Economic Activity, Prices,
and Monetary Policy in Japan
Speech at a Meeting with Business Leaders in Okinawa
(via webcast)
KATAOKA Goushi
Member of the Policy Board
I. Economic Activity and Prices
A. Overseas Economies
I would like to start my speech by looking at developments in overseas economies.
At the beginning of 2020, the growth pace of the global economy was expected to recover
gradually. Economic developments took an unexpected turn, however, after the novel
coronavirus (COVID-19) -- whose first case of infection was confirmed in China at the end
of last year -- spread worldwide. Chart 1 shows how the number of newly confirmed cases
increased in China from January to February 2020, and then from March to April cases
increased explosively in Europe and the United States. A further spread has been seen among
emerging and developing countries such as those in South America and South Asia, making
COVID-19 the most virulent pandemic since the Spanish flu in the early 20th century. The
pandemic continues to evolve, with uncertainty as to when the spread of the virus will subside.
Chart 1 Daily New Cases of COVID-19
1,000 cases 1,000 cases
220 5
200
United States Euro area Others China (right scale)
180
4
160
140
3
120
100
2
80
60
1
40
20
0 0
20-Jan 17-Feb 16-Mar 13-Apr 11-May 8-Jun 6-Jul 3-Aug 31-Aug
Notes: 1. Figures are 7-day backward moving averages.
2. The latest figures are as of August 31, 2020.
3. Figures for the United States are based on data from the Centers for Disease Control and
Prevention (CDC), while those for the Euro area and Others are based on data from the World
Health Organization (WHO). For China, there is a discontinuity in the data for February 17 to
19 due to the difference in the basis, and figures for March 16 onward are based on data
released by the Chinese government (those before March 16 are based on WHO data).
Source: CEIC.
Economic indicators declined markedly in many of the affected countries and regions as
economic activity became significantly constrained worldwide, mainly reflecting the
implementation of strict public health measures. The annualized quarter-on-quarter growth
rates of real GDP for the April-June quarter were around minus 30 percent in the United States
and around minus 40 percent in the European Union, resulting in record declines.
Although the global economy has bottomed out, the pace of recovery is likely to be moderate
for the time being. Chart 2 shows the June 2020 World Economic Outlook (WEO) Update
released by the International Monetary Fund (IMF). According to the baseline scenario on
the left-hand side of the chart, the timing of recovery for real GDP growth rates is expected
to differ across regions, depending on the timing and severity of the spread of COVID-19 as
well as the magnitude of the impact public health measures have on economic activity. In
China, where the spread of the disease was contained at an early stage, the real GDP growth
rate fell sharply for the January-March quarter, but returned to its pre-pandemic level for the
April-June quarter, as projected. The scenario for advanced economies is quite different. Real
GDP growth rates fell considerably -- more so than in China -- for the April-June quarter.
Although the rates are likely to follow a recovery trend, they are expected to return to pre-
Chart 2 World Economic Outlook (IMF)
Baseline Scenario Risk Scenarios
(Forecasts for Real GDP) (Deviation from the Baseline Scenario)
Q1 2019 = 100
% pts.
120
6
Faster-than-expected recovery starting in the second half
of 2020
Second major outbreak in 2021
4
110
2
100
0
90
World
-2
Advanced economies
Emerging market and developing economies other than China
China
80
-4
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
CY 2019 2020 2021
-6
CY 2019 20 21 22 23 24
Note: Figures in the right-hand graph are deviation rates of global real GDP from the baseline scenario.
Source: IMF, "World Economic Outlook (June 2020)."
pandemic levels only in or after 2022. Meanwhile, the real GDP growth rates of emerging
and developing economies other than China have declined less sharply and recovered with
greater momentum relative to advanced economies. Nonetheless, their return to pre-pandemic
levels is expected to lag behind China by about a year.
The baseline scenario I have referred to assumes that the impact of COVID-19 will wane as
early as the second half of this year. However, there is a distinct possibility that this
assumption may not be realized, given that several countries have already either suffered or
shown indications of a resurgence in cases. The right-hand side of Chart 2 provides two
different risk scenarios from the IMF, in which global real GDP deviates from the baseline
scenario: an upward deviation scenario that assumes a faster-than-expected recovery starting
in the second half of 2020, and a downward deviation scenario that assumes a second major
outbreak of COVID-19 next year. Specifically, the global real GDP is expected to deviate
upward by approximately 3 percent in the first scenario and downward by about 5 percent in
the second. Particularly, if the second scenario materializes, the global economic depression
will intensify and become prolonged; thus, it is necessary to pay further attention to
developments in the global economy and their effect on business and household sentiment as
well as on global capital markets and the financial system.
B. Japan's Economy
Next, I would like to turn to economic developments in Japan, starting with real GDP growth
rates.
In Chart 3, the line graph shows developments in the real GDP growth rate and the bar graph
shows the contribution of each demand component to the growth rate. The first preliminary
estimate of the real GDP growth rate for April-June 2020 registered negative growth for the
third consecutive quarter since October-December 2019, marking minus 7.8 percent on a
quarter-on-quarter basis and minus 27.8 percent on an annualized basis. The decline for the
April-June quarter is significantly larger than that for the January-March quarter of 2009,
immediately after the collapse of Lehman Brothers. The chart shows a significant decline in
both domestic demand -- mainly private consumption -- and exports, which reflects the
stagnation in economic activity at home and abroad caused by the COVID-19 pandemic.
Chart 3 Real GDP Growth Rate and Breakdown by Demand Component
s.a., ann., q/q % chg.
15
10
5
0
-5
-10
-15
Private consumption Private business fixed investment, etc.
-20
Government spending Exports
Imports Change in inventories, etc.
-25
Real GDP
-30
CY 2013 14 15 16 17 18 19 20
Source: Cabinet Office, "Quarterly Estimates of GDP for April-June 2020 (First Preliminary Estimates)."
Chart 4 shows the outlook for Japan's economy. As presented in the July 2020 Outlook for
Economic Activity and Prices (Outlook Report), the medians of the Bank of Japan Policy
Board members' forecasts for real GDP growth rates are minus 4.7 percent for fiscal 2020,
3.3 percent for fiscal 2021, and 1.5 percent for fiscal 2022. Japan's economy is likely to
improve gradually from the second half of 2020, but the pace is expected to be only moderate
Chart 4 Outlook for Economic Activity and Prices (July 2020 Outlook Report)
medians of Policy Board members' forecasts, y/y % chg.
(Reference) Excluding
CPI (all
the effects of the
consumption tax hike
Real GDP items less
and policies concerning
fresh food)
the provision of free
education
Fiscal 2020
-4.7 -0.5 -0.6
Fiscal 2021
+3.3 +0.3
Fiscal 2022
+1.5 +0.7
while the impact of COVID-19 remains worldwide. Thereafter, as the impact subsides
globally, the economy is projected to keep improving further with overseas economies
returning to a steady growth path.
However, as described in the July Outlook Report, risks to the outlook are tilted to the
downside. I am of the view that real GDP growth rates will in fact be lower than the medians
of the members' forecasts. In this regard, I will now examine major GDP components such as
consumption, business fixed investment, and exports.
Let me start with consumption, as shown in Chart 5. After declining considerably due to the
consumption tax hike in October 2019, real consumption had shown signs of a moderate
pick-up toward the beginning of this year, mainly in durable goods and services consumption.
However, since COVID-19 started to spread nationwide this March, there has been a marked
decline not only in some consumption of goods but also in services such as tourism, eating
and drinking, and transport. This may be attributed to the following factors: (1) the direct
effects of requests for self-restraint in going outside and temporary store closures following
Chart 5 Real Consumption
Jan. 2013 = 100
135
Durable goods
Non-durable goods
Services
Overall (Consumption Activity Index, real)
125
115
112.5
105
96.0
95
89.1
85
79.0
75
CY
2013 14 15 16 17 18 19 20
Note: The latest figures are as of June 2020.
Source: Bank of Japan, "Consumption Activity Index."
the government's declaration of a state of emergency, and (2) the effect on consumer
sentiment, namely, where consumers have become vigilant against consumption involving
the "three Cs" -- closed spaces, crowded places, and close-contact settings -- in the midst of
the spread of COVID-19. As for the outlook, with uncertainty as to when the spread of the
virus will subside, it is likely that developments in consumption will be sluggish for the time
being, considering that services consumption accounts for more than 50 percent of total
consumption. Another factor that could weigh on the recovery in consumption is that, unlike
durable goods consumption, only some of the services that people had temporarily stopped
consuming are expected to recover after COVID-19 subsides.
At this point, let us take a closer look at developments in the employment situation, which
underpin private consumption. The left-hand side of Chart 6 shows that the employment-
related diffusion index in the Economy Watchers Survey has deteriorated significantly since
the turn of 2020. Almost simultaneously, the real wage income of employees has also
declined. The right-hand side of the chart shows that, having stopped declining temporarily,
the unemployment rate for July was 2.9 percent. However, the number of people who became
involuntarily unemployed due to the circumstances of their employers or businesses increased
to 380,000, registering a rise of 190,000 people from a year ago. Looking at the number of
workers by industry, as shown on the left-hand side of Chart 7, there have been significant
decreases in accommodations and eating and drinking services, in wholesale and retail trade,
and in lifestyle-related and amusement services. This fall in employment figures can be
considered a consequence of the decline in services consumption. The labor underutilization
indicator on the right-hand side of the chart shows that in addition to the increase in
"unemployed persons" for the April-June quarter of 2020, there was also an increase in (1)
"persons in time-related underemployment," namely, those who are currently employed but
wish to work longer hours, and (2) the "potential labor force," which is comprised of those
who are excluded from the labor force in the Labour Force Survey but are actually willing to
work.1 Thus, the employment situation has been deteriorating due to the effects of the spread
of COVID-19, and this is likely to weigh on the recovery in consumption.
Chart 6 Labor Market Conditions (1)
Assessment of Current Employment Conditions Breakdown of Unemployment Figures by Reason
and Real Wage Income for Seeking a Job
mil. persons %, s.a.
CY 2011 = 100, s.a. DI, s.a.
110 75
250 3.0
Real wage income of employees
Newly started to seek a job
Quit a job involuntarily (circumstances of employers or businesses)
2.9
Assessment of current economic conditions
Quit a job (other reasons)
(employment-related, right scale)
Unemployed persons (reasons other than the above)
200 2.8
Unemployment rate (right scale)
2.7
105 50
150
2.6
2.5
100 2.4
100 25
2.3
50 2.2
2.1
95 0
0
2.0
CY 13 2013 14 15 16 17 18 19 20 CY 2018
18 19 20
Sources: Cabinet Office, "Wage Income of Employees," "Economy Watchers Survey"; Ministry of Internal Affairs
and Communications, "Labour Force Survey."
Chart 7 Labor Market Conditions (2)
Change in Number of Employed Persons Change in Labor Underutilization Indicator 4
% pts.
Information and communications
2.0
Medical, health care and welfare
Potential labor force
Government
Persons in time-related underemployment
Services (others)
1.5
Unemployed persons
Real estate and goods rental and leasing
Research, professional and technical services
Education, learning support
1.0
Transport and postal activities
Compound services
Finance and insurance
0.5
Agriculture and forestry
Construction
Manufacturing
0.0
Lifestyle-related and amusement services
Wholesale and retail trade
Accommodations, eating and drinking services
-0.5
Q1 Q2 Q3 Q4 Q1 Q2
-60 -40 -20 0 20
(10,000 employees) CY 2019 2020
Notes: 1. Figures in the left-hand graph show the difference from a year ago in the number of employed persons
(average in the April-June quarter of 2020).
2. Figures in the right-hand graph show the difference from a year ago in the ratios to the sum of labor force
and potential labor force.
3. "Labor Underutilization Indicator 4" is the sum of unemployed persons, persons in time-related
underemployment, and the potential labor force. "Persons in time-related underemployment" includes
employed persons who work less than 35 hours per week, but who wish to work additional hours and are
able to do so. "Potential labor force" is composed of "unavailable jobseekers" and "available potential job
seekers." "Unavailable jobseekers" are those who have engaged in job seeking activities within one month
and are ready to work within two weeks but not immediately. "Available potential jobseekers" are those
who have not engaged in any job seeking activities within one month, but who wish to work and are ready
to do so if a job becomes available.
Source: Ministry of Internal Affairs and Communications, "Labour Force Survey (Basic Tabulation and Detailed
Tabulation)."
I will now shift to business fixed investment. As shown in Chart 8, the amount outstanding
of business fixed investment has recently turned to a decline, albeit marginally, after
continuing on an increasing trend. This could be due to two underlying factors. First is the
reactionary decline in demand after the tax hike. Second is the rapid shift in perception of
both manufacturing and nonmanufacturing firms with regard to their production capacity as
being excessive, mainly due to the decrease in consumption triggered by the spread of
COVID-19. Looking at the business fixed investment plan in the Bank's June Tankan (Short-
Term Economic Survey of Enterprises in Japan), as shown in Chart 9, the investment plans
of manufacturing firms remain positive on a year-on-year basis. However, a comparison with
recent revision patterns reveals that the momentum of fixed investment is weak. The business
fixed investment plan figure for nonmanufacturing firms is already negative, in sharp contrast
with recent revision patterns. Firms in many industries will have no choice but to revise their
future demand downward, if the impact of COVID-19 becomes prolonged and firms'
medium- to long-term growth expectations decline. This could cause a further adjustment in
business fixed investment.
Chart 8 Business Fixed Investment and Production Capacity
Private Non-Residential Investment Production Capacity DI
diffusion index of "excessive capacity" minus
DI, % pts.
tril. yen
"insufficient capacity," % pts., reversed
40
95 -10
Manufacturing
Production capacity DI
Insufficient
(right scale)
Nonmanufacturing
-5
90
30
capacity
0
85
20
5
80 Excessive capacity
Excessive
10
10
75
capacity
15
0
Nominal private
70
20
nonresi. investment (left
scale)
Insufficient capacity
65 25
-10
CY 2005 07 09 11 13 15 17 19
CY 2005 05 07 09 11 13 15 17 19
Note: Figures for the production capacity DI in the left-hand graph are those for large enterprises of all
industries, and in the right-hand graph are those for large enterprises.
Sources: Cabinet Office, "Quarterly Estimates of GDP for April-June 2020 (First Preliminary Estimates)"; Bank
of Japan, "Tankan (Short-Term Economic Survey of Enterprises in Japan)."
Chart 9 Developments in Business Fixed Investment Plans
Manufacturing Nonmanufacturing
y/y % chg.
y/y % chg.
15 15
10
10
5
5
0
0
-5
Mar. June Sep. Dec. Forecast Actual Mar. June Sep. Dec. Forecast Actual
survey survey survey survey
survey survey survey survey
FY 2017 FY 2018
FY 2019 FY 2020
Average (FY 2017 - 2019)
Note: Figures include software and R&D investments and exclude land purchasing expenses. Figures are for all
enterprises.
Source: Bank of Japan, "Tankan."
Lastly, let me turn to exports. As can be seen in Chart 10, exports had been sluggish since
2019, and the rate of decline accelerated for the April-June quarter of 2020 when the effects
of COVID-19 intensified. This decline is particularly evident in exports to Europe and the
United States, and in exports of automobile-related goods, IT-related goods, and capital goods.
Deterioration in external demand has likely bottomed out due to the easing of public health
measures in many countries. However, it will take a considerable amount of time for countries
to recover from the impact of COVID-19. Bearing this in mind, my view is that it will
continue to be difficult to hold out high expectations for a recovery in exports as the
momentum for recovery in external demand remains weak for the time being.
Chart 10 Real Exports
y/y % chg. s.a., q/q % chg. s.a., m/m % chg.
CY 2019 2020 2020
Q2 Q3 Q4 Q1 Q2
2018 2019 May June July
Region
United States 2.4 1.7 2.8 -4.0 -6.1 0.4 -37.4 -20.1 8.2 45.3
EU 7.7 0.4 -3.0 3.3 -6.0 -0.2 -24.8 -11.4 10.9 -3.4
China 5.9 -3.3 0.8 0.7 2.5 -5.1 5.4 5.5 -1.5 6.2
Goods
Capital goods
5.3 -5.5 -0.6 1.0 -3.4 -8.4 -6.6 -5.8 14.7 -8.3
Motor vehicles and
5.7 -2.9 -0.6 -2.2 -3.1 -2.0 -47.4 -22.2 21.4 33.4
related goods
IT-related goods
4.1 -1.7 1.6 1.7 0.2 0.5 -14.9 -4.4 -2.7 5.9
Real exports
2.2 -2.0 -0.4 1.1 -1.5 -1.8 -18.4 -5.9 1.7 7.4
Source: Bank of Japan, "Developments in Real Exports and Real Imports."
C. Recent Developments and Outlook for Prices
Next, I will move on to price developments.
The observed year-on-year rate of change in the consumer price index (CPI) for July 2020
was 0.0 percent for all items less fresh food and 0.4 percent for all items less fresh food and
energy. Excluding the effects of the consumption tax hike and the introduction of free
preschool education, the figures were minus 0.3 percent and plus 0.2 percent, as shown on
the left-hand side of Chart 11. The inflation rate remained lower than before, reflecting the
tax hike in October 2019, a decrease in demand against the background of the spread of
COVID-19, and a drop in energy prices. The right-hand side of the chart shows that the
indicators representing underlying changes in consumer prices have also continued to show
relatively weak developments.
Turning to the outlook for prices, according to the medians of the Policy Board members'
forecasts presented in the July 2020 Outlook Report, the year-on-year rate of change in the
CPI (all items less fresh food) is expected to increase gradually from minus 0.5 percent for
fiscal 2020 to 0.3 percent for fiscal 2021, and to 0.7 percent for fiscal 2022, as shown in Chart
4. If we look at the output gap and medium- to long-term inflation expectations, both of which
affect the underlying changes in prices, the output gap, shown on the left-hand side of Chart
Chart 11 Consumer Prices
Consumer Price Index Underlying Trend in Inflation
y/y % chg.
y/y % chg. % pts.
2.0
2.0 50
1.5 1.5
1.0
1.0 25
0.5 0.5
0.0 0.0 0
-0.5
-0.5
-1.0 -1.0 -25
Trimmed mean
CPI (all items less fresh food)
-1.5 -1.5
Weighted median
CPI (all items less fresh food and energy)
Diffusion index (right scale)
-2.0 -50
-2.0
CY 2011 11 12 13 14 15 16 17 18 19 20
CY 11 2011 12 13 14 15 16 17 18 19 20
Note: Figures are adjusted for changes in the Note: The diffusion index is defined as the share of
consumption tax hike and the introduction of increasing items minus that of decreasing
free preschool education. items. The share of increasing/decreasing
items is the share of items in the CPI (less
Source: Ministry of Internal Affairs and
fresh food, consumption tax adjusted), for
Communications, "Consumer Price Index."
which the price increased/decreased from a
year earlier.
Sources: Bank of Japan, "Measures of Underlying
Inflation"; Ministry of Internal Affairs and
Communications.
12, reached its recent peak in the October-December quarter of 2018. The positive output gap
shrank thereafter, and in the January-March quarter of 2020 was at around 0 percent, which
indicates a state in which supply and demand are balanced. Inflation expectations have
declined somewhat since the end of 2019, as confirmed in the right-hand side of the chart.
Bearing in mind that the recovery pace of the economy is likely to be modest with uncertainty
over when the spread of COVID-19 will subside, it is difficult to project that the output gap
and inflation expectations will improve and that the inflation rate will gather momentum
toward approaching the 2 percent price stability target. I will elaborate on this point, together
with the Bank's conduct of monetary policy.
Chart 12 Output Gap and Inflation Expectation
Output Gap Synthetic Indicators of Inflation Expectations
%, % pts. y/y % chg.
6 2.0
Firms, households, and experts (QUICK Survey)
Labor input gap Capital input gap Output gap
Firms, households, and experts (Consensus Forecasts)
4
Firms, households, and experts (inflation swap rate)
1.5
2
0 1.0
-2
0.5
-4
-6 0.0
CY 1985 85 88 91 94 97 00 03 06 09 12 15 18 CY 2010 10 11 12 13 14 15 16 17 18 19 20
Notes: 1. The data for the output gap in the left-hand graph are the estimates by the Bank's staff as of July 3,
2020.
2. In the right-hand graph, inflation expectations of firms are taken from the Tankan (the output prices
DI), and those of households are taken from the Opinion Survey on the General Public's Views and
Behavior (the average of responses between minus 5 percent and plus 5 percent regarding annual
inflation expectations). For experts' inflation expectations, the QUICK Survey, the Consensus
Forecasts, and the inflation swap rate are used.
Sources: Consensus Economics Inc., "Consensus Forecasts"; QUICK Corp., "QUICK Monthly Market Survey
(Bonds)"; Bloomberg; Bank of Japan.
II. Conduct of Monetary Policy
Let me first outline the Bank's current monetary policy, based on the outlook for economic
activity and prices that I have described. I would then like to express my opinion about the
Bank's monetary policy conduct.
A. Outline of the Current Monetary Policy
The Bank conducts monetary policy under the framework of Quantitative and Qualitative
Monetary Easing with Yield Curve Control, aiming to achieve the 2 percent price stability
target. This current framework consists of three major components: yield curve control, the
purchase of risk assets, and the Bank's public commitment regarding the future conduct of
monetary policy. In addition to these three components, the Bank has, since March 2020,
enhanced monetary easing in response to the spread of COVID-19. The measures broadly fall
into the following three categories, as illustrated in Chart 13.
Chart 13 Outline of the Bank's Measures in Response to COVID-19
(1) Special Program to Support Financing in Response to COVID-19: Total Size
of about 120 Trillion Yen
The Special Funds-Supplying Operations to Facilitate Financing in Response to COVID-19: The Bank
provides funds on favorable terms to financial institutions that make loans in response to
COVID19 (providing funds at a zero interest rate with a maturity up to 1 year. An interest rate of 0.1% is
applied to the outstanding balances of current accounts that correspond to the amounts
outstanding of loans provided through the measure).
Additional purchases of CP and corporate bonds: The Bank conducts additional purchases with the
upper limit of the total amount outstanding of 20 trillion yen (almost quadrupled) until the end of
March 2021. The maximum amounts outstanding of a single issuer's CP and corporate bonds to be
purchased has been raised substantially, and the maximum remaining maturity of corporate bonds
to be purchased has been extended to 5 years.
(2) Ample Provision of the Yen and Foreign Currency Funds: Unlimited
Yen: The Bank purchases a necessary amount of JGBs without setting an upper limit (so that 10-year
JGB yields will remain at around zero percent, and also with a view to maintaining stability in the
bond market and stabilizing the entire yield curve at a low level).
Foreign Currencies: The Bank provides U.S. dollar funds in cooperation with 5 other major central
banks by lowering the loan rate by 0.25 percent and introducing a fund-provisioning measure to
provide funds with a longer maturity.
(3) Active Purchases of ETFs and J-REITs : Doubled
The Bank is to actively purchase ETFs and J-REITs for the time being so that their amounts outstanding
will increase at annual paces with the upper limit of about 12 trillion yen and about 180 billion yen,
respectively (both doubled).
The first is the introduction of the Special Program to Support Financing in Response to the
Novel Coronavirus (COVID-19), which aims to support financing mainly of firms. This
program consists of the Special Funds-Supplying Operations to Facilitate Financing in
Response to the Novel Coronavirus (COVID-19) -- through which the Bank encourages
financial institutions' lending to firms -- and an increase in purchases of CP and corporate
bonds. Through the Special Funds-Supplying Operations, the Bank, in cooperation with the
government, supports firms' and households' financing by providing funds at a zero interest
rate to financial institutions for the loans that they make in response to COVID-19 and for
provision of interest-free and unsecured loans under the government's economic measures.
The Bank applies a positive interest rate of 0.1 percent to the outstanding balances of current
accounts held by financial institutions at the Bank that correspond to the amounts outstanding
of loans provided through this operation, and has encouraged financial institutions to make
use of the operation. In terms of an increase in purchases of CP and corporate bonds, the Bank
has aimed to stabilize market interest rates and the financing conditions of financial
institutions and firms, among others, by increasing the upper limit of the amount outstanding
of CP and corporate bonds to be purchased by approximately four times, to about 20 trillion
yen in total. This is equivalent to almost a quarter of the domestic market size. The total size
of this special program, consisting of these two measures, is about 120 trillion yen.
The second of the Bank's measures in response to COVID-19 is unlimited provision of yen
and foreign currency funds. As for the yen funds, the Bank decided to purchase a necessary
amount of Japanese government bonds (JGBs) without setting an upper limit, removing the
indicative figure of an annual pace of increase in the amount outstanding, which was about
80 trillion yen. This was carried out with a view to stabilizing the entire yield curve at a low
level; meanwhile, the target rate of the long-term yield remains unchanged. Regarding foreign
currency funds, the Bank has, in cooperation with five other major central banks, provided
ample U.S. dollar funds through the U.S. dollar funds-supplying operations; specifically, the
Bank lowered the loan rate by 0.25 percent and introduced a fund-provisioning measure to
provide funds with a longer maturity.
The third of the Bank's measures is active purchases of exchange-traded funds (ETFs) and
Japan real estate investment trusts (J-REITs) to lower the risk premia in asset markets. The
aim of this measure is to prevent firms' and households' sentiment from deteriorating, through
volatility in asset markets, by doubling the upper limit of the pace of increase in their amounts
outstanding of purchases for the time being.
I hold the view that these three COVID-19 response measures have thus far contained the
disturbance in the financial and capital markets and produced some positive effects on firms'
financing.
B. My Personal View on the Conduct of Monetary Policy
In voting on the Bank's measures in response to COVID-19, I dissented from the following
two points: yield curve control and the Bank's commitment regarding the future conduct of
monetary policy. This was based on my view that the current situation calls for the need not
only to support financing and provide liquidity but also to take preemptive action to contain
any downward pressure that may be exerted on prices.
Let me first give the reasons for my assumption that downward pressure on prices intensified
as a result of the economic shock triggered by the global spread of COVID-19. The economic
shock of COVID-19 differs in nature from other shocks, such as those brought about by
natural disasters or a financial crisis in which the financial intermediation function becomes
impaired.2 The latest shock is unique in that it combines aspects of both a supply shock, with
sluggishness in production and trade, and a demand shock, with a sharp decline in services
consumption. While a negative demand shock brings about a fall in prices, a negative supply
shock on its own would theoretically lead to a rise in prices. In considering the impact of an
economic shock on prices, it is therefore necessary to determine whether the supply and
demand shocks are positive or negative and which of the two is dominant.3 Chart 14 shows
estimates of supply and demand shocks by sector in terms of their effects on output prices,
based on the Tankan, taking into account U.S. research findings. In the manufacturing sector,
the relatively strong effect of a supply shock is particularly evident in automobiles, while in
the nonmanufacturing sector the effect of a demand shock is estimated to be significantly
large in services for individuals, and in accommodations and eating and drinking services in
particular. Estimations across all sectors indicate that the shock to aggregate demand played
a dominant role in determining changes in prices on the whole, with prices being pushed
down. These findings should however be treated with some caution as they are based on a
number of assumptions. Nonetheless, when all the relevant factors are considered --
developments in the output gap and the decline in inflation expectations, the negative effects
brought about by externalities, and the mutual effects of the supply and demand shocks -- the
indications are that the economic shock of the spread of COVID-19 does indeed exert
downward pressure on prices.4
2
For more details on the economic impact of COVID-19, see, for example, the following. Ministry
of Economy, Trade and Industry. "White Paper on International Economy and Trade 2020" (Part I).
https://www.meti.go.jp/report/tsuhaku2020/whitepaper_2020.html.
3
See Watanabe Tsutomu, "Shingata korona uirusu ga shōhi to bukka ni ataeru eikyō," Gekkan Shihon
Shijō, no. 416, April 2020. Watanabe argues that, with regard to the economic shock of COVID-19,
the shock to aggregate demand is dominant, as can be seen in the fact that GDP and prices have fallen
in tandem as a global trend.
4
The following points should be taken into account: (1) until the impact of COVID-19 subsides, the
economy may be depressed further as individuals have no choice but to follow strict preventive
measures; (2) developments could be affected by externalities, namely, a decrease in demand acting
as a constraint on spending of other households; (3) it may not be feasible in the short term to fully
make up for lost demand through the substitution effect; and (4) supply shocks could lead to demand
shocks.
Chart 14 How Shocks Affect Output Prices (Estimates)
degree of impact of shocks
degree of impact of shocks
5 15
Impact of demand shock
4
Impact of supply shock
shocks that push prices up
10
3
Aggregate impact
2
5
1
0 0
-1
-5
-2
-3
-10
-4
shocks that push prices down
-5 -15
Total Motor General Total Services for
vehicles machinery individuals Accommodations, eating
and drinking
services
All industries Manufacturing Nonmanufacturing
Notes: 1. Figures are for the first half of CY 2020.
2. Figures show the degree of the effect on output prices, estimated as follows. First, supply and demand
shocks are estimated from the