years -- and
began large-scale monetary easing to fulfill the commitment. This is Quantitative
Qualitative Monetary Easing (QQE), which continues through to the present.
The Bank also introduced the price stability target in January 2013 and set it at 2 percent in
terms of the year-on-year rate of change in the CPI. At the same time, the government and
the Bank released a joint statement, in which they emphasized their policy coordination. I
view this as extremely important, because it indicated the determination by the government
and the Bank to work together in order to overcome deflation and achieve sustainable
economic growth. The Bank then introduced QQE in April 2013. After increasing the
amount of its asset purchases further in 2014, it adopted a negative interest rate policy in
January 2016 and introduced QQE with Yield Curve Control in September of that year.
Since the introduction of QQE, the basic mechanism of monetary easing itself has not
changed; that is, (1) pushing down the entire yield curve through the Bank's large-scale
purchases of Japanese government bonds (JGBs), and (2) raising inflation expectations
through the Bank's strong commitment to the 2 percent price stability target. The
transmission mechanism envisaged by the Bank is that these factors will lead to a reduction
in real interest rates, thereby producing positive effects on Japan's economic activity and
prices (Chart 2). Under QQE, the underlying trend in the CPI (all items less fresh food and
energy) turned positive and has been in such territory for more than two and a half years;
this leads to the judgment that Japan's economy has reached a state of being no longer in
deflation, which is commonly defined as a sustained decline in prices (Chart 3).
Furthermore, the Bank introduced last year QQE with Yield Curve Control as a means of
strengthening the past framework for monetary easing. My understanding is that there are
two points as the background to this decision. First, although QQE has produced its
intended effects, the price stability target of 2 percent has not been achieved, and therefore a
more effective framework was necessary.
Second, while it was confirmed that the combination of large-scale purchases of JGBs and
the negative interest rate policy was effective in influencing the entire yield curve, there was
concern over a possibility that this combination could in some cases push down the yield
curve more than necessary, thereby having a negative impact on financial functioning.
Under "yield curve control," which is the major component of the new framework, the Bank
is able to conduct monetary policy in an effective and flexible manner by taking account of
the economic, price, and financial conditions -- including the impact on the functioning of
financial intermediation -- as it directly targets long-term interest rates.
Another component of the new framework is an "inflation-overshooting commitment." With
this commitment, the Bank aims to raise inflation expectations by demonstrating its strong
determination.
The Bank has attempted to make expectation formation more forward-looking through QQE.
In reality, however, before the forward-looking expectation formation fully took hold, the
observed inflation rate declined, due mainly to the fall in crude oil prices. As a result,
people's inflation expectations also declined in an adaptive manner. Therefore, I consider
that, in order to achieve the price stability target of 2 percent, it is absolutely necessary to
raise inflation expectations and promote a shift in expectation formation toward a more
forward-looking direction. The inflation-overshooting commitment is a means to this end.
Inflation expectations are, so to speak, the sense of price trends among individuals and
firms, and to change such expectations is not an easy task. This is even more the case with a
country like Japan that has experienced protracted deflation. When QQE was introduced,
the Bank set a time frame of about two years to achieve the price stability target in order to
emphasize its strong and clear commitment to ensuring the economy's exit from deflation.
Therefore, it may seem like it has taken a long time for the Bank to achieve this target. On
the other side of the coin, only four years have passed since the target was set. Needless to
say, this does not mean that taking a long time to meet the objective is acceptable. First, it
remains important to have the Bank's strong commitment to achieving the price stability
target and express it in various different ways. Then, under the highly accommodative
financial conditions maintained by the Bank in addition to the large-scale economic
stimulus package implemented by the government, I consider it essential to enhance private
demand by further accelerating efforts in both the public and private sectors to strengthen
the growth potential.
In fact, such efforts already have been undertaken by both the public and private sectors. In
this context, the government decided the Japan Revitalization Strategy 2016 in June 2016
and launched the 10 strategic public-private joint projects, in which the public and private
sectors share knowledge and strategy, and cultivate new promising markets (Chart 4).
Looking at the list of projects may leave an impression that it is an all-around list of
challenges facing Japan's economy. I believe that what the economy needs now is to
implement various initiatives simultaneously to overcome many such challenges. What I
mean is that, while these initiatives may look like "a little bit of everything," firmly
promoting them in order to achieve economic revitalization in an omnidirectional manner,
and thereby revitalizing Japan's economy, is necessary. I think that this will lead to an
increase in growth expectations, and ultimately to a rise in inflation expectations.
For Japan's economy, the third largest in the world, ending deflation and returning to a
sustainable growth path will also have significant meaning for the global economy. The
Bank will maintain highly accommodative financial conditions, with a view to achieving
the price stability target of 2 percent, and ensure the overcoming of deflation. I believe that
highly accommodative financial conditions, combined with the initiatives of the public and
private sectors just mentioned, will give a boost to firms' investment and efforts for
improving productivity. Let me conclude by emphasizing that ensuring the exit from
deflation in Japan will lead to a more dynamic and stronger economy.
Thank you for your attention.
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