Haruhiko Kuroda: The Bank's Semiannual Report on Currency and
Monetary Control
Statement by Mr Haruhiko Kuroda, Governor of the Bank of Japan, before the Committee on
Financial Affairs, House of Councillors, Tokyo, 22 November 2016.
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Introduction
The Bank of Japan submits to the Diet its Semiannual Report on Currency and Monetary
Control in June and December. I am pleased to have this opportunity today to talk about
developments in Japan's economy and present an overall review of the Bank's conduct of
monetary policy.
I. Economic and Financial Developments in Japan
At the Monetary Policy Meeting (MPM) held on November 1, the Bank released the Outlook for
Economic Activity and Prices (Outlook Report), which presents its projections for Japan's
economic activity and prices through fiscal 2018. Based on this, I will first explain economic and
financial developments in Japan.
Japan's economy has continued its moderate recovery trend, although exports and production
have been sluggish due mainly to the effects of the slowdown in emerging economies. With
regard to the outlook, it is likely to continue growing at a pace above its potential through the
projection period - that is, through fiscal 2018 - with a virtuous cycle from income to spending
being maintained in both the corporate and household sectors, on the back of highly
accommodative financial conditions and the effects of the government's large-scale stimulus
measures, as well as the recovery in overseas economies.
On the price front, the year-on-year rate of change in the consumer price index (CPI, all items
less fresh food) has been slightly negative due to the effects of the decline in energy prices. As
for the outlook, it is likely to be slightly negative or about 0 percent for the time being, and as the
aggregate supply and demand balance (the output gap) improves and medium- to long-term
inflation expectations rise, it is expected to increase toward 2 percent - the price stability target
- in the second half of the projection period. The timing of the year-on-year rate of change in the
CPI reaching around 2 percent will likely be at the end of the projection period - that is, around
fiscal 2018. Thus, the momentum toward achieving the price stability target of 2 percent seems
to be maintained. However, it is somewhat weaker than the previous outlook made in the July
Outlook Report, and thus developments in prices warrant careful attention going forward.
II. Conduct of Monetary Policy
At the September 2016 MPM, the Bank conducted a comprehensive assessment of the
developments in economic activity and prices, as well as of the policy effects since the
introduction of quantitative and qualitative monetary easing (QQE). Based on its findings, with a
view to achieving the price stability target of 2 percent at the earliest possible time, the Bank
introduced "QQE with Yield Curve Control," which is a new framework for strengthening
monetary easing. This framework consists of two major components.
The first is "yield curve control." QQE, which was introduced in April 2013, has brought about
improvements in economic activity and prices mainly through the decline in real interest rates,
and Japan's economy is no longer in deflation, which is commonly defined as a sustained
decline in prices. With "yield curve control," the Bank seeks to bring about such a decline in real
interest rates by controlling short-term and long-term interest rates. It will work toward the
formation of the most appropriate yield curve with a view to maintaining the momentum toward
achieving the price stability target of 2 percent, while taking account of developments in
economic activity and prices as well as financial conditions. Specifically, in the guideline for
market operations - which is decided at and released after every MPM - the Bank will set two
interest rate levels: the short-term policy interest rate to be applied to current accounts held by
financial institutions at the Bank, and the target level of yields on 10-year Japanese government
bonds (JGBs). It will conduct JGB purchases aiming to achieve the target level of the long-term
interest rate specified by the guideline, while indicating the approximate amount of JGBs to be
purchased.
The second is an "inflation-overshooting commitment." In order to achieve the price stability
target of 2 percent, it is necessary to drastically convert the deflationary mindset among people
and raise inflation expectations. On this point, inflation expectation formation in Japan is still
largely adaptive, and thus tends to be strongly affected by the observed inflation rate. Against this
backdrop, the Bank introduced a very powerful commitment to "continue expanding the monetary
base until the year-on-year rate of increase in the observed CPI (all items less fresh food)
exceeds the price stability target of 2 percent and stays above the target in a stable manner." By
presenting its strong determination to achieve the price stability target, the Bank aims to enhance
the credibility of achieving 2 percent among the public and to raise inflation expectations in a
more forceful manner.
At the MPM held on November 1, the Bank decided to maintain the guideline for market
operations in which the short-term policy interest rate is set at minus 0.1 percent and the target
level of 10-year JGB yields is set at around zero percent. It will make policy adjustments as
appropriate, taking account of developments in economic activity and prices as well as financial
conditions, with a view to maintaining the momentum toward achieving the price stability target.
Thank you.